-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LiezY3coDwDLwhsuRJKjcQRnYpnEeXQ6TNd1Mgl6xS4cSNtiF37LtcTdQ6pcA2JN BGRvK/dcW/J4FmFbMFsBkA== 0000950133-98-001468.txt : 19980417 0000950133-98-001468.hdr.sgml : 19980417 ACCESSION NUMBER: 0000950133-98-001468 CONFORMED SUBMISSION TYPE: S-6/A PUBLIC DOCUMENT COUNT: 25 FILED AS OF DATE: 19980416 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL VARIABLE LIFE INSURANCE ACCOUNT CENTRAL INDEX KEY: 0000944992 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: VT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-6/A SEC ACT: SEC FILE NUMBER: 333-44723 FILM NUMBER: 98595648 BUSINESS ADDRESS: STREET 1: ONE NATIONAL LIFE DR CITY: MONTPELIER STATE: VT ZIP: 05604 BUSINESS PHONE: 8022293113 MAIL ADDRESS: STREET 1: C/O D RUSSELL MORGAN N535 STREET 2: ONE NATIONAL LIFE DR CITY: MONPELIER STATE: CT ZIP: 05604 S-6/A 1 AMENDMENT NO. 1 TO FORM S-6 1 As filed with the Securities and Exchange Commission on April 16, 1998 Registration No. 333-44723 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------- PRE-EFFECTIVE AMENDMENT NO. 1 TO FORM S-6 FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM N-8B-2 ----------------------- NATIONAL VARIABLE LIFE INSURANCE ACCOUNT (Exact name of trust) NATIONAL LIFE INSURANCE COMPANY (Name of depositor) One National Life Drive Montpelier, Vermont 05604 (Complete address of depositor's principal executive offices) ----------------------- D. Russell Morgan Counsel National Life Insurance Company One National Life Drive Montpelier, Vermont 05604 (Name and complete address of agent for service) ----------------------- Copy to: Stephen E. Roth, Esq. Sutherland, Asbill & Brennan 1275 Pennsylvania Avenue, N.W. Washington, D.C. 20004-2404 ----------------------- APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after the effective date of the Registration Statement. TITLE OF SECURITIES BEING REGISTERED: Last survivor flexible premium adjustable benefit variable life insurance policies. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that the Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ================================================================================ 2 NATIONAL VARIABLE LIFE INSURANCE ACCOUNT THE NATIONAL LIFE INSURANCE COMPANY Cross Reference to Items Required by Form N-8B-2
N-8B-2 ITEM CAPTION IN PROSPECTUS - ----------- --------------------- 1 Cover Page 2 Cover Page 3 Not applicable 4 Distribution of Policies 5 The Separate Account 6 The Separate Account 7 Not applicable 8 Not applicable 9 Legal Matters 10 Summary Description of the Policy; Payment and Allocation of Premiums; Policy Rights; Other Policy Provisions; Changes in Applicable Law, Funding or Otherwise; Voting Rights 11 The Market Street Fund; Variable Insurance Products Fund and Variable Insurance Products Fund II; American Century Investment Management, Inc.; Neuberger & Berman Advisers Managers Trust; J.P. Morgan Series Trust II; Goldman Sach Variable Insurance Trust; Strong Variable Insurance Funds, Inc. and Strong Opportunity Fund II, Inc.; Van Eck Worldwide Insurance Trust 12 The Market Street Fund; Variable Insurance Products Fund and Variable Insurance Products Fund II; American Century Investment Management, Inc.; Neuberger & Berman Advisers Managers Trust; J.P. Morgan Series Trust II; Goldman Sach Variable Insurance Trust; Strong Variable Insurance Funds, Inc. and Strong Opportunity Fund II, Inc.; American Century Investment Management, Inc.; Neuberger & Berman Advisers Managers Trust; J.P. Morgan Series Trust II; Goldman Sach Variable Insurance Trust; 13 Charges and Deductions 14 Payment and Allocation of Premiums 15 Payment and Allocation of Premiums 16 The Market Street Fund; Variable Insurance Products Fund and Variable Insurance Products Fund II; American Century Investment Management, Inc.; Neuberger & Berman Advisers Managers Trust; J.P. Morgan Series Trust II; Goldman Sach Variable Insurance Trust; Strong Variable Insurance Funds, Inc. and Strong Opportunity Fund II, Inc.; American Century Investment Management, Inc.; Neuberger & Berman Advisers Managers Trust; J.P. Morgan Series Trust II; Goldman Sach Variable Insurance Trust; 17 Surrender Privilege; Withdrawal of Cash Surrender Value 18 The Separate Account 19 Policy Reports 20 Not Applicable 21 Loan Privileges 22 Not applicable 23 Not applicable 24 Not applicable 25 National Life Insurance Company 26 Not applicable 27 National Life Insurance Company 28 Officers and Directors of National Life 29 Not applicable 30 Not applicable 31 Not applicable 32 Not applicable 33 Not applicable 34 Not applicable
3 35 Not applicable 36 Not applicable 37 Not applicable 38 Distribution of Policies 39 Distribution of Policies 40 Distribution of Policies 41 Not applicable 42 Not applicable 43 Not applicable 44 Accumulated Value 45 Not applicable 46 Not applicable 47 National Life Insurance Company, The Separate Account, The Funds 48 Not applicable 49 Not applicable 50 The Separate Account 51 Payment and Allocation of Premiums; Death Benefit; Distribution of Policies 52 Changes in Applicable Law, Funding and Otherwise 53 Not applicable 54 Not applicable 55 Appendix A - Illustration of Death Benefits, Accumulated Values and Cash Surrender Values 56 Not applicable 57 Not applicable 58 Not applicable 59 Financial Statements
4 PART I Information Required in Prospectus 5 PROSPEC 6 ALL CHANGES SINCE JANUARY 22, 1998 SEC FILING R:2DTODIE:PROSPEC5 (logo) PROSPECTUS SENTINEL ESTATE PROVIDER LAST SURVIVOR FLEXIBLE PREMIUM ADJUSTABLE BENEFIT VARIABLE LIFE INSURANCE POLICY ISSUED BY NATIONAL LIFE INSURANCE COMPANY One National Life Drive, Montpelier, Vermont 05604 Telephone: (800) 537-7003 This Prospectus describes the Sentinel Estate Provider Policy, a last survivor flexible premium adjustable benefit variable life insurance policy (the "Policy") offered by National Life Insurance Company ("National Life"). The Policy has an insurance component and an investment component. The primary purpose of the Policy is to provide insurance coverage which will provide a death benefit on the death of the last to die of two specified Insureds. It is designed to provide considerable flexibility in connection with premium payments, investment options, and death benefits. It does so by giving the owner of a Policy (the "Owner") the right, within limits, to vary the frequency and amount of premium payments (after the initial premium), to allocate Net Premiums among investment alternatives with different investment objectives and (after the first Policy Year) to increase or decrease the Death Benefit payable under the Policy. After certain deductions are made, Net Premiums are allocated to the National Variable Life Insurance Account, a separate account of National Life (the "Variable Account") or to the Fixed Account (which pays interest at declared rates guaranteed to equal or exceed 4%) or both. The Variable Account has twenty-two Subaccounts, the assets of which are used to purchase shares of a designated corresponding mutual fund portfolio (each, a "Portfolio") that is part of one of the following funds (each, a "Fund"): the Market Street Fund, Inc. (the "Market Street Fund"), managed by Sentinel Advisors Company, except as to the International Portfolio which is managed by Providentmutual Investment Management Company, the American Century Variable Portfolios, Inc., managed by American Century Investment Management, Inc., the Variable Insurance Products Fund and the Variable Insurance Products Fund II, managed by Fidelity Investments, the Goldman Sachs Variable Insurance Trust, managed by Goldman Sachs Asset Management and Goldman Sachs Asset Management International, the J.P. Morgan Series Trust II, managed by J.P. Morgan Asset Management Inc., the Neuberger & Berman Advisers Management Trust, managed by Neuberger & Berman Management Incorporated, and the Strong Growth Fund II and Strong Opportunity Fund II, managed by Strong Capital Management, Inc. The portion of the Accumulated Value in the Subaccounts will vary with the investment experience of the corresponding Portfolios. The Owner bears the entire investment risk for all amounts allocated to the Variable Account; there is no guaranteed minimum Accumulated Value for the Variable Account, and Cash Surrender Value may be more or less than premiums paid. The accompanying Prospectuses for the Funds describe the investment objectives and the attendant risks of the Portfolios. The Accumulated Value will reflect the Monthly Deductions, including the Variable Account Charge, and certain other fees and charges. Also, a Surrender Charge may be imposed if, during the first 10 Policy Years, the Policy lapses or is surrendered. Generally, during the first five Policy Years the Policy will remain in force as long as the Cumulative Minimum Monthly Premium is paid or the Cash Surrender Value is sufficient to pay Monthly Deductions imposed in connection with the Policy. After the fifth Policy Year, whether the Policy remains in force depends upon whether the Cash Surrender Value is sufficient to pay the Monthly Deductions under the Policy, unless the optional Guaranteed Death Benefit Rider has been purchased and Cumulative Guarantee Premium has been paid in accordance with such Rider. It may not be advantageous to purchase a Policy as a replacement for another type of life insurance or as a means to obtain additional protection if the purchaser already owns a life insurance policy. --------------- THIS PROSPECTUS MUST BE ACCOMPANIED OR PRECEDED BY CURRENT PROSPECTUSES OR PROSPECTUS PROFILES FOR THE FUNDS LISTED ABOVE. --------------- 6 PLEASE READ THIS PROSPECTUS CAREFULLY AND RETAIN IT FOR FUTURE REFERENCE. --------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. --------------- SHARES OF THE FUNDS AND INTERESTS IN THE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, A BANK, AND THE SHARES AND INTERESTS ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY. Prospectus dated 7 TABLE OF CONTENTS
PAGE Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Summary Description of the Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Policy Offered . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Variable Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Availability of Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Death Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Flexibility to Adjust Amount of Death Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allocation of Net Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Free-Look Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Charges Assessed in Connection with the Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary of Policy Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Premium Expense Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Surrender Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Withdrawal Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Monthly Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transfer Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Projection Report Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Policy Lapse and Reinstatement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loan Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Withdrawal of Cash Surrender Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Surrender of the Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Available Automated Fund Management Features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Optional Benefits Tax Treatment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Illustrations of Death Benefits, Accumulated Value and Cash Surrender Value . . . . . . . . . . . . . . National Life Insurance Company, The Variable Account, and The Funds . . . . . . . . . . . . . . . . . . . . . . National Life Insurance Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Variable Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Market Street Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Growth Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Sentinel Growth Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Aggressive Growth Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Bond Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Managed Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The International Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Money Market Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . American Century Variable Portfolios, Inc. VP Value Portfolio VP Income & Growth Portfolio Variable Insurance Products Fund and Variable Insurance Products Fund II . . . . . . . . . . . . . . . . Growth Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . High Income Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Index 500 Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Contrafund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ii 8
PAGE Goldman Sachs Variable Insurance Trust International Equity Global Income CORE Small Cap Equity Mid Cap Equity J.P. Morgan Series Trust II International Opportunities Portfolio Small Company Portfolio Neuberger & Berman Advisers Management Trust Partners Portfolio Strong Variable Insurance Funds, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Growth Fund II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Strong Opportunity Fund II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Resolving Material Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Fixed Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Detailed Description of Policy Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Death Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Death Benefit Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Option A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Option B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Which Death Benefit Option to Choose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in Death Benefit Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . How the Death Benefit May Vary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ability to Adjust Face Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Decrease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . How the Duration of the Policy May Vary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Determination of Number of Units for the Variable Account . . . . . . . . . . . . . . . . . . . Determination of Unit Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Investment Factor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Calculation of Accumulated Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payment and Allocation of Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issuance of a Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amount and Timing of Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Premium Limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allocation of Net Premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Policy Lapse . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reinstatement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Specialized Uses of the Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Charges and Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Premium Expense Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Surrender Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Monthly Deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of Insurance Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of Insurance Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rate Class . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Variable Account Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Monthly Administrative Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Optional Benefit Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Withdrawal Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transfer Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Projection Report Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
iii 9
PAGE Policy Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loan Privileges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest Rate Charged . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allocation of Loans and Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest Credited to Amounts Held as Collateral . . . . . . . . . . . . . . . . . . . . . . . . Preferred Policy Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of Policy Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loan Repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lapse With Loans Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Surrender Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Withdrawal of Cash Surrender Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Option A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Option B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Free-Look Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Telephone Transaction Privilege . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Special Transfer Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transfer Right for Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transfer Right for Change in Investment Policy . . . . . . . . . . . . . . . . . . . . . . . . . Available Automated Fund Management Features . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dollar Cost Averaging . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Portfolio Rebalancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Fixed Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Minimum Guaranteed and Current Interest Rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Calculation of Non-loaned Accumulated Value in the Fixed Account . . . . . . . . . . . . . . . . Transfers from Fixed Account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Policy Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Indefinite Policy Duration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payment of Policy Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change of Owner and Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Split Dollar Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assignments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Misstatement of Age and Sex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Suicide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Incontestability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Arbitration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Correspondence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Settlement Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payment of Interest Only . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments for a Stated Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments for Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
iv 10
PAGE Payments of a Stated Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Life Annuity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Joint and Two Thirds Annuity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50% Survivor Annuity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Optional Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Guaranteed Death Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional Protection Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Policy Split Option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estate Protector Rider . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Term Rider . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Continuing Coverage Rider . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Enhanced Death Benefit Rider . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Automatic Increase Rider . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal Income Tax Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax Status of the Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax Treatment of Policy Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . In General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Modified Endowment Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Distributions from Policies Classified as Modified Endowment Contracts . . . . . . . . . . . . . Distributions from Policies Not Classified as Modified Endowment Contracts . . . . . . . . . . . Policy Loan Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment in the Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Multiple Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Possible Charge for National Life's Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Possible Changes in Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in Applicable Law, Funding and Otherwise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Officers and Directors of National Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Distribution of Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Policy Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preparing for Year 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Appendix A-Illustration of Death Benefits, Accumulated Values and Cash Surrender Values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
THE POLICY MAY NOT BE AVAILABLE IN ALL JURISDICTIONS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS. IF GIVEN, SUCH INFORMATION OR REPRESENTATIONS SHOULD NOT BE RELIED ON. THE PRIMARY PURPOSE OF THIS VARIABLE LIFE INSURANCE POLICY IS TO PROVIDE INSURANCE PROTECTION. NO CLAIM IS MADE THAT THE POLICY IS IN ANY WAY SIMILAR OR COMPARABLE TO AN INVESTMENT IN A MUTUAL FUND. v 11 DEFINITIONS ACCUMULATED VALUE The sum of the Policy's values in the Variable Account and the Fixed Account. ADDITIONAL COVERAGE One of the two types of coverage of which the Face Amount is comprised, which is provided by the Additional Protection Benefit Rider; the other type of coverage is Basic Coverage. ADDITIONAL PROTECTION BENEFIT RIDER An optional benefit that may be included in the Policy at the Owner's option, which provides Additional Coverage. ATTAINED AGE The Issue Age of the Insured plus the number of full Policy Years which have passed since the Date of Issue. BASIC COVERAGE One of the two types of coverage of which the Face Amount is comprised; the other type is Additional Coverage, provided by the Additional Protection Benefit Rider. BENEFICIARY The person(s) or entity(ies) designated to receive all or some of the Death Benefit on the death of the last to die of the two Insureds. The Beneficiary is designated in the application or if subsequently changed, as shown in the latest change filed with National Life. The interest of any Beneficiary who dies before the last to die of the two Insureds shall vest in the Owner unless otherwise stated. CASH SURRENDER VALUE The Accumulated Value minus any applicable Surrender Charge, and minus any outstanding Policy loans and accrued interest on such loans. COLLATERAL The portion of the Accumulated Value in the Fixed Account which secures the amount of any Policy loan. CODE The Internal Revenue Code of 1986, as amended. CUMULATIVE GUARANTEE PREMIUM The sum of the Monthly Guarantee Premiums in effect on each Monthly Policy Date since the Date of Issue (including the current month), plus all Withdrawals and outstanding Policy loans and accrued interest. CUMULATIVE MINIMUM MONTHLY PREMIUM The sum of the Minimum Monthly Premiums in effect on each Monthly Policy Date since the Date of Issue (including the current month), plus all Withdrawals and outstanding Policy loans and accrued interest. DAC TAX A tax attributable to Specified Policy Acquisition Expenses under Section 848 of the Code. DATE OF ISSUE The date on which the Policy is issued, which is set forth in the Policy. It is used to determine Policy Years, Policy Months and Monthly Policy Dates, as well as to measure suicide and contestable periods.
1 12 DEATH BENEFIT The Policy's Unadjusted Death Benefit, plus any dividends payable, plus any relevant additional benefits provided by a supplementary benefit Rider, less any outstanding Policy loan and accrued interest, and less any unpaid Monthly Deductions. DURATION The number of full years the insurance has been in force; for the Initial Face Amount, measured from the Date of Issue; for any increase in Face Amount, measured from the effective date of such increase. FACE AMOUNT The Initial Face Amount plus any increases in Face Amount and minus any decreases in Face Amount. The Face Amount is the sum of the Basic Coverage and the Additional Coverage. FIXED ACCOUNT The account which holds the assets of National Life which are available to support its insurance and annuity obligations. GRACE PERIOD A 61-day period measured from the date on which notice of pending lapse is sent by National Life, during which the Policy will not lapse and insurance coverage continues. To prevent lapse, the Owner must during the Grace Period make a premium payment equal to the sum of any amount by which the past Monthly Deductions have been in excess of Cash Surrender Value, plus three times the Monthly Deduction due the date the Grace Period began. GUARANTEED DEATH BENEFIT RIDER An optional Rider that will guarantee that the Policy will not lapse, either prior to the end of the year that the younger Insured attains Age 80, or for the entire lifetimes of the Insureds, whichever is elected by the Owner, regardless of investment performance, if the Cumulative Guarantee Premium has been paid as of each Monthly Policy Date. HOME OFFICE National Life's Home Office at National Life Drive, Montpelier, Vermont 05604. INITIAL FACE AMOUNT The Face Amount of the Policy on the Date of Issue. The Face Amount may be increased or decreased after the first Policy Year. INSUREDS The two persons upon whose lives the Policy is issued. ISSUE AGE The age of an Insured at his or her birthday nearest the Date of Issue. The Issue Ages of the two Insureds are stated in the Policy. JOINT AGE The age assigned to the Policy, based on characteristics of the two Insureds, used in the calculation of the Target Premium and the Surrender Charge. The Joint Age is set forth in the Policy, and is discussed in Appendix B of this Prospectus. MINIMUM BASIC COVERAGE AMOUNT The Minimum Basic Coverage Amount is $100,000. MINIMUM INITIAL PREMIUM The minimum premium required to issue a Policy. It is equal to two times the Minimum Monthly Premium, or if the Guaranteed
2 13 Death Benefit Rider applies to the Policy, two times the Monthly Guarantee Premium. MINIMUM MONTHLY PREMIUM The monthly premium which, if paid, will guarantee that the Policy will stay in force during the first five Policy Years. This amount, which includes any substandard charges and any applicable Rider charges, is determined separately for each Policy, based on the requested Initial Face Amount, and the Issue Ages, sexes and Rate Classes of the two Insureds. This premium is stated in the Policy, and will be restated upon changes in coverage. MONTHLY ADMINISTRATIVE CHARGE A charge included in the Monthly Deduction, which is intended to reimburse National Life for ordinary administrative expenses and distribution expenses. MONTHLY DEDUCTION The amount deducted from the Accumulated Value on each Monthly Policy Date. It includes the Variable Account Charge, the Monthly Administrative Charge, the Cost of Insurance Charge, and the monthly cost of any benefits provided by Riders. MONTHLY GUARANTEE PREMIUM The monthly premium level which will keep the Guaranteed Death Benefit Rider in force. If the Guaranteed Death Benefit Rider applies only until the younger Insured's Attained Age 81, then the Monthly Guarantee Premium will be less than if the Owner elects to have the Guaranteed Death Benefit Rider apply for the entire lifetimes of the two Insureds. If the Guaranteed Death Benefit Rider applies to a Policy, the Monthly Guarantee Premium will be stated in the Policy. MONTHLY POLICY DATE The day in each calendar month which is the same day of the month as the Date of Issue, or the last day of any month having no such date, except that whenever the Monthly Policy Date would otherwise fall on a date other than a Valuation Day, the Monthly Policy Date will be deemed to be the next Valuation Day. NET AMOUNT AT RISK The amount by which the Unadjusted Death Benefit exceeds the Accumulated Value. NET PREMIUM The remainder of a premium after the deduction of the Premium Expense Charge. OWNER The person(s) or entity(ies) entitled to exercise the rights granted in the Policy. PLANNED PERIODIC PREMIUM The premium amount which the Owner plans to pay at the frequency selected. The Owner may request a reminder notice and may change the amount of the Planned Periodic Premium. The Owner is not required to pay the designated amount. POLICY ANNIVERSARY The same day and month as the Date of Issue in each later year. POLICY YEAR A year that starts on the Date of Issue or on a Policy Anniversary.
3 14 PREMIUM EXPENSE CHARGE A charge deducted from each premium payment which has two parts: one to cover the cost of state and local premium taxes, and the federal DAC Tax, and the other to cover distribution expenses incurred in connection with the Policies. RATE CLASS The classification of an Insured for cost of insurance purposes. The Rate Classes are: preferred nonsmoker; nonsmoker; preferred smoker; smoker; substandard and uninsurable. RIDERS Optional benefits that an Owner may elect to add to the Policy at an additional cost. SURRENDER CHARGE The amount deducted from the Accumulated Value of the Policy upon lapse or surrender during the first 10 Policy Years or 10 years following an increase in Basic Coverage. The Surrender Charge is shown in the Policy and is discussed in Appendix B to this Prosepctus. TARGET PREMIUM The premium used in the determination of the amount of the Premium Expense Charge. This amount is shown in each Policy and is discussed in Appendix B to this Prospectus. UNADJUSTED DEATH BENEFIT Under Option A, the greater of the Face Amount or the applicable percentage of the Accumulated Value; under Option B, the greater of the Face Amount plus the Accumulated Value, or the applicable percentage of the Accumulated Value. The Death Benefit Option is selected at time of application but may be later changed. VALUATION DAY Each day that the New York Stock Exchange is open for business other than the day after Thanksgiving and any day on which trading is restricted by directive of the Securities and Exchange Commission. Unless otherwise indicated, whenever under a Policy an event occurs or a transaction is to be effected on a day that is not a Valuation Date, it will be deemed to have occurred on the next Valuation Date. VALUATION PERIOD The time between two successive Valuation Days. Each Valuation Period includes a Valuation Day and any non-Valuation Day or consecutive non-Valuation Days immediately preceding it. WITHDRAWAL A payment made at the request of the Owner pursuant to the right in the Policy to withdraw a portion of the Cash Surrender Value of the Policy. The Withdrawal Charge will be deducted from the Withdrawal Amount.
4 15 SUMMARY DESCRIPTION OF THE POLICY The following summary of the Policy provisions should be read in conjunction with the detailed information appearing elsewhere in this Prospectus. Unless otherwise noted, this Prospectus assumes at least one of the Insureds is alive. THE POLICY OFFERED The Sentinel Estate Provider last survivor flexible premium adjustable benefit variable life insurance policy offered by this Prospectus is issued by National Life. The Policy allows the Owner, subject to certain limitations, to make premium payments in any amount and at any frequency. As long as the Policy remains in force, it will provide for: (1) Life insurance coverage which will provide a death benefit on the death of the last to die of two named Insureds; (2) A Cash Surrender Value; (3) Surrender and Withdrawal rights and Policy loan privileges; and (4) A variety of additional insurance benefits. The Policy described in this Prospectus is designed to provide insurance coverage to help lessen the economic loss resulting from the deaths of the two Insureds. It is not offered primarily as an investment. Life insurance is not a short-term investment. Prospective Owners should consider their need for survivorship insurance coverage and the Policy's investment potential on a long-term basis. The Policy is called "flexible premium" because there is no fixed schedule for premium payments, even though the Owner may establish a schedule of Planned Periodic Premiums. The Policy is described as "adjustable benefit" because the Owner may, after the first Policy Year and within limits, increase or decrease the Face Amount and may change the Death Benefit Option. The Policy is called "last survivor" because it pays its Death Benefit on the death of the last to die of two named Insureds. The Policy is called "variable" because, unlike a fixed benefit whole life insurance policy, the Death Benefit under the Policy may, and its Accumulated Value will, vary to reflect the investment performance of the chosen subaccounts of the Variable Account, and the crediting of interest to the Fixed Account, as well as other factors. The failure to pay Planned Periodic Premiums will not itself cause the Policy to lapse. Conversely, the payment of premiums in any amount or frequency will not necessarily guarantee that the Policy will remain in force. In general, the Policy will lapse if the Cash Surrender Value is insufficient to pay the Monthly Deduction. During the first five Policy Years, the Policy will not lapse, even if the Cash Surrender Value is insufficient to pay the Monthly Deductions, so long as the Cumulative Minimum Monthly Premium has been paid. In addition, if the optional Guaranteed Death Benefit Rider has been purchased, the Policy will not lapse, either prior to the younger Insured's Attained Age 81, or for the entire lifetimes of the two Insureds, as the Owner elects, even if the Cash Surrender Value is insufficient to pay the Monthly Deductions, so long as the Cumulative Guarantee Premium has been paid. The Monthly Guarantee Premium, and therefore the Cumulative Guarantee Premium, will be higher for Guaranteed Death Benefit Riders which apply for the entire lifetimes of the two Insureds, than for such Riders which apply until the younger Insured's Attained Age 81. 5 16 A prospective Owner who already has life insurance coverage should consider whether or not changing or adding to existing coverage would be advantageous. It may not be advisable to purchase another policy as a replacement for an existing policy. THE VARIABLE ACCOUNT The Variable Account is divided into Subaccounts, twenty two of which are available under the Policy. The assets of each Subaccount are used to purchase shares of a designated corresponding Portfolio that is part of one of the following Funds: the Market Street Fund, the American Century Variable Portfolios, Inc., the Variable Insurance Products Fund, the Variable Insurance Products Fund II, the Goldman Sachs Variable Insurance Trust, the J.P. Morgan Series Trust II, the Neuberger & Berman Advisers Management Trust, the Strong Variable Insurance Funds, Inc., and the Strong Opportunity Fund II. There is no assurance that the investment objectives of a particular Portfolio will be met. The Owner bears the entire investment risk of amounts allocated to the Variable Account. AVAILABILITY OF POLICY This Policy can be issued for Insureds from Issue Ages 0 to 90, as long as the Joint Age is 15 to 90. The minimum amount of Basic Coverage for a Policy is $100,000. Before issuing a Policy, National Life will require that the proposed Insureds meet certain underwriting standards satisfactory to National Life. The Rate Classes available are Preferred Nonsmoker, Nonsmoker, Preferred Smoker, Smoker, Substandard and Uninsurable. An Insured may be assigned to an Uninsurable Rate Class where he or she would not be insurable for single life coverage. (See "Issuance of a Policy," Page ___.) THE DEATH BENEFIT As long as the Policy remains in force, National Life will pay the Death Benefit to the Beneficiary upon receipt of due proof of the death of both of the two Insureds. The Death Benefit will consist of the Policy's Unadjusted Death Benefit, plus any dividends payable, plus any relevant additional benefits provided by a supplementary benefit Rider (other than the Additional Protection Benefit Rider, the benefit from which is included in the Face Amount of the Policy), less any outstanding Policy loan and accrued interest, and less any unpaid Monthly Deductions. There are two Death Benefit Options available. Death Benefit Option A provides for the greater of (a) the Face Amount and (b) the applicable percentage of the Accumulated Value. Death Benefit Option B provides for the greater of (a) the Face Amount plus the Accumulated Value and (b) the applicable percentage of the Accumulated Value. (See "Death Benefit Options," Page ___.) There are two types of coverage available under the Policy - Basic Coverage and Additional Coverage. (See "Death Benefit", Page .) FLEXIBILITY TO ADJUST AMOUNT OF DEATH BENEFIT After the first Policy Year, the Owner has significant flexibility to adjust the Death Benefit by changing the Death Benefit Option or by increasing or decreasing the Face Amount of the Policy. (See "Change in Death Benefit Option," Page ___, and "Ability to Adjust Face Amount," Page ___.) Any change in Death Benefit Option or in the Face Amount may affect the charges under the Policy. Any increase in the Face Amount will result in an increase in the Monthly Deductions. A decrease in Face Amount may also affect the Monthly Deductions. (See "Cost of Insurance Charge," Page ___.) To the extent that a requested decrease in Face Amount would result in cumulative premiums exceeding the maximum premium limitations applicable under the Code for life insurance, National Life will not effect the decrease. 6 17 ACCUMULATED VALUE The Accumulated Value is the total amount of value held under the Policy at any time. It equals the sum of the amounts held in the Variable Account and the Fixed Account. (See "Calculation of Accumulated Value," Page ___.) The Accumulated Value in the Variable Account will reflect the investment performance of the chosen Subaccounts of the Variable Account, any Net Premiums paid, any transfers, any Withdrawals, any loans, any loan repayments, any loan interest paid or credited and any charges assessed in connection with the Policy. The Owner bears the entire investment risk for amounts allocated to the Variable Account. There is no guaranteed minimum for the portion of the Accumulated Value in the Variable Account. Accumulated Value in the Variable Account may be greater or less than the Net Premiums allocated to the Variable Account. The Fixed Account earns interest at rates National Life declares in advance for specific periods. The rates are guaranteed to equal or exceed 4%. The principal, after all deductions and charges, is also guaranteed. The value of the Fixed Account will reflect any amounts allocated or transferred to it plus interest credited to it, less amounts deducted, transferred or withdrawn from it. (See "The Fixed Account," Page ___.) The Collateral portion of the Accumulated Value in the Fixed Account will reflect any amounts transferred from the Variable Account and/or non-loaned portion of the Fixed Account as collateral for Policy loans, plus interest at rates National Life declares of at least 4%. The Collateral will be reduced by loan repayments. (See "Loan Privileges," Page ___.) The Accumulated Value is relevant to the computation of the Death Benefit and the Monthly Deduction. ALLOCATION OF NET PREMIUMS Except as described below, Net Premiums will generally be allocated to the Subaccounts of the Variable Account and the Fixed Account in accordance with the allocation percentages which are in effect for such premium when received at National Life's Home Office. These percentages will be those specified in the application or as subsequently changed by the Owner. Owners of Policies may choose among all twenty-two available Subaccounts of the Variable Account; however, National Life reserves the right to limit the number of different Subaccounts used in any Policy over its entire life to 17. Any portion of the initial Net Premium and any Net Premiums received during the free-look period that are designated to be allocated to the Variable Account will be allocated instead to the Money Market Subaccount. At the end of such period, the amount in the Money Market Subaccount (including investment experience) will be allocated to each of the chosen Subaccounts based on the proportion that the allocation percentage for such Subaccount bears to the sum of the Variable Account premium allocation percentages. For this purpose, National Life will assume that the free-look period ends 20 days after the date the Policy is issued. (See "Allocation of Net Premiums," Page ___.) TRANSFERS The Owner may make transfers of the amounts in the Subaccounts of the Variable Account and Fixed Account between and among such accounts. Transfers between the Subaccounts of the Variable Account or into the Fixed Account will be made on the Valuation Day National Life receives the request. Transfers out of the Fixed Account are limited to the greater of $1000 and 25% of Accumulated Value in the Fixed Account, and to one transfer per Policy Year. Currently transfers may be made without charge 7 18 regardless of their frequency, and National Life has no present intent to impose a charge for transfers in the foreseeable future; however, National Life reserves the right, upon prior notice to Policy Owners, to impose in the future a charge of $25 on each transfer in excess of twelve transfers in any one Policy Year. (See "Transfers," Page ___.) FREE-LOOK PRIVILEGE The Policy provides for an initial "free-look" period, during which the Owner may cancel the Policy and receive a refund equal to the gross premiums paid on the Policy. This free-look period ends 10 days after the Owner receives the Policy, or at the end of such longer period provided by state law. To cancel the Policy, the Owner must return the Policy to National Life or to an agent of National Life within such time with a written request for cancellation. (See "Free-Look Privilege," Page ___.) CHARGES ASSESSED IN CONNECTION WITH THE POLICY Summary of Policy Expenses Transaction Expenses Premium Expense Charge (as a percentage of premiums paid) . . . . . . . . . . . . 3.40%, plus: for Policy Years 1 to 10: 7% up to Target Premium, 4% for premiums in excess of Target Premium After Policy Year 10: 4%(1) Surrender Charge . . . . . . . . . . . . . . . . . . See below Withdrawal Charge . . . . . . . . . . . . . . . . . Lesser of 2% or $25
- ---------------------- (1)National Life reserves the right to raise the Premium Expense Charge as a percentage of premiums paid in excess of the Target Premium to 3.40%, plus 5%. National Life also reserves the right after Policy Year 10 to charge a Premium Expense Charge of up to the maximum permitted during the first 10 Policy Years. MONTHLY DEDUCTIONS Accumulated Value Charge Policy Years 1-10: . . . . Basic Coverage less than $1 million: annual rate . . . . . . . . . . . . . . . . . . . . . . . . . . of 0.90%(2) Basic Coverage of $1 million to $2,999,999: annual rate of .80%(2) Basic Coverage $3 million and over: annual rate of 0.75%(2) After Policy Year 10: Basic Coverage less than $1 million: 0.35%(3) Basic Coverage of $1 million to $2,999,999: 0.30%(3) Basic Coverage $3 million and over: 0.25%(3) Cost of Insurance Charge Varies by Issue Age, sexes, Rate Class, duration of the Policy-See below Administrative Charge Policy Years 1 to 10: $15 plus $0.08(4) per $1000 of Basic Coverage per month(5) After Policy Year 10: $7.50 per month(6) Rider Charges . . . . . . . . . . . . . . . . . . . See "Optional Benefits" on page for charges applicable to optional Riders elected for a Policy
- ---------------------- 8 19 (2)The charge shown is the annual equivalent of the monthly charge. The Variable Account Charge applies to Accumulated Value held in the Variable Account. This charge does not apply to amounts held in the Fixed Account. (3)This reduction is not guaranteed, except as required by the state of issue. (4)This rate is lower for Joint Ages 38 and below. (5)This charge is increased by $.005 per $1000 of Basic Coverage per month for each Insured who is a smoker. (6)National Life reserves the right to increase the Monthly Administrative Charge for Policy years after Policy Year 10 up to an amount not to exceed $15 plus $0.08 per $1000 of Basic Coverage, plus $0.005 per $1000 of Basic Coverage per month for each smoker. In addition, the $0.08 per $1000 of Basic Coverage portion of the Monthly Administrative Charge will apply to increases in Basic Coverage for 10 years after an increase in Basic Coverage. Annual Charges of Underlying Funds (for the year ended December 31, 1997):
Management Other Total Fee, after expense Expenses, Expenses, reimbursement after expense after expense reimbursement reimbursement Market Street Fund, Inc.: Money Market Portfolio .25% .14% .39% Bond Portfolio .35% .22% .57% Managed Portfolio .40% .18% .58% Aggressive Growth Portfolio .45% .18% .63% International Portfolio .75% .27% 1.02% Growth Portfolio .33% .10% .43% Sentinel Growth Portfolio .50% .40% .90% American Century Variable Portfolios, Inc. VP Value Portfolio 1.00% 0 1.00% VP Income & Growth Portfolio .70% 0 .70% Fidelity: Variable Insurance Products Fund I: Growth Portfolio .60% .07% .67% High Income Portfolio .59% .12% .71% Fidelity: Variable Insurance Products Fund II: Index 500 Portfolio .24% .04% .28% Contrafund Portfolio .60% .08% .68% Goldman Sachs Variable Insurance Trust International Equity 1.00% .25% 1.25% Global Income .90% .15% 1.05% CORE Small Cap Equity .75% .15% .90% Mid Cap Equity .80% .15% .95% J.P. Morgan Series Trust II International Opportunities Portfolio .60% .60% 1.20% Small Company Portfolio .60% .55% 1.15%
9 20 Neuberger & Berman Advisers Management Trust Partners Portfolio .86% 0 .86% Strong Variable Insurance Funds, Inc. Growth Fund II 1.00% .20% 1.20% Strong Opportunity Fund II 1.00% .15% 1.15%
National Life has agreed to reimburse a portion of the expenses of the Sentinel Growth Portfolio. Without this reimbursement, the Sentinel Growth Portfolio's management fee, other expenses and total expenses would have been %, % and % respectively. Fidelity Investments agreed to reimburse a portion of Index 500 Portfolio's expenses during the period. Without this reimbursement, the fund's management fee, other expenses and total expenses would have been %, % and % respectively. Strong Capital Management, Inc. has agreed to reimburse a portion of the expenses of the Growth Fund II Portfolio. Without this reimbursement the management fee, other expenses and total expenses of the Growth Fund II Portfolio would have been . %, . % and . % respectively. Premium Expense Charge. A Premium Expense Charge will be deducted from each premium payment, which includes a charge in the amount of 3.40% of each premium, to cover the cost of state and local premium taxes, and the federal DAC Tax. National Life reserves the right to change the amount of the charge deducted from future premiums if the applicable law is changed. (See "Premium Expense Charge," Page ___.) The Premium Expense Charge will also include, during the first 10 Policy Years, a deduction of 7.0% of each premium paid up to the Target Premium, and 4.0% of premiums paid in excess of the Target Premium, from each premium payment prior to allocation of Net Premiums, to compensate National Life for the expenses incurred in distributing the Policies, including commissions to selling agents. National Life reserves the right to increase the charge for premiums in excess of the Target Premium from 4.0% to 5.0% of such premiums. National Life currently intends to reduce this deduction from premiums paid after the tenth Policy Anniversary to 4.0% of all premiums, although it reserves the right to make a deduction of up to the maximum permitted during the first ten Policy Years. Surrender Charge. A Surrender Charge is imposed if the Policy is surrendered or lapses at any time before the end of the tenth Policy Year, or the ten years after an increase in the Basic Coverage. The initial Surrender Charge varies by Joint Age and is shown in Appendix B of this Prospectus. The Surrender Charge will be level for up to five Policy Years, and then decline each month by one sixtieth of the initial Surrender Charge until it is zero at the beginning of Policy Year 11 (or if the level Surrender Charge period ends earlier than the end of Policy Year 5, declining each month by an amount equal to the initial Surrender Charge multiplied by a fraction of which the numerator is one and the denominator is the number of months from the end of the level Surrender Charge period to the beginning of Policy Year 11). For increases in Basic Coverage, the Surrender Charge will be determined in a like fashion and will decline each month by one sixtieth of the initial Surrender Charge following the five-year level period until it is zero at the beginning of the eleventh year after the date of the increase (or if the level Surrender Charge period ends earlier than the fifth anniversary of the increase, declining each month by an amount equal to the initial Surrender Charge multiplied by a fraction of which the numerator is one and the denominator is the number of months from the end of the level Surrender Charge period to the beginning of the eleventh year after the effective date of the increase). The Surrender Charge will not decrease in the event of a decrease in Basic Coverage. (See "Surrender Charge," Page .) 10 21 Withdrawal Charge. A charge equal to the lesser of 2% of the amount withdrawn or $25 will be deducted from each Withdrawal amount paid. (See "Withdrawal Charge," Page .) Monthly Deductions. On the Date of Issue and on each Monthly Policy Date thereafter, the Accumulated Value will be reduced by a Monthly Deduction equal to the sum of the monthly Cost of Insurance Charge, Variable Account Charge, Monthly Administrative Charge, and a charge for any additional benefits added by rider. The monthly Cost of Insurance Charge will be determined by multiplying the Net Amount at Risk (that is, the Unadjusted Death Benefit less Accumulated Value) by the applicable cost of insurance rate(s), which will depend upon the Issue Ages, sexes, and Rate Classes of the Insureds, the Duration of the coverage, whether the coverage is Basic Coverage or Additional Coverage, and on National Life's expectations as to future mortality and expense experience, but which will not exceed the guaranteed maximum cost of insurance rates set forth in the Policy based on the Insureds' Issue Ages, sexes, substandard or uninsurable status, the coverage's Duration, whether the coverage is Basic Coverage or Additional Coverage, and the "1980 Commissioners Standard Ordinary Mortality Table." (See "Cost of Insurance Charge," Page ___.). The Variable Account Charge varies by the amount of Basic Coverage in the Policy. It is a percentage of the Accumulated Value in the Variable Account, and does not apply to Accumulated Value in the Fixed Account. During the first 10 Policy Years, for Policies with Basic Coverage less than $1,000,000, the current annual charge is 0.90%; for Policies with Basic Coverage from $1,000,000 to $2,999,999, the current annual charge is 0.80%, and for Policies with Basic Coverage of $3 million or more, the current annual charge is 0.75%. In all cases, National Life reserves the right to increase this charge to an amount not to exceed 0.90%. After Policy Year 10, National Life currently intends to reduce this charge to the following rates: for Policies with Basic Coverage of less than $1 million, an annual charge of 0.35%; for Policies with Basic Coverage from $1,000,000 to $2,999,999, an annual charge of 0.30%, and for Policies with Basic Coverage of $3 million or more, an annual charge of 0.25%. However, National Life reserves the right to continue to charge a Variable Account Charge in an annual amount up to 0.90% after Policy Year 10. (See "Variable Account Charge, page ). The Monthly Administrative Charge during the first 10 Policy Years is $15.00 plus $0.08 per $1000 of Basic Coverage. This charge is increased during the first ten Policy Years by $0.005 per $1000 of Basic Coverage for each Insured who is a smoker, and is reduced if the Joint Age of the Insureds is 38 or less. After the end of Policy Year 10, National Life currently intends to assess a reduced Monthly Administrative Charge of $7.50, with no additional amount per $1000 of Basic Coverage, but National Life reserves the right to increase the Monthly Administrative Charge after Policy Year 10 to an amount not to exceed $15 plus $0.08 per $1000 of Basic Coverage, plus $0.005 for each smoker. The $0.08 per $1000 of Basic Coverage portion of the Monthly Administrative Charge will also apply to the increase in Basic Coverage for 10 years after an increase in Basic Coverage. (See "Monthly Administrative Charge," Page ___.) Transfer Charge. Currently an unlimited number of transfers are permitted in each Policy Year without charge, and National Life has no current intent to impose a transfer charge in the foreseeable future; however, National Life reserves the right to impose in the future a charge of $25 for each transfer in excess of twelve transfers in any one Policy Year. (See "Transfer Charge," Page ___.) Projection Report Charge. National Life may impose a charge for each projection report requested by the Owner. (See "Projection Report Charge," Page __.) Other Charges. Shares of the Portfolios are purchased by the Variable Account at net asset value, which reflects management fees and expenses deducted from the assets of the Portfolios. These management fees and expenses are shown above under "Annual Charges of Underlying Funds". 11 22 POLICY LAPSE AND REINSTATEMENT During the first five Policy Years, the Policy will not lapse if premiums in an amount at least equal to the Cumulative Minimum Monthly Premium have been paid, regardless of the amount of Cash Surrender Value. If, however, total premiums paid are less than the Cumulative Minimum Monthly Premium, and the Cash Surrender Value on a Monthly Processing Date is insufficient to cover the Monthly Deduction then due, the Policy will lapse after a 61-day Grace Period unless a sufficient premium has been paid. An optional Guaranteed Death Benefit Rider is available which will guarantee that the Policy will not lapse, either prior to the end of the year that the younger Insured attains Age 80, or for the entire lifetimes of the two Insureds, as the Owner elects, regardless of investment performance, if total premiums paid are at least equal to the Cumulative Guarantee Premium. (See "Optional Benefits - Guaranteed Death Benefit," Page ___.) Subject to certain conditions, including evidence of insurability satisfactory to National Life and the payment of a sufficient premium, a Policy may be reinstated at any time within five years (or such longer period as may be required in a particular state) after the beginning of the Grace Period. (See "Reinstatement," Page ___.) LOAN PRIVILEGE After the first Policy Year, the Owner may obtain Policy loans in an amount not exceeding, in the aggregate, the Cash Surrender Value less three Monthly Deductions. Policy loans will bear interest at a fixed rate of 6% per year, payable at the end of each Policy Year. At the end of the Policy Year, the loan interest will be added to the outstanding loan balance. Any payments made by the Owner to cover loan interest will be applied to the repayment of the outstanding loan balance. Policy loans may be repaid at any time and in any amount. Policy loans outstanding when the Death Benefit becomes payable or the Policy is surrendered will be deducted from the proceeds otherwise payable. When a Policy loan is taken, Accumulated Value will be held in the Fixed Account as Collateral for the Policy loan. Accumulated Value is taken from the Subaccounts of the Variable Account based on the instructions of the Owner at the time a loan is taken. If specific allocation instructions have not been received from the Owner, the Policy loan will be allocated to the Subaccounts based on the proportion that each Subaccount's value bears to the total Accumulated Value in the Variable Account. If the Accumulated Value in one or more of the Subaccounts is insufficient to carry out the Owner's instructions, the loan will not be processed until further instructions are received from the Owner. Accumulated Value will be taken from the non-loaned portion of the Fixed Account as Collateral for a loan only to the extent that the Accumulated Value in the Variable Account is insufficient. This amount held in the Fixed Account as Collateral will earn interest at an effective annual rate National Life will determine prior to each calendar year. This rate will not be less than 4%. National Life currently intends, but is not obligated to continue, to make preferred loans available beginning in Policy Year 11. At such time, the interest rate charged on all loans will be 4.25%, and the amount held in the Fixed Account as Collateral will be credited with interest at an annual rate of 4.0%. (See "Loan Privileges," Page ___.) Depending upon the investment performance of Cash Surrender Value and the amount of a Policy loan, the loan may cause a Policy to lapse. If a Policy is not a Modified Endowment Contract, lapse of the Policy with Policy loans outstanding may result in adverse tax consequences. (See "Tax Treatment of Policy Benefits," Page ___.) WITHDRAWAL OF CASH SURRENDER VALUE After the first Policy Anniversary, the Owner may, subject to certain restrictions, request a Withdrawal of Cash Surrender Value. The minimum amount for such Withdrawal is $500, and the 12 23 maximum is the Cash Surrender Value minus three Monthly Deductions. The Withdrawal amount will be taken from the Subaccounts of the Variable Account based on instructions provided by the Owner at the time of the Withdrawal. If specific allocation instructions have not been received from the Owner, the Withdrawal will be allocated to the Subaccounts based on the proportion that the value in each account bears to the total Accumulated Value in the Variable Account. If the Accumulated Value in one or more Subaccounts is insufficient to carry out the Owner's instructions, the Withdrawal will not be processed until further instructions are received from the Owner. Withdrawal amounts will be taken from the Fixed Account only to the extent that the Accumulated Value in the Variable Account is insufficient. If Death Benefit Option A is in effect, National Life will reduce the Face Amount by an amount equal to the lesser of (a) the amount of the withdrawal and (b) the excess of the Face Amount divided by the applicable percentage over the Accumulated Value just after the Withdrawal, but in any case not less than zero. (See "Withdrawal of Cash Surrender Value," Page ___.) A Withdrawal Charge will be deducted from the amount of each Withdrawal. (See "Charges and Deductions - Withdrawal Charge," Page ___.) SURRENDER OF THE POLICY The Owner may at any time fully surrender the Policy and receive the Cash Surrender Value, if any. The Cash Surrender Value will equal the Accumulated Value less any Policy loan with accrued interest and any applicable Surrender Charge. (See "Surrender Privilege," Page ___.) AVAILABLE AUTOMATED FUND MANAGEMENT FEATURES National Life currently offers, at no charge to Policyowners, two automated fund management programs, Dollar Cost Averaging and Portfolio Rebalancing. (For a description of these features, see "Available Automated Fund Management Features," Page ___.) OPTIONAL BENEFITS Several optional benefits are available in connection with the Policies, including the Guaranteed Death Benefit Rider, the Additional Protection Benefit Rider, the Policy Split Option, the Estate Preservation Rider, the Term Rider, the Continuing Coverage Rider, the Enhanced Death Benefit Rider and the Automatic Increase Rider. (See "Optional Benefits", page .) TAX TREATMENT Under current federal tax law, life insurance contracts receive tax-favored treatment. Assuming that a Policy qualifies as a life insurance contract for federal income tax purposes, an Owner should not be taxed on any increase in Cash Surrender Value while the Policy remains in force. Moreover, death benefits payable under a Policy should be completely excludable from the gross income of the Beneficiary. As a result, the Beneficiary generally should not be taxed on these proceeds. (See "Tax Status of the Policy," Page ___.) Under certain circumstances, a Policy may be treated as a "Modified Endowment Contract." If the Policy is a Modified Endowment Contract, then certain pre-death distributions, including Policy loans, will be treated first as a distribution of taxable income and then as a return of basis or investment in the contract. In addition, prior to age 59-1/2 any such distributions generally will be subject to a 10% penalty tax. (For further discussion on the circumstances under which a Policy will be treated as a Modified Endowment Contract, See "Tax Treatment of Policy Benefits," Page ___.) If the Policy is not a Modified Endowment Contract, distributions generally will be treated first as a return of basis or investment in the contract and then as disbursing taxable income. Moreover, loans will 13 24 not be treated as distributions. Finally, neither distributions nor loans from a Policy that is not a Modified Endowment Contract are subject to the 10% penalty tax. (See "Distributions from Policies Not Classified as Modified Endowment Contracts," Page ___.) Generally, the proceeds of the Policy are includible in the gross estate of the Insured if the Insured posses any "incidents of ownership" over the Policy at death. "Incidents of ownership" generally includes the right to receive economic benefits of the Policy as defined in Section 2042 of the Code and applicable Treasury regulations. If the Insured never held incidents of ownership over the Policy, or irrevocably transferred all interests in the Policy to a third party (e.g., an irrevocable life insurance trust) more than three years before death, the proceeds should be excluded from the Insured's gross estate. ILLUSTRATIONS OF DEATH BENEFITS, ACCUMULATED VALUE AND CASH SURRENDER VALUE Illustrations of how investment performance of the Variable Account may cause the Death Benefit, the Accumulated Value and the Cash Surrender Value to vary are included in Appendix A commencing on Page A-1. These projections of hypothetical values may be helpful in understanding the long-term effects of different levels of investment performance, of charges and deductions, of electing one or the other death benefit option, and generally comparing and contrasting this Policy to other life insurance policies. Nonetheless, the illustrations are based on hypothetical investment rates of return and are not guaranteed. Illustrations are illustrative only and are not a representation of past or future performance. Actual rates of return may be more or less than those reflected in the illustrations and, therefore, actual values will be different from those illustrated. NATIONAL LIFE INSURANCE COMPANY, THE VARIABLE ACCOUNT, AND THE FUNDS. NATIONAL LIFE INSURANCE COMPANY National Life, a mutual life insurance company chartered in 1848 under Vermont law, is authorized to transact life insurance and annuity business in Vermont and in 50 other jurisdictions. National Life assumes all insurance risks under the Policy and its assets support the Policy's benefits. On December 31, 1997, National Life's consolidated assets were over $8 billion. (See "Financial Statements," Page F-1.) THE VARIABLE ACCOUNT The Variable Account was established by National Life on February 1, 1985 under the provisions of the Vermont Insurance Law. It is a separate investment account to which assets are allocated to support the benefits payable under the Policies, other variable life insurance policies National Life currently issues, and other variable life insurance policies National Life may issue in the future. Owners of Policies may choose among all the Subaccounts of the Variable Account available under the Policies; however, National Life reserves the right to limit the number of different Subaccounts used in any Policy over its entire life to 17. The Variable Account's assets are the property of National Life. Each Policy provides that the portion of the Variable Account's assets equal to the reserves and other liabilities under the Policies (and other policies) supported by the Variable Account will not be chargeable with liabilities arising out of any other business that National Life may conduct. The portion of the Variable Account's assets equal to the reserves and other liabilities under the Policies may, however, be chargeable with liabilities arising from other subaccounts of the Variable Account that fund other variable life insurance policies. In addition to the net assets and other liabilities for the Policies (and other policies), the Variable Account's net assets 14 25 include amounts derived from expenses charged to the Policies (and the other policies) by National Life which it currently holds in the Variable Account, and may in the future include amounts held to support other variable life insurance policies issued by National Life. From time to time these additional amounts will be transferred in cash by National Life to its Fixed Account. The Variable Account is registered with the Securities and Exchange Commission ("SEC") under the Investment Company Act of 1940 ("1940 Act") as a unit investment trust type of investment company. Such registration does not involve any supervision of the management or investment practices or policies of the Variable Account by the SEC. The Variable Account meets the definition of a "separate account" under federal securities laws. THE MARKET STREET FUND The Growth, Sentinel Growth, Aggressive Growth, Bond, Managed, International, and Money Market Subaccounts of the Variable Account invest in shares of The Market Street Fund, Inc., a "series" type of mutual fund which is registered with the SEC under the 1940 Act as a diversified open-end management investment company. The Market Street Fund currently issues seven "series" or classes of shares, each of which represents an interest in a separate portfolio within the Fund, and which are purchased and redeemed by the corresponding Subaccounts of the Variable Account: the Growth Portfolio, the Sentinel Growth Portfolio, the Aggressive Growth Portfolio, the Bond Portfolio, the Managed Portfolio, the International Portfolio and the Money Market Portfolio. The Market Street Fund sells and redeems its shares at net asset value without a sales charge. The investment objectives of the Market Street Fund's Portfolios eligible for purchase by the Variable Account are set forth below. The investment experience of each of the Subaccounts of the Variable Account depends on the investment performance of the corresponding Portfolio. There is no assurance that any Portfolio will achieve its stated objective. The Growth Portfolio. The Growth Portfolio seeks intermediate and long-term growth of capital. A reasonable level of income is an important secondary objective. This Portfolio pursues its objectives by investing primarily in common stocks of companies believed to offer above-average growth potential over both the intermediate and the long term. The Sentinel Growth Portfolio. The Sentinel Growth Portfolio seeks long-term growth of capital through equity participation in companies having growth potential believed by its investment adviser to be more favorable than the U.S. economy as a whole, with a focus on relatively well-established companies. The Aggressive Growth Portfolio. The Aggressive Growth Portfolio seeks to achieve a high level of long-term capital appreciation by investing in securities of a diverse group of smaller emerging companies. The Bond Portfolio. The Bond Portfolio seeks to generate a high level of current income consistent with prudent investment risk by investing in a diversified portfolio of marketable debt securities. The Managed Portfolio. The Managed Portfolio seeks to realize as high a level of long-term total rate of return as is consistent with prudent investment risk by investing in stocks, bonds, money market instruments or a combination thereof. The International Portfolio. The International Portfolio seeks long-term growth of capital principally through investments in a diversified portfolio of marketable equity securities of established non-United States companies. 15 26 The Money Market Portfolio. The Money Market Portfolio seeks to provide maximum current income consistent with capital preservation and liquidity by investing in high-quality money market instruments. With respect to the Growth, Sentinel Growth, Aggressive Growth, Bond, Managed and Money Market Portfolios, the Market Street Fund is advised by Sentinel Advisors Company ("SAC"), which is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. SAC is a partnership whose partners are affiliates of National Life, Provident Mutual Life Insurance Company ("Provident Mutual"), and The Penn Mutual Life Insurance Company. National Life's affiliate is currently the managing partner of SAC and is entitled to the majority share of SAC's profit or loss. With respect to the International Portfolio, the Market Street Fund is advised by Providentmutual Investment Management Company ("PIMC"), which is also registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. PIMC has employed The Boston Company Asset Management, Inc. to provide investment advisory services in connection with the Portfolio. A full description of the Market Street Fund, its investment objectives and policies, its risks, expenses, and all other aspects of its operation is contained in the attached Prospectus for the Market Street Fund, which should be read together with this Prospectus. AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. The Variable Account has one Subaccount which invests exclusively in shares of the VP Value fund, and one Subaccount which invests exclusively in shares of VP Income & Growth fund, each of which are series of American Century Variable Portfolios, Inc. American Century Variable Portfolios, Inc. is a "series" type mutual fund registered with the SEC as a diversified open-end management investment company issuing a number of series or classes of shares, each of which represents an interest in a fund of American Century Variable Portfolios, Inc.. The American Century VP Value Subaccount and the American Century VP Income & Growth Subaccount of the Variable Account invest in shares of the VP Value fund and the VP Income & Growth fund, respectively, of the American Century Variable Portfolios, Inc.. Shares of these Funds are purchased and redeemed by the Variable Account at net asset value without a sales charge. The investment objectives of the Funds of American Century Variable Portfolios, Inc. in which the Subaccounts invest are set forth below. The investment experience of each Subaccount depends upon the investment performance of the underlying Fund. There is no assurance that either Fund will achieve its stated objective. VP Value. To seek long-term capital growth. Income is a secondary objective. The fund will seek to achieve its investment objective by investing in securities that management believes to be undervalued at the time of purchase. VP Income & Growth. To seek dividend growth, current income and capital appreciation. The fund will seek to achieve its investment objective by investing in common stocks. The VP Value fund and the VP Income & Growth fund of the American Century Variable Portfolios, Inc. are managed by American Century Investment Management, Inc. A full description of these Funds, their investment objectives and policies, and the risks, expenses and all other aspects of their operation is contained in the attached Prospectuses for VP Value and VP Income & Growth. VARIABLE INSURANCE PRODUCTS FUND AND VARIABLE INSURANCE PRODUCTS FUND II The Variable Account has two Subaccounts which invest exclusively in shares of Portfolios of the Variable Insurance Products Fund (the "VIP Fund") and two Subaccounts which invest exclusively in 16 27 shares of Portfolios of the Variable Insurance Products Fund II ("VIP Fund II"). Like the Market Street Fund, the VIP Fund and the VIP II Fund are "series" type mutual funds registered with the SEC as diversified open-end management investment companies issuing a number of series or classes of shares, each of which represents an interest in a Portfolio of the VIP Fund or VIP Fund II. The Fidelity Growth Subaccount and Fidelity High Income Subaccount of the Variable Account invest in shares of the Growth Portfolio and the High Income Portfolio, respectively, of the VIP Fund. The Fidelity Index 500 Subaccount and the Fidelity Contrafund Subaccount of the Variable Account invest in shares of the Index 500 Portfolio and the Contrafund Portfolio, respectively, of the VIP Fund II. Shares of these Portfolios are purchased and redeemed by the Variable Account at net asset value without a sales charge. The investment objectives of the Portfolios of the VIP Fund and the VIP Fund II in which the Subaccounts invest are set forth below. The investment experience of each Subaccount depends upon the investment performance of the corresponding Portfolio. There is no assurance that any Portfolio will achieve its stated objective. Growth Portfolio. This Portfolio seeks to achieve capital appreciation. The Growth Portfolio normally purchases common stocks, although its investments are not restricted to any one type of security. Capital appreciation may also be found in other types of securities, including bonds and preferred stocks. High Income Portfolio. This Portfolio seeks to obtain a high level of current income by investing primarily in high-yielding, lower-rated, fixed-income securities, while also considering growth of capital. The risks of investing in these high-yielding, high-risk securities is described in the attached Prospectus for the VIP Fund, which should be read carefully before investing. Index 500 Portfolio. This portfolio seeks to match the total return of the Standard & Poors' Composite Index of 500 Stocks ("S&P 500") while keeping expenses low. Fidelity Management & Research Company, the VIP Fund II Fund Manager, normally invests at least 80% of the fund's assets in equity securities of companies that compose the S&P 500. Contrafund Portfolio. This Portfolio seeks capital appreciation by investing primarily in companies that the Fund manager believes to be undervalued due to an overly pessimistic appraisal by the public. This strategy can lead to investments in domestic or foreign companies, small and large, many of which may not be well known. The Fund primarily invests in common stock and securities convertible into common stock, but it has the flexibility to invest in any type of security that may produce capital appreciation. The Growth and High Income Portfolios of the VIP Fund and the Index 500 and Contrafund Portfolios of the VIP Fund II are managed by Fidelity Management & Research Company. A full description of the VIP Fund and VIP Fund II, the investment objectives and policies of the Portfolios, the risks, expenses and all other aspects of their operation is contained in the attached Prospectuses for the VIP Fund and VIP Fund II. GOLDMAN SACHS VARIABLE INSURANCE TRUST The Variable Account has four Subaccounts which invest exclusively in shares of the following four Funds of Goldman Sachs Variable Insurance Trust: the International Equity Fund, the Global Income Fund, the CORE Small Cap Equity Fund and the Mid Cap Equity Fund. Goldman Sachs Variable Insurance Trust is a "series" type mutual fund registered with the SEC as a diversified open-end management investment company issuing a number of series or classes of shares, each of which represents an interest in a Fund of Goldman Sachs Variable Insurance Trust. 17 28 The Goldman Sachs International Equity Subaccount, the Goldman Sachs Global Income Subaccount, the Goldman Sachs CORE Small Cap Equity Subaccount and the Goldman Sachs Mid Cap Equity Subaccount invest in shares of the the International Equity Fund, the Global Income Fund, the CORE Small Cap Equity and the Mid Cap Equity Fund, respectively, of Goldman Sachs Variable Insurance Trust. Shares of these Funds are purchased and redeemed by the Variable Account at net asset value without a sales charge. The investment objectives of the Funds of Goldman Sachs Variable Insurance Trust which the Subaccounts invest are set forth below. The investment experience of each Subaccount depends upon the investment performance of the underlying Fund. There is no assurance that either Fund will achieve its stated objective. Goldman Sachs International Equity Fund. Seeks long-term capital appreciation through investments in equity securities of companies that are organized outside the U.S. or whose securities are principally traded outside the U.S. Goldman Sachs Global Income Fund. Seeks a high total return, emphasizing current income and, to a lesser extent, providing opportunities for capital appreciation. The Fund invests primarily in a portfolio of high quality fixed-income securities of U.S. and foreign issuers and foreign currencies.This Fund seeks capital appreciation through investments in a diversified portfolio of equity securities. Goldman Sachs Core Small Cap Equity Fund. Seeks long-term growth of capital through a broadly diversified portfolio of equity securities of U.S. issuers which are included in the Russell 2000 Index at the time of investment. Goldman Sachs Mid Cap Equity Fund. Seeks long-term capital appreciation primarily through investments in equity securities of companies with public stock market capitalizations of between $500 million and $10 billion at the time of investment. The International Equity and Global Income Funds are managed by Goldman Sachs Asset Management International, and the Core Small Cap Equity and Mid Cap Equity Funds are managed by Goldman Sachs Asset Management. A full description of the International Equity Fund, the Global Income Fund, the CORE Small Cap Equity Fund and the Mid Cap Equity Fund series of Goldman Sachs Variable Insurance Trust. their investment objectives and policies, and the risks, expenses and all other aspects of their operation is contained in the attached Prospectuses for the Goldman Sachs Variable Insurance Trust. J.P. MORGAN SERIES TRUST II The Variable Account has one Subaccount which invests exclusively in shares of the J.P. Morgan International Opportunities Portfolio, and one Subaccount which invests exclusively in shares of J.P. Morgan Small Company Portfolio, each of which are series of J.P. Morgan Series Trust II. J.P. Morgan Series Fund II is a "series" type mutual fund registered with the SEC as a diversified open-end management investment company issuing a number of series or classes of shares, each of which represents an interest in a Portfolio of J.P. Morgan Series Trust II. The J.P. Morgan International Opportunities Subaccount and the J.P. Morgan Small Company Subaccount of the Variable Account invest in shares of the J.P. Morgan International Opportunities Portfolio and the J.P. Morgan Small Company Portfolio, respectively, of the J.P. Morgan Series Trust II. Shares of these Funds are purchased and redeemed by the Variable Account at net asset value without a sales charge. The investment objectives of the J.P. Morgan Series Trust II Portfolios in which the Subaccounts invest are set forth below. The investment experience of each Subaccount depends upon the investment 18 29 performance of the underlying Fund. There is no assurance that either Fund will achieve its stated objective. J.P. Morgan International Opportunities Portfolio. Seeks to provide a high total return from a portfolio comprised of equity securities of foreign corporations. The Portfolio is designed for investors with a long-term investment horizon who want to diversify their investments by adding international equities and take advantage of investment opportunities outside the U.S. As an international investment, the Portfolio is subject to foreign market, political, and currency risks. J.P. Morgan Small Company Portfolio. Seeks to provide a high total return from a portfolio comprised of equity securities of small companies. The Portfolio invests at least 65% of the value of its total assets in the common stock of small U.S. companies primarily with market capitalizations of less than $1 billion. The Portfolio is designed for investors who are willing to assume the somewhat higher risk of investing in small companies in order to seek a higher return over time than might be expected from a portfolio of large companies. The J.P. Morgan International Opportunities Portfolio and the J.P. Morgan Small Company Portfolio of the J.P. Morgan Series Trust II are managed by J.P. Morgan Investment Management Inc. A full description of these Funds, their investment objectives and policies, and the risks, expenses and all other aspects of their operation is contained in the attached Prospectuses for the J.P. Morgan International Opportunities Portfolio and the J.P. Morgan Small Company Portfolio. NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST The Variable Account has one Subaccount which invests exclusively in shares of the Partners Portfolio, a series of Neuberger & Berman Advisers Management Trust. Neuberger & Berman Advisers Management Trust is a "series" type mutual fund registered with the SEC as a diversified open-end management investment company issuing a number of series or classes of shares, each of which represents an interest in a Portfolio of Neuberger & Berman Advisers Management Trust. The Neuberger & Berman Partners Subaccount of the Variable Account invests in shares of the Partners Portfolio of Neuberger & Berman Advisers Management Trust. Shares of this Portfolio are purchased and redeemed by the Variable Account at net asset value without a sales charge. The investment objectives of the Partners Portfolio are set forth below. The investment experience of each Subaccount depends upon the investment performance of the underlying Fund. There is no assurance that the Fund will achieve its stated objective. Partners Portfolio. To seek capital growth. This Portfolio will seek to achieve its objective by investing primarily in the common stock of established companies. Its investment program seeks securities believed to be undervalued based on fundamentals such as low price-to-earnings ratios, consistent cash flows, and support from asset values. The objective of the Partners Portfolio is not fundamental and can be changed by the Trustees of the Neuberger & Berman Advisers Management Trust without shareholder approval. Shareholders will, however, receive at least 30 days prior notice thereof. The Partners Portfolio of Neuberger & Berman Advisers Management Trust is managed by Neuberger & Berman Management Incorporated. A full description of this Fund, its investment objectives and policies, and the risks, expenses and all other aspects of its operation is contained in the attached Prospectus for the Partners Portfolio of Neuberger & Berman Advisers Management Trust. STRONG VARIABLE INSURANCE FUNDS, INC. AND STRONG OPPORTUNITY FUND II, INC. The Variable Account has one Subaccount which invests exclusively in shares of the Growth Fund II, a series of Strong Variable Insurance Funds, Inc., and one Subaccount which invests exclusively in shares of Strong Opportunity Fund II, Inc. Strong Variable Insurance Funds, Inc. is a "series" type mutual fund 19 30 registered with the SEC as a diversified open-end management investment company issuing a number of series or classes of shares, each of which represents an interest in a Fund of Strong Variable Insurance Funds, Inc., and Strong Opportunity Fund II is a single series mutual fund also registered with the SEC as a diversified open-end management investment company. The Strong Growth Subaccount and the Strong Opportunity Subaccount of the Variable Account invest in shares of the Growth Fund II series of the Strong Variable Insurance Funds, Inc., and the Strong Opportunity Fund II, respectively. Shares of these Funds are purchased and redeemed by the Variable Account at net asset value without a sales charge. The investment objectives of the Strong Funds in which the Subaccounts invest are set forth below. The investment experience of each Subaccount depends upon the investment performance of the underlying Fund. There is no assurance that either Fund will achieve its stated objective. Growth Fund II. This Fund seeks capital growth. It invests primarily in equity securities that the advisor believes have above-average growth prospects. Strong Opportunity Fund II, Inc. This Fund seeks capital appreciation through investments in a diversified portfolio of equity securities. The Growth Fund II series of Strong Variable Insurance Funds, Inc., and Strong Opportunity Fund, Inc. are managed by Strong Capital Management, Inc. A full description of the Growth Fund II series of Strong Variable Insurance Funds, Inc., and Strong Opportunity Fund, Inc. their investment objectives and policies, and the risks, expenses and all other aspects of their operation is contained in the attached Prospectuses for the Growth Fund II and Strong Opportunity Fund II, Inc. National Life has entered into or may enter into agreements with Funds pursuant to which the advisor or distributor pays National Life a fee based upon an annual percentage of the average net asset amount invested by National Life on behalf of the Variable Account and other separate accounts of National Life. These percentages may differ, and National Life may be paid a greater percentage by some investment advisors or distributors than other advisors or distributors. These agreements reflect administrative services provided by National Life. The participation agreements pursuant to which the Funds sell their shares to Subaccounts of the Variable Account contain varying provisions regarding termination. In general, each party may terminate at its option with specified advance written notice, and may also terminate in the event of specific regulatory or business developments. Should an agreement between National Life and a Fund terminate, the Subaccounts which invest in that Fund may not be able to purchase additional shares of such Fund. In that event, Owners will no longer be able to transfer Accumulated Values or allocate Net Premiums to Subaccounts investing in Portfolios of such Fund. Additionally, in certain circumstances, it is possible that a Fund or a Portfolio of a Fund may refuse to sell its shares to a Subaccount despite the fact that the participation agreement between the Fund and National Life has not been terminated. Should a Fund or Portfolio of such Fund decide not to sell its shares to National Life, National Life will not be able to honor requests by Owners to allocate cash values or net premiums to Subaccounts investing in shares of that Fund or Portfolio. RESOLVING MATERIAL CONFLICTS 20 31 The Funds are available to registered separate accounts of insurance companies, other than National Life, offering variable annuity and variable life insurance policies. As a result, there is a possibility that a material conflict may arise between the interests of Owners with Accumulated Value allocated to the Variable Account and the owners of life insurance policies and variable annuities issued by such other companies whose values are allocated to one or more other separate accounts investing in any one of the Funds. In the event of a material conflict, National Life will take any necessary steps, including removing the Variable Account from that Fund, to resolve the matter. The Board of Directors or Trustees of the Funds intend to monitor events in order to identify any material conflicts that possibly may arise and to determine what action, if any, should be taken in response to those events or conflicts. See the individual Fund Prospectuses for more information. The investment objectives and policies of certain Portfolios are similar to the investment objectives and policies of mutual fund portfolios other than the Portfolios that may be managed by the investment adviser or manager. The investment results of the Portfolios, however, may be higher or lower than the results of such other portfolios. 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, even if the other portfolio has the same investment adviser or manager. THE FIXED ACCOUNT For information on the Fixed Account, see page . DETAILED DESCRIPTION OF POLICY PROVISIONS DEATH BENEFIT General. As long as the Policy remains in force, the Death Benefit of the Policy will, upon due proof of the death of both of the Insureds (and fulfillment of certain other requirements), be paid to the named Beneficiary in accordance with the designated Death Benefit Option, unless the claim is contestable in accordance with the terms of the Policy. The proceeds may be paid in cash or under one of the Settlement Options set forth in the Policy. (See "Payment of Policy Benefits," Page ___.) The Death Benefit payable under the designated Death Benefit Option will be the Unadjusted Death Benefit under that Death Benefit Option, increased by any additional benefits and any dividend payable, and decreased by any outstanding Policy loan and accrued interest and any unpaid Monthly Deductions. The Face Amount of a Policy, on which the Unadjusted Death Benefit is based, may be made up of either Basic Coverage or Additional Coverage. Additional Coverage is provided by the Additional Protection Benefit Rider. The Owner must notify National Life as soon as reasonably possible of the death of each Insured. National Life may require proof of whether both Insureds are living two years from the Date of Issue. On the death of the first Insured to die National Life will require the Owner to provide it with evidence of death and proof of age and, if the death is within two years from the Date of Issue, the cause of death. Death Benefit Options. The Policy provides two Death Benefit Options: Option A and Option B. The Owner designates the Death Benefit Option in the application and may change it as described in "Change in Death Benefit Option," Page ___. Option A. The Unadjusted Death Benefit is equal to the greater of (a) the Face Amount of the Policy and (b) the Accumulated Value , multiplied by the specified percentage shown in the table below: 21 32
Attained Age Percentage Attained Age Percentage ------------ ---------- ------------ ---------- of Younger of Younger ---------- ---------- Insured Insured ------- ------- 40 and under 250% 75-90 105% 45 215% 91 104% 50 185% 92 103% 55 150% 93 102% 60 130% 94+ 101% 65 120% 70 115%
For Attained Ages of the younger Insured not shown, the percentages will decrease by a ratable portion of each full year. Illustration of Option A -- For purposes of this illustration, assume that the younger Insured is under Attained Age 40 and there is no Policy loan outstanding. Under Option A, a Policy with a Face Amount of $200,000 will generally have an Unadjusted Death Benefit of $200,000. Assuming the specified percentage for a particular Policy for a particular Attained Age of the younger Insured is 250%, then, because the Unadjusted Death Benefit must be equal to or greater than 2.50 times the Accumulated Value, any time the Accumulated Value exceeds $80,000 the Unadjusted Death Benefit will exceed the Face Amount. Each additional dollar added to the Accumulated Value will increase the Unadjusted Death Benefit by $2.50. Thus, an Accumulated Value of $90,000 for this Policy at this Attained Age for the younger Insured will result in an Unadjusted Death Benefit of $225,000 (2.50 x $90,000), and an Accumulated Value of $150,000 will result in an Unadjusted Death Benefit of $375,000 (2.50 x $150,000). Similarly, any time the Accumulated Value exceeds $80,000, each dollar taken out of the Accumulated Value will reduce the Unadjusted Death Benefit by $2.50. If at any time, however, the Accumulated Value multiplied by the specified percentage is less than the Face Amount, the Unadjusted Death Benefit will be the Face Amount of the Policy. Option B. The Unadjusted Death Benefit is equal to the greater of (a) the Face Amount of the Policy plus the Accumulated Value and (b) the Accumulated Value multiplied by the specified percentage shown in the table above. Illustration of Option B -- For purposes of this illustration, assume that the younger Insured is under Attained Age 40 and there is no Policy loan outstanding. Under Option B, a Policy with a Face Amount of $200,000 will generally pay an Unadjusted Death Benefit of $200,000 plus the Accumulated Value. Thus, for example, a Policy with a $50,000 Accumulated Value will have an Unadjusted Death Benefit of $250,000 ($200,000 plus $50,000). Since the specified percentage is 250%, the Unadjusted Death Benefit will be at least 2.50 times the Accumulated Value. As a result, if the Accumulated Value exceeds $133,333, the Unadjusted Death Benefit will be greater than the Face Amount plus the Accumulated Value. Each additional dollar added to the Accumulated Value above $133,333 will increase the Unadjusted Death Benefit by $2.50. An Accumulated Value of $150,000 will result in an Unadjusted Death Benefit of $375,000 (2.50 x $150,000), and an Accumulated Value of $200,000 will yield an Unadjusted Death Benefit of $500,000 (2.50 x $200,000). Similarly, any time the Accumulated Value exceeds $133,333, each dollar taken out of the Accumulated Value will reduce the Unadjusted Death Benefit by $2.50. If at any time, however, the Accumulated Value multiplied by the specified percentage is less than the Face Amount plus the Accumulated Value, the Unadjusted Death Benefit will be the Face Amount plus the Accumulated Value. At Attained Age 100 of the younger of the two Insureds (even if the younger of the two Insureds is not then living), Option B automatically becomes Option A. 22 33 Which Death Benefit Option to Choose. If an Owner prefers to have premium payments and favorable investment performance reflected partly in the form of an increasing Death Benefit, the Owner should choose Option B. If an Owner is satisfied with the amount of the Insureds' existing insurance coverages and prefers to have premium payments and favorable investment performance reflected to the maximum extent in the Accumulated Value, the Owner should choose Option A. Change in Death Benefit Option. After the first Policy Year, the Death Benefit Option in effect may be changed by sending National Life a written request. No charges will be imposed to make a change in the Death Benefit Option. The effective date of any such change will be the Monthly Policy Date on or next following the date National Life receives the written request. Only one change in Death Benefit Option is permitted in any one Policy Year. If the Death Benefit Option is changed from Option A to Option B, on the effective date of the change, the Death Benefit will not change and the Face Amount will be decreased by the Accumulated Value on that date. However, this change may not be made if it would reduce the Basic Coverage to less than the Minimum Basic Coverage Amount. If the Death Benefit Option is changed from Option B to Option A, on the effective date of the change, the Death Benefit will not change and the Face Amount will be increased by the Accumulated Value on that date. A change in the Death Benefit Option may affect the Net Amount at Risk over time which, in turn, would affect the monthly Cost of Insurance Charge (see "Monthly Deductions," Page ___). Changing from Option A to Option B will generally result in a Net Amount at Risk that remains level. Such a change will result in a relative increase in the Cost of Insurance Charges over time because the Net Amount at Risk will, unless the Unadjusted Death Benefit is based on the applicable percentage of Accumulated Value, remain level as cost of insurance rates increase over time, rather than the Net Amount at Risk decreasing as the Accumulated Value increases. Changing from Option B to Option A will, if the Accumulated Value increases, decrease the Net Amount at Risk over time, thereby potentially offsetting the effect of increases and over time in the cost of insurance rates. The effects of these Death Benefit Option changes on the Face Amount, Unadjusted Death Benefit and Net Amount at Risk can be illustrated as follows. Assume that a contract under Option A has a Face Amount of $500,000 and an Accumulated Value of $100,000 and, therefore, an Unadjusted Death Benefit of $500,000 and a Net Amount at Risk of $400,000 ($500,000 - $100,000). If the Death Benefit Option is changed from Option A to Option B, the Face Amount will decrease from $500,000 to $400,000 and the Unadjusted Death Benefit and Net Amount at Risk would remain the same. The decrease will apply to Basic Coverage and Additional Coverage in the order described under "Ability to Adjust Face Amount - Decreases" on page . Assume that a contract under Option B has a Face Amount of $500,000 and an Accumulated Value of $50,000 and, therefore, the Unadjusted Death Benefit is $550,000 ($500,000 + $50,000) and the Net Amount at Risk is $500,000 ($550,000 - $50,000). If the Death Benefit Option is changed from Option B to Option A, the Face Amount will increase to $550,000, and the Unadjusted Death Benefit and Net Amount at Risk would remain the same. The $50,000 increase in Face Amount will be Basic Coverage. If a change in the Death Benefit Option would result in cumulative premiums exceeding the maximum premium limitations under the Code for life insurance, National Life will not effect the change. A change in the Death Benefit Option may have Federal income tax consequences. (See "Tax Treatment of Policy Benefits," Page ___.) How the Death Benefit May Vary. The amount of the Death Benefit may vary with the Accumulated Value in the following circumstances. The Death Benefit under Option A will vary with the Accumulated Value whenever the specified percentage of Accumulated Value exceeds the Face Amount of the Policy. 23 34 The Death Benefit under Option B will always vary with the Accumulated Value because the Unadjusted Death Benefit equals the greater of (a) the Face Amount plus the Accumulated Value and (b) the Accumulated Value multiplied by the specified percentage. ABILITY TO ADJUST FACE AMOUNT Subject to certain limitations, an Owner may generally, at any time after the first Policy Year, increase or decrease the Policy's Face Amount by submitting a written application to National Life. The effective date of an increase will be the Monthly Policy Date on or next following National Life's approval of the request, and the effective date of a decrease is the Monthly Policy Date on or next following the date that National Life receives the written request. An increase or decrease in Face Amount may have federal tax consequences. (See "Tax Treatment Of Policy Benefits," Page ___.) The effect of changes in Face Amount on Policy charges, as well as other considerations, are described below. Increase. A request for an increase in Face Amount may not be for less than $50,000, or such lesser amount required in a particular state. The Owner may not increase the Face Amount after the older of the two Insureds' Attained Age 90 or if the Joint Age is greater than 90. To obtain the increase, the Owner must submit an application for the increase and provide evidence satisfactory to National Life of both Insureds' insurability. The increase may be either an addition of Basic Coverage or Additional Coverage. An increase in Basic Coverage will result in increased Surrender Charges. An increase in Basic Coverage will also begin a new ten year period for purposes of applying the Monthly Administrative Charge to the new amount of Basic Coverage. If an increase in Basic Coverage would move the Policy into a new size band for purposes of the Variable Account Charge, the Variable Account Charge percentage rate may be reduced as a result of the increase. In the event that an increase simultaneously adds both Basic Coverage and Additional Coverage, the Basic Coverage is assumed to have been added first. On the effective date of an increase, and taking the increase into account, the Cash Surrender Value must be equal to the Monthly Deductions then due, and the Surrender Charge associated with the increase, in the case of an increase in Basic Coverage. If the Cash Surrender Value is not sufficient, the increase will not take effect until the Owner makes a sufficient additional premium payment to increase the Cash Surrender Value. An increase in the Face Amount will generally affect the total Net Amount at Risk which will increase the monthly Cost of Insurance Charges. In addition, the Insureds may be in different Rate Classes as to the increase in insurance coverage. An increase in premium payment or frequency may be appropriate after an increase in Face Amount. (See "Cost of Insurance Charge," Page ___.) After an increase, part of the Net Amount at Risk will be attributable to the initial coverage under the Policy and part will be attributable to the increase. For purposes of allocating Accumulated Value to each coverage to determine the Net Amount at Risk and Cost of Insurance Charge by coverage segment, the Accumulated Value is first considered part of the initial segment. If the Accumulated Value exceeds the initial segment's Face Amount, then it is allocated to increases in Face Amount in the order that such increases took effect. Decrease. The amount of the Face Amount after a decrease cannot be less than 75% of the largest Face Amount in force at any time in the twelve months immediately preceding National Life's receipt of the request. The Basic Coverage after any decrease may not be less than the Minimum Basic Coverage Amount, which is currently $100,000. To the extent a decrease in the Face Amount could result in cumulative premiums exceeding the maximum premium limitations applicable for life insurance under the Code, National Life will not effect the decrease. 24 35 A decrease in the Face Amount generally will decrease the total Net Amount at Risk, which will decrease an Owner's monthly Cost of Insurance Charges. If a decrease in Basic Coverage would move the Policy into a new size band for purposes of the Variable Account Charge, the Variable Account Charge percentage rate may be increased as a result of the decrease. For purposes of determining the Monthly Deductions, any decrease in the Face Amount will reduce the Face Amount in the following order: (a) the increase in Face Amount provided by the most recent increase; (b) the next most recent increases, in inverse chronological order; and (c) the Initial Face Amount. If an increase involved the simultaneous addition of Basic Coverage, Additional Coverage and Face Amount added through the operation of the Automatic Increase Rider, a decrease in the Face Amount will reduce automatic increase first, the Additional Coverage second, and then the Basic Coverage. HOW THE DURATION OF THE POLICY MAY VARY The Policy will remain in force as long as the Cash Surrender Value of the Policy is sufficient to pay the Monthly Deductions and the charges under the Policy. When the Cash Surrender Value is insufficient to pay the charges and the Grace Period expires without an adequate premium payment by the Owner, the Policy will lapse and terminate without value. Notwithstanding the foregoing, during the first five Policy Years the Policy will not lapse if, as of the Monthly Policy Date that the Cash Surrender Value of the Policy first becomes insufficient to pay the charges, the Cumulative Minimum Monthly Premium has been paid. The Owner has certain rights to reinstate the Policy, if it should lapse. (See "Reinstatement," Page ___.) In addition, an optional Guaranteed Death Benefit Rider is available which will guarantee that the Policy will not lapse prior to a time specified in such Rider, regardless of investment performance, if the Cumulative Guarantee Premium has been paid as of each Monthly Policy Date. ACCUMULATED VALUE The Accumulated Value is the total amount of value held under the Policy at any time. It is equal to the sum of the Policy's values in the Variable Account and the Fixed Account. The Accumulated Value minus any applicable Surrender Charge, and minus any outstanding Policy loans and accrued interest, is equal to the Cash Surrender Value. There is no guaranteed minimum for the portion of the Accumulated Value in any of the Subaccounts of the Variable Account and, because the Accumulated Value on any future date depends upon a number of variables, it cannot be predetermined. The Accumulated Value and Cash Surrender Value will reflect the Net Premiums paid, investment performance of the chosen Subaccounts of the Variable Account, the crediting of interest on non-loaned Accumulated Value in the Fixed Account and amounts held as Collateral in the Fixed Account, any transfers, any Withdrawals, any loans, any loan repayments, and charges assessed in connection with the Policy. Determination of Number of Units for the Variable Account. Amounts allocated, transferred or added to a Subaccount of the Variable Account under a Policy are used to purchase units of that Subaccount; units are redeemed when amounts are deducted, transferred or withdrawn. The number of units a Policy has in a Subaccount equals the number of units purchased minus the number of units redeemed up to such time. For each Subaccount, the number of units purchased or redeemed in connection with a particular transaction is determined by dividing the dollar amount by the unit value. Determination of Unit Value. The unit value of a Subaccount is equal to the unit value on the immediately preceding Valuation Day multiplied by the Net Investment Factor for that Subaccount on that Valuation Day. 25 36 Net Investment Factor. Each Subaccount of the Variable Account has its own Net Investment Factor. The Net Investment Factor measures the daily investment performance of the Subaccount. The factor will increase or decrease, as appropriate, to reflect net investment income and capital gains or losses, realized and unrealized, for the securities of the underlying portfolio or series. Calculation of Accumulated Value. The Accumulated Value is determined first on the Date of Issue and thereafter on each Valuation Day. On the Date of Issue, the Accumulated Value will be the Net Premiums received, plus any earnings prior to the Date of Issue, less any Monthly Deductions due on the Date of Issue. On each Valuation Day after the Date of Issue, the Accumulated Value will be: (1) The aggregate of the values attributable to the Policy in the Variable Account, determined by multiplying the number of units the Policy has in each Subaccount of the Variable Account by such Subaccount's unit value on that date; plus (2) The value attributable to the Policy in the Fixed Account (See "The Fixed Account," Page ___.) PAYMENT AND ALLOCATION OF PREMIUMS Issuance of a Policy. In order to purchase a Policy, an individual must make application to National Life through a licensed National Life agent who is also a registered representative of Equity Services, Inc. ("ESI") or a broker/dealer having a Selling Agreement with ESI or a broker/dealer having a Selling Agreement with such a broker/dealer. If the Minimum Initial Premium is not submitted with the application, it must be submitted when the Policy is delivered. Prior to the Issue Date, National Life will accept amounts less than the Minimum Initial Premium as long as they are at least equal to the Minimum Monthly Premium. If the amount paid by the Issue Date is not at least the Minimum Initial Premium, then all premiums paid will be refunded, and the Policy will not be issued. If the first premium is submitted when the Policy is delivered, and the premium is less than the Minimum Initial Premium, the balance of the Minimum Initial Premium must be received within five days, or all premiums will be refunded. The minimum amount of Basic Coverage of a Policy under National Life's rules is $100,000. National Life reserves the right to revise its rules from time to time to specify a different minimum amount of Basic Coverage for subsequently issued Policies. A Policy will be issued only on two Insureds each of whom has an Issue Age from 0 to 90 and whose Joint Age is from 15 to 90, and who provide National Life with satisfactory evidence of insurability. Acceptance is subject to National Life's underwriting rules. National Life reserves the right to reject an application for any reason permitted by law. (See "Cost of Insurance Rate", Page , and "Distribution of Policies," Page ___.) From the time the application for a Policy is signed until the time the Policy is issued, an applicant can, subject to National Life's underwriting rules, obtain temporary survivorship insurance protection, pending issuance of the Policy, by answering "no" with respect to both Insureds to the Health Questions of the Receipt & Temporary Life Insurance Agreement and submitting (a) a complete Application including any medical questionnaire required, and (b) payment of the Minimum Monthly Premium. The amount of coverage under the Receipt & Temporary Life Insurance Agreement is the lesser of the Face Amount applied for or $1,000,000 ($100,000 in the case that the younger of the two proposed Insureds is age 70 or over). Coverage under the agreement will end on the earliest of (a) the 90th day from the date of the agreement; (b) the date that insurance takes effect under the Policy; (c) the date a policy, other than as applied for, is offered to the Applicant; (d) three days from the date National Life mails a notice of termination of coverage; (e) the time the Applicant first learns that the Company has terminated the temporary life insurance; or (f) the time the Applicant withdraws the application for life insurance. 26 37 National Life will offer a one time credit to Home Office employees who purchase a Policy, as both Owner and one of the two Insureds. This one time credit will be 50% of the Target Premium on the Policy. The amount of the credit will be added to the initial premium payment submitted by the Owner. Thus, the credit will be included in premium payments for purposes of calculating and deducting the Premium Tax Charge. If the Policy is surrendered, the credit will not be recaptured by National Life. The amount of the credit will not be included for purposes of calculating agent compensation for the sale of the Policy. Amount and Timing of Premiums. Each premium payment must be at least $100. Subject to certain limitations described below, an Owner has considerable flexibility in determining the amount and frequency of premium payments. At the time of application, each Owner will select a Planned Periodic Premium schedule, based on a periodic billing mode of annual, semi-annual, or quarterly payments. The Owner may request National Life to send a premium reminder notice at the specified interval. The Owner may change the Planned Periodic Premium frequency and amount. Also, under a "Check-O-Matic" plan, the Owner can select a monthly payment schedule pursuant to which premium payments will be automatically deducted from a bank account or other source, rather than being "billed." National Life may allow, in certain situations, Check-O-Matic or group billing payments of less than $100. National Life reserves the right to require that Check-O-Matic be set up for at least the Minimum Monthly Premium. The Owner is not required to pay the Planned Periodic Premiums in accordance with the specified schedule. The Owner may pay premiums in any amount (subject to the $100 minimum and the limitations described in the next section), frequency and time period. Payment of the Planned Periodic Premiums will not, however, guarantee that the Policy will remain in force (except that if such premiums are at least equal to the Cumulative Minimum Monthly Premium, then the Policy will remain in force for at least 5 years, or for the period covered by the Guaranteed Death Benefit Rider if such Rider is purchased and premiums equal to or greater than the Cumulative Guarantee Premium have been paid). Instead, the duration of the Policy depends upon the Policy's Cash Surrender Value. Thus, even if Planned Periodic Premiums are paid, the Policy will lapse whenever the Cash Surrender Value is insufficient to pay the Monthly Deductions and any other charges under the Policy and if a Grace Period expires without an adequate payment by the Owner (unless the Policy is in its first five years, or the Guaranteed Death Benefit Rider has been purchased and remains applicable, so long as the Cumulative Minimum Monthly Premium, or the Cumulative Guarantee Premium, respectively, has been paid). Any payments made while there is an outstanding Policy loan will be applied as premium payments rather than loan repayments, unless National Life is notified in writing that the amount is to be applied as a loan repayment. No premium payments may be made after the younger of the Insureds reaches Attained Age 100. However, loan repayments will be permitted after the younger of the Insureds Attained Age 100. Higher premium payments under Death Benefit Option A, until the applicable percentage of Accumulated Value exceeds the Face Amount, will generally result in a lower Net Amount at Risk, and lower Cost of Insurance Charges against the Policy. Conversely, lower premium payments in this situation will result in a higher Net Amount at Risk, which will result in higher Cost of Insurance Charges under the Policy. Under Death Benefit Option B, until the applicable percentage of Accumulated Value exceeds the Face Amount plus the Accumulated Value, the level of premium payments will not affect the Net Amount at Risk. (However, both the Accumulated Value and Death Benefit will be higher if premium payments are higher, and lower if premium payments are lower.) Under either Death Benefit Option, if the Unadjusted Death Benefit is the applicable percentage of Accumulated Value, then higher premium payments will result in a higher Net Amount at Risk, and higher 27 38 Cost of Insurance Charges. Lower premium payments will result in a lower Net Amount at Risk, and lower Cost of Insurance Charges. Premium Limitations. With regard to a Policy's inside build up, the Code provides for exclusion of the Death Benefit from gross income if total premium payments do not exceed certain stated limits. In no event can the total of all premiums paid under a Policy exceed such limits. If at any time a premium is paid which would result in total premiums exceeding such limits, National Life will only accept that portion of the premium which would make total premiums equal the maximum amount which may be paid under the Policy. The excess will be promptly refunded, and in the cases of premiums paid by check, after such check has cleared. If there is an outstanding loan on the Policy, the excess may instead be applied as a loan repayment. Even if total premiums were to exceed the maximum premium limitations established by the Code, the excess of (a) a Policy's Unadjusted Death Benefit over (b) the Policy's Cash Surrender Value plus outstanding Policy loans and accrued interest, would still generally be excludable from gross income under the Code. The maximum premium limitations set forth in the Code depend in part upon the amount of the Unadjusted Death Benefit at any time. As a result, any Policy changes which affect the amount of the Unadjusted Death Benefit may affect whether cumulative premiums paid under the Policy exceed the maximum premium limitations. To the extent that any such change would result in cumulative premiums exceeding the maximum premium limitations, National Life will not effect such change. (See "Federal Income Tax Considerations," Page ___.) Unless the Insureds provide satisfactory evidence of insurability, National Life reserves the right to limit the amount of any premium payment if it increases the Unadjusted Death Benefit more than it increases the Accumulated Value. However, premiums will not be limited to the extent that they are Planned Periodic Premiums. Allocation of Net Premiums. The Net Premium equals the premium paid less the Premium Expense Charge. In the application for the Policy, the Owner will indicate how Net Premiums should be allocated among the Subaccounts of the Variable Account and/or the Fixed Account. These allocations may be changed at any time by the Owner by written notice to National Life at its Home Office, or if the telephone transaction privilege has been elected, by telephone instructions (See "Telephone Transaction Privilege," Page ___.) The percentages of each Net Premium that may be allocated to any Subaccount must be in whole numbers of not less than 5%, and the sum of the allocation percentages must be 100%. Except in the circumstances described in the following paragraph, National Life will allocate the Net Premiums as of the Valuation Date it receives such premium at its Home Office, based on the allocation percentages then in effect. Any portion of the Initial Premium and any subsequent premiums received by National Life before the end of the free-look period which are to be allocated to the Variable Account will be allocated to the Money Market Subaccount. For this purpose, National Life will assume that the free-look period will end 20 days after the date the Policy is issued. On the first Valuation Date following 20 days after issue of the Policy, National Life will allocate the amount in the Money Market Subaccount to each of the Subaccounts selected in the application based on the proportion that the allocation percentage set forth in the application for such Subaccount bears to the sum of the Variable Account premium allocation percentages then in effect. For example, assume a Policy was issued with Net Premiums to be allocated 25% to the Managed Subaccount, 25% to the Bond Subaccount and 50% to the Fixed Account. During the period stated above, 50% (25% + 25%) of the Net Premiums will be allocated to the Money Market Subaccount. At the end of such period, 50% (25% / 50%) of the amount in the Money Market Subaccount will be transferred to the Managed Subaccount and 50% to the Bond Subaccount. 28 39 The values of the Subaccounts will vary with their investment experience and the Owner bears the entire investment risk. Owners should periodically review their allocation percentages in light of market conditions and the Owner's overall financial objectives. Transfers. The Owner may transfer the Accumulated Value between and among the Subaccounts of the Variable Account and the Fixed Account by making a written transfer request to National Life, or if the telephone transaction privilege has been elected, by telephone instructions to National Life. (See "Telephone Transaction Privilege," Page ___.) Transfers between and among the Subaccounts of the Variable Account and the Fixed Account are made as of the Valuation Day that the request for transfer is received at the Home Office. The Owner may, at any time, transfer all or part of the amount in one of the Subaccounts of the Variable Account to another Subaccount and/or to the Fixed Account. (For transfers from the Fixed Account to the Variable Account, see "Transfers from Fixed Account," Page ___.) Currently an unlimited number of transfers is permitted without charge, and National Life has no current intent to impose a transfer charge in the foreseeable future. However, National Life reserves the right, upon prior notice to Policy Owners, to change this policy so as to deduct a $25 transfer charge from each transfer in excess of the twelfth transfer during any one Policy Year. All transfers requested during one Valuation Period are treated as one transfer transaction. If a transfer charge is adopted in the future, transfers resulting from Policy loans, the operation of the dollar cost averaging or portfolio rebalancing features, the exercise of Special Transfer Rights (see "Policy Rights - Special Transfer Rights," Page ___), and the reallocation from the Money Market Subaccount following the 10-day period after the Date of Issue, will not be subject to a transfer charge and will not count against the twelve free transfers in any Policy Year. Under present law, transfers are not taxable transactions. Policy Lapse. The failure to make a premium payment will not itself cause a Policy to lapse. Lapse will only occur when the Cash Surrender Value is insufficient to cover the Monthly Deductions and other charges under the Policy and the Grace Period expires without a sufficient payment. During the first five Policy Years, the Policy will not lapse so long as the Cumulative Minimum Monthly Premium has been paid, regardless of whether the Cash Surrender Value is sufficient to cover the monthly Deductions and other charges. In addition, if the Owner has elected at issue the Guaranteed Death Benefit Rider, and has paid the Cumulative Guarantee Premium as of each Monthly Policy Date, the Policy will not lapse, either prior to the end of the year that the younger Insured attains Age 80 or for the entire lifetimes of the two Insureds, whichever is elected by the Owner, regardless of whether the Cash Surrender Value is sufficient to cover the Monthly Deductions. (See "Optional Benefits - Guaranteed Death Benefit," Page ___.) The Policy provides for a 61-day Grace Period that is measured from the date on which notice is sent by National Life. The Policy does not lapse, and the insurance coverage continues, until the expiration of this Grace Period. In order to prevent lapse, the Owner must during the Grace Period make a premium payment equal to the sum of any amount by which the past Monthly Deductions have been in excess of Cash Surrender Value, plus three times the Monthly Deduction due the date the Grace Period began. The notice sent by National Life will specify the payment required to keep the Policy in force. Failure to make a payment at least equal to the required amount within the Grace Period will result in lapse of the Policy without value. Reinstatement. A Policy that lapses without value may be reinstated at any time within five years (or longer period required in a particular state) after the beginning of the Grace Period by submitting evidence of both Insureds' insurability satisfactory to National Life and payment of an amount sufficient to provide for two times the Monthly Deduction due on the date the Grace Period began plus three times the Monthly Deduction due on the effective date of reinstatement, which is, unless otherwise required by state law, the Monthly Policy Date on or next following the date the reinstatement application is approved. Upon reinstatement, the Accumulated Value will be based upon the premium paid to reinstate the Policy and the Policy will be reinstated with the same Date of Issue as it had prior to the lapse. Neither the five year no lapse guarantee nor the Death Benefit Guarantee Rider may be reinstated. 29 40 Specialized Uses of the Policy. Because the Policy provides for an accumulation of cash value as well as a death benefit, the Policy can be used for various individual and business financial planning purposes. Purchasing the Policy in part for such purposes entails certain risks. For example, if the investment performance of Subaccounts to which Policy Value is allocated is poorer than expected or if sufficient premiums are not paid, the Policy may lapse or may not accumulate sufficient Accumulated Value or Cash Surrender Value to fund the purpose for which the Policy was purchased. Withdrawals and Policy loans may significantly affect current and future Accumulated Value, Cash Surrender Value, or Death Benefit proceeds. Depending upon Subaccount investment performance and the amount of a Policy loan, the loan may cause a Policy to lapse. Because the Policy is designed to provide benefits on a long-term basis, before purchasing a Policy for a specialized purpose a purchaser should consider whether the long-term nature of the Policy is consistent with the purpose for which it is being considered. Using a Policy for a specialized purpose may have tax consequences. (See "Federal Income Tax Considerations," Page ___.) CHARGES AND DEDUCTIONS Charges will be deducted in connection with the Policy to compensate National Life for (a) providing the insurance and other benefits set forth in the Policy; (b) issuing and administering the Policy; (c) assuming certain mortality and other risks in connection with the Policy; and (d) incurring expenses in distributing the Policy including costs associated with printing prospectuses and sales literature and sales compensation. National Life may realize a profit from any charges. Any such profit may be used for any purpose, including payment of distribution expenses. PREMIUM EXPENSE CHARGE The Premium Expense Charge consists of two portions. The first is that a deduction of 3.40% of the premium will be made from each premium payment prior to allocation of Net Premiums, to cover state premium taxes and the federal DAC Tax. The federal DAC Tax is a tax attributable to certain "policy acquisition expenses" under Section 848 of the Code. Section 848 in effect accelerates the realization of income National Life receives from the Policies, and therefore the payment of federal income taxes on that income. The economic consequence of Section 848 is, therefore, an increase in the tax burden borne by National Life that is attributable to the Policies. The Premium Expense Charge will also include, during the first 10 Policy Years, a deduction of 7.0% of the premium up to the Target Premium, and 4.0% of premium in excess of the Target Premium, from each premium payment prior to allocation of Net Premiums, to compensate National Life for the expenses incurred in distributing the Policies, including commissions to selling agents. National Life reserves the right to increase the the charge for premiums in excess of the Target Premium from 4.0% to 5.0% of such premiums. National Life currently intends to reduce this deduction from premiums paid after the tenth Policy Anniversary to 4.0% of all premiums, although it reserves the right to make a deduction of up to the maximum permitted during the first ten years. SURRENDER CHARGE A Surrender Charge is imposed if the Policy is surrendered or lapses at any time before the end of the tenth Policy Year, or the ten years after an increase in the Basic Coverage. The Surrender Charge rate depends on the Joint Age at issue or at the time of increase in Basic Coverage. The initial Surrender Charge per $1,000 of Basic Coverage is shown in Appendix B to this Prospectus. The Surrender Charge will be level for up to five years, and then decline each month by one sixtieth of the initial Surrender Charge until it is zero at the beginning of Policy Year 11, or at the beginning of the eleventh year after the date of an increase in Basic Coverage (or, for those cases in which the level Surrender Charge period is 30 41 less than five years from the Date of Issue or the effective date of the increase, declining each month by an amount equal to the initial Surrender Charge multiplied by a fraction of which the numerator is one and the denominator is the number of months from the end of the level Surrender Charge period to the beginning of Policy Year 11, or the beginning of the eleventh year from the effective date of the increase). The Surrender Charge will not decrease in the event of a decrease in Basic Coverage. The actual Surrender Charge for your Policy will be stated in the Policy. MONTHLY DEDUCTIONS Charges will be deducted from the Accumulated Value on the Date of Issue and on each Monthly Policy Date. The Monthly Deduction consists of four components - (a) the Cost of Insurance Charge, (b) the Variable Account Charge, (c) the Monthly Administrative Charge, and (d) the cost of any additional benefits provided by Rider. Because portions of the Monthly Deduction, such as the Cost of Insurance Charge, can vary from Policy Month to Policy Month, the Monthly Deduction may vary in amount from Policy Month to Policy Month. The Monthly Deduction will be deducted on a pro rata basis from the Subaccounts of the Variable Account and the Fixed Account, unless the Owner has elected at the time of application, or later requests in writing, that the Monthly Deduction be made from the Money Market Subaccount. If a Monthly Deduction cannot be made from the Money Market Subaccount, where that has been elected, the amount of the deduction in excess of the Accumulated Value available in the Money Market Subaccount will be made on a pro rata basis from Accumulated Value in the Subaccounts of the Variable Account and the Fixed Account. Cost of Insurance Charge. Because the Cost of Insurance Charge depends upon several variables, the cost for each Policy Month can vary. National Life will determine the monthly Cost of Insurance Charge by multiplying the applicable cost of insurance rate or rates by the Net Amount at Risk for each Policy Month. The Net Amount at Risk on any Monthly Policy Date is the amount by which the Unadjusted Death Benefit on that Monthly Policy Date, adjusted by a factor, exceeds the Accumulated Value. This factor is 1.00327234, and is used to reduce the Net Amount at Risk, solely for purposes of computing the Cost of Insurance Charge, by taking into account assumed monthly earnings at an annual rate of 4%. The Net Amount at Risk is determined separately for the Initial Face Amount and any increases in Face Amount. In determining the Net Amount at Risk for each increment of Face Amount, the Accumulated Value is first considered part of the Initial Face Amount. If the Accumulated Value exceeds the Initial Face Amount, it is considered as part of any increases in Face Amount in the order such increases took effect. If the Policy includes Basic Coverage, Additional Coverage and coverage added through the operation of the Automatic Increase Rider, the Net Amount at Risk is separated into portions applicable to each type of coverage. For this purpose, Accumulated Value is applied against Basic Coverage first, Additional Coverage second and automatic increase third if they began simultaneously. Any change in the Net Amount at Risk will affect the total Cost of Insurance Charges paid by the Owner. A cost of insurance rate is also determined separately for the Initial Face Amount and any increases in Face Amount. In calculating the Cost of Insurance Charge, a rate based on the Rate Classes of the two Insureds on the Date of Issue is applied to the Net Amount at Risk for the Initial Face Amount. For each increase in Face Amount, a rate based on the Rate Classes of the two Insureds applicable at the time of the increase is used. If, however, the Unadjusted Death Benefit is calculated as the Accumulated Value times the specified percentage, the rate based on the Rate Classes for the Initial Face Amount will be used for the amount of the Unadjusted Death Benefit in excess of the total Face Amount. Again, if any time segment includes both Basic Coverage and Additional Coverage, separate cost of insurance rates are applied to each type of coverage. 31 42 Cost of Insurance Rate. The guaranteed maximum cost of insurance rates are set forth in the Policy, and will depend on each Insured's Issue Age, sex, substandard or uninsurable status, the coverage's Duration, and the 1980 Commissioners Standard Ordinary Mortality Table. Guaranteed maximum cost of insurance rates will also vary depending on whether the coverage is Basic Coverage or Additional Coverage, with higher rates being applicable to Additional Coverage. The actual cost of insurance rates used ("current rates") will depend on each Insured's Issue Age, sex, and Rate Class, as well as the coverage's Duration, and whether the coverage is Basic Coverage or Additional Coverage (however, current rates applicable to Additional Coverage may be higher or lower than for Basic Coverage). National Life periodically reviews the adequacy of its current cost of insurance rates and may adjust their level. However, they will never exceed guaranteed maximum cost of insurance rates. Any change in the current cost of insurance rates will apply to all sets of persons of the same Issue Ages, sexes, and Rate Classes, and with coverages of the same Duration. Rate Class. The Rate Classes of the two Insureds will affect the current cost of insurance rates. National Life currently places Insureds into preferred nonsmoker, nonsmoker, preferred smoker, smoker, substandard, and uninsurable classes. Smoker, substandard, and uninsurable classes reflect higher mortality risks. In an otherwise identical Policy, Insureds in a preferred or standard class will have a lower Cost of Insurance Charge than Insureds in a substandard class with higher mortality risks. Nonsmoking Insureds will generally incur lower cost of insurance rates than Insureds who are classified as smokers. Classification of an Insured as substandard or uninsurable will also affect the guaranteed cost of insurance rates. Variable Account Charge. The Variable Account Charge varies by the amount of Basic Coverage in the Policy. It is a percentage of the Accumulated Value in the Variable Account, and does not apply to Accumulated Value in the Fixed Account. During the first 10 Policy Years, for Policies with Basic Coverage less than $1,000,000, the current annual charge is 0.90%; for Policies with Basic Coverage from $1,000,000 to $2,999,999, the current annual charge is 0.80%, and for Policies with Basic Coverage of $3 million or more, the current annual charge is 0.75%. In all cases, National Life reserves the right to increase this charge to an amount not to exceed 0.90%. For years after Policy Year 10, National Life currently intends to reduce this charge to the following rates: for Polices with Basic Coverage of less than $1,000,000, an annual charge of 0.35%; for Policies with Basic Coverage from $1,000,000 to $2,999,999, an annual charge of 0.30%, and for Policies with Basic Coverage of $3 million or more, an annual charge of 0.25%. However, National Life reserves the right to continue to charge a Variable Account Charge in an annual amount up to 0.90% in years after Policy Year 10. Monthly Administrative Charge. The amount of the Monthly Administrative Charge during the first ten Policy Years is $15.00, plus $0.08 per $1000 of Basic Coverage (less for Joint Ages of 38 or less). The per $1000 portion of this charge during the first ten Policy Years will be increased by $.005 per $1000 of Basic Coverage for each Insured who is a smoker. National Life classifies all nicotine users as smokers, including cigarette, cigar, pipe, chewing tobacco, snuff, nicotine patches and nicotine gum. After the first ten Policy Years, National Life currently intends to charge a Monthly Administrative Charge in the amount of $7.50, with no additional amount per $1000 of Basic Coverage, and during this period the Monthly Administrative Charge is guaranteed not to exceed $15.00, plus $0.08 per $1000 of Basic Coverage plus $0.005 per $1000 of Basic Coverage for each Insured who is a smoker. In addition, the $0.08 per $1000 of Basic Coverage portion of the Monthly Administrative Charge will apply to increases in Basic Coverage for 10 years after an increase in Basic Coverage. Optional Benefit Charges. The Monthly Deduction will include charges for any additional benefits added to the Policy. The monthly charges will be specified in the applicable Rider. The available Riders are listed under "Optional Benefits," on Page ___ below. 32 43 WITHDRAWAL CHARGE At the time of a Withdrawal, National Life will assess a charge equal to the lesser of 2% of the Withdrawal amount and $25. This Withdrawal Charge will be deducted from the Withdrawal amount. TRANSFER CHARGE Currently, unlimited transfers are permitted among the Subaccounts, or from the Variable Account to the Fixed Account, and transfers from the Fixed Account to the Variable Account are permitted within the limits described on Page ___, in each case without charge. National Life has no present intention to impose a transfer charge in the foreseeable future. However, National Life reserves the right to impose in the future a transfer charge of $25 on each transfer in excess of twelve transfers in any Policy Year. The Transfer Charge would be imposed to compensate National Life for the costs of processing such transfers, and would not be designed to produce a profit. If imposed, the transfer charge will be deducted from the amount being transferred. All transfers requested on the same Valuation Day are treated as one transfer transaction. Any future transfer charge will not apply to transfers resulting from Policy loans, the exercise of special transfer rights, the initial reallocation of account values from the Money Market Subaccount to other Subaccounts, and any transfers made pursuant to the Dollar Cost Averaging and Portfolio Rebalancing features. These transfers will not count against the twelve free transfers in any Policy Year. PROJECTION REPORT CHARGE National Life may impose a charge for each projection report requested by the Owner. This report will project future values and future Death Benefits for the Policy. National Life will notify the Owner in advance of the amount of the charge, and the Owner may elect to pay the charge in advance. If not paid in advance, this charge will be allocated among and deducted from the Subaccounts of the Variable Account and/or the Fixed Account in proportion to their respective Accumulated Values on the date of the deduction. OTHER CHARGES The Variable Account purchases shares of the Funds at net asset value. The net asset value of those shares reflect management fees and expenses already deducted from the assets of the Funds' Portfolios. The fees and expenses for the Funds and their Portfolios are described briefly in connection with a general description of each Fund, and historical expense ratio information for the Funds is presented in the "Summary of Policy Expenses" section on page above. More detailed information is contained in the Funds Prospectuses which are attached to or accompany this Prospectus. POLICY RIGHTS LOAN PRIVILEGES General. The Owner may at any time after the first anniversary of the Date of Issue (and during the first year where required by law) borrow money from National Life using the Policy as the only security for the loan. The Owner may obtain Policy loans while the Policy is in force in an amount not exceeding the Policy's Cash Surrender Value on the date of receipt of the loan request, minus three times the Monthly Deduction for the most recent Monthly Policy Date. However, for Policies which have elected the Guaranteed Death Benefit Rider, if the Owner obtains a Policy loan in excess of the cumulative premiums paid minus the Cumulative Guarantee Premium, then the Guaranteed Death Benefit Rider will enter a lapse pending notification period. This means that the Guaranteed Death Benefit Rider (but not the Policy itself) will lapse if a sufficient premium is not paid within the 61-day lapse pending notification period. 33 44 While either Insured is living, the Owner may repay all or a portion of a loan and accrued interest. Loans may be taken by making a written request to National Life at its Home Office, or, if the telephone transaction privilege has been elected, by providing telephone instructions to National Life at its Home Office. Loan proceeds will be paid within seven days of a valid loan request. (See "Telephone Transaction Privilege," Page ___.) National Life limits the amount of a Policy loan taken pursuant to telephone instructions to $25,000. Interest Rate Charged. The interest rate charged on Policy loans will be at the fixed rate of 6% per year. At the end of the Policy Year, the loan interest will be added to the loan balance. Any payments made by the Owner to cover loan interest will be used to reduce the amount of the Policy loan. Allocation of Loans and Collateral. When a Policy loan is taken, Accumulated Value is held in the Fixed Account as Collateral for the Policy loan. Accumulated Value is taken from the Subaccounts of the Variable Account based upon the instructions of the Owner at the time the loan is taken. If specific allocation instructions have not been received from the Owner, the Policy loan will be allocated to the Subaccounts based on the proportion that each Subaccount's value bears to the total Accumulated Value in the Variable Account. If the Accumulated Value in one or more of the Subaccounts is insufficient to carry out the Owner's instructions, the loan will not be processed until further instructions are received from the Owner. Non-loaned Accumulated Value in the Fixed Account will become Collateral for a loan only to the extent that the Accumulated Value in the Variable Account is insufficient. Loan interest will be allocated among and transferred first from the Subaccounts of the Variable Account in proportion to the Accumulated Values held in the Subaccounts, and then from the non-loaned portion of the Fixed Account. The Collateral for a Policy loan will initially be the loan amount. Loan interest will be added to the Policy loan. National Life will take additional Collateral for such loan interest so added pro rata from the Subaccounts of the Variable Account, and then, if the amounts in the Variable Account are insufficient, from the non-loaned portion of the Fixed Account, and hold the Collateral in the Fixed Account. At any time, the amount of the outstanding loan under a Policy equals the sum of all loans (including interest added to the loan balance) minus any loan repayments. Interest Credited to Amounts Held as Collateral. As long as the Policy is in force, National Life will credit the amount held in the Fixed Account as Collateral with interest at effective annual rates it determines, but not less than 4% or such higher minimum rate required under state law. The rate will apply to the calendar year which follows the date of determination. Preferred Policy Loans. National Life currently intends, but is not obligated to continue, to make preferred Policy loans available at the beginning of Policy Year 11. At such time the rate of interest charged on all loans will be 4.25%, and amounts held as Collateral in the Fixed Account will be credited with interest at an annual rate of 4.0%. National Life is not obligated to continue to make preferred loans available, and will make such loans available in its sole discretion. Preferred loans may not be treated as indebtedness for federal income tax purposes. Effect of Policy Loan. Policy loans, whether or not repaid, will have a permanent effect on the Accumulated Value and the Cash Surrender Value, and may permanently affect the Death Benefit under the Policy. The effect on the Accumulated Value and Death Benefit could be favorable or unfavorable, depending on whether the investment performance of the Subaccounts and the interest credited to the Accumulated Value in the Fixed Account not held as Collateral is less than or greater than the interest being credited on the amounts held as Collateral in the Fixed Account while the loan is outstanding. Compared to a Policy under which no loan is made, values under a Policy will be lower when the credited interest rate on Collateral is less than the investment experience of assets held in the Variable Account and interest credited to the Accumulated Value in the Fixed Account not held as Collateral. The longer a loan is outstanding, the greater the effect a Policy loan is likely to have. The Death Benefit will be reduced by the amount of any outstanding Policy loan. 34 45 Loan Repayments. National Life will assume that any payments made while there is an outstanding loan on the Policy are premium payments, rather than loan repayments, unless it receives written instructions that a payment is a loan repayment. In the event of a loan repayment, the amount held as Collateral in the Fixed Account will be reduced by an amount equal to the repayment, and such amount will be transferred to the Subaccounts of the Variable Account and to the non-loaned portion of the Fixed Account based on the Net Premium allocations in effect at the time of the repayment. Lapse With Loans Outstanding. The amount of an outstanding loan under a Policy plus any accrued interest on outstanding loans is not part of Cash Surrender Value. Therefore, the larger the amount of an outstanding loan, the more likely it is that the Policy could lapse. (See "How the Duration of the Policy May Vary," Page ___ and "Policy Lapse," Page ___.) In addition, if the Policy is not a Modified Endowment Policy, lapse of the Policy with outstanding loans may result in adverse federal income tax consequences. (See "Tax Treatment of Policy Benefits," Page ___.) Tax Considerations. Any loans taken from a "Modified Endowment Contract" will be treated as a taxable distribution. In addition, with certain exceptions, a 10% additional income tax penalty will be imposed on the portion of any loan that is included in income. (See "Distributions from Policies Classified as Modified Endowment Contracts," Page ___.) SURRENDER PRIVILEGE At any time before the death of the last to die of the two Insureds, the Owner may surrender the Policy for its Cash Surrender Value. The Cash Surrender Value is the Accumulated Value minus any Policy loan and accrued interest and less any applicable Surrender Charge. The Cash Surrender Value will be determined by National Life on the Valuation Day it receives, at its Home Office, a written surrender request signed by the Owner, and the Policy. A surrender may not be requested over the telephone. Coverage under the Policy will end on the day the Owner mails or otherwise sends the written surrender request and the Policy to National Life. Surrender proceeds will ordinarily be mailed by National Life to the Owner within seven days of receipt of the request. (See "Other Policy Provisions - Payment of Policy Benefits", Page ___.) A surrender may have Federal income tax consequences. (See "Tax Treatment of Policy Benefits," Page ___. WITHDRAWAL OF CASH SURRENDER VALUE At any time before the death of the last to die of the two Insureds and after the first Policy Anniversary, the Owner may withdraw a portion of the Policy's Cash Surrender Value. The minimum amount which may be withdrawn is $500. The maximum Withdrawal is the Cash Surrender Value on the date of receipt of the Withdrawal request, minus three times the Monthly Deduction for the most recent Monthly Policy Date. However, for Policies which have elected the Guaranteed Death Benefit Rider, if the Owner obtains a Withdrawal in excess of the cumulative premiums paid minus the Cumulative Guarantee Premium, then the Guaranteed Death Benefit Rider will enter a lapse pending notification period. This means that the Guaranteed Death Benefit Rider (but not the Policy itself) will lapse if a sufficient premium is not paid within the 61-day lapse pending notification period. A Withdrawal Charge will be deducted from the amount of the Withdrawal. For a discussion of the Withdrawal Charge, see "Charges and Deductions - Withdrawal Charge" on Page ___. The Withdrawal will be taken from the Subaccounts of the Variable Account based upon the instructions of the Owner at the time of the Withdrawal. If specific allocation instructions have not been received from the Owner, the Withdrawal will be allocated to the Subaccounts based on the proportion that 35 46 each Subaccount's value bears to the total Accumulated Value in the Variable Account. If the Accumulated Value in one or more Subaccounts is insufficient to carry out the Owner's instructions, the Withdrawal will not be processed until further instructions are received from the Owner. Withdrawals will be taken from the Fixed Account only to the extent that Accumulated Value in the Variable Account is insufficient. The effect of a Withdrawal on the Death Benefit and Face Amount will vary depending upon the Death Benefit Option in effect and whether the Unadjusted Death Benefit is based on the applicable percentage of Accumulated Value. (See "Death Benefit Options," Page ___.) Option A. The effect of a Withdrawal on the Face Amount and Unadjusted Death Benefit under Option A can be described as follows: If the Face Amount divided by the applicable percentage of Accumulated Value exceeds the Accumulated Value just after the Withdrawal, a Withdrawal will reduce the Face Amount and the Unadjusted Death Benefit by the lesser of such excess and the amount of the Withdrawal. For the purposes of this illustration (and the following illustrations of Withdrawals), assume that the Attained Age of the younger Insured is under 40 and there is no indebtedness. The applicable percentage is 250% for a younger Insured with an Attained Age under 40. Under Option A, a contract with a Face Amount of $300,000 and an Accumulated Value of $30,000 will have an Unadjusted Death Benefit of $300,000. Assume that the Owner takes a Withdrawal of $10,000. The Withdrawal Charge will be $25 and the amount paid to the Owner will be $9,975. The Withdrawal will reduce the Accumulated Value to $20,000 ($30,000 - $10,000) after the Withdrawal. The Face Amount divided by the applicable percentage is $120,000 ($300,000 / 2.50), which exceeds the Accumulated Value after the Withdrawal by $100,000 ($120,000 - $20,000). The lesser of this excess and the amount of the Withdrawal is $10,000, the amount of the Withdrawal. Therefore, the Unadjusted Death Benefit and Face Amount will be reduced by $10,000 to $290,000. If the Face Amount divided by the applicable percentage of Accumulated Value does not exceed the Accumulated Value just after the Withdrawal, then the Face Amount is not reduced. The Unadjusted Death Benefit will be reduced by an amount equal to the reduction in Accumulated Value times the applicable percentage (or equivalently, the Unadjusted Death Benefit is equal to the new Accumulated Value times the applicable percentage). Under Option A, a policy with a Face Amount of $300,000 and an Accumulated Value of $150,000 will have an Unadjusted Death Benefit of $375,000 ($150,000 x 2.50). Assume that the Owner takes a Withdrawal of $10,000. The Withdrawal Charge will be $25 and the amount paid to the Owner will be $9,975. The Withdrawal will reduce the Accumulated Value to $140,000 ($150,000 - $10,000). The Face Amount divided by the applicable percentage is $120,000, which does not exceed the Accumulated Value after the withdrawal. Therefore, the Face Amount stays at $300,000 and the Unadjusted Death Benefit is $350,000 ($140,000 x 2.50). Option B. The Face Amount will never be decreased by a Withdrawal. A Withdrawal will, however, always decrease the Death Benefit. If the Unadjusted Death Benefit equals the Face Amount plus the Accumulated Value, a Withdrawal will reduce the Accumulated Value by the amount of the Withdrawal and thus the Unadjusted Death Benefit will also be reduced by the amount of the Withdrawal. 36 47 Under Option B, a Policy with a Face Amount of $300,000 and an Accumulated Value of $90,000 will have an Unadjusted Death Benefit of $390,000 ($300,000 + $90,000). Assume the Owner takes a Withdrawal of $20,000. The Withdrawal Charge will be $25 and the amount paid to the Owner will be $19,975. The Withdrawal will reduce the Accumulated Value to $70,000 ($90,000 - $20,000) and the Unadjusted Death Benefit to $370,000 ($300,000 + $70,000). The Face Amount is unchanged. If the Unadjusted Death Benefit immediately prior to the Withdrawal is based on the applicable percentage of Accumulated Value, the Unadjusted Death Benefit will be reduced to equal the greater of (a) the Face Amount plus the Accumulated Value after deducting the amount of the Withdrawal and Withdrawal Charge and (b) the applicable percentage of Accumulated Value after deducting the amount of the Withdrawal. Under Option B, a Policy with a Face Amount of $300,000 and an Accumulated Value of $210,000 will have an Unadjusted Death Benefit of $525,000 ($210,000 X 2.5). Assume the Owner takes a Withdrawal of $60,000. The Withdrawal Charge will be $25 and the amount paid to the Owner will be $59,975. The Withdrawal will reduce the Accumulated Value to $150,000 ($210,000 - $60,000), and the Unadjusted Death Benefit to the greater of (a) the Face Amount plus the Accumulated Value, or $450,000 ($300,000 + $150,000) and (b) the Unadjusted Death Benefit based on the applicable percentage of the Accumulated Value, or $375,000 ($150,000 X 2.50). Therefore, the Unadjusted Death Benefit will be $450,000. The Face Amount is unchanged. Any decrease in Face Amount due to a Withdrawal will reduce Face Amount in the order described under "Ability to Adjust Face Amount - Decreases" on page . Because a Withdrawal can affect the Face Amount and the Unadjusted Death Benefit as described above, a Withdrawal may also affect the Net Amount at Risk which is used to calculate the Cost of Insurance Charge under the Policy. (See "Cost of Insurance Charge," Page ___.) Since a Withdrawal reduces the Accumulated Value, the Cash Surrender Value of the Policy is reduced, thereby increasing the likelihood that the Policy will lapse. (See "Policy Lapse," Page ___.) Also, if a Withdrawal would result in cumulative premiums exceeding the maximum premium limitations applicable under the Code for life insurance, National Life will not allow such Withdrawal. Withdrawals may be requested only by sending a written request, signed by the Owner, to National Life at its Home Office. A Withdrawal may not be requested over the telephone. A Withdrawal will ordinarily be paid within seven days of receipt at the Home Office of a valid Withdrawal request. A Withdrawal of Cash Surrender Value may have Federal income tax consequences. (See "Tax Treatment of Policy Benefits," Page ___.) FREE-LOOK PRIVILEGE The Policy provides for a "free-look" period, during which the Owner may cancel the Policy and receive a refund equal to the gross premiums paid on the Policy. This free-look period ends 10 days after the Owner receives the Policy (or any longer period provided by state law). To cancel the Policy, the Owner must return the Policy to National Life or to an agent of National Life within such time with a written request for cancellation. TELEPHONE TRANSACTION PRIVILEGE If the telephone transaction privilege has been elected, either on the application for the Policy or thereafter by providing a proper written authorization to National Life, an Owner may effect changes in premium allocation, transfers, and loans of up to $25,000 by providing instructions to National Life at its Home Office over the telephone. National Life reserves the right to suspend telephone transaction 37 48 privileges at any time, for any reason, if it deems such suspension to be in the best interests of Policy Owners. National Life will employ reasonable procedures to confirm that instructions communicated by telephone are genuine. If National Life follows these procedures it will not be liable for any losses due to unauthorized or fraudulent instructions. National Life may be liable for any such losses if those reasonable procedures are not followed. The procedures to be followed for telephone transfers will include one or more of the following: requiring some form of personal identification prior to acting on instructions received by telephone, providing written confirmation of the transaction, and making a tape recording of the instructions given by telephone. SPECIAL TRANSFER RIGHTS Transfer Right for Policy. During the first two years following Policy issue, the Owner may, on one occasion, transfer the entire Accumulated Value in the Variable Account to the Fixed Account, without regard to any limits on transfers or free transfers. Transfer Right for Change in Investment Policy. If the investment policy of a Subaccount of the Variable Account is materially changed, the Owner may transfer the portion of the Accumulated Value in such Subaccount to another Subaccount or to the Fixed Account, without regard to any limits on transfers or free transfers. AVAILABLE AUTOMATED FUND MANAGEMENT FEATURES National Life currently offers, at no charge to Owners, the following automated fund management features. Only one of these two automated fund management features may be operable at any time. National Life is not legally obligated to continue to offer these features, and although it has no current intention to do so, it may cease offering one or both such features at any time, after providing 60 days prior written notice to all Owners who are currently utilizing the features being discontinued. Dollar Cost Averaging. This feature permits an Owner to automatically transfer funds from the Money Market Subaccount to any other Subaccounts on a monthly basis. It may be elected at issue by marking the appropriate box on the initial application, and completing the appropriate instructions, or, after issue, by filling out similar information on a change request form and sending it to the Home Office. If this feature is elected, the amount to be transferred will be taken from the Money Market Subaccount and transferred to the Subaccount or Subaccounts designated to receive the funds, each month on the Monthly Policy Date (starting with the Monthly Policy Date next succeeding the date that the reallocation of the Accumulated Value out of the Money Market Subaccount and into the other Subaccounts would normally have occurred after expiration of the 10-day free look period after the Owner receives the Policy, or next succeeding the date of an election subsequent to purchase), until the amount in the Money Market Fund is depleted. The minimum monthly transfer by Dollar Cost Averaging is $100, except for the transfer which reduces the amount in the Money Market Subaccount to zero. An Owner may discontinue Dollar Cost Averaging at any time by sending an appropriate change request form to the Home Office. The dollar cost averaging feature may not be used to transfer Accumulated Value to the Fixed Account. This feature allows an Owner to move funds into the various investment types on a more gradual and systematic basis than the frequency on which premiums are paid. The periodic investment of the same amount will result in higher numbers of units being purchased when unit prices are lower, and lower numbers of units being purchased when unit prices are higher. This will result, over time, in a lower cost per unit than the average of the unit costs on the days on which the automated purchases are made. This technique will not, however, assure a profit or protect against a loss in declining markets. Moreover, for 38 49 the dollar cost averaging technique to be effective, amounts should be available for allocation from the Money Market Subaccount through periods of low price levels as well as higher price levels. Portfolio Rebalancing. This feature permits an Owner to automatically rebalance the value in the Subaccounts on a quarterly, semi-annual or annual basis, based on the Owner's premium allocation percentages in effect at the time of the rebalancing. It may be elected at issue by marking the appropriate box on the initial application, or, after issue, by completing a change request form and sending it to the Home Office. In Policies utilizing Portfolio Rebalancing from the Date of Issue, an automatic transfer will take place which causes the percentages of the current values in each Subaccount to match the current premium allocation percentages, starting with the Monthly Policy Date three, six or twelve months after the Date of Issue, and then on each Monthly Policy Date three, six or twelve months thereafter. Policies electing Portfolio Rebalancing after issue will have the first automated transfer occur as of the Monthly Policy Date on or next following the date that the election is received at the Home Office, and subsequent rebalancing transfers will occur every three, six or twelve months from such date. An Owner may discontinue Portfolio Rebalancing at any time by submitting an appropriate change request form to the Home Office. In the event that an Owner changes the Policy's premium allocation percentages, Portfolio Rebalancing will automatically be discontinued unless the Owner specifically directs otherwise. Portfolio Rebalancing will result in periodic transfers out of Subaccounts that have had relatively favorable investment performance in relation to the other Subaccounts to which a Policy allocates premiums, and into Subaccounts which have had relatively unfavorable investment performance in relation to the other Subaccounts to which the Policy allocates premiums. THE GENERAL ACCOUNT An Owner may allocate some or all of the Net Premiums and transfer some or all of the Accumulated Value to National Life's Fixed Account. National Life credits interest on Net Premiums and Accumulated Value allocated to the Fixed Account at rates declared by National Life (subject to a minimum guaranteed interest rate of 4%). The principal, after deductions, is also guaranteed. National Life's Fixed Account supports its insurance and annuity obligations. All assets in the Fixed Account are subject to National Life's general liabilities from business operations. The Fixed Account has not, and is not required to be, registered with the SEC under the Securities Act of 1933, and the Fixed Account has not been registered as an investment company under the Investment Company Act of 1940. Therefore, the Fixed Account and the interests therein are generally not subject to regulation under the 1933 Act or the 1940 Act. The disclosures relating to this account which are included in this Prospectus are for your information and have not been reviewed by the SEC. However, such disclosures may be subject to certain generally applicable provisions of the Federal securities laws relating to the accuracy and completeness of statements made in prospectuses. MINIMUM GUARANTEED AND CURRENT INTEREST RATES The Accumulated Value in the Fixed Account is guaranteed to accumulate at a minimum effective annual interest rate of 4%. National Life may credit the non-loaned Accumulated Value in the Fixed Account with current rates in excess of the minimum guarantee but is not obligated to do so. These current interest rates are influenced by, but do not necessarily correspond to, prevailing general market interest rates. Since National Life, in its sole discretion, anticipates changing the current interest rate from time to time, allocations to the Fixed Account made at different times are likely to be credited with different current interest rates. An interest rate will be declared by National Life each month to apply to amounts allocated or transferred to the Fixed Account in that month. The rate declared on such amounts 39 50 will remain in effect for twelve months. At the end of the 12-month period, National Life reserves the right to declare a new current interest rate on such amounts and accrued interest thereon (which may be a different current interest rate than the current interest rate on new allocations to the Fixed Account on that date). Any interest credited on the amounts in the Fixed Account in excess of the minimum guaranteed rate of 4% per year will be determined in the sole discretion of National Life. The Owner assumes the risk that interest credited may not exceed the guaranteed minimum rate. Amounts deducted from the non-loaned Accumulated Value in the Fixed Account for Withdrawals, Policy loans, transfers to the Variable Account, Monthly Deductions or other charges are currently, for the purpose of crediting interest, accounted for on a last in, first out ("LIFO") method. National Life reserves the right to change the method of crediting interest from time to time, provided that such changes do not have the effect of reducing the guaranteed rate of interest below 4% per annum or shorten the period for which the interest rate applies to less than 12 months. Calculation of Non-loaned Accumulated Value in the Fixed Account. The non-loaned Accumulated Value in the Fixed Account at any time is equal to amounts allocated and transferred to it plus interest credited to it, minus amounts deducted, transferred or withdrawn from it. Interest will be credited to the non-loaned Accumulated Value in the Fixed Account on each Monthly Policy Date as follows: for amounts in the account for the entire Policy Month, from the beginning to the end of the month; for amounts allocated to the account during the prior Policy Month, from the date the Net Premium or loan repayment is allocated to the end of the month; for amounts transferred to the account during the Policy Month, from the date of transfer to the end of the month; and for amounts deducted or withdrawn from the account during the prior Policy Month, from the beginning of the month to the date of deduction or withdrawal. TRANSFERS FROM FIXED ACCOUNT One transfer in each Policy Year is allowed from the amount of non-loaned Accumulated Value in the Fixed Account to any or all of the Subaccounts of the Variable Account. The amount transferred from the Fixed Account may not exceed the greater of 25% of the value of the non-loaned Accumulated Value in such account at the time of transfer, or $1000. The transfer will be made as of the Valuation Day National Life receives the written or telephone request at its Home Office. OTHER POLICY PROVISIONS Indefinite Policy Duration. The Policy can remain in force indefinitely (in Texas and Maryland, however, the Policy matures at the younger Insured's Attained Age 100 at which time National Life will pay the Cash Surrender Value to the Owner in one sum unless a Payment Option is chosen, and the Policy will terminate). However, for a Policy to remain in force after the younger Insured reaches Attained Age 100, if the Face Amount is greater than the Accumulated Value, the Face Amount will automatically be decreased to the current Accumulated Value, and all Accumulated Value is transferred to the Fixed Account. Also, at the younger Insured's Attained Age 100 Option B automatically becomes Option A, and no premium payments are allowed after the younger Insured's Attained Age 100, although loan repayments are allowed. Monthly Deductions cease at the younger Insured's Attained Age 100. The tax treatment of a Policy's Accumulated Value after Age 100 is unclear, and the Owner may wish to discuss this treatment with a tax advisor. Payment of Policy Benefits. The Owner may decide the form in which Death Benefit proceeds will be paid. During the lifetime of either of the two Insureds, the Owner may arrange for the Death Benefit to be paid in a lump sum or under a Settlement Option. These choices are also available upon surrender of the Policy for its Cash Surrender Value. If no election is made, payment will be made in a lump sum. The Beneficiary may also arrange for payment of the Death Benefit in a lump sum or under a Settlement Option. If paid in a lump sum, the Death Benefit under a Policy will ordinarily be paid to the 40 51 Beneficiary within seven days after National Life receives proof of the death of both of the Insureds at its Home Office and all other requirements are satisfied. If paid under a Settlement Option, the Death Benefit will be applied to the Settlement Option within seven days after National Life receives proof of the death of both of the Insureds at its Home Office and all other requirements are satisfied. Interest at the annual rate of 4% or any higher rate declared by National Life or required by law is paid on the Death Benefit from the date National Life receives due proof of the death of the last to die of the two Insureds until payment is made. Any amounts payable as a result of surrender, Withdrawal, or Policy loan will ordinarily be paid within seven days of receipt of written request at National Life's Home Office in a form satisfactory to National Life. Generally, the amount of a payment will be determined as of the date of receipt by National Life of all required documents. However, National Life may defer the determination or payment of such amounts if the date for determining such amounts falls within any period during which: (1) the disposal or valuation of a Subaccount's assets is not reasonably practicable because the New York Stock Exchange is closed or conditions are such that, under the SEC's rules and regulations, trading is restricted or an emergency is deemed to exist; or (2) the SEC by order permits postponement of such actions for the protection of National Life policyholders. National Life also may defer the determination or payment of amounts from the Fixed Account for up to six months. National Life may postpone any payment under the Policy derived from an amount paid by check or draft until National Life is satisfied that the check or draft has been paid by the bank upon which it was drawn. The Contract. The Policy and a copy of the applications attached thereto are the entire contract. Only statements made in the applications can be used to void the Policy or deny a claim. The statements are considered representations and not warranties. Only one of National Life's duly authorized officers or registrars can agree to change or waive any provisions of the Policy and only in writing. As a result of differences in applicable state laws, certain provisions of the Policy may vary from state to state. Ownership. The Owner is named in the application or thereafter changed. While either of the two Insureds is living, the Owner is entitled to exercise any of the rights stated in the Policy or otherwise granted by National Life. If the Owner dies before the last to die of the two Insureds, these rights will vest in the estate of the Owner, unless otherwise provided. Beneficiary. The Beneficiary is designated in the application for the Policy, unless thereafter changed by the Owner during the lifetime of either of the two Insureds by written notice to National Life. The interest of any Beneficiary who dies before the last to die of the two Insureds shall vest in the Owner unless otherwise stated. Change of Owner and Beneficiary. As long as the Policy is in force, the Owner or Beneficiary may be changed by written request in a form acceptable to National Life. The change will take effect as of the date it is signed, whether or not the Insureds are living when the request is received by National Life. National Life will not be responsible for any payment made or action taken before it receives the written request. Split Dollar Arrangements. The Owner or Owners may enter into a Split Dollar Arrangement between each other or another person or persons whereby the payment of premiums and the right to receive the benefits under the Policy (i.e., Cash Surrender Value or Death Benefit) are split between the parties. There are different ways of allocating such rights. 41 52 For example, an employer and employee might agree that under a Policy on the lives of the employee and his or her spouse, the employer will pay the premiums and will have the right to receive the Cash Surrender Value. The employee may designate the Beneficiary to receive any Death Benefit in excess of the Cash Surrender Value. If the employee and his or her spouse both die while such an arrangement is in effect, the employer would receive from the Death Benefit the amount which the employer would have been entitled to receive upon surrender of the Policy and the employee's Beneficiary would receive the balance of the proceeds. No transfer of Policy rights pursuant to a Split Dollar Arrangement will be binding on National Life unless in writing and received by National Life. The parties who elect to enter into a Split Dollar Arrangement should consult their own tax advisers regarding the tax consequences of such an arrangement. Assignments. The Owner may assign any and all rights under the Policy. No assignment binds National Life unless in writing and received by National Life at its Home Office. National Life assumes no responsibility for determining whether an assignment is valid or the extent of the assignee's interest. All assignments will be subject to any Policy loan. The interest of any Beneficiary or other person will be subordinate to any assignment. A payee who is not also the Owner may not assign or encumber Policy benefits, and to the extent permitted by applicable law, such benefits are not subject to any legal process for the payment of any claim against the payee. Misstatement of Age and Sex. If the age or sex of either of the two Insureds at the Date of Issue has been misstated in the application, the Accumulated Value of the Policy will be adjusted to be the amount that it would have been had the Cost of Insurance Charges deducted been based on the correct age and sex, or as otherwise required by state law. The adjustment will take place on the Monthly Policy Date on or after the date on which National Life has proof to its satisfaction of the misstatement. If both of the Insureds have died, National Life will adjust the Accumulated Value as of the last Monthly Policy Date prior to the last to die of the Insureds' death; however, if the Accumulated Value is insufficient for that adjustment, the amount of the Unadjusted Death Benefit will also be adjusted. Suicide. In the event that either Insured dies by suicide, while sane or insane, within two years from the Date of Issue of the Policy (except where state law requires a shorter period), or within two years of the effective date of a reinstatement (unless otherwise required by state law), National Life's liability is limited to the payment to the Beneficiary of a sum equal to the premiums paid less any Policy loan and accrued interest and any Withdrawals (since the date of reinstatement, in the case of a suicide within two years of the effective date of a reinstatement), or other reduced amount provided by state law. If either Insured dies by suicide within two years (or shorter period required by state law) from the effective date of any Policy change which increases the Unadjusted Death Benefit and for which an application is required, the amount which National Life will pay with respect to the increase will be the Cost of Insurance Charges previously made for such increase (unless otherwise required by state law). Incontestability. The Policy will be incontestable after it has been in force during both Insured's lifetimes for two years from the Date of Issue (or such other date as required by state law). Similar incontestability will apply to an increase in Face Amount or reinstatement after it has been in force during both Insureds' lifetimes for two years from its effective date. Before such times, however, National Life may contest the validity of the Policy (or changes) based on material misstatements in the initial or any subsequent application. 42 53 Dividends. The Policy is participating; however, no dividends are expected to be paid on the Policy. If dividends are ever declared, they will be paid in cash, or paid in the form required by the applicable state. Correspondence. All correspondence to the Owner is deemed to have been sent to the Owner if mailed to the Owner at the Owner's last known address. Settlement Options. In lieu of a single sum payment on death or surrender, an election may be made to apply the Death Benefit under any one of the fixed-benefit Settlement Options provided in the Policy. The options are described below. Payment of Interest Only. Interest at a rate of 3.5% per year will be paid on the amount of the proceeds retained by National Life. Upon the earlier of the payee's death or the end of a chosen period, the proceeds retained will be paid. Payments for a Stated Time. Equal monthly payments, based on an interest rate of 3.5% per annum, will be made for the number of years selected. Payments for Life. Equal monthly payments, based on an interest rate of 3.5% per annum, will be made for a guaranteed period and thereafter during the life of a chosen person. Guaranteed payment periods may be elected for 0, 10, 15, or 20 years or for a refund period, at the end of which the total payments will equal the proceeds placed under the option. Payments of a Stated Amount. Equal monthly payments will be made until the proceeds, with interest at 3.5% per year on the unpaid balance, have been paid in full. The total payments in any year must be at least $10 per month for each thousand dollars of proceeds placed under this option. Life Annuity. Equal monthly payments will be made in the same manner as in the above Payments for Life option except that the amount of each payment will be the monthly income provided by National Life's then current settlement rates on the date the proceeds become payable. No additional interest will be paid. Joint and Two Thirds Annuity. Equal monthly payments, based on an interest rate of 3.5% per year, will be made while two chosen persons are both living. Upon the death of either, two-thirds of the amount of those payments will continue to be made during the life of the survivor. National Life may require proof of the ages of the chosen persons. 50% Survivor Annuity. Equal monthly payments, based on an interest rate of 3.5% per year, will be made during the lifetime of the chosen primary person. Upon the death of the chosen primary person, 50% of the amount of those payments will continue to be made during the lifetime of the secondary chosen person. National Life may require proof of the ages of the chosen persons. National Life may pay interest in excess of the stated amounts under the first four options listed above, but not the last three. A right to change options or to withdraw all or part of the remaining proceeds may be included in the first two, and the fourth, options above. For additional information concerning the payment options, see the Policy. OPTIONAL BENEFITS The following optional benefits, which are subject to the restrictions and limitations set forth in the applicable Policy Riders, may be included in a Policy at the option of the Owner, if the Insureds meet any applicable underwriting requirements (election of any of these optional benefits may involve an additional cost): 43 54 GUARANTEED DEATH BENEFIT If the Guaranteed Death Benefit Rider is elected, National Life will guarantee that the Policy will not lapse, regardless of the Policy's investment performance, either for the entire lifetimes of the Insureds, or until the end of the year that the younger Insured attains Age 80, whichever is elected by the Owner. In order to elect the guarantee period until the end of the year that the younger Insured attains Age 80, the Issue Age of the younger Insured must be 70 or less. Riders which guarantee that the Policy will not lapse prior to the end of the year that the younger Insured attains Age 80 will have lower Monthly Guarantee Premiums (and therefore lower Cumulative Guarantee Premiums) than Riders which guarantee that the Policy will not lapse for the entire lifetimes of the Insureds. To keep this Rider in force, cumulative premiums paid must be greater than the Cumulative Guarantee Premium from the Date of Issue. The Policy will be tested monthly for this qualification, and if not met, a notice will be sent to the Owner, who will have 61 days from the date the notice is mailed to pay a premium sufficient to keep the Rider in force. The premium required will be an amount equal to the Cumulative Guarantee Premium from the Date of Issue, plus two times the Monthly Guarantee Premium, minus the sum of all premiums previously paid. The Rider will be cancelled if a sufficient premium is not paid during that 61-day period. The Rider cannot be reinstated. The amount of the Monthly Guarantee Premium for each Policy electing the Guaranteed Death Benefit Rider will be stated in the Data section of the Policy. The cost of the Guaranteed Death Benefit Rider is $0.01 per thousand of Face Amount per month. This Rider is available only at issue, and only if at least 50% of the Face Amount consists of Basic Coverage. If while the Guaranteed Death Benefit Rider is in force, the Accumulated Value of the Policy is not sufficient to cover the Monthly Deductions, Monthly Deductions will be made until the Accumulated Value of the Policy is exhausted, and will thereafter be deferred, and collected at such time as the Policy has positive Accumulated Value. For as long as Cash Surrender Value is zero, failure to have paid the Cumulative Guarantee Premium as of any Monthly Policy Date will cause the Guaranteed Death Benefit Rider to enter a 61 day lapse pending notification period. If a sufficient premium, as set forth above, is not paid during this period, the Rider will be cancelled and if the Cash Surrender Value is still zero, the Policy will enter a Grace Period, and will lapse if the Grace Period expires without a sufficient premium payment (see "Payment and Allocation of Premiums - Policy Lapse", Page ). If the Face Amount of a Policy subject to the Guaranteed Death Benefit Rider is increased or the Death Benefit Option is changed from Option A to Option B, the Rider's guarantee will extend to the increased Face Amount. This will result in increased Monthly Guarantee Premiums. For Policies with the Guaranteed Death Benefit Rider, Withdrawals and Policy loans will be limited to the excess of premiums paid over the Cumulative Guarantee Premium, if the Owner wishes to keep the Rider in force. If a Policy loan or Withdrawal for an amount greater than such excess is desired, the Guaranteed Death Benefit Rider will enter a 61-day lapse-pending notification period, and will be cancelled if a sufficient premium is not paid. THE GUARANTEED DEATH BENEFIT RIDER IS NOT AVAILABLE IN TEXAS OR MASSACHUSETTS. ADDITIONAL PROTECTION BENEFIT The Additional Protection Benefit Rider may be used to provide a higher Face Amount by adding Additional Coverage to the Policy. This Rider is available only at issue, or after issue only by submitting an application to National Life with evidence satisfactory to National Life of insurability of both Insureds. Additional Coverage must be in an amount of at least $50,000, and cannot exceed three times the Basic Coverage. 44 55 Adding to the Face Amount of the Policy through the Additional Protection Benefit Rider can offer a cost savings over adding to the Face Amount by increasing the Basic Coverage. Specifically, there is no Target Premium, no Surrender Charge, and no per $1000 Monthly Administrative Charge associated with Additional Coverage. The cost of the Rider is that a Cost of Insurance Charge is included in the Monthly Deductions for the Additional Coverage - the guaranteed cost of insurance rate applicable to the Additional Coverage will generally be higher than the rate applicable to Basic Coverage, but current cost of insurance rates may be either higher or lower for the Additional Coverage than for the Basic Coverage. POLICY SPLIT OPTION If the Policy Split Option Rider is elected, the Owner will have the right to split the Face Amount and Accumulated Value of a Policy into two single life whole life insurance contracts on the lives of each of the two Insureds, in the event of divorce or a material change in federal estate tax law. The two single life contracts may be any traditional whole life insurance, universal or variable life insurance contract then offered by National Life. This Rider is available only at issue, only to Insureds legally married to each other, only where both Insureds are not in a substandard Rate Class with a rating in excess of 250% and not uninsurable, and only where neither Insured is older than age 80. Exercise of the option to split the Policy will be allowed without evidence of insurability, but only within 180 days of the date of a final divorce decree relating to the Insureds, or within 180 days of the occurrence of either of the following changes in federal estate tax law: (1) an end to the Unlimited Marital Deduction, as defined in the Code;; and (2) a reduction of 50% or more of the percentage federal estate tax rate applicable to the estate of the surviving spouse. The two new policies will have an issue date of the date of the split, and will be based on the Insureds' ages as of the date of the split. The Rate Classes of each of the Insureds will be the Rate Class for such Insured for the most recently issued coverage segment under the Policy. The Owner may select the face amounts of the new policies, as long as the total of the two face amounts does not exceed the Face Amount of the Policy on the date of the split, and neither of the face amounts on the two new policies exceeds 50% of the Face Amount on the Policy. Increases on the Policy which contain a substandard rating in excess of 250% will not be eligible for the split. If the face amounts of the new policies are not equal, and the Policy is jointly owned, then the consent of all Owners to the split is required. The Accumulated Value, and any Policy loans and accrued interest, will be split in proportion to the Face Amount split, and the total of the accumulated values and any policy loans and accrued interest of the new individual contracts will equal the Accumulated Value of the Policy. There will not be new suicide and incontestability periods for the new individual policies as of the date of the split if they had expired on the Policy prior to the split, but if such periods had not expired, then the remaining time to expiration will be transferred to the new Policies. There is no cost for the Policy Split Option Rider, except that a fixed charge of $200 will also be assessed at the time of the split to cover administrative costs. The Rider may be cancelled at any time by the Owner, and will automatically terminate on its exercise, on the date of death of the first of the two Insureds to die, or on the date that the older of the Insureds reaches Attained Age 85. Any other Riders applicable to the Policy will terminate upon exercise of the Policy Split Option. ESTATE PRESERVATION RIDER The Estate Preservation Rider is designed for use in situations in which a Policy is issued outside of an irrevocable life insurance trust but is expected to be transferred into such a trust within a year after the Date of Issue. This Rider provides four years of additional last survivor term coverage on the two Insureds. The goal of the rider is to provide a Death Benefit including this Rider, net of incremental 45 56 estate taxes owed as a result of the Policy, at least equal to the Death Benefit provided by the Policy not including the Rider. This Rider is available only at issue and only where the Insureds are legally married to each other. The cost of the Estate Preservation Rider is a charge for the death benefit coverage included by this Rider, at the same rates that apply to the Additional Coverage. The coverage provided by this Rider will be level, regardless of whether Option A or Option B applies to the Face Amount of the Policy. The amount of coverage will be the initial Face Amount multiplied by a fraction the numerator of which is 0.55 and the denominator of which is 1-0.55, or 0.45. A factor of 0.55 is used in the above formula because the maximum estate tax rate is currently 55%. Any decrease in Face Amount during the first four Policy Years will result in a proportionate reduction in the coverage provided by the Estate Preservation Rider. The Estate Preservation Rider will terminate on the first Policy Anniversary, if the Owner of the Policy has not become an irrevocable life insurance trust by that time. If the Owner has become an irrevocable life insurance trust by such time, then the Rider will automatically terminate at the end of the fourth Policy Year. TERM RIDER The Term Rider allows an Owner to add individual life term coverage on either or both of the two Insureds. The Term Rider is available at any time, subject to submission of an application with evidence of insurability satisfactory to National Life, on Insureds with Issue Ages from 20 through 75. The Term Rider coverage is renewable through age 80. The maximum amount of Term Rider coverage for each Insured is 50% of the Face Amount of the Policy. Charges included in the Monthly Deductions will include amounts associated with the individual life term coverage. The cost of insurance rates for the Term Rider will be set forth in the Rider. Individual term life insurance coverage addresses different insurance needs than the survivorship life insurance coverage provided by the Face Amount of the Policy. Your determination of the usefulness of the Term Rider should be based on your specific insurance needs. Consult your sales representative for further information. CONTINUING COVERAGE RIDER The Continuing Coverage Rider allows an Owner to extend coverage at the Face Amount of a Policy beyond the younger Insured's Attained Age 100 if the Policy is still in force at that time. This Rider is available only at issue and only if the younger Insured is no older than Attained Age 75. On the date that the extension of coverage occurs, the Policy's Accumulated Value will be transferred to the Fixed Account, and no further transfers will be permitted. The Monthly Deductions will be set to zero. No further Premium Payments will be accepted. All other rights and benefits will continue while the Policy is in force. The charge is guaranteed never to exceed $3.50 per $1000 per month applied to the Net Amount at Risk. The current charge for the Continuing Coverage Rider is $2.50 per $1000 per month, applied to the Net Amount at Risk. The charge will begin at the younger Insured's Attained Age 90. At the time charges 46 57 begin for this Rider, Policies with Death Benefit Option B will automatically be changed to Death Benefit Option A. The tax consequences associated with continuing a Policy beyond age 100 of the younger Insured are uncertain. ENHANCED DEATH BENEFIT RIDER The Enhanced Death Benefit Rider may provide a higher Death Benefit at a targeted age for the younger Insured. The target age is selected by the Owner. The Rider operates by increasing the otherwise applicable specified percentages that are shown in the Policy and which may be applied in determining the Death Benefit, beginning 4 years prior to the targeted Attained Age and ending at Attained Age 99 of the younger Insured, by the following percentages: Target Age - 4: 4% Target Age -1: 16% Attained Age - 97: 12% Target Age - 3: 8% Target Age through Age 95: 20% Attained Age - 98: 8% Target Age - 2: 12% Attained Age - 96: 16% Attained Age - 99: 4%
The minimum target age that may be selected by the Owner is the later of the younger Insured's Attained Age 70 and 15 years after the Date of Issue. The maximum target age that may be selected is Attained Age 95 of the younger Insured. Once selected, the target age may not be changed. This Rider may be cancelled at any time, but if cancelled, cannot be reinstated. There is no cost for the Enhanced Death Benefit Rider. However, if the Rider's increases in the specified percentages result in an increase in Death Benefit, the Net Amount at Risk will be higher than if the Rider did not apply, and the Cost of Insurance Charges will be commensurately higher . This Rider is available only at issue, and only where the younger Insured's Attained Age is 80 or less. AUTOMATIC INCREASE RIDER The Automatic Increase Rider will provide for regular increases in Face Amount. The Owner may elect that such increases be effected annually in amounts equal to either of 5% or 10% of the sum of the Face Amount of the Policy at issue plus all previous increases resulting from this Rider. The Owner may also elect annual increases of a level amount equal to the Owner's planned periodic premiums for the Policy. In either case, the maximum increase that can be effected by means of the Automatic Increase Rider is 100% of the Face Amount of the Policy at issue. Increases in Face Amount effected by means of the Automatic Increase Rider will be similar to Additional Coverage in that there will be no Target Premium , no Surrender Charge and no per $1000 Monthly Administrative Charge associated with these increases. The cost of the Rider is that the Cost of Insurance Charge for the Policy will include amounts for the increase segments as they become effective. The cost of insurance rates will be the same as the rates 47 58 applied to Basic Coverage at issue. Guaranteed cost of insurance rates that will be applied to increases effected through this Rider will be set forth in the Rider. An Automatic Increase Rider terminates (a) at the request of the Owner, (b) when the younger insured reaches Attained Age 81, (c) when the maximum total increase is reached, (d) on the death of the first to die of the Insureds, or (e) when a requested decrease in Face Amount becomes effective. Termination of the Rider does not cancel previously added increases. This Rider is available only at issue, only if the younger Insured's Issue Age is at least 20 and less than 71, and only if neither Insured has a substandard rating in excess of 250%. FEDERAL INCOME TAX CONSIDERATIONS INTRODUCTION The following summary provides a general description of the federal income tax considerations associated with the Policy and does not purport to be complete or to cover all situations. This discussion is not intended as tax advice. Counsel or other competent tax advisors should be consulted for more complete information. This discussion is based upon National Life's understanding of the present federal income tax laws as they are currently interpreted by the Internal Revenue Service (the "Service"). No representation is made as to the likelihood of continuation of the present Federal income tax laws or of the current interpretations by the Service. TAX STATUS OF THE POLICY In order to qualify as a life insurance contract for federal income tax purposes, the policy must meet the definition of a life insurance contract which is set forth in Section 7702 of the Code. The manner in which Section 7702 should be applied to certain features of the Policy is not directly addressed by Section 7702 or any guidance issued to date under Section 7702. Nevertheless, National Life believes it is reasonable to conclude that the Policy will meet the Section 7702 definition of a life insurance contract. In the absence of final regulations or other pertinent interpretations of Section 7702, however, there is necessarily some uncertainty as to whether a Policy will meet the life insurance contract definition, particularly if the Owner pays the full amount of premiums permitted under the Policy. An Owner contemplating the payment of such premiums should do so only after consulting a tax adviser. If a Policy were determined not to be a life insurance contract for purposes of Section 7702, such Policy would not provide the tax advantages normally provided by a life insurance policy. If it is subsequently determined that a Policy does not satisfy Section 7702, National Life may take whatever steps are appropriate and necessary to attempt to cause such a Policy to comply with Section 7702. For these reasons, National Life reserves the right to restrict Policy transactions as necessary to attempt to qualify it as a life insurance contract under Section 7702. Section 817(h) of the Code requires that the investments of each Subaccount of the Variable Account must be "adequately diversified" in accordance with Treasury regulations in order for the Policy to qualify as a life insurance contract under Section 7702 of the Code (discussed above). The Variable Account, through the Funds, intends to comply with the diversification requirements prescribed in Treas. Reg. Section 1.817-5, which affect how each Fund's assets are to be invested. National Life believes that the Variable Account will, thus, meet the diversification requirement, and National Life will monitor continued compliance with this requirement. In certain circumstances, owners of variable life insurance contracts may be considered the owners, for federal income tax purposes, of the assets of the separate accounts used to support their contracts. In those circumstances, income and gains from the separate account assets would be includible in the variable contract owner's gross income. The Service has stated in published rulings that a variable contract owner will be considered the owner of separate account assets if the contract owner possesses incidents of ownership in those assets, such as the ability to exercise investment control over the assets. The Treasury Department has also announced, in connection with the 48 59 issuance of regulations concerning diversification, that those regulations "do not provide guidance concerning the circumstances in which investor control of the investments of a segregated asset account may cause the investor (i.e., the Owner), rather than the insurance company, to be treated as the owner of the assets in the account." This announcement also stated that guidance would be issued by way of regulations or rulings on the "extent to which policyholders may direct their investments to particular subaccounts without being treated as owners of the underlying assets." The ownership rights under the Policy are similar to, but different in certain respects from, those described by the Service in rulings in which it was determined that Policy Owners were not owners of separate account assets. For example, the Owner has additional flexibility in allocating premium payments and Accumulated Value. These differences could result in an Owner being treated as the owner of a pro rata portion of the assets of the Variable Account. In addition, National Life does not know what standards will be set forth, if any, in the regulations or rulings which the Treasury Department has stated it expects to issue. National Life therefore reserves the right to modify the Policy as necessary to attempt to prevent an Owner from being considered the owner of a pro rata share of the assets of the Variable Account. The following discussion assumes that the Policy will qualify as a life insurance contract for Federal income tax purposes. TAX TREATMENT OF POLICY BENEFITS In General. National Life believes that the proceeds and cash value increases of a Policy should be treated in a manner consistent with a fixed-benefit life insurance policy for Federal income tax purposes. Thus, the Unadjusted Death Benefit under the Policy should be excludable from the gross income of the Beneficiary under Section 101(a)(1) of the Code. Depending on the circumstances, an increase or decrease in a Policy's Face Amount, the exchange of a Policy, a change in the Policy's Death Benefit Option (i.e., a change from Death Benefit Option A to Death Benefit Option B or vice versa), a Policy loan, a Withdrawal, a surrender, a change in ownership, or an assignment of the Policy may have Federal income tax consequences. Generally, the Owner will not be deemed to be in constructive receipt of the Accumulated Value, including increments thereof, until there is a distribution. The tax consequences of distributions from, and loans taken from or secured by, a Policy depend on whether the Policy is classified as a "Modified Endowment Contract". Whether a Policy is or is not a Modified Endowment Contract, upon a complete surrender or lapse of a Policy or when benefits are paid at a Policy's maturity date, if the amount received plus the amount of indebtedness exceeds the total investment in the Policy, the excess will generally be treated as ordinary income subject to tax. Modified Endowment Contracts. Section 7702A establishes a class of life insurance contracts designated as "Modified Endowment Contracts. The rules for determining whether a Policy will be classified as a Modifeid Endowment Contract generally apply when a Policy is entered into, materially changed, or the death benefit is reduced. Due to the Policy's flexibility, classification as a Modified Endowment Contract will depend on the individual circumstances of each Policy. In general, a Policy will be a Modified Endowment Contract if the accumulated premiums paid at any time during the first seven Policy Years exceeds the sum of the net level premiums which would have been paid on or before such time if the Policy provided for paid-up future benefits after the payment of seven level annual premiums. The determination of whether a Policy will be a Modified Endowment Contract after a material change generally depends upon the relationship of the Unadjusted Death Benefit and Accumulated Value at the time of such change and the additional premiums paid in the seven years following the material change. A policy may become a Modified Endowment Contract if there is a reduction in the Policy's death benefit at any time. At the time a premium is credited, or the death benefit is reduced, which would cause the Policy to become a Modified Endowment Contract, National Life will notify the Owner's agent of action or actions that may be taken to 49 60 prevent the Policy from becoming a Modified Endowment Contract. If after 30 days from contacting the agent, National Life has not heard from the Owner, National Life will mail a letter directly to the Owner notifying him or her of actions that may be taken to prevent the Policy from becoming a Modified Endowment Contract. If after 30 days from mailing such notification National Life has received no response, National Life will assume the Owner wishes to take no action. If the Owner requests a refund of excess premium, the excess premium paid (with appropriate interest) will be returned to the Owner. The amount to be refunded will be deducted from the Accumulated Value in the Variable Account and in the Fixed Account in the same proportion as the premium payment was allocated to such accounts. The rules relating to whether a Policy will be treated as a Modified Endowment Contract are extremely complex and cannot be adequately described in the limited confines of this summary. Therefore, a current or prospective Owner should consult with a competent advisor to determine whether a policy transaction will cause the Policy to be treated as a Modified Endowment Contract. Distributions from Policies Classified as Modified Endowment Contracts. Policies classified as Modified Endowment Contracts will be subject to the following tax rules: First, all distributions, including distributions upon surrender and Withdrawals from such a Policy are treated as ordinary income subject to tax up to the amount equal to the excess (if any) of the Accumulated Value immediately before the distribution over the investment in the Policy (described below) at such time. Second, loans taken from or secured by, such a Policy are treated as distributions from such a Policy and taxed accordingly. Past due loan interest that is added to the loan amount will be treated as a loan. Third, a 10 percent additional income tax is imposed on the portion of any distribution from, or loan taken from or secured by, such a Policy that is included in income except where the distribution or loan is made on or after the Owner attains age 59-1/2, is attributable to the Owner's becoming disabled, or is part of a series of substantially equal periodic payments for the life (or life expectancy) of the Owner or the joint lives (or joint life expectancies) of the Owner and the Owner's Beneficiary. Distributions From Policies Not Classified as Modified Endowment Contracts. Distributions from a Policy that is not a Modified Endowment Contract, are generally treated as first recovering the investment in the Policy (described below) and then, only after the return of all such investment in the Policy, as distributing taxable income. An exception to this general rule occurs in the case of a decrease in the Policy's Unadjusted Death Benefit or any other change that reduces benefits under the Policy in the first 15 years after the Policy is issued and that results in a cash distribution to the Owner in order for the Policy to continue complying with the Section 7702 definitional limits. Such a cash distribution will be taxed in whole or in part as ordinary income (to the extent of any gain in the Policy) under rules prescribed in Section 7702. Loans from, or secured by, a Policy that is not a Modified Endowment Contract are not treated as distributions. Instead, such loans are treated as indebtedness of the Owner. Finally, neither distributions (including distributions upon surrender) nor loans from, or secured by, a Policy that is not a Modified Endowment Contract are subject to the 10 percent additional tax. Policy Loan Interest. Generally, interest paid on any loan under a Policy is not deductible. A tax advisor should be consulted before deducting Policy loan interest. Investment in the Policy. Investment in the Policy means: (i) the aggregate amount of any premiums or other consideration paid for a Policy, minus (ii) the aggregate amount received under the Policy which is excluded from gross income of the Owner (except that the amount of any loan from, or secured by, a Policy that is a Modified Endowment Contract, to the extent such amount is excluded from gross income, will be disregarded), plus (iii) the amount of any loan from, or secured by, a Policy that is a Modified Endowment Contract to the extent that such amount is included in the gross income of the Owner. 50 61 Multiple Policies. All Modified Endowment Contracts that are issued by National Life to the same Owner during any calendar year are treated as one Modified Endowment Contract for purposes of determining the amount includible in the gross income under Section 72(e) of the Code. Taxation of Policy Split. The Policy Split Option Rider permits a Policy to be split into two other fixed-benefit or variable-benefit life insurance policies in certain situations. A Policy split could have adverse tax consequences; for example, it is not clear whether a Policy split will be treated as a non-taxable exchange under Sections 1031 through 1043 of the Code. If a Policy split is not treated as a nontaxable exchange, a split could result in the recognition of taxable income in an amount up to any gain in the Policy at the time of the split. In addition, it is not clear whether, in all circumstances, the individual contracts that result from a Policy split would be would be classified as modified endowment contracts. Before exercising rights provided by the Policy Split Option Rider, it is important for an Owner to consult with a tax adviser regarding the possible consequences of a Policy split. Other Tax Considerations. The transfer of a Policy or the designation of a Beneficiary may have federal, state, and/or local transfer and inheritance tax consequences, including the imposition of gift, estate and generation-skipping transfer taxes. For example, the transfer of a Policy to, or the designation as Beneficiary of, or the payments of proceeds to, a person who is assigned to a generation which is two or more generations below the generation assignment of the Owner, may have gift and generation skipping transfer tax considerations under the Code. Generally, the proceeds of the Policy are includible in the gross estate of the Insured if the Insured possesses any "incidents of ownership" over the Policy at death. "Incidents of ownership" generally includes the right to receive economic benefits of the Policy as defined in Section 2042 of the Code and applicable Treasury regulations. If the Insured never held incidents of ownership over the Policy, or irrevocably transferred all interests in the Policy to a third party (e.g., an irrevocable life insurance trust) more than three years before death, the proceeds should be excluded from the Insured's gross estate. The individual situations of each Owner or Beneficiary will determine the extent, if any, to which federal, state or local transfer taxes may be imposed. Prospective Owners should consult their tax advisers for specific information in connection with these taxes. The Policies also may be used in various arrangements, including nonqualified deferred compensation or salary continuance plans, split dollar insurance plans, executive bonus plans, retiree medical benefit plans and others. The tax consequences of such plans may vary depending on the particular facts and circumstances of each individual arrangement. Therefore, if you are contemplating the use of the Policies in any arrangement the value of which depends in part on its tax consequences, you should be sure to consult a qualified tax advisor regarding the tax attributes of the particular arrangement. POSSIBLE CHARGE FOR NATIONAL LIFE'S TAXES At the present time, National Life makes no charge for any Federal, state or local taxes (other than state premium taxes or the DAC Tax) that the Company incurs that may be attributable to the Variable Account or to the Policies. National Life, however, reserves the right in the future to make a charge for any such tax or other economic burden resulting from the application of the tax laws that it determines to be properly attributable to the Accounts or to the Policies. If any tax charges are made in the future, they will be accumulated daily and transferred periodically from the Variable Account to National Life's general account. Any investment earnings on tax charges accumulated in the Variable Account will be retained by National Life. POSSIBLE CHANGES IN TAXATION Although the likelihood of legislative change is uncertain, there is always the possibility that the tax treatment of the Policies could change by legislation or other means. For instance, the President's 1999 Budget Proposal recommended legislation that, if enacted, would adversely modify the federal taxation of 51 62 the Policies. It is also possible that any change could be retroactive (that is, effective prior to the date of the change). A tax adviser should be consulted with respect to legislative developments and their effect on the Policy. VOTING RIGHTS All of the assets held in the Subaccounts of the Variable Account will be invested in shares of corresponding Portfolios of the Funds. The Funds do not hold routine annual shareholders' meetings. Shareholders' meetings will be called whenever each Fund believes that it is necessary to vote to elect the Board of Directors of the Fund and to vote upon certain other matters that are required by the 1940 Act or other applicable law or governing documents to be approved or ratified by the shareholders of a mutual fund. National Life is the legal owner of Fund shares and as such has the right to vote upon any matter that may be voted upon at a shareholders' meeting. However, in accordance with the SEC's view of present applicable law, National Life will vote the shares of the Funds at meetings of the shareholders of the appropriate Fund or Portfolio in accordance with instructions received from Owners. Fund shares held in each Subaccount of the Variable Account for which no timely instructions from Owners are received will be voted by National Life in the same proportion as those shares in that Subaccount for which instructions are received. Each Owner having a voting interest will be sent proxy material and a form for giving voting instructions. Owners may vote, by proxy or in person, only as to the Portfolios that correspond to the Subaccounts in which their Policy values are allocated. The number of shares held in each Subaccount attributable to a Policy for which the Owner may provide voting instructions will be determined by dividing the Policy's Accumulated Value in that account by the net asset value of one share of the corresponding Portfolio as of the record date for the shareholder meeting. Fractional shares will be counted. For each share of a Portfolio for which Owners have no interest, National Life will cast votes, for or against any matter, in the same proportion as Owners vote. If required by state insurance officials, National Life may disregard voting instructions if such instructions would require shares to be voted so as to cause a change in the investment objectives or policies of one or more of the Portfolios, or to approve or disapprove an investment policy or investment adviser of one or more of the Portfolios. In addition, National Life may disregard voting instructions in favor of certain changes initiated by an Owner or the Fund's Board of Directors provided that National Life's disapproval of the change is reasonable and is based on a good faith determination that the change would be contrary to state law or otherwise inappropriate, considering the portfolio's objectives and purposes, and the effect the change would have on National Life. If National Life does disregard voting instructions, it will advise Owners of that action and its reasons for such action in the next semi-annual report to Owners. Shares of the Funds are currently being offered to variable life insurance and variable annuity separate accounts of life insurance companies other than National Life that are not affiliated with National Life. National Life understands that shares of these Funds also will be voted by such other life insurance companies in accordance with instructions from their policyholders invested in such separate accounts. This will dilute the effect of voting instructions of Owners of the Policies. CHANGES IN APPLICABLE LAW, FUNDING AND OTHERWISE The voting rights described in this Prospectus are created under applicable Federal securities laws. To the extent that such laws or regulations promulgated thereunder eliminate the necessity to solicit voting instructions from Owners or restrict such voting rights, National Life reserves the right to proceed in accordance with any such laws or regulations. National Life also reserves the right, subject to compliance with applicable law, including approval of Owners, if so required: (1) to make changes in the form of the Variable Account, if in its judgment such 52 63 changes would serve the interests of Owners or would be appropriate in carrying out the purposes of the Policies, for example: (i) operating the Variable Account as a management company under the 1940 Act; (ii) deregistering the Variable Account under the 1940 Act if registration is no longer required; (iii) combining or substituting separate accounts; (iv) transferring the assets of the Variable Account to another separate account or to the Fixed Account; (v) making changes necessary to comply with, obtain or continue any exemptions from the 1940 Act; or (vi) making other technical changes in the Policy to conform with any action described herein; (2) if in its judgment a Portfolio no longer suits the investment goals of the Policy, or if tax or marketing conditions so warrant, to substitute shares of another investment portfolio for shares of such Portfolio; (3) to eliminate, combine, or substitute Subaccounts and establish new Subaccounts, if in its judgment marketing needs, tax considerations, or investment conditions so warrant; and (4) to transfer assets from a Subaccount to another Subaccount or separate account if the transfer in National Life's judgment would best serve interests of Policy Owners or would be appropriate in carrying out the purposes of the Policies; and (5) to modify the provisions of the Policies to comply with applicable laws. National Life has reserved all rights in respect of its corporate name and any part thereof, including without limitation the right to withdraw its use and to grant its use to one or more other separate accounts and other entities. If a Policy has Accumulated Value in a Subaccount that is eliminated, National Life will give the Owner at least 30 days notice before the elimination, and will request that the Owner designate the Subaccount or Subaccounts (or the Fixed Account) to which the Accumulated Value in the Subaccount to be eliminated should be transferred. If no such designation is received prior to the date of the elimination, then the Accumulated Value in such Subaccount will be transferred to the Money Market Subaccount. In any case, if in the future a transfer charge is imposed or limits on the number of transfers or free transfers are established, no charge will be made for this transfer, and it will not count toward any limit on transfers or free transfers. OFFICERS AND DIRECTORS OF NATIONAL LIFE The officers and directors of National Life, as well as their principal occupations during the past five years, are listed below.
PRINCIPAL OCCUPATION NAME AND POSITION DURING THE PAST FIVE YEARS - ----------------- -------------------------- Patrick E. Welch 1997 to present - Chairman of the Board Chairman of the Board, and Chief Executive Officer; 1992 to 1997 - Chief Executive Officer Chairman of the Board, Chief Executive Officer and President of GNA Corporation Thomas H. MacLeay 1996 to Present - President and President, Chief Chief Operating Officer; 1993 to Operating Officer, 1996 - Executive Vice President and Director & Chief Financial Officer; 1991 to 1993 - Senior Vice President & Chief Financial Officer Robert E. Boardman 1994 to present - Chairman of Hickok & Director Boardman Financial Network 1967 to present - President of Hickok & Boardman Realty, Inc. David R. Coates 1993 to present - Business Director Consultant; 1987 to 1993 - Managing Partner of KPMG Peat Marwick in Burlington, VT Benjamin F. Edwards III 1983 to present - Chairman, President
53 64 Director and Chief Executive Officer of A. G. Edwards, Inc. Earle H. Harbison, Jr. 1993 to present: Chairman of Director Harbison Walker, Inc.; 1986 to 1992 - President and Chief Operating Officer of Monsanto Company Roger B. Porter 1985 to present - Professor of Business Director and Government, Harvard University; 1976 to present - Member of the President's Commission on White House Fellowships; 1993 to present, Senior Scholar, Woodrow Wilson International Center for Scholars E. Miles Prentice III 1997 to present: Partner in the law firm of Eaton Director & Van Winkle; 1996 to 1997 - Partner in the law firm of Bryan Cave L.L.P.; 1993 to 1996 - Partner in the law firm of Piper & Marbury Thomas P. Salmon 1997 to present: Partner in the law firm of Director Salmon & Nostrand; 1991 to 1996 - President, the University of Vermont; formerly Governor, State of Vermont A. Gary Shilling 1978 to present - President of A. Director Gary Shilling & Company, Inc. Thomas R. Williams 1987 to present - President of the Director Wales Group, Inc. Patricia K. Woolf 1990 to present - Author, Consultant, Director and lecturer at the Department of Molecular Biology at Princeton University Martin P. Klein 1998 to present: Executive Vice President & Executive Vice President & Chief Financial Officer; 1996 to 1998: Managing Chief Financial Officer Director - Zurich Insurance Group; 1994 to 1996: Executive Vice President Centre-Re Chase Investment Company; 1992 to 1994: Executive Vice President and Chief Financial Officer - Arm Financial Group, Inc. James A. Mallon 1998 to present: Executive Vice President & Chief Executive Vice President & Marketing Officer; 1996 to 1998: President & Chief Chief Marketing Officer Executive Officer - Integon Life Insurance Corporation; 1993 to 1996: Senior Vice President & Chief Marketing Officer - Commercial Union Life Insurance Company of America Rodney A. Buck 1996 to present - Senior Vice Senior Vice President & President and Chief Investment Chief Investment Officer Officer; 1993 to 1995 - Senior Vice President - Investments; 1996 to present - Chairman & Chief Executive Officer, National Life Investment Management Company, Inc. ("NLIMC"); 1991 to 1995 - President and Chief Operating Officer, NLIMC; 1998 to present - Chief Executive Officer - Sentinel Advisors Company; 1987 to present - Senior Vice President - Sentinel Advisors Company Jeffrey P. Johnson 1997 to present - General Counsel; 1992- to present - General Counsel Partner, Primmer & Piper (law firm) Craig A. Smith 1998 to present: Vice President - Corporate Vice President Actuarial; 1996 to 1998 - Senior Vice President; 1993 to 1996 - Senior Vice
54 65 - President - Product; 1992 to 1993 - Vice President - Product Development
DISTRIBUTION OF POLICIES Applications for the Policies are solicited by agents who are licensed by state insurance authorities to sell National Life's variable life insurance policies, and who are also registered representatives of Equity Services, Inc. ("ESI") or registered representatives of broker/dealers who have Selling Agreements with ESI. ESI, whose address is National Life Drive, Montpelier, Vermont 05604, is a registered broker/dealer under the Securities Exchange Act of 1934 (the "1934 Act") and a member of the National Association of Securities Dealers, Inc. (the "NASD"). ESI is an indirect wholly-owned subsidiary of National Life. ESI acts as the principal underwriter, as defined in the 1940 Act, of the Policies, and for the Variable Account pursuant to an Underwriting Agreement to which the Variable Account, ESI and National Life are parties. The Policies are offered and sold only in those states where their sale is lawful. The insurance underwriting and the determination of a proposed Insured's Rate Class and whether to accept or reject an application for a Policy is done by National Life. National Life will refund any premiums paid if a Policy ultimately is not issued or will refund the applicable amount if the Policy is returned under the free look provision. Agents who are ESI registered representatives are compensated for sales of the Policies on a commission and service fee basis and with other forms of compensation. During the first Policy Year, agent commissions will not be more than 50% of the premiums paid up to a target amount (which is a function of Basic Coverage, and which is used primarily to determine commission payments) and 3% of the premiums paid in excess of that amount. For Policy Years 2 through 10, the agent commissions will not be more than 4.0% of the premiums paid up to the target amount, and 3% of premiums paid in excess of that amount. For Policy Year 11 and thereafter, agent commissions will be 1.5% of all premiums paid. For premiums received in the year following an increase in Basic Coverage and attributable to the increase, agent commissions will not be more than 48.5% up to the target amount for the increase. Agents may also receive expense allowances, and will also receive service fees, starting in Policy year 5, of 0.15% of unloaned accumulated value. Agents who are affiliated with National Life's producer group may receive compensation somewhat higher than the amounts stated above. Dealers other than ESI will receive gross concessions during the first Policy Year of 90% of the premiums paid up to the target amount, and 4% of the premiums paid in excess of that amount. For Policy Years 2 through 10, the gross dealer concession will not be more than 4.0% of the premiums paid. For Policy Year 11 and thereafter, the gross dealer concession will be 1.5% of all premiums paid. Such delaers will also receive gross service fees beginning in Policy Year 5 of 0.20% of unloaned Accumulated Value. POLICY REPORTS At least once each Policy Year a statement will be sent to the Owner describing the status of the Policy, including setting forth the Face Amount, the current Unadjusted Death Benefit, any Policy loans and accrued interest, the current Accumulated Value, the non-loaned Accumulated Value in the Fixed Account, the amount held as Collateral in the Fixed Account, the value in each Subaccount of the Variable Account, premiums paid since the last report, charges deducted since the last report, any Withdrawals since the last report, and the current Cash Surrender Value. National Life currently plans to send such statements quarterly. In addition, a statement will be sent to an Owner showing the status of the Policy following the transfer of amounts from one Subaccount of a Variable Account to another or between the Fixed Account and the Variable Account, the taking out of a loan, a repayment of a loan, a Withdrawal and the payment of any premiums (excluding those paid by bank draft or otherwise under the Automatic Payment Plan). 55 66 An Owner will be sent a semi-annual report containing the financial statements of each Fund in which his or her Policy has Accumulated Value, as required by the 1940 Act. STATE REGULATION National Life is subject to regulation and supervision by the Insurance Department of the State of Vermont which periodically examines its affairs. It is also subject to the insurance laws and regulations of all jurisdictions where it is authorized to do business. A copy of the Policy form has been filed with, and where required approved by, insurance officials in each jurisdiction where the Policies are sold. National Life is required to submit annual statements of its operations, including financial statements, to the insurance departments of the various jurisdictions in which it does business for the purposes of determining solvency and compliance with local insurance laws and regulations. PREPARING FOR YEAR 2000 Many computer systems were designed using only two digits to designate years. These systems may not be able to distinguish the year 2000 from the year 1900. Like all financial services providers, National Life utilizes computer systems that may be effected by Year 2000 transition issues, and National Life relies on service providers, including the Funds, that also may be affected. National Life has developed, and is in the process of implementing, a Year 2000 transition plan, and is confirming that its service providers are also so engaged. The resources that are being devoted to this effort are substantial. It is difficult to predict with precision whether the amount of resources ultimately devoted, or the outcome of these efforts, will have any negative impact on National Life. However, as of the date of this prospectus, it is not anticipated that any Policy Owners will experience negative effects on their investment, or on the services provided in connection therewith, as a result of Year 2000 transition implementation. National Life currently anticipates that its computer systems will be Year 2000 compliant on or about January 1, 1999, but there can be no assurance that National Life will be successful, or that interaction with other service providers will not impair National Life's services at that time. EXPERTS The Financial Statements listed on Page F-1 have been included in this Prospectus, in reliance on the reports of Price Waterhouse LLP, independent accountants, given on the authority of that firm as experts in accounting and auditing. Actuarial matters included in the Prospectus have been examined by Elizabeth H. MacGowan, F.S.A., MAAA, Associate Actuary - Product Development of National Life. LEGAL MATTERS Sutherland, Asbill & Brennan LLP of Washington, D.C. has provided advice on legal matters relating to certain aspects of Federal securities law applicable to the issue and sale of the Policies. Matters of Vermont law pertaining to the Policies, including National Life's right to issue the Policies and its qualification to do so under applicable laws and regulations issued thereunder, have been passed upon by Jeffrey P. Johnson, General Counsel of National Life. The Variable Account is not a party to any litigation. There are no material legal proceedings involving National Life which are likely to have a material adverse effect upon the Variable Account or upon the ability of National Life to meet its obligations under the Policies. ESI is not engaged in any litigation of any material nature. In recent years, life insurance companies have been named as defendants in lawsuits, including class action lawsuits, relating to life insurance pricing and sales practices. A number of these lawsuits have resulted in substantial jury awards or settlements. During 1997 several lawsuits of this nature were 56 67 filed against National Life on behalf of purported classes of persons who purchased certain insurance products from National Life. National Life has highly meritorious defenses and believes that plaintiffs' claims are entirely without merit and further, does not believe that these lawsuits will have any material adverse effect upon its ability to meet its obligations under the Policies. National Life is also party to ordinary routine litigation incidental to the business, none of which is expected to have a material adverse effect upon its ability to meet its obligations under the Policies. FINANCIAL STATEMENTS The financial statements of National Life appear on the following pages. The financial statements of National Life should be distinguished from any financial statements of the Variable Account and should be considered only as bearing upon National Life's ability to meet its obligations under the Policies. No financial statements of the Variable Account are included herein because, as of the date of this prospectus, the Subaccounts of the Variable Account that have been established to serve as investment options under the Policies had no assets and had incurred no liabilities. 57 68 APPENDIX A ILLUSTRATION OF DEATH BENEFITS, ACCUMULATED VALUES AND CASH SURRENDER VALUES The following tables illustrate how the Death Benefits, Accumulated Values and Cash Surrender Values of a Policy may change with the investment experience of the Variable Account. The tables show how the Death Benefits, Accumulated Values and Cash Surrender Values of a Policy issued to two Insureds of given age, sex and Rate Class would vary over time if the investment return on the assets held in each Portfolio of each of the Funds were a uniform, gross, annual rate of 0%, 6% and 12%. The tables on Pages A-2 to A-7 illustrate a Policy issued with the Insureds being a male age 55 and a female age 50, each in the Preferred Nonsmoker Rate Class with a Face Amount of $1,000,000 and Planned Periodic Premiums of $10,000 paid at the beginning of each Policy Year. Both Death Benefit Option A and Death Benefit Option B, are illustrated. The Death Benefits, Accumulated Values and Cash Surrender Values would be lower if either or both of the Insureds were in a nonsmoker, preferred smoker, smoker, substandard or uninsurable class since the cost of insurance charges are higher for these classes. Also, the values would be different from those shown if the gross annual investment returns averaged 0%, 6% and 12% over a period of years, but fluctuated above and below those averages for individual Policy Years. The second column of the tables show the amount to which the premiums would accumulate if an amount equal to those premiums were invested to earn interest, after taxes, at 5% compounded annually. The columns shown under the heading "Guaranteed" assume that throughout the life of the policy, the monthly Cost of Insurance Charge, the Premium Expense Charge, the Variable Account Charge, and the Monthly Administrative Charge are charged at the maximum level. The columns under the heading "Current" assume that throughout the life of the Policy, the monthly charge for the cost of insurance is based on the current cost of insurance rates and that the Premium Expense Charge, the Variable Account Charge and the Monthly Administrative Charges are assessed at current levels. The amounts shown in all tables reflect an averaging of certain other asset charges described below that may be assessed under the Policy, depending upon how premiums are allocated. The total asset charge reflected in the Current and Guaranteed illustrations, is 0.83%. This total charge is based on an assumption that an Owner allocates the Policy values equally among the Subaccounts of the Variable Account. The asset charge reflects an investment advisory fee of %, which represents an average of the fees incurred by the Portfolios during 1997 and expenses of % which is based on an average of the actual expenses incurred by the Portfolios during 1997, adjusted, as appropriate, to take into account expense reimbursement arrangements expected to be in place for 1998. For information on Fund expenses, see the prospectuses for the Funds accompanying this prospectus. For some of the Portfolios, the annual expenses used in the illustrations are net of certain reimbursements that may or may not continue. The tables also reflect the fact that no charges for Federal or state income taxes are currently made against the Variable Accounts. If such a charge is made in the future, it would take a higher gross annual rate of return to produce the same Policy values. The tables illustrate the Policy values that would result based upon the hypothetical investment rates of return if premiums are paid and allocated as indicated, no amounts are allocated to the Fixed Account, and no Policy loans are made. The tables are also based on the assumption that the Owner has not requested an increase or decrease in the Face Amount, that no Withdrawals have been made and no transfers have been made in any Policy Year, and that no Riders have been purchased. Upon request, National Life will provide a comparable illustration based upon the proposed Insureds' Ages and Rate Classes, the Death Benefit Option, Face Amount, Planned Periodic Premiums and Riders requested. A-1 69 NATIONAL LIFE SENTINEL ESTATE PROVIDER LAST SURVIVOR FLEXIBLE PREMIUM ADJUSTABLE VARIABLE LIFE INSURANCE $1,000,000 FACE AMOUNT MALE INSURED ISSUE AGE 55, PREFERRED NONSMOKER FEMALE INSURED ISSUE AGE 50, PREFERRED NONSMOKER DEATH BENEFIT OPTION A ANNUAL PREMIUM $10,000 ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 0%
Guaranteed Current Premiums ------------------------------------------- ----------------------------------- End of Accumulated Accum- Cash Accum- Cash Policy at 5% Int. ulated Surrender Death ulated Surrender Death Year Per Year Value Value Benefit Value Value Benefit - ---- -------- ----- ----- ------- ----- ----- ------- 1 10,000 7,626 0 1,000,000 7,634 0 1,000,000 2 20,500 15,005 5,005 1,000,000 15,028 5,028 1,000,000 3 31,525 22,117 12,117 1,000,000 22,164 12,164 1,000,000 4 43,101 28,941 18,941 1,000,000 29,016 19,016 1,000,000 5 55,256 35,449 25,449 1,000,000 35,559 25,559 1,000,000 6 68,019 41,613 33,446 1,000,000 41,764 33,597 1,000,000 7 81,420 47,400 41,233 1,000,000 47,597 41,430 1,000,000 8 95,491 52,774 48,608 1,000,000 53,315 49,149 1,000,000 9 110,266 57,698 55,531 1,000,000 58,923 56,756 1,000,000 10 125,779 62,122 61,955 1,000,000 64,412 64,245 1,000,000 11 142,068 65,990 65,990 1,000,000 71,465 71,465 1,000,000 12 159,171 69,229 69,229 1,000,000 78,390 78,390 1,000,000 13 177,130 71,748 71,748 1,000,000 85,172 85,172 1,000,000 14 195,986 73,427 73,427 1,000,000 91,784 91,784 1,000,000 15 215,786 74,133 74,133 1,000,000 98,206 98,206 1,000,000 16 236,575 73,717 73,717 1,000,000 104,406 104,406 1,000,000 17 258,404 72,014 72,014 1,000,000 110,345 110,345 1,000,000 18 281,324 68,846 68,846 1,000,000 115,975 115,975 1,000,000 19 305,390 64,021 64,021 1,000,000 121,235 121,235 1,000,000 20 330,660 57,301 57,301 1,000,000 126,050 126,050 1,000,000 25 477,271 0 0 0 145,339 145,339 1,000,000 30 664,388 0 0 0 133,585 133,585 1,000,000
The Death Benefit may, and the Accumulated Values and Cash Surrender Values will, differ if premiums are paid in different amounts or frequencies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
Guaranteed Current Premiums ------------------------------------------- ----------------------------------- End of Accumulated Accum- Cash Accum- Cash Policy at 5% Int. ulated Surrender Death ulated Surrender Death Year Per Year Value Value Benefit Value Value Benefit - ---- -------- ----- ----- ------- ----- ----- ------- 1 10,000 8,116 0 1,000,000 8,125 0 1,000,000 2 20,500 16,452 6,452 1,000,000 16,478 6,478 1,000,000 3 31,525 24,993 14,993 1,000,000 25,046 15,046 1,000,000 4 43,101 33,720 23,720 1,000,000 33,809 23,809 1,000,000 5 55,256 42,609 32,609 1,000,000 42,746 32,746 1,000,000 6 68,019 51,634 43,467 1,000,000 51,829 43,663 1,000,000 7 81,420 60,762 54,595 1,000,000 61,028 54,862 1,000,000 8 95,491 69,959 65,792 1,000,000 70,605 66,439 1,000,000 9 110,266 79,184 77,017 1,000,000 80,580 78,413 1,000,000 10 125,779 88,387 88,220 1,000,000 90,960 90,793 1,000,000 11 142,068 97,507 97,507 1,000,000 103,657 103,657 1,000,000 12 159,171 106,466 106,466 1,000,000 116,925 116,925 1,000,000 13 177,130 115,166 115,166 1,000,000 130,776 130,776 1,000,000 14 195,986 123,477 123,477 1,000,000 145,215 145,215 1,000,000 15 215,786 131,255 131,255 1,000,000 160,250 160,250 1,000,000 16 236,575 138,335 138,335 1,000,000 175,883 175,883 1,000,000 17 258,404 144,533 144,533 1,000,000 192,108 192,108 1,000,000 18 281,324 149,646 149,646 1,000,000 208,912 208,912 1,000,000 19 305,390 153,456 153,456 1,000,000 226,274 226,274 1,000,000 20 330,660 155,693 155,693 1,000,000 244,164 244,164 1,000,000 25 477,271 128,044 128,044 1,000,000 344,981 344,981 1,000,000 30 664,388 0 0 0 451,264 451,264 1,000,000
The Death Benefit may, and the Accumulated Values and Cash Surrender Values will, differ if premiums are paid in different amounts or frequencies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
Guaranteed Current Premiums ------------------------------------------- ----------------------------------- End of Accumulated Accum- Cash Accum- Cash Policy at 5% Int. ulated Surrender Death ulated Surrender Death Year Per Year Value Value Benefit Value Value Benefit - ---- -------- ----- ----- ------- ----- ----- ------- 1 10,000 8,607 0 1,000,000 8,616 0 1,000,000 2 20,500 17,959 7,959 1,000,000 17,988 7,988 1,000,000 3 31,525 28,106 18,106 1,000,000 28,166 18,166 1,000,000 4 43,101 39,099 29,099 1,000,000 39,206 29,206 1,000,000 5 55,256 50,996 40,996 1,000,000 51,165 41,165 1,000,000 6 68,019 63,853 55,686 1,000,000 64,104 55,938 1,000,000 7 81,420 77,732 71,565 1,000,000 78,089 71,922 1,000,000 8 95,491 92,701 88,534 1,000,000 93,488 89,321 1,000,000 9 110,266 108,832 106,666 1,000,000 110,452 108,285 1,000,000 10 125,779 126,200 126,034 1,000,000 129,134 128,967 1,000,000 11 142,068 144,883 144,883 1,000,000 151,896 151,896 1,000,000 12 159,171 164,956 164,956 1,000,000 177,082 177,082 1,000,000 13 177,130 186,494 186,494 1,000,000 204,942 204,942 1,000,000 14 195,986 209,561 209,561 1,000,000 235,747 235,747 1,000,000 15 215,786 234,235 234,235 1,000,000 269,806 269,806 1,000,000 16 236,575 260,603 260,603 1,000,000 307,454 307,454 1,000,000 17 258,404 288,771 288,771 1,000,000 349,066 349,066 1,000,000 18 281,324 318,875 318,875 1,000,000 395,055 395,055 1,000,000 19 305,390 351,093 351,093 1,000,000 445,886 445,886 1,000,000 20 330,660 385,626 385,626 1,000,000 502,082 502,082 1,000,000 25 477,271 603,292 603,292 1,000,000 890,838 890,838 1,000,000 30 664,388 960,216 960,216 1,008,227 1,542,054 1,542,054 1,619,156
The Death Benefit may, and the Accumulated Values and Cash Surrender Values will, differ if premiums are paid in different amounts or frequencies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
Guaranteed Current Premiums ------------------------------------------- ----------------------------------- End of Accumulated Accum- Cash Accum- Cash Policy at 5% Int. ulated Surrender Death ulated Surrender Death Year Per Year Value Value Benefit Value Value Benefit - ---- -------- ----- ----- ------- ----- ----- ------- 1 10,000 7625 0 1,007,625 7,645 0 1,007,634 2 20,500 15,002 5,002 1,015,002 15,025 5,024 1,015,025 3 31,525 22,107 12,107 1,022,107 22,153 12,153 1,022,153 4 43,101 28,916 18,916 1,028,916 28,991 18,991 1,028,991 5 55,256 35,399 25,399 1,035,399 35,509 25,509 1,035,509 6 68,019 41,523 33,357 1,041,523 41,674 33,507 1,041,674 7 81,420 47,251 41,084 1,047,251 47,448 41,281 1,047,448 8 95,491 52,542 48,376 1,052,542 53,099 48,932 1,053,099 9 110,266 57,352 55,186 1,057,352 58,631 56,465 1,058,631 10 125,779 61,626 61,460 1,061,626 64,037 63,871 1,064,037 11 142,068 65,301 65,301 1,065,301 70,994 70,994 1,070,994 12 159,171 68,295 68,295 1,068,295 77,808 77,808 1,077,808 13 177,130 70,507 70,507 1,070,507 84,464 84,464 1,084,464 14 195,986 71,808 71,808 1,071,808 90,931 90,931 1,090,931 15 215,786 72,056 72,056 1,072,056 97,184 97,184 1,097,184 16 236,575 71,093 71,093 1,071,093 103,187 103,187 1,103,187 17 258,404 68,752 68,752 1,068,752 108,893 108,893 1,108,893 18 281,324 64,857 64,587 1,064,587 114,246 114,246 1,114,246 19 305,390 59,231 59,231 1,059,231 119,173 119,173 1,119,173 20 330,660 51,658 51,658 1,051,658 123,587 123,587 1,123,587 25 477,271 0 0 0 139,974 139,974 1,139,974 30 664,388 0 0 0 120,204 120,204 1,120,204
The Death Benefit may, and the Accumulated Values and Cash Surrender Values will, differ if premiums are paid in different amounts or frequencies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
Guaranteed Current Premiums ------------------------------------------- ----------------------------------- End of Accumulated Accum- Cash Accum- Cash Policy at 5% Int. ulated Surrender Death ulated Surrender Death Year Per Year Value Value Benefit Value Value Benefit - ---- -------- ----- ----- ------- ----- ----- ------- 1 10,000 8,116 0 1,008,116 8,124 0 1,008,124 2 20,500 16,449 6,449 1,016,449 16,475 6,475 1,016,475 3 31.525 24,982 14,982 1,024,982 25,034 15,034 1,025,034 4 43,101 33,690 23,690 1,033,690 33,780 23,780 1,033,780 5 55,256 42,548 32,548 1,042,548 42,685 32,685 1,042,685 6 68,019 51,520 43,353 1,051,520 51,715 43,549 1,051,715 7 81,420 60,566 54,400 1,060,566 60,832 54,665 1,060,832 8 95,491 69,642 65,475 1,069,642 70,309 66,142 1,070,309 9 110,266 78,694 76,527 1,078,694 80,164 77,997 1,080,164 10 125,779 87,656 87,490 1.087,656 90,403 90,236 1,090,403 11 142,068 96,450 96,450 1,096,450 102,927 102,927 1,102,927 12 159,171 104,974 104,974 1,104,974 115,988 115,988 1,115,988 13 177,130 113,101 113,101 1,113,101 129,591 129,591 1,129,591 14 195,986 120,667 120,667 1,120,667 143,731 143,731 1,143,731 15 215,786 127,484 127,484 1,127,484 158,405 158,405 1,158,405 16 236,575 133,342 133,342 1,133,342 173,598 173,598 1,173,598 17 258,404 138,006 138,006 1,138,006 189,286 189,286 1,189,286 18 281,324 141,219 141,219 1,141,219 205,430 205,430 1,205,430 19 305,390 142,711 142,711 1,142,711 221,972 221,972 1,221,972 20 330,660 142,159 142,159 1,142,159 238,836 238,836 1,238,836 25 477,271 92,109 92,109 1,092,109 330,948 330,948 1,330,948 30 664,388 0 0 0 407,332 407,332 1,407,332
The Death Benefit may, and the Accumulated Values and Cash Surrender Values will, differ if premiums are paid in different amounts or frequencies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
Guaranteed Current Premiums ------------------------------------------- ----------------------------------- End of Accumulated Accum- Cash Accum- Cash Policy at 5% Int. ulated Surrender Death ulated Surrender Death Year Per Year Value Value Benefit Value Value Benefit - ---- -------- ----- ----- ------- ----- ----- ------- 1 10,000 8,607 0 1,008,607 8,616 0 1,008,616 2 20,500 17,955 7955 1,017,955 17,984 7,984 1,017,984 3 31,525 28,093 18,093 1,028,093 28,153 18,153 1,028,153 4 43,101 39,065 29,065 1,039,065 39,172 29,172 1,039,172 5 55,256 50,922 40,922 1,050,922 51,091 41,091 1,051,091 6 68,019 63,709 55,543 1,063,709 63,960 55,794 1,063,960 7 81,420 77,476 71,309 1,077,476 77,831 71,664 1,077,831 8 95,491 92,269 88,103 1,092,269 93,083 88,917 1,093,083 9 110,266 108,138 105,972 1,108,138 109,861 107,694 1,109,861 10 125,779 125,125 124,958 1,125,125 128,308 128,141 1,128,308 11 142,068 143,262 143,262 1,143,262 150,768 150,768 1,150,768 12 159,171 162,571 162,571 1,162,571 175,572 175,572 1,175,572 13 177,130 183,049 183,049 1,183,049 202,953 202,953 1,202,953 14 195,986 204,663 204,663 1,204,663 233,153 233,153 1,233,153 15 215,786 227,357 227,357 1,227,357 266,446 266,446 1,266,446 16 236,575 251,057 251,057 1,251,057 303,123 303,123 1,303,123 17 258,404 275,662 275,662 1,275,662 343,496 343,496 1,343,496 18 281,324 301,052 301,052 1,301,052 387,896 387,896 1,387,896 19 305,390 327,090 327,090 1,327,090 436,675 436,675 1,436,675 20 330,660 353,582 353,582 1,353,582 490,207 490,207 1,490,207 25 477,271 479,970 479,970 1,479,970 852,096 852,096 1,852,096 30 664,388 531,112 531,112 1,531,112 1,409,275 1,409,275 2,409,275
The Death Benefit may, and the Accumulated Values and Cash Surrender Values will, differ if premiums are paid in different amounts or frequencies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o calculate Joint Age, the two insureds ages are converted to adjusted ages, the difference in the adjusted ages is converted to an add-on, and the add-on is added to the adjusted age of the younger insured. Step1: Sex Adjustment Make the following adjustment to each insured's age based on sex: Male: Subtract 0 Female: Subtract 5 Step2: Tobacco Adjustment Take the results from Step 1 and make the following adjustment to each insured's age based on tobacco use: Male Tobacco: Add 3 Female Tobacco: Add 2 Step3: Substandard Rating Adjustment: Take the results from Step 2 and make the following adjustment to each insured's age based on substandard rating table: Table A (125%) Add 2 Table B (150%) Add 4 Table C (175%) Add 6 Table D (200%) Add 8 Table E (225%) Add 10 Table F (250%) Add 12 Table H (300%) Add 14 Table J (350%) Add 15 Table L (400%) Add 16 Table P (500%) Add 19
If the adjusted age exceeds 100, then cap the adjusted age at 100. Step 4: Uninsurables: An adjusted age of 100 will be used for all uninsurables. B-1 76 Step 5: Age Add-on: Take the difference of the adjusted ages and determine the add-on from the following table: 0 0 1-2 1 3-4 2 5-6 3 7-9 4 10-12 5 13-15 6 16-18 7 19-23 8 24-28 9 29-34 10 35-39 11 40-44 12 45-47 13 48-50 14 51-53 15 54-56 16 57-60 17 61-64 18 65-69 19 70-75 20 76-85 21
Step 6: Joint Age: Add the add-on from Step 5 to the younger adjusted age to get the Joint Age. B-2 77 Target Premiums and Surrender Charges (Annual rates per $1000 of Basic Coverage) The initial surrender charge is level for the number of years indicated below. Following this level period, the surrender charge decreases linearly by month until it is zero at the beginning of the 11th year.
Initial Level Initial Level Joint Target Surrender Period Joint Target Surrender Period Age Premium Charge (in years) Age Premium Charge (in years) - --- ------- ------ ---------- --- ------- ------ ---------- 15 2.40 2.40 5 53 11.70 11.70 5 16 2.50 2.50 5 54 12.90 12.90 5 17 2.60 2.60 5 55 14.05 14.05 5 18 2.65 2.65 5 56 15.25 15.25 5 19 2.75 2.75 5 57 16.45 16.45 5 20 2.80 2.80 5 58 17.65 17.65 5 21 2.90 2.90 5 59 18.80 18.80 5 22 3.00 3.00 5 60 20.00 20.00 5 23 3.10 3.10 5 61 20.75 20.75 5 24 3.20 3.20 5 62 21.50 21.50 5 25 3.30 3.30 5 63 22.70 22.70 5 26 3.35 3.35 5 64 23.90 23.90 5 27 3.45 3.45 5 65 25.05 25.05 5 28 3.60 3.60 5 66 26.25 26.25 5 29 3.70 3.70 5 67 27.45 27.45 5 30 3.80 3.80 5 68 28.65 28.65 5 31 3.90 3.90 5 69 29.80 29.80 5 32 4.00 4.00 5 70 31.00 31.00 5 33 4.15 4.15 5 71 31.75 31.75 5 34 4.30 4.30 5 72 32.50 32.50 5 35 4.50 4.50 5 73 33.45 33.45 5 36 4.70 4.70 5 74 34.40 34.40 5 37 4.85 4.85 5 75 35.30 35.30 5 38 5.05 5.05 5 76 36.25 36.25 5 39 5.30 5.30 5 77 37.20 37.20 5 40 5.50 5.50 5 78 38.15 38.15 5 41 5.65 5.65 5 79 39.05 39.05 5 42 5.80 5.80 5 80 40.00 40.00 5 43 6.35 6.35 5 81 40.00 41.00 4 44 6.85 6.85 5 82 40.00 42.00 4 45 7.40 7.40 5 83 40.00 43.00 4
B-3 78 46 7.90 7.90 5 84 40.00 44.00 3 47 8.45 8.45 5 85 40.00 45.00 3 48 8.95 8.95 5 86 40.00 46.00 2 49 9.50 9.50 5 87 40.00 47.00 2 50 10.00 10.00 5 88 40.00 48.00 2 51 10.25 10.25 5 89 40.00 49.00 2 52 10.50 10.50 5 90 40.00 50.00 2
B-4 79 NATIONAL LIFE INSURANCE COMPANY * * * * * FINANCIAL STATEMENTS * * * * * DECEMBER 31, 1997 AND 1996 80 Report of Independent Accountants April 7, 1998 To the Board of Directors and Policyowners of National Life Insurance Company In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of operations and policyowners' equity, and of cash flows present fairly, in all material respects, the financial position of National Life Insurance Company and its subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 the opinion expressed above. PRICE WATERHOUSE, LLP 81 NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET
DECEMBER 31, - ------------------------------------------------------------------------------------------------------------------- (In Thousands) 1997 1996 - ------------------------------------------------------------------------------------------------------------------- ASSETS: Cash and cash equivalents $ 372,180 $ 268,235 Available-for-sale debt and equity securities, at fair value 5,317,427 4,393,046 Held-to-maturity debt securities, at amortized cost - 590,700 Mortgage loans 992,170 907,024 Policy loans 791,753 796,193 Real estate investments 95,926 99,442 Other invested assets 90,520 78,596 - ------------------------------------------------------------------------------------------------------------------- Total cash and invested assets 7,659,976 7,133,236 Deferred policy acquisition costs 392,014 421,584 Due and accrued investment income 125,790 120,753 Premiums and fees receivable 23,458 25,874 Deferred income taxes 17,517 33,514 Amounts recoverable from reinsurers 210,020 190,873 Present value of future profits of insurance acquired 54,444 80,957 Property and equipment, net 59,188 64,302 Other assets 63,967 51,453 Separate account assets 207,425 181,771 - ------------------------------------------------------------------------------------------------------------------- Total assets $ 8,813,799 $ 8,304,317 =================================================================================================================== LIABILITIES: Policy benefit liabilities $ 3,814,213 $ 3,701,597 Policyowners' accounts 3,236,710 3,051,973 Policyowners' deposits 40,836 37,524 Policy claims payable 26,968 31,217 Policyowners' dividends 53,395 51,792 Other liabilities and accrued expenses 479,483 394,127 Debt 80,085 82,682 Separate account liabilities 187,998 165,234 - ------------------------------------------------------------------------------------------------------------------- Total liabilities 7,919,688 7,516,146 - ------------------------------------------------------------------------------------------------------------------- MINORITY INTERESTS 53,222 39,263 POLICYOWNERS' EQUITY: Net unrealized gains on available-for-sale securities 85,017 28,867 Retained earnings 755,872 720,041 - ------------------------------------------------------------------------------------------------------------------- Total policyowners' equity 840,889 748,908 - ------------------------------------------------------------------------------------------------------------------- Total liabilities, minority interests and policyowners' equity $ 8,813,799 $ 8,304,317 ===================================================================================================================
The accompanying notes are an integral part of these financial statements. 1 82 NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS AND POLICYOWNERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------------------------- (In Thousands) 1997 1996 - ------------------------------------------------------------------------------------------------------------------- REVENUES: Insurance premiums $ 399,017 $ 406,286 Universal life and investment-type policy fees 45,397 41,745 Net investment income 532,594 517,268 Realized investment gains (losses) 11,887 (2,070) Mutual fund commission and fee income 51,417 42,256 Other income 17,524 21,278 - ------------------------------------------------------------------------------------------------------------------- Total revenue 1,057,836 1,026,763 - ------------------------------------------------------------------------------------------------------------------- BENEFITS AND EXPENSES: Increase in policy liabilities 118,134 166,668 Policy benefits 313,819 297,564 Policyowners' dividends 106,312 105,690 Interest credited to policyowners' accounts 189,776 170,955 Operating expenses 174,709 148,716 Commissions and expense allowances 105,329 95,517 Net deferral of policy acquisition costs (14,617) (13,352) - ------------------------------------------------------------------------------------------------------------------- Total benefits and expenses 993,462 971,758 - ------------------------------------------------------------------------------------------------------------------- Income before income taxes and minority interests 64,374 55,005 Income taxes 20,907 31,957 - ------------------------------------------------------------------------------------------------------------------- Income before minority interests 43,467 23,048 Minority interests 7,636 5,925 - ------------------------------------------------------------------------------------------------------------------- NET INCOME 35,831 17,123 RETAINED EARNINGS: Beginning of year 720,041 702,918 - ------------------------------------------------------------------------------------------------------------------- End of year $ 755,872 $ 720,041 =================================================================================================================== NET UNREALIZED GAINS ON AVAILABLE-FOR-SALE SECURITIES: Beginning of year $ 28,867 $ 77,173 Change during year 56,150 (48,306) - ------------------------------------------------------------------------------------------------------------------- End of year $ 85,017 $ 28,867 ===================================================================================================================
The accompanying notes are an integral part of these financial statements. 2 83 NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOW
FOR THE YEARS ENDED DECEMBER 31, - ---------------------------------------------------------------------------------------------------------------------- (In Thousands) 1997 1996 - ---------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 35,831 $ 17,123 Adjustments to reconcile net income to net cash provided by operations: Change in: Due and accrued investment income (5,037) (1,502) Policy liabilities 74,693 144,723 Deferred policy acquisition costs (14,617) (9,956) Policyowners' dividends 1,603 4,975 Deferred income taxes (20,747) (13,646) Realized investment (gains) losses (11,887) 2,070 Depreciation 3,715 4,283 Other 15,774 (12,678) - ---------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 79,328 135,392 - ---------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales, maturities and repayments of investments 2,385,471 2,497,648 Cost of investments acquired (2,647,628) (2,714,560) Acquisition of subsidiary, net - (81,551) Other 7,091 4,793 - ---------------------------------------------------------------------------------------------------------------------- Net cash used by investing activities (255,066) (293,670) - ---------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Policyowners' deposits, including interest credited 670,780 535,932 Policyowners' withdrawals, including policy charges (495,076) (418,775) Net increase (decrease) in borrowings under repurchase agreements 234,570 (51,013) Net (decrease) increase in securities lending liabilities (139,652) 31,717 Other 9,061 17,747 - ---------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 279,683 115,608 - ---------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 103,945 (42,670) CASH AND CASH EQUIVALENTS: Beginning of year 268,235 310,905 - ---------------------------------------------------------------------------------------------------------------------- End of year $ 372,180 $ 268,235 ======================================================================================================================
The accompanying notes are an integral part of these financial statements. 3 84 NATIONAL LIFE INSURANCE COMPANY and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 and 1996 NOTE 1 - NATURE OF OPERATIONS National Life Insurance Company (National Life) was chartered in 1848 and is among the 15 largest mutual life insurance companies in the United States. National Life is also known by its registered trade name "National Life of Vermont". National Life employs about 750 people in its home office in Montpelier, Vermont. As a mutual life insurance company, National Life has no shareholders. With its affiliates and subsidiaries, National Life offers a broad range of financial products and services, including life insurance, annuities, disability income insurance, mutual funds, investment advisory and administration services. National Life primarily develops and distributes individual life insurance and annuity products. National Life markets its products primarily to small business owners, professionals and high net worth individuals by providing financial solutions in the form of estate, business succession and retirement planning, deferred compensation and other key executive fringe benefit plans. Insurance and annuity products are primarily distributed through about 40 general agencies in major metropolitan areas throughout the United States. National Life also distributes its products through brokers and banks. National Life has about 235,000 policyowners and is licensed to do business in all 50 states and the District of Columbia. About 26% of National Life's total collected premiums are from residents of New York and California. Through affiliates National Life also distributes and provides investment advisory and administrative services to the Sentinel Group Funds, Inc. The Sentinel Funds' $2.8 billion of net assets represent thirteen mutual funds managed on behalf of about 107,000 individual, corporate and institutional shareholders worldwide. During 1996, National Life acquired a majority interest in Life Insurance Company of the Southwest (LSW), a Dallas, Texas based financial services company specializing in annuities. LSW is licensed in all states but New York, with particular concentration in the west and the southwest. About 50% of LSW's total collected premiums are from residents of California, Texas and Florida. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying consolidated financial statements of National Life and subsidiaries have been prepared in conformity with generally accepted accounting principles (GAAP). The consolidated financial statements include the accounts of National Life Insurance Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. Certain reclassifications have been made to conform prior periods presented to the current year's presentation. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INVESTMENTS Cash and cash equivalents include highly liquid debt instruments purchased with remaining maturities of three months or less. 4 85 Debt securities are designated as available-for-sale or held-to-maturity where the company has the ability and intent to hold securities to maturity. Available-for-sale debt securities and equity securities are reported at estimated fair value. Held-to-maturity debt securities are reported at amortized cost. Debt and equity securities that experience declines in value that are other than temporary are written down with a corresponding charge to realized losses. Mortgage loans are reported at amortized cost, less valuation allowances for the excess, if any, of the amortized cost of impaired loans over the estimated fair value of the related collateral. Changes in valuation allowances are included in realized gains and losses. Policy loans are reported at their unpaid balance and are fully collateralized by related cash surrender values. Real estate investments are reported at depreciated cost. Real estate acquired in satisfaction of debt is transferred to real estate at the lower of the recorded investment in the loan, including accrued interest, or estimated fair value. Realized investment gains and losses are recognized using the specific identification method and include changes in valuation allowances. Changes in the estimated fair values of available-for-sale debt and equity securities are reflected in policyowners' equity after adjustments for related deferred policy acquisition costs, present value of future profits of insurance acquired, income taxes and minority interests. DEFERRED POLICY ACQUISITION COSTS Commissions and other costs of acquiring new business that vary with and are primarily related to the production of new business are generally deferred. Deferred policy acquisition costs for participating life insurance, universal life insurance and investment-type annuities are amortized in relation to estimated gross margins or profits. Amortization is adjusted retrospectively for actual experience and when estimates of future gross margins or profits are revised. Balances of deferred policy acquisition costs for these products are adjusted for related unrealized gains and losses on available-for-sale debt and equity securities through policyowners' equity, net of related income taxes. Deferred policy acquisition costs for non-participating term life insurance and disability income insurance is amortized in relation to premium income using assumptions consistent with those used in computing policy benefit liabilities. Balances of deferred policy acquisition costs are regularly evaluated for recoverability from product margins or profits. PRESENT VALUE OF FUTURE PROFITS OF INSURANCE ACQUIRED Present value of future profits of insurance acquired is the actuarially-determined present value of future projected profits from policies in force at the date of their acquisition, and is amortized in relation to gross profits of those policies. Amortization is adjusted retrospectively for actual experience and when estimates of future profits are revised. PROPERTY AND EQUIPMENT Property and equipment is reported at depreciated cost. Real property is depreciated over 40 years using the straight line method. Furniture and equipment is depreciated using accelerated depreciation methods over 7 years and 5 years, respectively. 5 86 SEPARATE ACCOUNTS Separate accounts are segregated funds relating to certain variable annuity and variable life policies, and National Life's pension plans. Separate account assets are primarily common stocks, bonds, mortgage loans, and real estate and are carried at estimated fair value. Separate account liabilities reflect separate account policyowners' interests in separate account assets, include the actual investment performance of the respective accounts and are not guaranteed. Separate account results relating to these policyowners' interests are excluded from revenues and expenses. POLICY LIABILITIES Policy benefit liabilities for participating life insurance are developed using the net level premium method, with interest and mortality assumptions used in calculating policy cash surrender values. Participating life insurance terminal dividends are accrued in relation to gross margins. Policy benefit liabilities for non-participating life insurance, disability income insurance and certain annuities are developed using the net level premium method, with assumptions for interest, mortality, morbidity, withdrawals and expenses based principally on company experience. Policyowners' account balances for universal life insurance and investment-type annuities represent amounts that inure to the benefit of the policyowners (before surrender charges). POLICYOWNERS' DIVIDENDS Policyowners' dividends are the pro-rata amount of dividends earned that will be paid or credited at the next policy anniversary. Dividends are based on a scale that seeks to reflect the relative contribution of each group of policies to National Life's overall operating results. The dividend scale is approved annually by National Life's Board of Directors. RECOGNITION OF INSURANCE INCOME AND RELATED EXPENSES Premiums from traditional life and certain annuities are recognized as revenue when due from the policyowner. Benefits and expenses are matched with income by providing for policy benefit liabilities and the deferral and amortization of policy acquisition costs so as to recognize profits over the life of the policies. Premiums from universal life and investment-type annuities are reported as increases in policyowners' accounts. Revenues for these policies consist of mortality charges, policy administration fees and surrender charges deducted from policyowners' accounts. Policy benefits charged to expense include benefit claims in excess of related policyowners' account balances. Premiums from disability income policies are recognized as revenue over the period to which the premiums relate. FEDERAL INCOME TAXES National Life files a consolidated federal income tax return that includes all of its wholly-owned subsidiaries. Current federal income taxes are charged or credited to operations based upon amounts estimated to be payable or recoverable as a result of taxable operations for the current year. Deferred income tax assets and liabilities are recognized based on temporary differences between financial statement carrying amounts and income tax bases of assets and liabilities using enacted income tax rates and laws. 6 87 NOTE 3 - ACQUISITION National Financial Services, Inc., a wholly-owned subsidiary of National Life, acquired a two-thirds interest in Life Insurance Company of the Southwest (LSW) located in Dallas, Texas on February 8, 1996. LSW is a financial services company specializing in annuities that is licensed in all states except New York. The acquisition was accomplished by purchasing two-thirds of LSW Holdings Corporation, the owner of LSW. LSW Holdings Corporation was renamed LSW National Holdings, Inc. concurrent with the purchase. The purchase price was about $102 million in cash. The purchase resulted in the recording of an intangible asset for the present value of future profits of insurance acquired of $67.2 million. The minority shareholders have the right to put their shares to National Life at specified prices in the event of certain contingencies during the first five years subsequent to closing and generally thereafter. Similarly, National Life has the right to call the minority shareholders' shares at specified prices. The specified prices are generally a function of GAAP equity or the original purchase price. These consolidated financial statements include the financial position and operations of LSW National Holdings since the purchase, along with appropriate adjustments for minority interests, using the purchase method. Pro forma results had the acquisition occurred as of January 1, 1996 are shown in the table below (in thousands). These pro forma consolidated results are not necessarily indicative of the actual results which might have occurred had National Life owned LSW since that date.
1996 - --------------------------------------------------------------------------------- Revenues $ 1,026,763 Net income 17,356
Noncash investing activities relating to the acquisition that are not reflected in the 1996 consolidated statement of cash flow were as follows (in thousands): Fair value of assets acquired, excluding cash acquired $ 1,144,694 Liabilities assumed (1,063,143) - --------------------------------------------------------------------------------- Cash paid (net of cash acquired) $ 81,551 =================================================================================
7 88 NOTE 4 - INVESTMENTS Debt and Equity Securities The amortized cost and estimated fair values of debt and equity securities at December 31 were as follows (in thousands):
Gross Gross Amortized Unrealized Unrealized Estimated Fair 1997 Cost Gains Losses Value - --------------------------------------------------------------------------------------------------------------- Available-for-sale (AFS): U.S. government obligations $ 284,039 $ 13,515 $ 612 $ 296,942 Government agencies, authorities and subdivisions 178,986 11,649 793 189,842 Public utilities 389,744 19,246 6,314 402,676 Corporate 2,403,091 133,881 7,069 2,529,903 Private placements 598,144 29,576 2,170 625,550 Mortgage-backed securities 1,196,369 35,308 1,275 1,230,402 - --------------------------------------------------------------------------------------------------------------- Total AFS debt securities 5,050,373 243,175 18,233 5,275,315 Preferred stocks 6,482 803 259 7,026 Common stocks 29,638 5,511 63 35,086 - --------------------------------------------------------------------------------------------------------------- Total AFS debt and equity securities $ 5,086,493 $ 249,489 $ 18,555 $ 5,317,427 =============================================================================================================== 1996 - --------------------------------------------------------------------------------------------------------------- Available-for-sale (AFS): U.S. government obligations $ 180,646 $ 3,336 $ 187 $ 183,795 Government agencies, authorities and subdivisions 222,867 9,165 3,693 228,339 Public utilities 427,426 12,354 7,270 432,510 Corporate 2,176,977 72,482 20,581 2,228,878 Private placements 199,061 4,923 2,349 201,635 Mortgage-backed securities 1,089,434 16,244 10,142 1,095,536 - --------------------------------------------------------------------------------------------------------------- Total AFS debt securities 4,296,411 118,504 44,222 4,370,693 Preferred stocks 9,719 739 359 10,099 Common stocks 9,705 2,560 11 12,254 - --------------------------------------------------------------------------------------------------------------- Total AFS debt and equity securities $ 4,315,835 $ 121,803 $ 44,592 $ 4,393,046 =============================================================================================================== Held-to-maturity (HTM) debt securities: U.S. government obligations $ 2,052 $ 14 $ 2 $ 2,064 Government agencies, authorities and subdivisions 20,970 1,264 208 22,026 Public utilities 9,953 359 1 10,311 Corporate 30,669 1,593 40 32,222 Private placements 527,056 21,799 3,061 545,794 - --------------------------------------------------------------------------------------------------------------- Total HTM debt securities $ 590,700 $ 25,029 $ 3,312 $ 612,417 ===============================================================================================================
8 89 Unrealized gains and losses on available-for-sale debt and equity securities included as a component of policyowners' equity and changes therein for the years ended December 31 were as follows (in thousands):
1997 1996 - ---------------------------------------------------------------------------------------------------- Net unrealized gains (losses) on available-for-sale securities $ 153,723 $ (153,543) Net unrealized gains on separate accounts 3,047 1,225 Related minority interests (9,360) 2,474 Related deferred policy acquisition costs (44,378) 61,726 Related present value of future profits of insurance acquired (10,138) 11,639 Related deferred income taxes (36,744) 28,173 - ---------------------------------------------------------------------------------------------------- Increase (decrease) in net unrealized gains (losses) 56,150 (48,306) Balance, beginning of year 28,867 77,173 - ---------------------------------------------------------------------------------------------------- Balance, end of year $ 85,017 $ 28,867 ==================================================================================================== Balance, end of year includes: Net unrealized gains on available-for-sale securities $ 230,934 $ 77,211 Net unrealized gains on separate accounts 4,272 1,225 Related minority interests (6,886) 2,474 Related deferred policy acquisition costs (94,678) (50,300) Related present value of future profits on insurance acquired 1,501 11,639 Related deferred income taxes (50,126) (13,382) - ---------------------------------------------------------------------------------------------------- Balance, end of year $ 85,017 $ 28,867 ====================================================================================================
In December 1997, National Life transferred all securities designated as held-to-maturity to available-for-sale. The securities transferred had an estimated fair value of $618.8 million and an amortized cost of $586.1 million, resulting in $32.7 million in unrealized gains. The amortized cost and estimated fair values of debt securities by contractual maturity at December 31, 1997 are shown below (in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Estimated Fair Cost Value - --------------------------------------------------------------------------- Due in one year or less $ 82,465 $ 83,291 Due after one year through five years 557,609 575,489 Due after five years through ten years 2,074,439 2,147,536 Due after ten years 1,139,491 1,238,597 Mortgage-backed securities 1,196,369 1,230,402 - --------------------------------------------------------------------------- Total $ 5,050,373 $ 5,275,315 ===========================================================================
Information relating to available-for-sale debt security sale transactions for the years ended December 31 are shown below (in thousands):
1997 1996 - --------------------------------------------------------------------------- Proceeds from sales $ 1,928,055 $ 1,990,175 Gross realized gains $ 27,318 $ 46,092 Gross realized losses $ 16,916 $ 42,759
9 90 National Life periodically lends certain U.S. government or corporate bonds to approved counterparties to enhance the yield of its bond portfolio. National Life receives cash collateral for at least 105% of the market value of securities loaned. Collateral adequacy is evaluated daily and periodically adjusted for changes in the market value of securities loaned. The carrying values of securities loaned are unaffected by the transaction. Collateral held (included in cash and cash equivalents) and the corresponding liability for collateral held (included in other liabilities) were $19.8 million and $159.4 million at December 31, 1997 and 1996, respectively. National Life also periodically enters into repurchase agreements on U.S. Treasury securities to enhance the yield of its bond portfolio. These transactions are accounted for as financings because the securities received at the end of the repurchase period are identical to the securities transferred. There were no open transactions at December 31, 1996. The repurchase liability is included in other liabilities and was $234.6 million at December 31, 1997. MORTGAGE LOANS AND REAL ESTATE The distributions of mortgage loans and real estate at December 31 were as follows:
1997 1996 ------------------------------ GEOGRAPHIC REGION ----------------- New England 4.0% 4.5% Middle Atlantic 10.3 9.0 East North Central 8.8 10.4 West North Central 4.9 3.6 South Atlantic 29.1 30.2 East South Central 5.0 4.4 West South Central 10.8 13.3 Mountain 16.7 15.9 Pacific 10.4 8.7 - --------------------------------------------------------------------------------- Total 100.0% 100.0% ================================================================================= PROPERTY TYPE ------------- Residential 0.2% 0.3% Apartment 24.3 21.1 Retail 15.9 18.6 Office Building 34.0 32.6 Industrial 22.2 25.0 Hotel/Motel 0.9 1.0 Other Commercial 2.5 1.4 - --------------------------------------------------------------------------------- Total 100.0% 100.0% ================================================================================= Total mortgage loans and real estate $ 1,088,096 $ 1,006,466 =================================================================================
10 91 Mortgage loans and related valuation allowances at December 31 were as follows (in thousands):
1997 1996 - ---------------------------------------------------------------------------- Unimpaired loans $ 965,760 $ 876,994 Impaired loans without valuation allowances 9,413 6,146 - ---------------------------------------------------------------------------- Subtotal 975,173 883,140 - ---------------------------------------------------------------------------- Impaired loans with valuation allowances 21,426 31,167 Related valuation allowances (4,429) (7,283) - ---------------------------------------------------------------------------- Subtotal 16,997 23,884 - ---------------------------------------------------------------------------- Total $ 992,170 $ 907,024 ============================================================================ Impaired loans: Average recorded investment $ 34,076 $ 40,161 Interest income recognized $ 3,543 $ 5,026 Interest received $ 3,818 $ 5,170
Impaired loans are mortgage loans where it is not probable that all amounts due under the contractual terms of the loan will be received. Impaired loans without valuation allowances are mortgage loans where the estimated fair value of the collateral exceeds the recorded investment in the loan. For these impaired loans, interest income is recognized on an accrual basis, subject to recoverability from the estimated fair value of the loan collateral. For impaired loans with valuation allowances, interest income is recognized on a cash basis. Activity in the valuation allowances for impaired mortgage loans for the years ended December 31 were as follows (in thousands):
1997 1996 ========================================================================================= Additions for impaired loans charged to realized losses $ 1,543 $ 3,944 Impairment losses charged to valuation allowances (1,419) (7,559) Changes to previously established valuation allowances (2,978) 2,423 - ----------------------------------------------------------------------------------------- Decrease in valuation allowances (2,854) (1,192) Balance, beginning of year 7,283 8,475 - ----------------------------------------------------------------------------------------- Balance, end of year $ 4,429 $ 7,283 =========================================================================================
NET INVESTMENT INCOME The components of net investment income for the years ended December 31 were as follows (in thousands):
1997 1996 - ---------------------------------------------------------------------------- Debt securities interest $ 392,674 $ 385,750 Equity securities dividends 2,765 1,730 Mortgage loan interest 85,782 81,575 Policy loan interest 48,856 49,438 Real estate income 15,822 15,193 Other investment income 13,627 9,016 - ---------------------------------------------------------------------------- Gross investment income 559,526 542,702 Less: investment expenses 26,932 25,434 - ---------------------------------------------------------------------------- Net investment income $ 532,594 $ 517,268 ============================================================================
DERIVATIVES National Life purchases over-the-counter options and exchange-traded futures on the Standard & Poor's 500 (S&P 500) index to hedge obligations relating to equity indexed products. When the S&P 500 index increases, increases in the intrinsic value of the options and fair value of futures are offset by increases in equity indexed product account values. When the S&P 500 index decreases, National Life's loss is the decrease in the fair value of futures and is limited to the premium paid for the options. 11 92 National Life purchases options only from highly rated counterparties. However, in the event a counterparty failed to perform, National Life's loss would be equal to the fair value of the net options held from that counterparty. The option premium is expensed over the term of the option. The amortization of the option premium, increases in the intrinsic value of options and changes in the fair value of futures are reflected in investment income. Interest credited includes amounts that would be credited on the next policy anniversary based on the S&P 500 index's value at the reporting date. The notional amounts and net book value of options and futures at December 31, were as follows (in thousands):
1997 1996 - ----------------------------------------------------------------------------------------------------------- Notional amounts: Options $ 245,187 $ 61,078 Futures $ 27,892 - =========================================================================================================== Book values: Options: Net amortized cost $ 4,058 $ 2,986 Intrinsic value 7,876 3,480 - ----------------------------------------------------------------------------------------------------------- Book value 11,934 6,466 Futures at fair value 630 - - ----------------------------------------------------------------------------------------------------------- Net book value (included in other invested assets) $ 12,564 $ 6,466 ===========================================================================================================
FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying values and estimated fair values of financial instruments at December 31 were as follows (in thousands):
1997 1996 - ---------------------------------------------------------------------------------------------------------------------- Carrying Estimated Fair Carrying Value Estimated Fair Value Value Value - ---------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 372,180 $ 372,180 $ 268,235 $ 268,235 Available-for-sale debt and equity securities 5,317,427 5,317,427 4,393,046 4,393,046 Held-to-maturity debt securities - - 590,700 612,417 Mortgage loans 992,170 1,024,582 907,024 924,732 Policy loans 791,753 730,059 796,193 715,914 Derivatives 12,564 11,629 6,466 5,123 Investment products 2,642,511 2,503,727 2,341,273 2,336,171 Debt 80,085 82,314 82,682 80,149
For cash and cash equivalents carrying value approximates estimated fair value. Debt and equity securities estimated fair values are based on quoted values where available. Where quoted values are not available, estimated fair values are based on discounted cash flows using current interest rates of similar securities. Mortgage loan fair values are estimated as the average of discounted cash flows under different scenarios of future mortgage interest rates (including appropriate provisions for default losses and borrower prepayments). For variable rate policy loans the unpaid balance approximates fair value. Fixed rate policy loan fair values are estimated based on discounted cash flows using the current variable policy loan rate (including appropriate provisions for mortality and repayments). Derivatives estimated fair values are based on quoted values. 12 93 Investment products include flexible premium annuities, single premium deferred annuities and supplementary contracts not involving life contingencies. Investment product fair values are estimated as the average of discounted cash flows under different scenarios of future interest rates of A-rated corporate bonds and related changes in premium persistency and surrenders. Debt fair values are estimated values are based on discounted cash flows using current interest rates of similar securities. NOTE 5 - INSURANCE IN-FORCE AND REINSURANCE National Life reinsures certain risks assumed in the normal course of business. For individual life products, National Life generally retains no more than $3.0 million of risk on any person (excluding accidental death benefits and dividend additions). Reinsurance for life products is ceded under yearly renewable term, coinsurance, and modified coinsurance. Disability income products are significantly reinsured under coinsurance and modified coinsurance. National Life remains liable in the event any reinsurer is unable to meet its assumed obligations. National Life regularly evaluates the financial condition of its reinsurers and concentrations of credit risk of reinsurers to minimize its exposure to significant losses from reinsurer insolvencies. The effects of reinsurance for the years ended December 31, were as follows (in thousands):
1997 1996 - ------------------------------------------------------------------------------- Insurance premiums: Direct premiums $ 470,853 $ 474,998 Reinsurance assumed 896 959 Reinsurance ceded (72,732) (69,671) - ------------------------------------------------------------------------------- $ 399,017 $ 406,286 =============================================================================== Increase in policy liabilities: Direct increase in policy $ 112,577 $ 164,233 liabilities Reinsurance assumed 17 (20) Reinsurance ceded 5,540 2,455 - ------------------------------------------------------------------------------- $ 118,134 $ 166,668 =============================================================================== Policy benefits: Direct policy benefits $ 393,082 $ 363,405 Reinsurance assumed 12 62 Reinsurance ceded (79,275) (65,903) - ------------------------------------------------------------------------------- $ 313,819 $ 297,564 =============================================================================== Policyowners' dividends: Direct policyowners' dividends $ 111,617 $ 112,050 Reinsurance ceded (5,305) (6,360) - ------------------------------------------------------------------------------- $ 106,312 $ 105,690 ===============================================================================
13 94 NOTE 6 - INCOME TAXES The components of income taxes and a reconciliation of the expected and actual income taxes and marginal and effective federal income tax rates for the years ended December 31 were as follows ($ in thousands):
1997 1996 - ----------------------------------------------------------------------------------------------------------------- Amount Rate Amount Rate - ----------------------------------------------------------------------------------------------------------------- Current $ 41,654 $ 45,603 Deferred (20,747) (13,646) - ------------------------------------------------------------------ ----------------- Income taxes $ 20,907 $ 31,957 ================================================================== ================= Expected income taxes $ 22,531 35.0% $ 19,252 35.0% Differential earnings amount 4,581 7.1 6,007 10.9 Affordable housing tax credit (4,318) (6.7) (1,305) (2.4) Net change in tax reserves 1,298 2.0 10,290 18.7 Other, net (3,185) (4.9) (2,287) (4.1) - ----------------------------------------------------------------------------------------------------------------- Income taxes $ 20,907 $ 31,957 ================================================================= ================= Effective federal income tax rate 32.5% 58.1% ========================================== ============== ==================
Components of net deferred income tax assets at December 31 were as follows (in thousands):
1997 1996 - ----------------------------------------------------------------------------------------------------------------- Deferred income tax assets: Policy liabilities $ 172,387 $ 160,933 Other liabilities and accrued expenses 56,946 47,703 Other 4,294 10,495 - ----------------------------------------------------------------------------------------------------------------- Total deferred income tax assets 233,627 219,131 - ----------------------------------------------------------------------------------------------------------------- Deferred income tax liabilities: Deferred policy acquisition costs 126,914 125,454 Present value of future profits of insurance acquired 20,642 24,262 Net unrealized gain on available-for-sale securities 50,126 13,382 Debt and equity securities 9,253 9,352 Other 9,175 13,167 - ----------------------------------------------------------------------------------------------------------------- Total deferred income tax liabilities 216,110 185,617 - ----------------------------------------------------------------------------------------------------------------- Net deferred income tax assets $ 17,517 $ 33,514 =================================================================================================================
Management believes it is more likely than not that National Life will realize the benefit of deferred tax assets. National Life's federal income tax returns are routinely audited by the IRS. The IRS has examined tax returns through 1993 and is currently examining the years 1994 and 1995. In management's opinion adequate tax liabilities have been established for all open years. NOTE 7 - BENEFIT PLANS National Life sponsors a qualified defined benefit pension plan covering substantially all employees. The plan is administered by National Life's Benefits Committee and is non-contributory, with benefits based on an employee's retirement age, years of service and compensation near retirement. Plan assets are primarily bonds and common stocks held in a National Life separate account and funds invested in an annuity contract issued by National Life. National Life also sponsors other non-qualified pension plans, including a non-contributory defined benefit plan for general agents that provides benefits based on years of service and sales levels, a contributory defined benefit plan for certain employees, agents and general 14 95 agents and a non-contributory defined supplemental benefit plan for certain executives. These non-qualified plans are not funded. National Life sponsors four defined benefit postretirement plans that provide medical, dental and life insurance benefits to employees and agents. Substantially all employees and agents may be eligible for retiree benefits if they reach normal retirement age and meet certain minimum service requirements while working for National Life. Most of the plans are contributory, with retiree contributions adjusted annually, and contain cost sharing features such as deductibles and copayments. The plans are not funded and National Life pays for plan benefits on a current basis. The cost of these benefits is recognized as earned. During 1997, National Life offered enhanced pension and postretirement benefits to employees meeting certain defined eligibility requirements. The program resulted in special termination benefits for the expected present value of the enhancements to benefits, curtailment gains for reductions in the pension benefit obligations relating to assumed increases in future compensation levels and settlement gains for the pro-rata recognition of actuarial gains on lump sum settlements of pension benefit obligations. The status of the defined benefit plans at December 31, was as follows (in thousands):
Pension Benefits Other Benefits --------------------------------------------------------- 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------------------------------ CHANGE IN BENEFIT OBLIGATION: Benefit obligation, beginning of year $180,075 $ 170,740 $ 24,351 $ 23,410 Service cost (benefits earned during the current period) 4,467 4,384 630 667 Interest cost on benefit obligation 13,629 11,788 1,669 1,652 Actuarial gains (19,077) 3,312 (3,587) (592) Benefits paid (14,557) (10,149) (784) (786) 1997 early retirement program: Special termination benefits 10,878 - 2,480 - Curtailment gain (3,630) - - - Settlement payments (8,799) - - - - ------------------------------------------------------------------------------------------------------------------------------ Benefit obligation, end of year $ 162,986 $ 180,075 $ 24,759 $ 24,351 ============================================================================================================================== CHANGE IN PLAN ASSETS: Plan assets, beginning of year $ 97,566 $ 90,592 Actual return on plan assets 23,337 10,230 Employer contributions 2,502 2,047 Benefits paid (5,722) (5,303) 1997 early retirement program settlement payments (8,799) - - ------------------------------------------------------------------------------------------------------ Plan assets, end of year $ 108,884 $ 97,566 ====================================================================================================== FUNDED STATUS: Benefit obligation $ 162,986 $ 180,075 $ 24,759 $ 24,351 Plan assets (108,884) (97,566) - - - ------------------------------------------------------------------------------------------------------------------------------ Benefit obligation in excess of plan assets 54,102 82,509 24,759 24,351 Unrecognized actuarial gains (losses) 28,485 (2,376) 4,548 930 Unrecognized prior service cost - - (1,224) (1,296) - ------------------------------------------------------------------------------------------------------------------------------ Accrued benefit cost (included in other liabilities) $ 82,587 $ 80,133 $ 28,083 $ 23,985 ==============================================================================================================================
15 96 The components of net periodic benefit cost for the years ended December 31, were as follows (in thousands):
Pension Benefits Other Benefits ---------------------------------------------------- 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------------------ Service cost (benefits earned during the current period) $ 4,467 $ 4,384 $ 630 $ 667 Interest cost on benefit obligation 13,629 11,788 1,669 1,652 Expected return on plan assets (8,636) (6,225) - - Net amortization and deferrals - - 31 - Amortization of prior service cost - - 72 72 1997 early retirement program: Special termination benefits 10,878 - 2,480 - Curtailment gain (3,630) - - - Settlement gains (2,917) - - - - ------------------------------------------------------------------------------------------------------------------ Net periodic benefit cost (included in operating expenses) $ 13,791 $ 9,947 $ 4,882 $ 2,391 ==================================================================================================================
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were as follows (in thousands):
1997 1996 - --------------------------------------------------------------------------------------- Projected benefit obligation $ 69,116 $ 71,511 Accumulated benefit obligation 66,268 67,070 Fair value of plan assets - -
The actuarial assumptions used in determining benefit obligations at December 31, were as follows:
Pension Benefits Other Benefits --------------------------------------------------- 1997 1996 1997 1996 - ------------------------------------------------------------------------------------------------------------------ Discount rate 7.50% 7.00% 7.50% 7.00% Rate of increase in future compensation levels 3.50% 5.00% Expected long term return on plan assets 9.00% 7.00%
Health care cost trend rates grade to 5% in year 2000 and remain level thereafter. Increasing the assumed health care trend rates by one percentage point in each year would increase the APBO by about $2.4 million and the 1997 service and interest cost components of net periodic postretirement benefit cost by about $0.3 million. Decreasing the assumed health care trend rates by one percentage point in each year would reduce the APBO by about $1.9 million and the 1997 service and interest cost components of net periodic postretirement benefit cost by about $0.3 million. National Life uses the straight-line method of amortization for prior service cost and unrecognized gains and losses. National Life provides employee savings and 401(k) plans where up to 3% of an employee's compensation may be invested by the employee in either plan with matching funds contributed by the company. National Life also contributes various amounts of an employee's compensation (up to certain levels) to a 401(k) account. Additional voluntary employee contributions may be made to the plans subject to certain limits. Company contributions to these plans generally vest within two years. 16 97 NOTE 8 - DEBT
Debt consists of the following (in thousands): 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- 8.25% Surplus Notes: $ 69,685 $ 69,682 $70 million, maturing March 1, 2024 with interest payable semi-annually on March 1 and September 1. The notes are unsecured and subordinated to all present and future indebtedness, policy claims and prior claims. The notes may be redeemed in whole or in part any time after March 1, 2004 at predetermined redemption prices. All interest and principal payments require prior written approval by the State of Vermont Department of Banking, Insurance, Securities and Health Care Administration. 6.10% Term Note: 10,400 13,000 maturing March 1, 2000 with interest payable semi-annually on March 1 and September 1. The note is secured by subsidiary stock, includes certain restrictive covenants and requires annual payments of principal (see below). - --------------------------------------------------------------------------------------------------------------------------- Total debt $ 80,085 $ 82,682 ===========================================================================================================================
The aggregate annual maturities of debt for the next five years are as follows (in thousands):
1998 $ 4,400 1999 3,000 2000 3,000 2001 - 2002 -
In February 1998, the Term Note was renegotiated. Under the new terms, effective March 1, 1998, the interest rate will be 6.57% with principal payments of $2.0 million annually for 1998 to 2001 (inclusive) and $2.4 million in 2002. NOTE 9 - CONTINGENCIES During 1997, several class action lawsuits were filed against National Life in various states relating to the sale of life insurance policies during the 1980's and 1990's. National Life specifically denies any wrongdoing and intends to defend these cases vigorously. Accordingly, a provision for legal and administrative costs of defending these lawsuits was established in 1997. The ultimate outcome of such litigation is uncertain given the complexity and scope of the issues involved. While management believes that the ultimate outcome is unlikely to have a material adverse effect on National Life's financial position (after considering existing provisions), an adverse outcome could materially affect operating results for a given year. 17 98 NOTE 10 - STATUTORY INFORMATION National Life prepares statutory basis financial statements for regulatory filings with insurance regulators in all 50 states and the District of Columbia. A reconciliation of National Life Insurance Company's statutory surplus to GAAP retained earnings at December 31 and statutory net income to GAAP net income for the years ended December 31 were as follows (in thousands):
1997 1996 ---------------------------------------------------------------------- Surplus/ Surplus/ Retained Retained Earnings Net Income Earnings Net Income - -------------------------------------------------------------------------------------------------------------- Statutory surplus/net income $ 342,614 $ 49,574 $ 305,611 $ 11,684 Asset valuation reserve 67,734 - 57,054 - Interest maintenance reserve 56,940 (229) 57,169 1,540 Surplus notes (69,685) (3) (69,682) (3) Non-admitted assets 20,874 - 18,391 - Investments (944) (18,856) 18,504 290 Deferred policy acquisition costs 437,932 (5,651) 443,583 3,970 Deferred income taxes 72,544 13,807 58,737 9,179 Policy liabilities (186,349) 7,449 (193,798) (9,874) Policyowners' dividends 64,734 2,206 62,528 (1,142) Benefit plans (37,826) (1,732) (36,094) 4,403 Other changes, net (12,696) (10,734) (1,962) (2,924) - -------------------------------------------------------------------------------------------------------------- GAAP retained earnings/net income $ 755,872 $ 35,831 $ 720,041 $ 17,123 ==============================================================================================================
The New York Insurance Department recognizes only statutory accounting practices for determining and reporting the financial condition and results of operations of an insurance company and for determining solvency under the New York Insurance Law. No consideration is given by the Department to financial statements prepared in accordance with generally accepted accounting principles in making such determinations. 18 99 UNDERTAKING TO FILE REPORTS Subject to the terms and conditions of Section 15(d) of the Securities Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with the Securities and Exchange Commission such supplementary and periodic information, documents and reports as may be prescribed by any rule or regulation of the Commission heretofore or hereafter duly adopted pursuant to authority conferred in that section. RULE 484 UNDERTAKING Article VI, Section 2 of the Bylaws of National Life Insurance Company ("National Life" or the "Company") provides that, in accordance with the provisions of the Section, the Company shall indemnify directors, officers and employees of the Company or any other corporation served at the request of the Company, and their heirs, executors and administrators, shall be indemnified to the maximum extent permitted by law against all costs and expenses, including judgments paid, settlement costs, and counsel fees, reasonably incurred in the defense of any claim in which such person is involved by virtue of his or her being or having been such a director, officer, or employee. The Bylaws are filed as Exhibit 1.A.(7) to this Registration Statement. Vermont law authorizes Vermont corporations to provide indemnification to directors, officers and other persons. National Life owns a directors and officers liability insurance policy covering liabilities that directors and officers of National Life and its subsidiaries and affiliates may incur in acting as directors and officers. Insofar as indemnification for liability arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers, and controlling persons of the Registrant pursuant to the foregoing provisions, 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 other controlling person of the Registrant in the successful defense of any 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. REPRESENTATION RELATING TO FEES AND CHARGES National Life Insurance Company ("the Company") hereby represents that the fees and charges deducted under the last survivor variable life insurance policy described in the prospectus contained in this registration statement are, in the aggregate, reasonable in relationship to the services rendered, the expenses expected to be incurred, and the risks assumed by the Company. 100 Part II 101 CONTENTS OF REGISTRATION STATEMENT This Registration Statement comprises the following papers and documents. The facing sheet. The prospectus consisting of __ pages. Undertaking to file reports. Rule 484 undertaking. Representation relating to fees and charges. The signatures. Written consents of the following persons: (a) Jeffrey P. Johnson, Esq. (b) Elizabeth H. MacGowan, F.S.A., M.A.A.A. (c) Sutherland, Asbill & Brennan. (d) Price Waterhouse LLP. The following exhibits, corresponding to those required by paragraph A of the instructions as to exhibits in Form N-8B-2: 1. A. (1) Resolutions of the Board of Directors of National Life Insurance Company establishing the National Variable Life Insurance Account.** (2) Not Applicable. (3) (a) Form of Distribution Agreement between National Life Insurance Company and Equity Services, Inc.**** (b)(1) Form of Equity Services, Inc. Branch Office Supervisor Contract.** (b)(2) Form of Equity Services, Inc. Registered Representative Contract.** (c) Schedule of Sales Commissions. (4) Not Applicable. (5) (a) Specimen Sentinel Estate Builder Policy Form. (b) Rider for Guaranteed Death Benefit. (c) Rider for Additional Protection Benefit. (d) Rider for Policy Split Option. (e) Rider for Estate Preservation. (f) Rider for Annually Renewable Term. (g) Rider for Continuing Coverage. (h) Rider for Enhanced Death Benefit. (i) Rider for Automatic Increase. (6) (a) Charter documents of National Life Insurance Company.** (b) Bylaws of National Life Insurance Company.** (7) Not Applicable. (8) (a) Participation Agreement by and among Market Street Fund, Inc., National Life Insurance Company and Equity Services, Inc.**** (a)(3) Form of Amendment No. 2 to Participation Agreement among Market Street Fund., Inc., National Life Insurance Company and Equity Services, Inc. (b) Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Vermont Life Insurance Company (now National Life Insurance Company) dated August 1, 1989.*** (b)(2) Amendment No. 1 to Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and National Life Insurance Company.**** (b)(4) Form of Amendment No. 3 to Participation Agreement Among Variable Insurance Products Fund, Fidelity Distributors Corporation and National Life Insurance Company (c) Participation Agreement by and among National Life Insurance Company, Strong Variable Insurance Funds, Inc., Strong Special Fund II, Strong Capital Management, Inc. and Strong Funds Distributors, Inc. (d) Form of Participation Agreement Among Variable Insurance Products Fund II, Fidelity Distributors Corporation and Vermont Life Insurance Company (now National Life Insurance Company) dated April 1, 1990***** (d)(2) Form of Amendment No 1. to Participation Agreement Among Variable Insurance Products Fund II, Fidelity Distributors Corporation, and National Life Insurance Company (as successor to Vermont Life Insurance Company)****** (d)(3) Form of Amendment No. 2 to Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and National Life Insurance Company (as successor to Vermont Life Insurance Company) (e) Form of Participation Agreement among National Life Insurance Company, American Century Investment Management, Inc. (f) Form of Participation Agreement among National Life Insurance Company, Neuberger & Berman Advisers Managers Trust. (g) Form of Participation Agreement among National Life Insurance Company, J. P. Morgan Series Trust II. (h) Form of Participation Agreement among National Life Insurance Company, Goldman Sachs Variable Insurance Trust. 102 (9) Not Applicable. (10) Sentinel Estate Builder Application Form. (11) Memorandum describing issuance, transfer and redemption procedures. 2. Opinion and Consent of Jeffrey P. Johnson, Esq., as to the legality of the securities being offered. 3. Not Applicable. 4. Not Applicable. 5. Not Applicable. 6. Opinion and Consent of Elizabeth H. MacGowan, F.S.A., M.A.A.A., as to actuarial matters pertaining to the securities being registered. 7. (a) Consent of Price Waterhouse LLP. (b) Consent of Sutherland, Asbill & Brennan LLP. 8. Powers of Attorney for Directors.* - ------------------ * Incorporated herein by reference to Registration Statement on Form S-6 (File No. 333-44723) filed January 22, 1998, Accession No. 00009501 33-98-000165. ** Incorporated herein by reference to the Form S-6 Registration Statement (File No. 33-91938) for National Variable Life Insurance Account filed on May 5, 1995. *** Incorporated herein by reference to Post-Effective Amendment No. 3 to the Form S-6 Registration Statement (File No. 33-16470) for Vermont Variable Life Insurance Account filed April 30, 1990. **** Incorporated herein by reference to Post Effective Amendment No. 1 to S-6 Registration Statement File No. 33-91938 for National Variable Life Insurance Account filed March 12, 1996, Accession Number 0000950133-96-000202. ***** Incorporated herein by reference to Post-Effective Amendment No. 3 to the Form S-6 Registration Statement (File No. 33-16470) for Vermont Variable Life Insurance Company filed April 30, 1990. ****** Incorporated herein by reference to Post Effective Amendment No. 2 to the Form S-6 Registration Statement (File No. 33-91938) for National Variable Life Insurance Account filed April 30, 1997 (Accession Number 000.950133-97-001551). 103 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant, National Variable Life Insurance Account, has duly caused this Pre-Effective Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Montpelier and the State of Vermont, on the 9th day of April, 1998. NATIONAL VARIABLE LIFE INSURANCE ACCOUNT (Registrant) By: NATIONAL LIFE INSURANCE COMPANY Attest: /s/ LISA A. PETTREY By: /s/ PATRICK E. WELCH --------------------- ----------------------------- Patrick E. Welch Assistant Secretary Chairman of the Board and Chief Executive Officer 104 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, National Life Insurance Company has duly caused this Pre-Effective Amendment No. 1 to the Registration Statement to be signed on its behalf by the undersigned thereunto duly authorized, and its seal fixed and attested, in the City of Montpelier and the State of Vermont, on the 9th day of April, 1998. NATIONAL LIFE INSURANCE COMPANY (SEAL) (Depositor) Attest: /s/ LISA A. PETTREY By: /s/ PATRICK E. WELCH --------------------- ----------------------------- Patrick E. Welch Assistant Secretary Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Pre-Effective Amendment No. 1 Registration Statement has been signed below by the following persons in the capacities indicated on the date(s) set forth below.
Signature Title Date - --------- ----- ---- /s/ PATRICK E. WELCH Chairman of the Board and April 9, 1998 - ------------------------ and Chief Executive Officer Patrick E. Welch /s/ THOMAS H. MACLEAY President, Chief Operating April 9, 1998 - ------------------------ Officer and Director Thomas H. MacLeay /s/ Martin P. Klein Executive Vice President April 9, 1998 - ------------------------ Chief Financial Officer Martin P. Klein Robert E. Boardman* Director - ------------------ ------------ Robert E. Boardman David R. Coates* Director - ---------------- ------------ David R. Coates
105 Benjamin F. Edwards III* Director - ----------------------- ------------ Benjamin F. Edwards III Earle H. Harbison, Jr.* Director - ---------------------- ------------ Earle H. Harbison, Jr. Roger B. Porter* Director - ---------------------- ------------ Roger B. Porter E. Miles Prentice, III* Director - ---------------------- ------------ E. Miles Prentice, III Director - ---------------- ------------ Thomas P. Salmon A. Gary Shilling* Director - ---------------- ------------ A. Gary Shilling Thomas R. Williams* Director - ------------------ ------------ Thomas R. Williams Director - ----------------- ------------ Patricia K. Woolf *By /s/ PATRICK E. WELCH Date: April 9, 1998 -------------------------- Patrick E. Welch Pursuant to Power of Attorney
106 EXHIBIT INDEX 1. A. (3) (c) Schedule of Sales Commissions (5) (a) Sentinel Estate Provider Policy Form (b) Rider for Guaranteed Death Benefit (c) Rider for Additional Protection Benefit (d) Rider for Policy Split option (e) Rider for Estate Preservation (f) Rider for Annually Renewable Term (g) Rider for Continuing Coverage (h) Rider for Enhanced Death Benefit (i) Rider for Automatic Increase (8) (a)(3) Form of Amendment No. 2 to Participation Agreement among Market Street Fund., Inc., National Life Insurance Company and Equity Services, Inc. (b)(4) Form of Amendment No. 3 to Participation Agreement Among Variable Insurance Products Fund, Fidelity Distributors Corporation and National Life Insurance Company (c) Participation Agreement by and among National Life Insurance Company, Strong Variable Insurance Funds, Inc., Strong Special Fund II, Strong Capital Management, Inc. and Strong Funds Distributors, Inc. (d)(3) Form of Amendment No. 2 to Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and National Life Insurance Company (as successor to Vermont Life Insurance Company) (e) Form of Participation Agreement among National Life Insurance Company, American Century Investment Management, Inc. (f) Form of Participation Agreement among National Life Insurance Company, Neuberger & Berman Advisers Managers Trust. (g) Form of Participation Agreement among National Life Insurance Company, J. P. Morgan Series Trust II. (h) Form of Participation Agreement among National Life Insurance Company, Goldman Sachs Variable Insurance Trust. (10) Sentinel Estate Provider Application Form. (11) Memorandum describing issuance, transfer and redemption procedures 107 EXHIBIT INDEX (continued) (2) Opinion and Consent of Jeffrey P. Johnson, Esq. (6) Opinion and Consent of Elizabeth H. MacGowan, FSA, MAAA (7) (a) Consent of Price Waterhouse LLP (b) Consent of Sutherland, Asbill & Brennan LLP EX-1.A.3.C 2 SCHEDULE OF SALES COMMISSIONS 1 EXHIBIT 1(A)(3)(c) Page 1 of 2 Schedule of Sales Commissions (Broker-Dealers other than ESI) Broker-dealers other than ESI are compensated for sales of this Policy on a gross concession and service fee basis. The compensation is calculated as a percentage of premium paid up to the Commissionable Target Premium (a target amount used only to determine commission payments), plus a percentage of premium paid in excess of Commissionable Target Premium. The schedule of percentage is as follows: Percent of Premium up to Commissionable Target Premium:
Policy Year Gross Concession - ----------- 1 90% 2-10 4% 11+ 1.5%
Percent of Premium in excess of Commissionable Target Premium:
Policy Year Gross Concession - ----------- 1 4% 2-10 4% 11+ 1.5%
Service fees beginning in policy year 5 of 0.20% of unloaned Accumulated Value (paid quarterly) 2 EXHIBIT 1(A)(3)(c) Page 2 of 2 Schedule of Sales Commissions (ESI Registered Representatives) ESI Registered Representatives are compensated for sales of this Policy on a commission and service fee basis. The compensation is calculated as a percentage of premium paid up to the Commissionable Target Premium (a target amount used only to determine commission payments), plus a percentage of premium paid in excess of Commissionable Target Premium. The schedule of percentage is as follows: Percent of Premium up to Commissionable Target Premium:
Policy Year Commission Service Fee - ---------- 1 50% 2-10 4.0% 11+ 1.5%
Percent of Premium in excess of Commissionable Target Premium:
Policy Year Commission Service Fee - ---------- ---------- ----------- 1 2% 2-10 2.0% 11+ 1.5%
Service fees beginning in policy year 5 of 0.15% of unloaned Accumulated Value (paid quarterly) EX-1.A.5.A 3 SENTINEL ESTATE PROVIDER POLICY FORM 1 EXHIBIT 1.A.(5)(a) We, National Life Insurance Company, agree to pay the Death Benefit to the Beneficiary, subject to the terms of this policy, when we receive at our Home Office due proof that both of the Insureds died while this policy was in force. The final section of this policy, General Terms of this Policy, defines terms used in this policy. ROLES IN THIS POLICY --------------------------------------------------------------------- If used, the term "estate" of any person shall be deemed to be a designation of the executors or administrators of that person's estate. OWNER The Owner holds all rights under this policy. The Owner may take action without the consent and against the interest of any revocable Beneficiary and any contingent owner. If the Owner has waived the right to change the Beneficiary, action may be taken by the Owner only with the written consent of all irrevocable Beneficiaries. These actions may be taken only during the lives of one or both of the Insureds. If an instrument of trust is identified as the Owner of this contract, ownership will extend to such trust as amended if the trust is amendable, or to the successor(s) in said trust or assigns. INSUREDS The Death Benefit becomes payable upon the death of the second of the Insureds to die. The Insureds, in their role as the Insureds, have no rights and receive no benefits under this policy. BENEFICIARY The Beneficiary receives the Death Benefit. Unless later changed, the Beneficiary shall be as stated in the application. The interest of any Beneficiary who predeceases the second of the Insureds to die shall vest in the Owner unless otherwise stated. Where two or more Beneficiaries are designated to take in the alternative based on the order of the Insureds' deaths and there is not sufficient evidence that the Insureds died other than simultaneously, one half of the Death Benefit shall be paid as if the first Insured had survived the second Insured, and one half shall be paid as if the second Insured had survived the first Insured. This shall not apply if the application or the Owner has provided for a different payment. CHANGE OF BENEFICIARY The Owner has the right to change the Beneficiary. If the Owner expressly waives this right, no change can be made without the written consent of the Beneficiary. A new Beneficiary may be named during the lives of one or both of the Insureds by filing at our Home Office written notice in such form as we may require. When notice is received at our Home Office, the change shall take effect as of the date the notice is signed whether or not either Insured is living at the time of receipt. We will not be liable for any payment we make before receipt of the written notice at our Home Office. - -------------------------------------------------------------------------------- 7461(0398) 2 TRUST BENEFICIARY Unless an authorized officer or registrar of the Company explicitly agrees otherwise in writing, the following provision shall apply when a trust is named as Beneficiary. In no event is the Company responsible for the application or disposition of any proceeds it pays to a Trust Beneficiary. Payment to a Trust Beneficiary is a full discharge of the liability of the Company. If a designated trust provides for successor trustees, the designation in this policy includes successor trustees. Likewise, if the trust allows amendments, the trust, if so amended, remains as a designated Beneficiary. A Trust Beneficiary is considered to be a Beneficiary who did not survive the Insureds if: 1. the trust has been terminated; or 2. the specified testamentary trust does not qualify as such; or 3. for any other reason a Trust Beneficiary is not entitled to any proceeds. UNNAMED BENEFICIARY We may rely on an affidavit by any person who in our judgment knows the facts to identify any Beneficiary not specified by name. All our liability shall cease when we pay on the basis of such affidavit. If used, the term "children" of any person shall include only lawful children born to or legally adopted by that person. ASSIGNMENTS If this contract is assigned, such assignment shall transfer to the assignee the interest of: 1. any Beneficiary whom the assignor can change; and 2. any contingent owner. If the assignee acquires a right to proceeds, they shall be paid in one sum even though a Payment Option may be in effect at the time the assignment was signed. However, if we specifically agree, an assignment may limit the method of payment of any proceeds. We are not responsible for the validity or effect of any assignment of this policy. We will not recognize any assignment until it has been filed at our Home Office. SPENDTHRIFT PROVISION If we receive at our Home Office written request by the Owner for this Spendthrift Provision, then, to the extent allowed by law and by this policy: 1. only the Owner may transfer, anticipate, commute, or encumber the proceeds of this policy; and 2. only legal process against the Owner may affect the proceeds of this policy. Any proceeds payable after this request is withdrawn by the Owner shall not be affected by this provision. PREMIUMS --------------------------------------------------------------------- - -------------------------------------------------------------------------------- 7461(0398) 3 POLICY PROTECTION PERIOD The first 60 months following the Date of Issue during which this policy remains continuously in force is referred to as the Policy Protection Period. MINIMUM INITIAL PREMIUM A premium at least equal to the Minimum Initial Premium stated in the Data Section is due on the Date of Issue. Thereafter, premiums may be paid towards this policy, under the circumstances described below, until the Final Premium Acceptance Date stated in the Data Section. MINIMUM MONTHLY PREMIUM The Minimum Monthly Premium specific to this policy is stated in the Data Section. It is subject to change upon Changes in Face Amount and Death Benefit Option, and upon adding, changing, or deleting rider coverages on this contract. CUMULATIVE MINIMUM MONTHLY PREMIUM The Cumulative Minimum Monthly Premium at any time is the sum of all Minimum Monthly Premiums in effect on this policy for all months elapsed since the Date of Issue. During the Policy Protection Period payment of total accumulated premiums, in excess of withdrawals and debt, at least equal to the Cumulative Minimum Monthly Premium, will keep the policy in force to the next Monthly Policy Date. If during the Policy Protection Period, while this Cumulative Minimum Monthly Premium test is met, the Cash Surrender Value is not sufficient to cover the Monthly Deductions, Monthly Deductions will be deducted from the Accumulated Value until the Accumulated Value is exhausted, and will thereafter be forgiven until such time as this policy has positive Accumulated Value. This policy will always remain in force, both during the Policy Protection Period and beyond, as long as the Cash Surrender Value is sufficient to provide for Monthly Deductions. PLANNED PERIODIC PREMIUMS The Planned Periodic Premiums are the premiums the Applicant has requested be billed. The Owner may change the amount or frequency of Planned Periodic Premiums at any time by sending a written notice to us at our Home Office. Planned Periodic Premiums, however, may not be more frequent than quarterly, except for policies which are part of a group or pension plan on which premiums are accepted monthly, or for policies on which the premiums are automatically withdrawn from a checking account according to the terms of a special billing arrangement agreed to by the Company. In addition, we will accept unscheduled premiums, which are premiums in addition to the Minimum Initial, Minimum Monthly, or Planned Periodic Premiums. All premiums are limited by a minimum and a maximum. The minimum is $100 per premium payment. The maximum is any limit imposed by the Internal Revenue Code for qualifying the policy as "Life Insurance" for Federal Income Tax purposes. We will - -------------------------------------------------------------------------------- 7461(0398) 4 not accept any premium in excess of the maximum. We reserve the right to return any premium, the payment of which, through application of the Death Benefit Standard, increases the Death Benefit of this policy by an amount exceeding the dollar amount of the premium paid. No premium will be accepted on this policy on or after the Final Premium Acceptance Date. The first premium may be paid to us either through our duly authorized agent in exchange for a receipt signed by that agent, or at our Home Office. All subsequent premiums must be paid to us at our Home Office, and will be credited and allocated on the day we receive them. NET PREMIUM A Net Premium is the amount of any premium paid after the deduction of the applicable Premium Expense Charge associated with that premium. PREMIUM EXPENSE CHARGE We will deduct from each premium paid percentages for the payment of premium taxes before allocating such premium to the Accumulated Value. The State Premium Tax percentage and the percentage for Taxes Attributed to Specified Policy Acquisition Expenses under Internal Revenue Code Section 848 deducted from the premium paid as of the Date of Issue of the policy are stated in the Data Section. We will deduct from each premium paid a Percent of Premium Charge before allocating such premium to the Accumulated Value. The Current Percent of Premium Charge will not exceed the Guaranteed Maximum Percent of Premium percentages stated in the Data Section. PREMIUM ALLOCATION The Owner has the right to designate the allocation of net premiums among the Fixed Account and the Sub-Accounts of the Variable Account. The initial allocation is shown in the Data Section. That portion of the premium due on the Date of Issue which is allocated to the Fixed Account will be transferred to the Fixed Account upon receipt. However, any portion of the premium due on the Date of Issue which is allocated to a Sub-Account of the Variable Account will be held in the Money Market Fund Sub-Account until the end of the 20th day following the Date of Issue. It will then be transferred to any other accounts as designated by the Owner. The allocation must be made in percentages. Each percentage must be a whole number. Each allocation made must be at least five percent. The Owner may change the allocation of future premiums by notifying us in writing at our Home Office. Any allocation made will remain in effect until changed. We reserve the right to restrict the number of different Sub-Accounts to which premiums are allocated over the life of this contract to seventeen. GRACE PERIOD A Grace Period shall start: 5 - If on any Monthly Policy Date during the Policy Protection Period, both of the following occur: 1. the amount of Cash Surrender Value is smaller than the amount of the Monthly Deductions on that date; and 2. the Cumulative Minimum Monthly Premium is greater than a sum equal to: a) all premiums paid; less b) all withdrawals made; less c) any debt to us on this policy. - If on any Monthly Policy Date on or after the end of the Policy Protection Period, the Cash Surrender Value is smaller than the Monthly Deductions on such date. A Grace Period shall not be less than 61 days. During a Grace Period this policy shall remain in force. The premium needed to keep the policy in force beyond a Grace Period shall be the net premium sufficient to produce a Cash Surrender Value equal to three times the Monthly Deduction due on the date the Grace Period began. We will mail notice of the premium needed to the Owner. If the premium needed is unpaid on the 61st day after the notice is sent, then the Grace Period shall end and this policy shall terminate without value. This policy shall then be null and void and all rights shall cease, except as may be provided in Reinstatement. A Grace Period will not begin solely because payments of Planned Periodic Premiums are discontinued. Whether or not premiums are paid, Charges Against the Accumulated Value will be made. REINSTATEMENT If this policy terminates after the end of a Grace Period, it may be reinstated. It must be reinstated on a Monthly Policy Date within five years from the start of such Grace Period. For Reinstatement we will require: 1. an application for Reinstatement; and 2. proof to our satisfaction that each Insured who was living at the end of the Grace Period is living and insurable; and 3. payment of a net premium which will make the Cash Surrender Value sufficient to provide: a) two times the Monthly Deduction due on the date the Grace Period began; plus b) three times the Monthly Deduction due on the date of Reinstatement. We will send the Owner notice of the required payment upon request. In the event of Reinstatement, all schedules of charges in effect on the date the Grace Period began, except the Cost of Insurance Charges, will resume as if uninterrupted. The Cost of Insurance Charges will be applied at the Attained Ages of the Insureds. 6 DEATH BENEFIT AND POLICY CHANGES --------------------------------------------------------------------- DEATH BENEFIT We will pay the Death Benefit to the Beneficiary when we receive at our Home Office due proof that both Insureds died while this policy was in force. We will pay the Death Benefit in one sum unless a Payment Option is chosen. If the Death Benefit is paid in one sum, it shall be increased by interest from the date we receive proof of death of the second of the Insureds to die to the date of payment. We will set the rate of interest at not less than the Minimum Interest Paid on Death Claims percentage shown in the Data Section. SUICIDE LIMITATION If either of the Insureds dies within two years of the Date of Issue as the result of suicide, while sane or insane, we will pay only a sum equal to: 1. the premiums paid; less 2. any debt to us on this policy; less 3. any withdrawals made. This policy shall immediately terminate on the first such death by suicide. Payment will be made to the Beneficiary. A similar two year period shall apply to any increase in Face Amount for which an application is required. Such period shall begin on the Effective Date of any such increase. During such period if either Insured dies as the result of suicide, we will terminate the increase segment, and will refund to the Owner only a sum equal to the Cost of Insurance Charges that we have deducted from the Accumulated Value for such increase. However, if such increase became effective within two years after the Effective Date of a Reinstatement, we will pay only the amount set forth in the next paragraph. 7 If this policy is reinstated, a similar two year period shall start from the Effective Date of the Reinstatement. During such period, if either Insured dies as the result of suicide, while sane or insane, we will pay only a sum equal to: 1. the premiums paid since the Effective Date of the Reinstatement; less 2. any debt to us on this policy; less 3. any withdrawals made since the Effective Date of the Reinstatement. NOTICE OF DEATH AND CLAIMS The Owner must notify us as soon as reasonably possible of the death of each Insured. We may require proof whether both Insureds are living two years from the Date of Issue. On the death of the first Insured to die we will require the Owner to provide us with evidence of death and proof of age and, if the death is within two years from the Date of Issue, the cause of death. QUALIFICATION AS LIFE INSURANCE This policy will retain its qualification as "Life Insurance" under Section 7702 of the Internal Revenue Code according to the requirements of the Guideline Premium and Cash Value Corridor Test. DEATH BENEFIT OPTIONS The Owner may elect either of two Death Benefit Options, Option A or Option B, for the period prior to the Final Premium Acceptance Date. The Death Benefit Option in effect on this policy is stated in the Data Section. OPTION A Under Option A the Death Benefit shall be the greater of the Death Benefit Standard or the following: 1. the Face Amount on the date of death of the second of the Insureds to die; less 2. the amount of any Monthly Deductions then due; less 3. any debt to us on this policy. OPTION B Under Option B the Death Benefit shall be the greater of the Death Benefit Standard or the following: 1. the Face Amount on the date of death of the second of the Insureds to die; plus 2. the Accumulated Value of this policy on the date of death of the second of the Insureds to die; less 3. the amount of any Monthly Deductions then due; less 4. any debt to us on this policy. DEATH BENEFIT STANDARD The Death Benefit Standard is established in conformance with Section 7702 of the Internal Revenue Code, which defines "Life Insurance" for Federal Income Tax purposes. The Death Benefit Standard is: 1. the Death Benefit Factor multiplied by the Accumulated Value of the policy on the date of death of the second of the Insureds to die; less 2. the amount of any Monthly Deductions then due; less 3. any debt to us on this policy. The Death Benefit Factors for this policy are stated in the Data Section. CHANGES IN FACE AMOUNT AND 8 DEATH BENEFIT OPTION The Face Amount is the sum of the Base Coverage and any Additional Protection Benefit provided through an Additional Protection Benefit Rider attached to this policy and all Automatic Increase Coverages added under an Automatic Increase Rider attached to this policy. The Owner may request any of the following changes. We will make a change subject to the conditions stated. In addition, the following conditions apply to all of these changes: 1. These changes may be made only after the first Policy Anniversary. 2. Any change will initiate a redetermination of the Minimum Monthly Premium. We will send the Owner a revised or additional Data Section if any of these changes is made. FACE AMOUNT INCREASES. A Face Amount Increase may be made only while both Insureds are living. Face Amount Increases may be made in conformance with our policy issue limits. We will require an application from the Owner and proof to our satisfaction that both Insureds are then insurable. An increase in Face Amount, and an associated redetermination of the Minimum Monthly Premium, shall be effective upon the Monthly Policy Date next following our approval. Any increase in Face Amount must be at least as large as the Minimum Increase Amount stated in the Data Section. Face Amount Increases may be limited by our condition that the Accumulated Value immediately following the increase must be at least equal to the sum of the Surrender Charges associated with the original coverage and the increase in coverage. FACE AMOUNT DECREASES. We will require a written request by the Owner. A decrease in Face Amount, and an associated redetermination of the Minimum Monthly Premium, shall be effective upon the Monthly Policy Date on or next following our receipt of the request. Decreases shall not be permitted which would reduce the Face Amount to less than any of the following: - the minimum insurance amount for which the policy would qualify as "Life Insurance" for Federal Income Tax purposes under the Internal Revenue Code; or - the Minimum Base Coverage shown in the Data Section; or - 75% of the largest Face Amount in force at any time in the twelve policy months immediately preceding our receipt of the request. A decrease in total coverage shall apply in the following order: - first, to any increases in Face Amount in the reverse order in which they were made; - second, to the Face Amount on the Date of Issue. If an increase in Base Coverage, addition of Additional Protection Benefit, and/or addition of an Automatic Increase Coverage were performed simultaneously, the Automatic Increase Coverage will be removed first, followed by the Additional Protection Benefit, and finally any other increases made in Base Coverage. DEATH BENEFIT OPTION CHANGES. The Death Benefit Option may be changed once each Policy Year prior to the Final Premium Acceptance Date. A Death Benefit Option Change may be made only while both Insureds are living. We will require a written request from the Owner. A change will be effective on the Monthly Policy Date on or next following our receipt of the request. The change will be made only if after such 9 change the policy would qualify as "Life Insurance" for Federal Income Tax purposes under the Internal Revenue Code. Upon a change from Option A to Option B, the Face Amount shall decrease by an amount equal to the Accumulated Value of the policy just prior to the Effective Date of the change. However, the change may be made only if after such change the Face Amount would not be below the Minimum Base Coverage shown in the Data Section. The decrease in Face Amount will be performed in the order described in Face Amount Decreases, above. Upon a change from Option B to Option A, the Face Amount shall increase by an amount equal to the Accumulated Value just prior to the Effective Date of the change. INSURANCE CONTINUATION On the Final Premium Acceptance Date stated in the Data Section, if this policy is still in force, the Face Amount of this policy will be set equal to the Accumulated Value, and the Death Benefit Option will automatically revert to Option A. The Death Benefit Option may not thereafter be changed, and no additional premium will be accepted on this policy. All Accumulated Value will be transferred to the Fixed Account, and no transfers will be thereafter allowed. All Monthly Deductions on this policy will cease. The Owner may, however, continue to access the Cash Surrender Value and to make or repay Policy Loans. INVESTMENT --------------------------------------------------------------------- Investment of the Accumulated Value of the policy may be made in the Fixed Account and/or in one or more of the Sub-Accounts of the National Variable Life Insurance Account (herein called the "Variable Account"). The Accumulated Value in the Variable Account is based on the investment experience of the chosen Sub-Account(s) of the Variable Account, and may increase or decrease daily. It is not guaranteed as to dollar amount. FIXED ACCOUNT The Fixed Account is composed of the admitted assets of National Life Insurance Company other than those in the Variable Account or any other separate account. INTEREST RATES CREDITED TO THE ACCUMULATED VALUE IN THE FIXED ACCOUNT The rate of interest credited on any portion of the Accumulated Value in the Fixed Account shall never be less than the Minimum Fixed Account Interest Rate shown in the Data Section. We may credit interest at a higher interest rate. Any higher interest rate credited on Accumulated Value in the Fixed Account shall remain in effect for at least a one-year period. Allocations to the Fixed Account made at different times may be credited interest at different rates. Each month we will declare an interest rate to apply to amounts allocated 10 or transferred to the Fixed Account during that month. The rate declared on such amounts will remain in effect for twelve months. At the end of the twelve month period, such amounts and accrued interest thereon will rollover for interest crediting at a new rate. The interest credited to such rollover amounts may be at a different rate than that applicable to new allocations to the Fixed Account on that date. Interest at different rates may be credited to: 1. that portion which is equal to any debt to us on this policy; and 2. any portion in excess of any such debt. VARIABLE ACCOUNT The Variable Account is composed of assets owned by National Life Insurance Company. These assets are held separate and apart from Fixed Account assets. The Variable Account is devoted exclusively to the investment of assets of variable life insurance policies. Income, gains, and losses from assets allocated to the Variable Account, whether or not realized, are credited to or charged against such account without regard to our other income, gains, or losses. The portion of the assets of the Variable Account equal to the reserves and other liabilities for these policies shall not be chargeable with liabilities arising out of any other business which we may conduct. We may transfer assets which exceed the reserves and other liabilities of the Variable Account to our Fixed Account. The Variable Account is registered with the Securities and Exchange Commission as a unit investment trust under the Investment Company Act of 1940 ("the 1940 Act"). It is also governed by applicable state law. We may make certain changes if, in our sole judgment, they would best serve the interests of the owners of policies such as this one or would be appropriate in carrying out the purposes of such policies. Any changes will be made only if permitted by applicable laws and regulations. Also, when required by law, we will obtain the approval of policyowners of the changes and the approval of any appropriate regulatory authority. For example, we may: 1. operate the Variable Account as a management company under the 1940 Act; 2. deregister the Variable Account under the 1940 Act if registration is no longer required; and 3. combine or substitute Variable Accounts; and 4. create new Variable Accounts; and 5. transfer all or part of the assets of the Variable Account to another Variable Account or to the Fixed Account; and 6. add new investment funds or remove existing investment funds; and 7. make any changes necessary to comply with, or obtain and continue any exemptions from the 1940 Act; and 8. make any other necessary technical changes in this policy to conform with any action this provision permits us to take. SUB-ACCOUNTS The Variable Account has several Sub-Accounts. Each Sub-Account will buy shares of an investment fund. Each investment fund represents a separate investment portfolio. 11 If, in our judgment, an investment fund no longer suits the investment goals of the policy, or tax or marketing conditions so warrant, we may substitute shares of another investment fund or shares of another investment company. Income and realized and unrealized gains or losses from the assets of each Sub- Account of the Variable Account are credited to or charged against that Sub-Account without regard to income, gains, or losses in the other Sub-Accounts of the Variable Account, the Fixed Account, or any other separate accounts. We reserve the right to credit or charge a Sub-Account in a different manner if required, or made appropriate, by reason of a change in the law. We maintain records of all purchases and redemptions of investment fund shares by each of the Sub-Accounts. VALUATION We will value the assets of each Sub-Account of the Variable Account on each Valuation Date. TRANSFERS Subject to any applicable Transfer Charges, the Owner may transfer Accumulated Value among the Sub-Accounts or to the Fixed Account without limitation. However, only one transfer from the Fixed Account to the Variable Account may be made during any Policy Year. The Accumulated Value transferred from the Fixed Account in any Policy Year may not exceed the greater of: - 25% of the unloaned portion of the Accumulated Value in the Fixed Account immediately prior to the transfer; and - $1,000. POLICY VALUES --------------------------------------------------------------------- ACCUMULATED VALUE OF THE POLICY The Accumulated Value of the policy is equal to the sum of the Accumulated Value in the Fixed Account and the Accumulated Value in the Variable Account. ACCUMULATED VALUE IN THE FIXED ACCOUNT The Accumulated Value in the Fixed Account on any day is: 1. the Accumulated Value in the Fixed Account on the just prior Monthly Policy Date, if any; plus 2. interest on the Accumulated Value in the Fixed Account on the just prior Monthly Policy Date from the just prior Monthly Policy Date to such day; plus 3. the amount of all net premiums accepted since the just prior Monthly Policy Date which are allocated to the Fixed Account; plus 4. interest on item (3) from the date of net premium allocation to the Fixed Account to such day; plus 5. the amount of all Accumulated Values transferred to the Fixed Account from a Sub-Account of the Variable Account since the just prior Monthly Policy Date; plus 12 6. interest on item (5) from the date of the transfer to such day; less 7. the amount of all Accumulated Values transferred from the Fixed Account to a Sub-Account of the Variable Account since the just prior Monthly Policy Date; less 8. interest on item (7) from the date of transfer to such day; less 9. the amount of all Accumulated Values withdrawn from the Fixed Account since the just prior Monthly Policy Date; less 10. interest on item (9) from the date of withdrawal to such day; less 11. any Monthly Deduction allocated to the Fixed Account for the month next following the Monthly Policy Date which is due on such day. ACCUMULATED VALUE IN THE VARIABLE ACCOUNT The Accumulated Value in the Variable Account is the sum of the Accumulated Values in each Sub-Account of the Variable Account. On any later day which is a Valuation Date, the policy's Accumulated Value in each Sub-Account is the number of units in the Sub-Account multiplied by the Unit Value on that date. On any date after the Date of Issue other than a Valuation Date, the Accumulated Value in a Sub-Account is the Accumulated Value of such Sub-Account on the next following Valuation Date. UNITS IN A SUB- ACCOUNT Amounts allocated, transferred, or added to a Sub-Account are used to purchase units in that Sub-Account. Any such amount increases the number of units credited to that Sub-Account. The number of units credited to the Sub-Account equals the dollar amount directed to the Sub-Account divided by the Unit Value for that Sub-Account for the Valuation Date as of which the transaction is performed. Units are redeemed from a Sub-Account when amounts are deducted, transferred, or withdrawn from the Sub-Account. Any such amount decreases the number of units credited to that Sub-Account. The number of units redeemed from the Sub-Account equals the dollar amount redeemed from the Sub-Account divided by the Unit Value for that Sub-Account for the Valuation Date as of which the transaction is performed. UNIT VALUE The Unit Value in a Sub-Account on any Valuation Date is equal to that Unit Value on the immediately preceding Valuation Date multiplied by the Net Investment Factor in effect for that Sub-Account. NET INVESTMENT FACTOR Each Sub-Account of the Variable Account has its own Net Investment Factor. The Net Investment Factor measures the performance of the Sub-Account for individual Valuation Periods. The Net Investment Factor is calculated as follows: 1. Take the net asset value per share of the corresponding investment fund on the current Valuation Date. 13 2. Add the per share capital gain or loss and dividend distribution of the investment fund during the current Valuation Period. 3. Divide the result of item (2) by the net asset value per share of the corresponding investment fund on the just prior Valuation Date. 4. Subtract from the result of item (3) any Tax Charge during the current Valuation Period. The result of item (4) is the Net Investment Factor on the current Valuation Date. Net asset values per share of corresponding investment funds reflect fees and operating expenses deducted by investment advisors. ACCUMULATED VALUE UPON REINSTATEMENT If this policy is reinstated, the Accumulated Value on the date of Reinstatement shall be: 1. the Accumulated Value on the date the Grace Period began; less 2. two times the Monthly Deduction due on the date the Grace Period began; plus 3. the net premium paid to reinstate the policy; less 4. the Monthly Deduction due on such date. CASH SURRENDER VALUE The Owner may, by written request to us, surrender this policy while one or both of the Insureds are living for its Cash Surrender Value. We may require that the policy be returned to us. When this policy has been surrendered, it shall be null and void and all rights shall cease. Proceeds shall be paid in one lump sum unless a Payment Option is chosen. The Cash Surrender Value on any day shall be equal to: 1. the Accumulated Value on such day; less 2. any debt to us on this policy; less 3. any Surrender Charges which apply on such day. SURRENDER CHARGES Surrender Charges, according to the schedule presented in the Data Section, apply during the first 120 Policy Months following the Effective Date of any segment of coverage. An increase in Base Coverage will be accompanied by a New Data Section which will present the Surrender Charge Schedule associated with the increase. DIVIDENDS We may credit this policy with shares, called dividends, from our divisible surplus. However, it is expected that no dividends will be credited to this policy. Any dividends shall be set by us and shall be credited on the policy anniversary. Any dividends credited shall be paid in cash. CHARGES AGAINST THE ACCUMULATED VALUE --------------------------------------------------------------------- TAX CHARGE 14 We reserve the right to deduct any charge for taxes or amounts set aside as a reserve for taxes in determining the value of an Accumulated Value Unit for each of the Sub-Accounts in the event that such a tax is levied on that Sub-Account in the future. MONTHLY DEDUCTION The Monthly Deduction is the sum of the Cost of Insurance Charge, the Variable Account Charge, and the Monthly Administrative Charge and any rider charges. The Monthly Deduction shall be deducted from the Accumulated Value of the policy on the Monthly Policy Date, as follows: 1. The Owner may elect to allocate the Monthly Deduction entirely to the Money Market Fund Sub-Account, by notifying us in writing. If the Accumulated Value in the Money Market Fund Sub-Account is not sufficient to provide for the entire Monthly Deduction on a Monthly Policy Date, the Monthly Deduction will be taken from the Money Market Fund Sub-Account until that account is exhausted, and any additional amount necessary to fund the full Monthly Deduction shall be allocated among and deducted from the unloaned portion of the Fixed Account and the other Sub-Accounts on a pro rata basis. 2. If the Owner does not elect 1, above, the Monthly Deduction shall be allocated among and deducted from the unloaned portion of the Fixed Account and the Sub-Accounts on a pro rata basis. COST OF INSURANCE CHARGE The Cost of Insurance rate for each segment of coverage on any day shall be based on the issue ages and duration of each coverage segment, the sexes and rate class of each Insured, and any substandard rating applied to either Insured on the Date of Issue or upon any increase in Face Amount. On any Monthly Policy Date, the Cost of Insurance Charge of the policy shall be the Cost of Insurance rates on such date multiplied by the excess of: 1. the Death Benefit of the policy plus any debt to us on the policy divided by the Cost of Insurance Divisor; over 2. the Accumulated Value of the policy on such date before the Cost of Insurance Charge is deducted. We may change the Cost of Insurance rates from time to time based on our expectations of future experience. Any change in the Cost of Insurance rates shall apply to all policies of the same duration, insuring persons of the same sexes, Attained Ages, and rate classes as the Insureds. The Cost of Insurance rates applicable to each segment of coverage shall not be greater than the guaranteed rates set forth in the Data Section. These rates are based on the Mortality Table named in the Data Section. The rate class of the Insureds at the time of an increase in Face Amount for which an application is required may differ from the rate class on the Date of Issue. For determining the Cost of Insurance Charge: 1. the Accumulated Value is first considered part of the Base Coverage on the Date of Issue; and 15 2. then, part of any Additional Protection Benefit on the Date of Issue; and 3. then, coverage segments are addressed in their order of occurrence. If more than one segment was added on the same day, segments are addressed in the prioritization described in the Changes in Face Amount and Death Benefit Option provision of this contract. 4. If the Death Benefit is the Death Benefit Standard, the excess of the Death Benefit over the total Face Amount divided by the Cost of Insurance Divisor is assigned the rate class of the Base Coverage in effect on the Date of Issue. VARIABLE ACCOUNT CHARGE The Variable Account Charge Percentage shown in the Data Section will be applied against Accumulated Value in the Variable Account on the Monthly Policy Date to determine the monthly Variable Account Charge. This monthly charge, assessed to cover mortality and expense risk, will never exceed that determined using the Guaranteed Maximum Variable Account Charge Percentage shown in the Data Section. MONTHLY ADMINISTRATION CHARGE The Monthly Administrative Charges are shown in the Data Section. Increases in Base Coverage will increase the Monthly per $1,000 Administrative Charge but this charge will not be reduced upon a decrease in Base Coverage. TRANSFER CHARGE We may charge a Transfer Charge for the thirteenth and each subsequent requested transfer of Accumulated Value between and among the Fixed Account and the Sub- Accounts occurring during any Policy Year. Transfers to or from more than one account at the same time shall be treated as one transfer. The Transfer Charge may not exceed the Maximum Transfer Charge stated in the Data Section. Transfer Charges shall be allocated among and deducted from the Fixed Account and the Sub-Accounts in proportion to the Accumulated Values to be transferred from such accounts. No Transfer Charge will be imposed for the following transactions, nor will any of the following transactions be counted against the twelve free transfers allowed each Policy Year: 1. the transfer of all Accumulated Value to the Fixed Account if during the first two Policy Years and in one transaction; and 2. the transfer of Accumulated Value from a Sub-Account of the Variable Account to another Sub-Account or to the Fixed Account, if there has been a material change in the investment policy of the fund in which the funds of that Sub- Account are invested; and 3. the initial allocation of the premium due on the Date of Issue from the Money Market Fund Sub-Account; and 4. transfers of Accumulated Value from the Variable Account into the Fixed Account pursuant to the taking of a Policy Loan; and 5. allocation of the payment of any debt to us on this policy 16 WITHDRAWALS --------------------------------------------------------------------- After the first policy anniversary, the Owner may make withdrawals by written request to us. Withdrawals shall be subject to all of the following terms. 1. The amount withdrawn may not be less than the Minimum Withdrawal Amount stated in the Data Section. 2. The amount withdrawn may not exceed the Cash Surrender Value on the date of withdrawal less three times the Monthly Deduction for the most recent Monthly Policy Date. 3. The amount withdrawn may not be such that it reduces the Face Amount below the Minimum Base Coverage stated in the Data Section. The Accumulated Value will be reduced by the amount of the withdrawal. If Death Benefit Option A is in effect on the date of the withdrawal and if the Face Amount divided by the Death Benefit Factor on the date of the withdrawal exceeds the Accumulated Value of the policy just after the withdrawal, the Face Amount shall also be decreased. The decrease in Face Amount shall equal the lesser of such excess or the amount of the withdrawal. A decrease in total insurance coverage shall apply first to any increases in Face Amount in the reverse order in which they were made, and then to the Face Amount on the Date of Issue. If Death Benefit Option B is in effect on the date of the withdrawal, there shall be no decrease in the Face Amount. WITHDRAWAL CHARGE We will assess a Withdrawal Charge equal to the lesser of: - 2% of the amount withdrawn; and - $25. This Withdrawal Charge will be deducted from the amount withdrawn. ALLOCATION OF WITHDRAWALS The amount withdrawn shall be allocated among and deducted from the Accumulated Values held in each account according to the following prioritization: 1. first, from the Accumulated Value held in specific Sub-Accounts as specified by the Owner, if the Owner so specifies; and 2. second, from the Accumulated Value in the Sub-Accounts on a pro rata basis; and 3. finally, from the non-loaned Accumulated Value held in the Fixed Account. If the Accumulated Value in any Sub-Account from which the Owner has requested that withdrawals be allocated and deducted is insufficient to cover the amount of the withdrawal, the withdrawal will not be processed until further instructions are received by us from the Owner. POLICY LOANS --------------------------------------------------------------------- 17 We will loan an amount up to the Loan Value of this policy less the amount of any outstanding debt, at any time after the first Policy Year. At the time of the loan the policy must be in force. The policy shall be the sole security for the loan and must be duly assigned to us. LOAN VALUE The Loan Value on any day is equal to: 1. the Accumulated Value on such day; less 2. the Surrender Charges on such day; less 3. three times the Monthly Deduction for the most recent Monthly Policy Date. LOAN INTEREST RATE Any loan shall bear interest from the date the loan is made. The Loan Interest Rate is shown in the Data Section. GENERAL LOAN TERMS After the loan is made, loan interest shall be due on the next and all later Policy Anniversaries. On the date interest is due, it shall be added to the loan and bear interest on the same terms. The debt secured by this policy includes loans, unpaid loan interest, and accrued loan interest not otherwise due. All or any part of the debt may be paid to us at any time prior to: 1. the death of the second of the Insureds to die; and 2. surrender of the policy. However, during a Grace Period the debt may not be repaid. All payments made to repay debt will be used to reduce the amount of loans. Unless the Owner specifies, any payment to us shall be deemed a premium payment and not a payment of the debt. At the death of the Insured or upon the surrender of the policy, all debt shall become due at once. It shall be paid from the policy values. ALLOCATION OF POLICY LOANS The loaned amounts allocated to the Sub-Accounts shall be transferred from the Sub-Accounts and placed into the Fixed Account. Policy Loans shall be allocated among and transferred from the Accumulated Values held in each account according to the following prioritization: 1. first, from the Accumulated Value held in specific Sub-Accounts as specified by the Owner, if the Owner so specifies; and 2. second, from the Accumulated Value in the Sub-Accounts on a pro rata basis ; and 3. finally, from the non-loaned Accumulated Value held in the Fixed Account. If the Accumulated Value in any Sub-Account from which the Owner has requested that loaned amounts be transferred is insufficient to cover the amount of the loan, the loan will not be processed until further instructions are received from the Owner. 18 Loan repayments shall be allocated among the Fixed Account and the Sub-Accounts in proportion to the Premium Allocation percentages assigned by the Owner. Loan interest due shall be allocated among and transferred, on the date the interest is due, from the Accumulated Values held in each account: 1. first, from the Accumulated Values held in the Sub-Accounts on a pro rata basis until those accounts are exhausted; and 2. then from the non-loaned Accumulated Value held in the Fixed Account. These amounts shall be placed in, or segmented within, the Fixed Account. PAYMENT OPTIONS --------------------------------------------------------------------- In lieu of a lump sum settlement, all or part of the proceeds of this contract may be applied under a Payment Option. When proceeds are applied under a Payment Option, all other rights and benefits under this contract shall cease. In addition to the following options, other payment options may be available. OPTION EFFECTIVE DATE The Option Effective Date is the date the proceeds become payable. GENERAL PAYMENT OPTION TERMS If the proceeds to be placed under a Payment Option are less than $3,500, we may pay them in one sum to the payee who otherwise would receive the first payment under the option. If any payments would be less than $100, we will change the frequency to provide payments of at least $100. If the proceeds are assigned on the Option Effective Date, we will pay the assignee's share in one sum and place only the balance under the option. After the Option Effective Date neither the payments nor the remaining value may be assigned or encumbered. To the extent the law permits, they are not subject to any claims against the payee. We may require proof to our satisfaction that any payee is alive on the date any payment is due. CHOICE OF OPTION Choice of an option may be made: 1. by the Owner if one or both of the Insureds are living; or 2. by the Beneficiary if neither Insured is living and no option is in effect. Equivalent payments for 12-, 6-, 3-, or 1-month intervals may be chosen. The options are described in terms of monthly payments. We will quote the amount of other payments on request. We may issue a document stating the terms of the option. 19 CHANGE OF PAYMENT OPTION The right to change Payment Options exists under Options 1, 2, and 4. At the time of change the remaining value under the old option shall become the proceeds to be placed under the new option. LUMP SUM REMOVAL OF PROCEEDS APPLIED UNDER A PAYMENT OPTION Lump sum payments may be taken from the remaining proceeds placed under Payment Options 1, 2, and 4. Under Options 1 and 4 all or any part of the remaining value may be taken at any time, though no more than four transactions may be made during any calendar year. Under Option 2 the entire remaining value may be taken at any time. No lump sum removal of proceeds may be made under Options 3, 5, 6, and 7. OPTION 1 - PAYMENT OF INTEREST ONLY Interest at a rate of 3 1/2% per year shall be paid either for: 1. the life of a chosen human being; or 2. a chosen period. We may pay more interest in any given year. Upon the earlier of the death of the chosen human being or the end of the chosen period, any remaining value will be paid. The first payment shall be made one month after the Option Effective Date. If the payee is not a human being, payments may not continue for more than 30 years. OPTION 2 - PAYMENTS FOR A STATED TIME Equal monthly payments shall be made for a stated number of years. The first payment shall be made on the Option Effective Date. The amount of each monthly payment is shown in the table. The monthly payments are based on an interest rate of 3 1/2% per year. We may pay more interest in any year. OPTION 2 TABLE MONTHLY PAYMENTS FOR EACH $1,000 OF PROCEEDS
Stated Number of Years Monthly Payments 1 $84.65 2 43.05 3 29.19 4 22.27 5 18.12
20 6 15.35 7 13.38 8 11.90 9 10.75 10 9.83 11 9.09 12 8.46 13 7.94 14 7.49 15 7.10 16 6.76 17 6.47 18 6.20 19 5.97 20 5.75 21 5.56 22 5.39 23 5.24 24 5.09 25 4.96 26 4.84 27 4.73 28 4.63 29 4.53 30 4.45
OPTION 3 - PAYMENTS FOR LIFE Equal monthly payments shall be made for any guaranteed period chosen and thereafter during the life of a chosen human being. The first payment shall be made on the Option Effective Date. The amount of each monthly payment depends on the age and sex of the chosen human being on the Option Effective Date and on any guaranteed period chosen. We may require proof to our satisfaction of such age. We may require like proof that such human being is alive on the date any payment is due. The guaranteed period may be five or ten years or a Refund period. A Refund period extends until the sum of the payments is equal to the proceeds placed under the option. The monthly payments are based on an interest rate of 3 1/2% per year. We may pay more interest in any year during the guaranteed period. We will quote the amount of monthly payments for lower ages and guaranteed periods not shown in the Option 3 Table on request. OPTION 3 TABLE MONTHLY PAYMENTS FOR EACH $1,000 OF PROCEEDS (Amounts shown are for the age nearest birthday on the Option Effective Date) Guaranteed Period
Male Female Age None 10 Years Refund None 10 Years Refund 50 $4.44 $4.40 $4.29 $4.10 $4.09 $4.03 51 4.52 4.47 4.35 4.16 4.14 4.08
21 52 4.59 4.54 4.42 4.22 4.20 4.13 53 4.67 4.62 4.48 4.29 4.26 4.19 54 4.76 4.70 4.55 4.35 4.33 4.24 55 4.85 4.78 4.62 4.42 4.39 4.30 56 4.94 4.86 4.70 4.50 4.47 4.37 57 5.04 4.96 4.78 4.58 4.54 4.44 58 5.15 5.05 4.86 4.66 4.62 4.51 59 5.26 5.15 4.95 4.75 4.70 4.58 60 5.38 5.26 5.04 4.85 4.79 4.66 61 5.51 5.37 5.14 4.95 4.89 4.74 62 5.65 5.49 5.24 5.06 4.99 4.83 63 5.80 5.62 5.35 5.17 5.09 4.92 64 5.96 5.75 5.47 5.30 5.20 5.02 65 6.13 5.88 5.59 5.43 5.32 5.12 66 6.31 6.03 5.71 5.57 5.44 5.23 67 6.51 6.17 5.84 5.72 5.57 5.34 68 6.72 6.33 5.98 5.88 5.71 5.47 69 6.94 6.48 6.13 6.05 5.85 5.60 70 7.18 6.65 6.28 6.24 6.01 5.73 71 7.43 6.81 6.45 6.44 6.17 5.87 72 7.70 6.98 6.61 6.66 6.34 6.03 73 7.99 7.15 6.79 6.90 6.51 6.19 74 8.29 7.33 6.99 7.16 6.69 6.37 75 8.62 7.50 7.17 7.44 6.88 6.55 76 8.98 7.67 7.38 7.74 7.07 6.74 77 9.35 7.85 7.61 8.06 7.27 6.95 78 9.76 8.02 7.84 8.41 7.46 7.16 79 10.19 8.18 8.08 8.79 7.66 7.39 80 10.66 8.34 8.35 9.20 7.86 7.65 81 11.15 8.50 8.59 9.65 8.05 7.90 82 11.68 8.65 8.88 10.13 8.24 8.16 83 12.24 8.79 9.19 10.65 8.42 8.45 84 12.83 8.91 9.47 11.21 8.59 8.74 85+ 13.46 9.04 9.81 11.82 8.74 9.09
+ Higher ages the same OPTION 4 - PAYMENTS OF A STATED AMOUNT Equal monthly payments of a stated amount shall be made until the proceeds, with interest at 3 1/2% per year on the unpaid balance, are used up. The first payment shall be made on the Option Effective Date. The amount chosen must be at least $10 per month for each $1,000 of proceeds placed under this option. We may add more interest to the unpaid balance in any year, which will extend the number of payments. The last payment will be for the balance only. OPTION 5 - LIFE ANNUITY Equal monthly payments shall be made in the same manner as Option 3 except: 22 1. the amount of each payment shall be based on our current settlement rates on the Option Effective Date; and 2. no additional interest shall be paid. OPTION 6 - JOINT AND TWO-THIRDS ANNUITY Equal monthly payments shall be made while two chosen human beings are both living. Upon the death of either, two-thirds of the amount of such payments shall continue during the life of the survivor. The first payment shall be made on the Option Effective Date. The amount of each monthly payment depends on the ages and sexes of the chosen human beings on the Option Effective Date. We may require proof to our satisfaction of their ages. We may require like proof that any chosen human being is alive on the date any payment conditioned on the life of such human being is due. The initial amount of each monthly payment is shown in the table. We will quote the amount of monthly payments for any other age combination on request. The monthly payments are based on an interest rate of 3 1/2% per year. No additional interest shall be paid. OPTION 6 TABLE MONTHLY PAYMENTS FOR EACH $1,000 OF PROCEEDS (Amounts shown are for the age nearest birthday on the Option Effective Date)
Ages of Both One Male Ages of Both One Male and and One Female One Female 50 $4.11 68 $5.86 51 4.17 69 6.03 52 4.23 70 6.21 53 4.29 71 6.41 54 4.35 72 6.62 55 4.42 73 6.84 56 4.50 74 7.08 57 4.58 75 7.35 58 4.66 76 7.63 59 4.75 77 7.93 60 4.84 78 8.25 61 4.94 79 8.60 62 5.05 80 8.97 63 5.16 81 9.38 64 5.29 82 9.81 65 5.42 83 10.27 66 5.55 84 10.77 67 5.70 85+ 11.31
+Higher ages the same OPTION 7 - 50% SURVIVOR ANNUITY Equal monthly payments shall be made during the life of the chosen primary human being. Upon the death of the chosen primary human being, 50% of the amount of such 23 payments shall continue during the life of the chosen secondary human being. The first payment shall be made on the Option Effective Date. The amount of each monthly payment depends on the ages and sexes of the chosen human beings on the Option Effective Date. We may require proof to our satisfaction of their ages. We may require like proof that any chosen human being is alive on the date any payment conditioned on the life of such human being is due. The initial amount of each monthly payment is shown in the table. We will quote the amount of monthly payments for any other age combination on request. The monthly payments are based on an interest rate of 3 1/2% per year. No additional interest shall be paid. OPTION 7 TABLE MONTHLY PAYMENTS FOR EACH $1,000 OF PROCEEDS (Amounts shown are for the age nearest birthday on the Option Effective Date)
Male Female Male Female Ages Primary Primary Ages Primary Primary of Female Male of Female Male Both Secondary Secondary Both Secondary Secondary 50 $4.11 $3.96 68 $5.85 $5.51 51 4.17 4.01 69 6.02 5.66 52 4.23 4.06 70 6.20 5.82 53 4.29 4.12 71 6.39 6.00 54 4.35 4.18 72 6.59 6.18 55 4.42 4.24 73 6.81 6.39 56 4.50 4.31 74 7.05 6.60 57 4.58 4.38 75 7.30 6.84 58 4.66 4.45 76 7.57 7.09 59 4.75 4.53 77 7.86 7.36 60 4.84 4.61 78 8.17 7.66 61 4.94 4.70 79 8.51 7.97 62 5.05 4.79 80 8.86 8.32 63 5.16 4.89 81 9.25 8.68 64 5.28 5.00 82 9.66 9.08 65 5.41 5.12 83 10.10 9.51 66 5.55 5.24 84 10.56 9.97 67 5.69 5.37 85+ 11.06 10.47
+Higher ages the same GENERAL TERMS OF THIS POLICY --------------------------------------------------------------------- CONSIDERATION This policy is issued in consideration of the application and payment of at least the Minimum Initial Premium shown in the Data Section. We will incur no liability if no premium is paid. ENTIRE CONTRACT On the Date of Issue the entire contract between the parties is this policy and a copy of the application and any riders and endorsements which are attached at issue. Any changes of this contract must be written and may be made only by one of our authorized 24 officers or registrars. We will send the Owner a copy of any application for a change which we approve. It and any additional Data Section shall become part of this contract on the effective date of such change. REPRESENTATIONS Any statement made by or for either or both of the Insureds shall be deemed a representation and not a warranty. Unless such statement is in the attached application or in any subsequent application, it shall not be used to: 1. make this policy void; or 2. make any increase in Face Amount void; or 3. make any Reinstatement void; or 4. defend any claim. INCONTESTABILITY After this policy has been in force during the life of each Insured for two years from the policy Date of Issue, we will not contest it with respect to representations made by that Insured; however: 1. we may contest any increase in Face Amount for which an application is required until such increase has been in force during the life of both Insureds for two years from its Effective Date; and 2. we may contest any Reinstatement until such Reinstatement has been in force during the life of both Insureds for two years from its Effective Date. POLICY MONTHS, YEARS AND ANNIVERSARIES Policy Months, Years and Anniversaries shall be measured from the Date of Issue. The Date of Issue is the first Monthly Policy Date. The Monthly Policy Date shown in the Data Section occurs on the same day each month or on the last day of any month having no such date. A Contract Anniversary falls on each successive anniversary of the Date of Issue. The first Contract Year begins on the Date of Issue and ends on the day before the first Contract Anniversary. Each subsequent Contract Year begins on a Contract Anniversary and ends on the day before the next Contract Anniversary. POLICY EFFECTIVE DATES The Face Amount on the Date of Issue shall become effective on the Date of Issue shown in the Data Section. Any increase in Face Amount for which an application is required shall become effective on the Monthly Policy Date on or next following the date we approve the application for such increase in Face Amount. Any increase in Face Amount for which an application is not required shall become effective on the Monthly Policy Date on or next following the date we receive the request for such increase unless otherwise provided by the policy. Any decrease in Face Amount requested shall become effective on the Monthly Policy Date on or next following the date we receive the request for such decrease. 25 Any reinstatement of this policy shall become effective on the Monthly Policy Date on or next following the date we approve the application for Reinstatement. Any change of Death Benefit Option shall become effective on the Monthly Policy Date on or next following the date we receive the request for such change. ATTAINED AGE The Attained Age of each Insured on any date is that Insured's Issue Age shown in the Data Section plus the number of full Policy Years which have passed since the Date of Issue. MISSTATEMENT OF AGE OR SEX The Issue Ages shown in the Data Section are the ages of the Insureds on their birthdays nearest to the Date of Issue. These are based on the dates of birth shown in the application. If the age or sex of either Insured has been misstated, we will adjust the Accumulated Value to be the Accumulated Value that would have resulted had the Cost of Insurance Charges been based on the correct ages and sexes of the Insureds. The adjustment shall take effect on the Monthly Policy Date on or next following the date we have proof to our satisfaction of such misstatement. If both Insureds have died, we will similarly adjust the Accumulated Value as of the last Monthly Policy Date prior to the death of the second of the Insureds to die. To the extent that the recomputed, adjusted Accumulated Value is negative, we will deduct such negative amount from the Death Benefit otherwise payable. VALUATION DATE AND VALUATION PERIOD A Valuation Date is each day that the New York Stock Exchange is customarily open for trading, except for: 1. the day following Thanksgiving in each year; and 2. any day on which trading is restricted by directive of the Securities and Exchange Commission. A Valuation Period is the period between two successive Valuation Dates. INTEREST RATES All interest rates stated in this policy are effective annual rates. BASIS OF VALUES Any guaranteed values for this policy are equal to or greater than those required by the law of the state where this policy is delivered. Any guaranteed values are based on interest at the Minimum Fixed Account Interest Rate and the Mortality Table shown in the Data Section. A detailed statement of the method of computing values has been filed in the state in which this policy is delivered. PAYMENT OF BENEFITS 26 We will pay all benefits under this policy at our Home Office. Before payment of any Death Benefit we may investigate the death. POSTPONEMENT OF BENEFITS We will pay any amounts which are payable as a result of Cash Surrender, Withdrawals, or Policy Loans and which are allocated to the Variable Account within seven days after we receive written request in a form satisfactory to us. However, determination and payment of any amount payable from the Variable Account may be postponed whenever: 1. the New York Stock Exchange is closed, or trading on the New York Stock Exchange is restricted by directive of the Securities and Exchange Commission; or 2. the Securities and Exchange Commission by order permits postponement for the protection of policyowners; or 3. an emergency exists, as determined by the Securities and Exchange Commission, as a result of which it is not reasonably practicable to dispose of securities or to determine the value of the net assets of the Variable Account. Transfers to or from the Sub-Accounts of the Variable Account, though normally occurring on the same day we receive the request for transfer, may also be postponed upon any of the above events. We may delay payment of any amounts which are payable as a result of Cash Surrender, Withdrawals, or Policy Loans and which are allocated to the FIXED ACCOUNT for up to six months after we receive written request in a form satisfactory to us. We will pay the Death Benefit within seven days after we receive due proof satisfactory to us of the death of the second of the Insureds to die while this policy is in force. We may postpone determination and payment of any Death Benefit in excess of the Face Amount, net of any debt to us on this policy, upon any of the events enumerated above. We have the right to postpone payment which is derived from any amount recently paid to us by check or draft, until we are satisfied the check or draft has been paid by the bank or other financial institution on which it is drawn. NOTICES Unless this policy provides otherwise, any requests, changes, or notices: 1. from us to the Owner shall be sent to the last address known to us of the Owner; and 2. from us to an assignee shall be sent to the last address known to us of such assignee; and 3. from the Owner or an assignee to us must be in writing and received by us at our Home Office in Montpelier, Vermont. ANNUAL REPORT At least once each Policy Year we will send a report to the Owner. The report will show, as of its date: 1. the Accumulated Value of the policy, detailing the Accumulated Value in the Fixed Account and the Accumulated Value in each Sub-Account of the Variable Account; and 2. the Face Amount; and 3. the Cash Surrender Value; and 27 4. any debt to us on this policy; and 5. the Death Benefit. The report will also show a summary of transactions of the previous year and any information required by law or by the supervisory insurance official of the Insurance Department of the state in which this policy was delivered. PROJECTION REPORT The Owner may request in writing a report which projects future values and future Death Benefits for this policy. The report will also show any information required by law. The Projection Report will be based on: 1. data the Owner gives us as to Face Amount and premiums; and 2. such assumptions as either we or the Owner specifies. We may charge the Owner for each Projection Report. EX-1.A.5.B 4 RIDER FOR GUARANTEED DEATH BENEFIT 1 EXHIBIT 1.A.(5)(b) GUARANTEED DEATH BENEFIT RIDER We, National Life Insurance Company, guarantee that the policy will not lapse if and as long as the Conditions of this Rider are met. This no-lapse guarantee ensures that a Death Benefit will be payable under this policy for as long as this rider remains in force. The date of issue of this rider is the policy Date of Issue. MONTHLY GUARANTEE PREMIUM. The Monthly Guarantee Premium specific to this rider is stated in the Data Section. It is subject to change upon increases or decreases in Face Amount, changes in the Death Benefit Option of this policy, and additions or deletions of rider coverages. CONDITIONS OF THIS RIDER. To keep this rider in force, cumulative premiums paid in excess of withdrawals and debt must, on each Monthly Policy Date during the No Lapse Period, equal at least the sum of all unique Monthly Guarantee Premiums in effect since the Date of Issue of the policy times the number of Monthly Policy Dates that elapsed while each Monthly Guarantee Premium was in effect. Compliance with this condition will be determined on every Monthly Policy Date. IMPACT OF WITHDRAWALS AND POLICY LOANS. Withdrawals and Policy Loans taken against this policy will impact the calculation described in Conditions of this Rider. If a Withdrawal made or Policy Loan taken against this policy leaves the policy out of compliance with the Conditions of this Rider, a Notice of Pending Termination of this Rider will be sent to the Owner. COST OF THIS RIDER. The monthly cost of this rider is shown in the Data Section. It shall be based on the Face Amount of the policy. If, while this rider is in force, any increase or decrease in the Face Amount of the policy is made, the monthly cost of this rider will similarly increase or decrease. The monthly cost of this rider shall be deducted from the Accumulated Value of the policy in the same manner as is the Monthly Deduction. SUSPENSION OF MONTHLY DEDUCTIONS. If, while this rider is in force, the Accumulated Value of the Policy is not sufficient to cover the Monthly Deductions, Monthly Deductions will be deducted from the Accumulated Value until the Accumulated Value is exhausted, and will thereafter be deferred until such time as the policy has positive Accumulated Value. Upon the death of the second of the Insureds to die, we will waive that portion of any Monthly Deductions then in arrears. SUICIDE LIMITATION If either of the Insureds dies within two years of the date of issue of this rider as the result of suicide, while sane or insane, we will pay only the sum set forth in the Suicide Limitation provision of the policy. Payment will be made to the Beneficiary. INCONTESTABILITY. After this rider has been in force during the life of each Insured for two years from its date of issue, we will not contest it. CONSIDERATION. This rider is issued in consideration of the application for the rider and the monthly cost of the rider. The rider and a copy of the application for the rider shall become part of the policy on the date of issue of the rider. NOTICE OF PENDING TERMINATION OF THIS RIDER. If on any Monthly Policy Date the Conditions of this Rider are not met, the Owner will be sent notice that unless the premium described below is paid during the first 61 days measured from the date we mail such notice, this rider will terminate. The required premium will be: 1. the sum of all unique Minimum Guarantee Premiums in effect since the Date of Issue of this policy times the number of Monthly Policy Dates that elapsed while each Monthly Guarantee Premium was in effect; plus 2. two times the Monthly Guarantee Premium then in effect; plus 3. all withdrawals made from this policy; plus 4. all debt to us on the policy; minus 5. all premiums paid on the policy since its Date of Issue. 2 TERMINATION OF THIS RIDER. This rider shall terminate on the earliest of: 1. the end of the No-Lapse Period specified in the Data Section; or 2. the end of the 61st day following our sending a notice of pending termination of this rider, if prior to that time the premium described in Notice of Pending Termination of this Rider is not paid; or 3. the date the policy terminates. If the policy is reinstated, this rider will not be reinstated; or 4. any Monthly Policy Date requested, if before that date we receive at our Home Office written request for termination of this rider. When this rider terminates: 1. all rights under this rider will cease; and 2. there will be no further monthly costs for this rider; and 3. the policy will be considered separate and complete without this rider. If this rider terminates while the Cash Surrender Value of the policy is zero, the policy will immediately enter a Grace Period. Signed for NATIONAL LIFE INSURANCE COMPANY at Montpelier, Vermont, as of the date of issue of this rider, by Chairman of the Board and Chief Executive Officer 7464(0398) EX-1.A.5.C 5 RIDER FOR ADDITIONAL PROTECTION BENEFIT 1 EXHIBIT 1.A.(5)(c) ADDITIONAL PROTECTION BENEFIT RIDER We, National Life Insurance Company, will pay the Additional Protection Benefit, subject to the terms of this rider, in addition to the Basic Coverage of the policy, when we receive at our Home Office due proof that both Insureds died while this rider was in force. The sum of the Basic Coverage provided by the base policy all Automatic Increase Coverages added under any Automatic Increase Rider attached to the policy and the Additional Protection Benefit provided by this rider is the total Face Amount of the policy. The date of issue of this rider is the policy Date of Issue unless a later date is set forth below. ADDITIONAL PROTECTION BENEFIT. We will pay the Additional Protection Benefit to the Beneficiary when we receive at our Home Office due proof that both Insureds died while this rider was in force. We will pay the Additional Protection Benefit in one sum unless a Payment Option, as described in the policy to which this rider is attached, is chosen. If the Additional Protection Benefit is paid in one sum, it shall be increased by interest from the date we receive proof of death of the second of the Insureds to die to the date of payment. We will set the rate of interest at not less than the Minimum Interest Paid on Death Claims percentage shown in the Data Section. COST OF ADDITIONAL PROTECTION BENEFIT. The Cost of Additional Protection Benefit rate on any day shall be based on the duration of this rider, the Insureds' then Attained Ages, and the rate class of the Additional Protection Benefit on the date of issue of this rider. On any Monthly Policy Date, the Cost of Additional Protection Benefit shall be: 1. the Cost of Additional Protection Benefit rate on such date divided by $1,000; multiplied times 2. the Additional Protection Benefit on such date, divided by the Cost of Insurance Divisor shown in the Data Section. We may change the Cost of Additional Protection Benefit rates from time to time based on our expectations of future experience. Any change in the Cost of Additional Protection Benefit rates shall apply to all riders of the same duration, insuring persons of the same Attained Ages and rate class as the Insureds. The Cost of Additional Protection Benefit rates shall not be greater than the rates set forth in the Table of Guaranteed Maximum Cost of Additional Protection Benefit Rates shown in the Data Section. ADDITIONAL PROTECTION BENEFIT DECREASES. The Owner may request that the Additional Protection Benefit be decreased. Such decreases will be performed subject to the terms of the Face Amount Decreases provision of the base policy. SUICIDE LIMITATION. If either of the Insureds dies within two years of the date of issue of this rider as the result of suicide, while sane or insane, we will pay only the sum set forth in the Suicide Limitation provision of the policy. Payment will be made to the Beneficiary. INCONTESTABILITY. After this rider has been in force during the life of each Insured for two years from its date of issue, we will not contest it. CONSIDERATION. This rider is issued in consideration of the application for the rider and the monthly cost of the rider. The rider and a copy of the application for the rider shall become part of the policy on the date of issue of the rider. TERMINATION. This rider shall terminate on the earliest of: 2 1. the date the policy terminates; or 2. any Monthly Policy Date requested, if before that date we receive at our Home Office written request for termination. When this rider terminates: 1. all rights under this rider shall cease; and 2. there will be no further monthly costs for this rider; and 3. the policy will be considered separate and complete without this rider. Signed for NATIONAL LIFE INSURANCE COMPANY at Montpelier, Vermont, as of the date of issue, by Chairman of the Board and Chief Executive Officer 7463(0398) EX-1.A.5.D 6 RIDER FOR POLICY SPLIT OPTION 1 EXHIBIT 1.A.(5)(d) POLICY SPLIT OPTION RIDER You may exchange this policy, subject to the terms of this rider, for two new individual policies, one on each of the two Insureds, described below. The date of issue of this rider is the policy Date of Issue. EXCHANGE CONDITIONS We will exchange this policy only if one of the following events occurs: 1. A final decree of divorce is issued terminating a marriage of the two Insureds to each other. 2. There is a change in the Federal Estate Tax law which results in either- a) an end to the unlimited marital deduction available to the Insureds if they were to die; or b) a reduction in maximum Federal Estate Tax rate of 50% or more. We must receive a written request from the Owner for an exchange within 180 days of the date a decree of divorce becomes final or the date we notify the Owner of a change in the Federal Estate Tax law, whichever applies. We will require the return of this policy. A $200 fee will be deducted from the Accumulated Value of the base policy on the day prior to the Exchange Date. This charge is to cover expenses associated with the policy split. We reserve the right to deduct a charge from the base policy's Accumulated Value to cover our expenses arising from any state or federal taxes generated by the exchange. EXCHANGE DATE. The exchange will be effective on the Exchange Date, which is the date all of the above exchange conditions are met. NEW POLICIES. The exchange may be to any traditional whole life, individual flexible premium adjustable benefit life or variable life policy that we regularly issue at the time of exchange, subject to our approval. The issue date of each of the two new individual policies will be the Exchange Date. The new policy on each Insured will be based on that Insured's Attained Age on the Exchange Date. The new policy on each Insured will be based on that Insured's risk classification as of the most recently issued coverage segment on this policy. The face amount of each new individual policy may not exceed 50% of the Face Amount of this policy. Any Increase in Face Amount on this policy which was made with either or both of the Insureds rated 250% or higher, or in an uninsurable class, will be surrendered at the time of the policy split. The Accumulated Value and debt of this policy on the day prior to the Exchange Date will be divided and allocated to the two new individual policies in proportion to their face amounts. Subject to our approval, riders or benefits may be added to the new policies where available. ASSIGNMENT. Any assignment of this policy will apply to each new individual policy. Suicide Limitation and Incontestability. The Suicide Limitation and Incontestability periods of the new policies will be measured from the Date of Issue of this policy. TERMINATION. Coverage under this rider will terminate on the earliest of: 2 1. our receipt of written request by the Owner for termination; or 2. the date that the first death of the two Insured's occurs; or 3. termination of the base policy; or 4. the Policy Anniversary on which the older of the Insureds reaches Attained Age 85; or 5. exercise of the option to exchange the base policy under this rider. Signed for NATIONAL LIFE INSURANCE COMPANY at Montpelier, Vermont, as of the date of issue of this rider, by Chairman of the Board and Chief Executive Officer 7465(0398) EX-1.A.5.E 7 RIDER FOR ESTATE PRESERVATION 1 EXHIBIT 1.A.(5)(e) ESTATE PRESERVATION RIDER In addition to the Death Benefit of the policy, we, National Life Insurance Company, will pay the Estate Preservation Benefit, subject to the terms of this rider, when we receive at our Home Office due proof that both Insureds died while this rider was in force. The dollar amount of the Estate Preservation Benefit is stated in the Data Section. The date of issue of this rider is the policy Date of Issue. ESTATE PRESERVATION BENEFIT. We will pay the Estate Preservation Benefit to the Beneficiary when we receive at our Home Office due proof that both Insureds died while this rider was in force. We will pay the Estate Preservation Benefit in one sum unless a Payment Option, as described in the policy to which this rider is attached, is chosen. If the Estate Preservation Benefit is paid in one sum, it shall be increased by interest from the date we receive proof of death of the second of the Insureds to die to the date of payment. We will set the rate of interest at not less than the Minimum Interest Paid on Death Claims percentage shown in the Data Section. The Estate Preservation Benefit will be decreased in proportion to any decrease in the Face Amount of this policy. COST OF ESTATE PRESERVATION BENEFIT. The Cost of Estate Preservation Benefit rate on any day shall be based on the duration of this rider, the Insureds' then Attained Ages, and the rate classes of the Insureds on the Date of Issue. On any Monthly Policy Date, the Cost of Estate Preservation Benefit shall be: 1. the Cost of Estate Preservation Benefit rate on such date divided by $1,000; multiplied times 2. the Estate Preservation Benefit We may change the Cost of Estate Preservation Benefit rates from time to time based on our expectations of future experience. Any change in the Cost of Estate Preservation Benefit rates shall apply to all riders of the same duration, insuring persons of the same Attained Ages and rate classes as the Insureds. The Cost of Estate Preservation Benefit rates shall not be greater than the rates set forth in the Table of Guaranteed Maximum Cost of Estate Preservation Benefit Rates shown in the Data Section. SUICIDE LIMITATION. If either of the Insureds dies within two years of the date of issue of this ride as the result of suicide, while sane or insane, we will pay only the sum set forth in the Suicide Limitation provision of the policy. Payment will be made to the Beneficiary. INCONTESTABILITY. After this rider has been in force during the life of each Insured for two years from its date of issue, we will not contest it. CONSIDERATION. This rider is issued in consideration of the application for the rider and the monthly cost of the rider. The rider and a copy of the application for the rider shall become part of the policy on the date of issue of the rider. TERMINATION. This rider shall terminate on the earliest of: 1. the first Policy Anniversary, if the Owner of the policy to which this rider is attached is not an irrevocable life insurance trust on that date; or 2. the date the policy terminates; or 3. any Monthly Policy Date requested, if before that date we receive at our Home Office written request 2 for termination; or 4. the fourth Policy Anniversary. When this rider terminates: 1. all rights under this rider shall cease; and 2. there will be no further monthly costs for this rider; and 3. the policy will be considered separate and complete without this rider. Signed for National Life Insurance Company at Montpelier, Vermont, as of the date of issue, by Chairman of the Board and Chief Executive Officer 7467(0398) EX-1.A.5.F 8 RIDER FOR ANNUALLY RENEWABLE TERM 1 EXHIBIT 1.A.(5)(f) ANNUALLY RENEWABLE TERM INSURANCE RIDER In addition to the Death Benefit of the policy, we, National Life Insurance Company, will pay the Renewable Term Insurance Amount, subject to the terms of this rider, when we receive at our Home Office due proof that the Term Insured died while this rider was in force. Payment will be made to the Renewable Term Insurance Beneficiary. The Term Insured and the Renewable Term Insurance Beneficiary are identified in the Data Section. The date of issue of this rider is the policy Date of Issue unless a later date is shown below. Renewable Term Insurance Amount. A schedule of Renewable Term Insurance Amounts is presented in the Data Section. COST OF RENEWABLE TERM INSURANCE. The Renewable Term Insurance rate on any day shall be based on the duration of this rider, the Attained Age of the Term Insured, and the rate classes of the Term Insured on the date of issue of this rider. On any Monthly Policy Date, the Cost of Renewable Term Insurance shall be: 1. the Renewable Term Insurance rate on such date divided by $1,000; multiplied times 2. the Renewable Term Insurance Amount. We may change the Cost of Renewable Term Insurance rates from time to time based on our expectations of future experience. Any change in the Cost of Renewable Term Insurance rates shall apply to all riders of the same duration, insuring persons of the same Attained Age and rate class as the Term Insured. The Cost of Renewable Term Insurance rates shall not be greater than the rates set forth in the Table of Guaranteed Maximum Cost of Renewable Term Insurance Rates shown in the Data Section. These rates are based on the Renewable Term Insurance Mortality Table named in the Data Section. RENEWAL. This rider expires on each rider anniversary. Upon each expiration, if all monthly Cost of Renewable Term Insurance charges for the expired term have been paid, the rider will be renewed for a one year term. No renewal shall occur on or after the Final Term Expiration Date shown in the Data Section. ATTAINED AGE EXCHANGE. Upon written request received at our Home Office, this rider may be exchanged for a whole life policy, limited payment life policy, or a flexible premium life policy, on the life of the Term Insured with a Sum Insured or Face Amount equal to this rider is Renewable Term Insurance Amount, without proof that the Term Insured is insurable if: 1. this rider is in force; and 2. the exchange is made prior to the Final Exchange Date set forth in the Data Section. The new policy shall: 1. be on a form in use by us on the date of exchange; and 2. be at the premium rate in effect for the Term Insured's Attained Age on the date of exchange. If this rider is subject to a substandard risk classification on the date of exchange, the new policy shall be issued in the same substandard risk class. 2 We may require that this rider be returned to us. INCONTESTABILITY. After this rider has been in force during the life of the Term Insured for two years from its date of issue, we will not contest it except for failure to pay the Cost of Renewable Term Insurance. SUICIDE LIMITATION. If the death of the Term Insured within two years from the date of issue of this rider results from suicide, while sane or insane, we will pay only the sum set forth in the Suicide Limitation provision of the policy. CONSIDERATION. This rider is issued in consideration of the application for the rider and the monthly cost of the rider. The rider and a copy of the application for the rider are attached and made a part of the policy. RIDER YEARS AND ANNIVERSARIES. Rider years and anniversaries shall be measured from the date of issue of the rider. TERMINATION. This rider shall terminate: 1. on each anniversary, unless renewed; or 3 2. on its Final Term Expiration Date; or 3. on the day the rider is exchanged, or 4. on the day the policy terminates; or 5. on any Monthly Policy Date requested, if before that date we receive at our Home Office written request for termination. When this rider terminates: 1. all rights under this rider shall cease; and 2. there will be no further monthly costs for this rider; and 3. the policy will be considered separate and complete without this rider. Signed for National Life Insurance Company at Montpelier, Vermont, as of the date of issue, by Chairman of the Board and Chief Executive Officer 7468(0398) EX-1.A.5.G 9 RIDER FOR CONTINUING COVERAGE 1 EXHIBIT 1.A.(5)(g) CONTINUING COVERAGE RIDER CONTINUING COVERAGE RIDER This rider provides Continuing Coverage on and after the Final Premium Acceptance Date stated in the Data Section. The amount of coverage that continues is the Face Amount that was in force on the Final Premium Acceptance Date. The date of issue of this rider is the policy Date of Issue. CONTINUING COVERAGE On the Continuing Coverage Start Date shown in the Data Section, the Death Benefit Option of the policy will automatically revert to Option A. The Death Benefit Option may not thereafter be changed. On the Final Premium Acceptance Date, if the terms of this rider are met and the policy remains in force: 1. the terms of the Insurance Continuation provision of the policy are negated; and 2. no additional premium will be accepted on the policy, and 3. all Accumulated Value will be transferred to the Fixed Account, and no transfers will be thereafter allowed; and 4. all Monthly Deductions on the policy will cease; and 5. the Owner may continue to access the Cash Surrender Value and make or repay Policy Loans. COST OF THIS RIDER Monthly charges for this rider, identified in the Data Section, will be assessed beginning on the Continuing Coverage Start Date. SUICIDE LIMITATIONS If either of the Insureds dies within two years of the date of issue of this rider as the result of suicide, while sane or insane, we will pay only the sum set forth in the Suicide Limitation provision of the policy. Payment will be made to the Beneficiary. INCONTESTABILITY After this rider has been in force during the life of each Insured for two years from its date of issue, we will not contest it. CONSIDERATION This rider is issued in consideration of the application for the rider and the monthly cost of the rider. The rider and a copy of the application for the rider shall become part of the policy on the date of issue of the rider. TERMINATION This rider shall terminate on the earliest of: 1. any Monthly Policy Date requested, if before that date we receive at our Home Office written request for termination; or 2 the date the policy terminates. When this rider terminates: 1. all rights under this rider shall cease;. and 2. there will be no further monthly costs for this rider; and 3. the policy will be considered separate and complete without this rider. Signed for National Life Insurance Company at Montpelier, Vermont, as of the date of issue, by Chairman of the Board and Chief Executive Officer 7462(0398) EX-1.A.5.H 10 RIDER FOR ENHANCED DEATH BENEFIT 1 EXHIBIT 1.A.(5)(h) ENHANCED DEATH BENEFIT RIDER The Death Benefit Factors provided in the Data Section of the policy are raised to provide enhanced Death Benefits in Policy Years associated with a Targeted Attained Age of the Younger of the Insureds. The Targeted Attained Age of the Younger of the Insureds is stated in the Data Section. The date of issue of this rider is the policy Date of Issue. DEATH BENEFIT FACTOR. The table of Death Benefit Factors shown in the rider Data Section supercedes the table of Death Benefit Factors provided in the policy Data Section. The Death Benefit Factors applied through operation of this rider are higher than those which would otherwise be in effect on the policy. COST OF THE ENHANCED DEATH BENEFIT. There is no separate additional charge for this Enhanced Death Benefit Rider, but the Cost of Insurance Charge on the policy will be higher to the extent that the higher Death Benefit Factors associated with this rider increase the Death Benefit of the policy. SUICIDE LIMITATION. If either of the Insureds dies within two years of the date of issue of this rider as the result of suicide, while sane or insane, we will pay only the sum set forth in the Suicide Limitation provision of the policy. Payment will be made to the Beneficiary. INCONTESTABILITY. After this rider has been in force during the life of each Insured for two years from its date of issue, we will not contest it. TERMINATION. This rider shall terminate on the earliest of: 1. any Monthly Policy Date requested, if before that date we receive at our Home Office written request for termination; or 2. the date the policy terminates. If the policy is later reinstated, this rider will not be reinstated. 2 When this rider terminates: 1. all rights under this rider will cease; and 2. the policy will be considered separate and complete without this rider. Signed for National Life Insurance Company at Montpelier, Vermont, as of the date of issue of this rider, by Chairman of the Board and Chief Executive Officer 7466(0398) EX-1.A.5.I 11 RIDER FOR AUTOMATIC INCREASE 1 EXHIBIT 1.A.(5)(i) AUTOMATIC INCREASE RIDER We, National Life Insurance Company, will add to the Face Amount of the policy, without proof that the Insured is insurable, on each policy anniversary while this rider is in force, subject to its terms. The date of issue of this rider is the policy Date of Issue. AMOUNTS ADDED TO FACE AMOUNT Each coverage segment added to the Face Amount under this rider will be called an Automatic Increase Coverage. The amount added to the Face Amount on a Policy Anniversary will equal either: 1. the Automatic Increase Rate shown in the Data Section multiplied by.- a) the sum of all amounts added to the Face Amount under this rider; plus b) the Face Amount of the policy on its Date of Issue; or 2. the Automatic Increase Amount shown in the Data Section. However, the total amount added to the Face Amount under this rider will not exceed the Face Amount of the policy on its Date of Issue. COST OF AMOUNTS ADDED TO FACE AMOUNT The rate classes of the Insured on the policy Date of Issue will be used in determining Cost of Insurance rates for any amounts added under this rider. Each increase segment will be assessed Cost of Insurance charges at the same rate applied in that Policy Year to the Base Coverage at issue. No other charges apply to the Face Amount added under this rider. FEATURES OF ADDED FACE AMOUNT The effective date of each amount added under this rider will be the Policy Anniversary on which the Face Amount is added. We will not contest any Face Amount added under this rider after this rider has been in force during the life of both Insureds for two years from its date of issue. SUICIDE LIMITATION If either of the Insureds dies within two years of the date of issue of this rider as the result of suicide, while sane or insane, we will pay only the sum set forth in the 2 Suicide Limitation provision of the policy. Payment will be made to the Beneficiary. INCONTESTABILITY After this rider has been in force during the life of each Insured for two years from its date of issue, we will not contest it. CONSIDERATION This rider is issued in consideration of the application for the rider and the monthly cost of the rider. The rider and a copy of the application for the rider shall become part of the policy on its Date of Issue. TERMINATION OF AUTOMATIC INCREASES No further Face Amount will be added under this rider: 1. on or after the Policy Anniversary when the total Face Amount added under this rider equals or exceeds the Face Amount of the policy on its Date of Issue; or 2. on or after the Automatic Increase End Date stated in the Data Section; or 3. on or after any Policy Anniversary as of which the Owner requests that an addition to the Face Amount not be made under this rider or that automatic increases terminate; or 4. on or after the date a requested decrease in Face Amount of this policy becomes effective. However, termination of automatic increases under this rider will not occur solely because of a decrease in Face Amount as a result of a change in the Death Benefit Option. TERMINATION OF RIDER This rider will terminate on the date the policy terminates. Signed for National Life Insurance Company at Montpelier, Vermont as of the date of issue, by Chairman of the Board and Chief Executive Officer 7630(0398) EX-1.A.8.A.3 12 FORM OF AMENDMENT NO. 2 TO PARTICIPATION AGREEMENT 1 EXHIBIT 8(a)(3) Amendment No. 2, dated April ____, 1998, to the Participation Agreement dated January 30, 1996 By and Among MARKET STREET FUND, INC. and NATIONAL LIFE INSURANCE COMPANY and 1717 CAPITAL MANAGEMENT COMPANY (formerly PML SECURITIES COMPANY) This Amendment No. 2, dated as of April ___, 1998, to the Participation Agreement dated January 30, 1996 (the "Participation Agreement"), by and among NATIONAL LIFE INSURANCE COMPANY, a Vermont insurance company (the "Company"), the MARKET STREET FUND, INC., an open-end diversified investment company organized under the laws of the State of Maryland (the "Fund") and 1717 CAPITAL MANAGEMENT COMPANY (formerly PML SECURITIES COMPANY), a Delaware corporation (the "Underwriter"), is made and entered into as of April ___, 1998. WHEREAS, the Company has formed a new set of subaccounts of National Variable Life Insurance Account, which will fund second-to-die variable life insurance contracts, such new set of subaccounts being known as the "New Subacounts"; and WHEREAS, the Company desires to purchase shares of the Portfolios on behalf of the New Subaccounts to fund the second-to-die variable life insurance contracts, and the Fund and the Underwriter are willing to to sell such shares to the Company for such purpose; NOW, THEREFORE, in consideration of their mutual promises, the Company, the Fund and the Underwriter agree to amend the Participation Agreement as follows: 1. Definitions. Unless otherwise specifically provided for herein, all capitalized terms defined in the Participation Agreement shall have the same meanings when used herein as in the Participation Agreement. The definition of the term "Policy" is hereby broadened to include the second-to-die variable life insurance contracts to be offered by the New Subaccounts, as well as the single life flexible premium adjustable benefit variable life insurance policies offered by National Variable Life Insurance Account, and the variable annuity contracts being offered by National Variable Annuity Account II. 2. Sale of Fund Shares. The Underwriter agrees to sell shares of the Fund, and the Fund agrees to make available its shares for such sale, to the Company on behalf of the New Subaccounts, on the same terms and conditions as the Underwriter currently sells shares of the Fund, and the Fund currently makes its shares available for such sale to the 2 Company on behalf of the existing subaccounts of the National Variable Life Insurance Account, and the National Variable Annuity Account II. IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment No. 2 to the Participation Agreement to be executed in its name and behalf by its duly authorized representative as of the date set forth above. NATIONAL LIFE INSURANCE COMPANY ------------------------------ by: MARKET STREET FUND, INC. ------------------------------ by: 1717 CAPITAL MANAGEMENT COMPANY ------------------------------ by: EX-1.A.8.B.4 13 FORM OF AMENDMENT 3 TO PARTICIPATION AGREEMENT 1 EXHIBIT 8(b)4 AMENDMENT NO. 3 TO PARTICIPATION AGREEMENT AMONG VARIABLE INSURANCE PRODUCTS FUND, FIDELITY DISTRIBUTORS CORPORATION AND NATIONAL LIFE INSURANCE COMPANY (AS SUCCESSOR TO VERMONT LIFE INSURANCE COMPANY) THIS AMENDMENT NO. 3 to the Participation Agreement by and among Vermont Life Insurance Company (since merged into National Life Insurance Company), Variable Insurance Products Fund (the "Fund"), and Fidelity Distributors Corporation (the "Underwriter"), dated August 1, 1989 as amended by Amendment No. 1 to Participation Agreement dated January 1, 1996 and Amendment No. 2 to Participation Agreement dated April 28, 1997 (the "Participation Agreement"), is made and entered into this ____ day of _______, 1998. 1. Schedule A is hereby further amended to add the following contract forms: National Life Contract Form 7461(0398) (Last Survivor Flexible Premium Adjustable Benefit Variable Life Insurance) 2. Pursuant to section 1.6 hereof, the Fund and the Distributor hereby consents to the investment of net amounts available under the variable contracts listed in paragraph 1 above in the following Funds other than the Fund: The Market Street Fund, Strong Opportunity Fund II, Inc., Strong Variable Insurance Funds, Inc., American Century Investment Management, Inc., Neuberger & Berman Advisers Managers Trust, J. P. Morgan Series Trust II and Goldman Sachs Variable Insurance Trust. IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment No. 3 to the Participation Agreement to be executed in its name and on its behalf by its duly authorized representative and its seal to be affixed hereto as of the date specified below. NATIONAL LIFE INSURANCE COMPANY by ----------------------------- Name: Title: VARIABLE INSURANCE PRODUCTS FUND by ----------------------------- Name: Title: FIDELITY DISTRIBUTORS CORPORATION by ----------------------------- Name: Title: EX-1.A.8.C 14 PARTICIPATION AGREEMENT 1 EXHIBIT 1 A 8(c) PARTICIPATION AGREEMENT THIS AGREEMENT, is made as of ___________ __, 1998, by and among National Life Insurance Company ("Company"), on its own behalf and on behalf of ____________________________________ Separate Account ___, a segregated asset account of the Company ("Account"), Strong Variable Insurance Funds, Inc. ("Strong Variable") on behalf of the Portfolios of Strong Variable listed on the attached Exhibit A as such Exhibit may be amended from time to time (the "Designated Portfolios"), Strong Opportunity Fund II, Inc. ("Opportunity Fund II"), Strong Capital Management, Inc. (the "Adviser"), the investment adviser and transfer agent for the Opportunity Fund II and Strong Variable, and Strong Funds Distributors, Inc. ("Distributors"), the distributor for Strong Variable and the Opportunity Fund II (each, a "Party" and collectively, the "Parties"). PRELIMINARY STATEMENTS A. Beneficial interests in Strong Variable are divided into several series of shares, each representing the interest in a particular managed portfolio of securities and other assets (each, a "Portfolio"). B. To the extent permitted by applicable insurance laws and regulations, the Company intends to purchase shares of Opportunity Fund II and the Designated Portfolios ("Fund" or "Funds" shall be deemed to refer to each Designated Portfolio and to the Opportunity Fund II to the extent the context requires), on behalf of the Account to fund the variable annuity contracts that use the Funds as an underlying investment medium (the "Contracts"). C. The Company, Adviser and Distributors desire to facilitate the purchase and redemption of shares of the Funds by the Company for the Account through one account in each Fund (each an "Omnibus Account") to be maintained of record by the Company, subject to the terms and conditions of this Agreement. D. The Company desires to provide administrative services and functions (the "Services") for purchasers of Contracts ("Owners") who are beneficial owners of shares of the Funds on the terms and conditions set forth in this Agreement. AGREEMENTS The parties to this Agreement agree as follows: 1. Performance of Services. Company agrees to perform the administrative functions and services specified in Exhibit B attached to this Agreement with respect to the shares of the Funds beneficially owned by the Owners and included in the Account. 2 2. The Omnibus Accounts. 2.1 Each Omnibus Account will be opened based upon the information contained in Exhibit C to this Agreement. In connection with each Omnibus Account, Company represents and warrants that it is authorized to act on behalf of each Owner effecting transactions in the Omnibus Account and that the information specified on Exhibit C to this Agreement is correct. 2.2 Each Fund shall designate each Omnibus Account with an account number. These account numbers will be the means of identification when the Parties are transacting in the Omnibus Accounts. The assets in the Accounts are segregated from the Company's own assets. The Adviser agrees to cause the Omnibus Accounts to be kept open on each Fund's books, as applicable, regardless of a lack of activity or small position size except to the extent the Company takes specific action to close an Omnibus Account or to the extent a Fund's prospectus reserves the right to close accounts which are inactive or of a small position size. In the latter two cases, the Adviser will give prior notice to the Company before closing an Omnibus Account. 2.3 The Company agrees to provide Adviser such information as Adviser or Distributors may reasonably request concerning Owners as may be necessary or advisable to enable Company and Distributors to comply with applicable laws, including state "Blue Sky" laws relating to the sales of shares of the Funds to the Accounts. 3. Fund Shares Transactions. 3.1 In General. Shares of the Funds shall be sold on behalf of the Funds by Distributors and purchased by Company for the Account and, indirectly for the appropriate subaccount thereof at the net asset value next computed after receipt by Distributors of each order of the Company or its designee, in accordance with the provisions of this Agreement, the then current prospectuses of the Funds, and the Contracts. Company may purchase shares of the Funds for its own account subject to (a) receipt of prior written approval by Distributors; and (b) such purchases being in accordance with the then current prospectuses of the Fund and the Contracts. The Board of Directors of each Fund ("Directors") may refuse to sell shares of the applicable Fund to any person, or suspend or terminate the offering of shares of the Fund if such action is required by law or by regulatory authorities having jurisdiction. Company agrees to purchase and redeem the shares of the Funds in accordance with the provisions of this Agreement, of the Contracts and of the then current prospectuses for the Contracts and Funds. Except as necessary to implement transactions initiated by Owners, or as otherwise permitted by state or federal laws or regulations, Company shall not redeem shares of Funds attributable to the Contracts. 3.2 Purchase and Redemption Orders. On each day that a Fund is open for business (a "Business Day"), the Company shall aggregate and calculate the net purchase or redemption order it receives for the Account from the Owners for shares of the Fund that it received prior to 2 3 the close of trading on the New York Stock Exchange (the "NYSE") (i.e. 3:00 p.m., Central time, unless the NYSE closes at an earlier time in which case such earlier time shall apply) and communicate to Distributors, by telephone or facsimile (or by such other means as the Parties to this Agreement may agree to in writing), the net aggregate purchase or redemption order (if any) for the Omnibus Account for such Business Day (such Business Day is sometimes referred to herein as the "Trade Date"). The Company will communicate such orders to Distributors prior to 9:00 a.m., Central time, on the next Business Day following the Trade Date. All trades communicated to Distributors by the foregoing deadline shall be treated by Distributors as if they were received by Distributors prior to the close of trading on the Trade Date. 3.3 Settlement of Transactions. (a) Purchases. Company will wire, or arrange for the wire of, the purchase price of each purchase order to the custodian for the Fund in accordance with written instructions provided by Distributors to the Company so that either (1) such funds are received by the custodian for the Fund prior to 10:30 a.m., Central time, on the next Business Day following the Trade Date, or (2) Distributors is provided with a Federal Funds wire system reference number prior to such 10:30 a.m. deadline evidencing the entry of the wire transfer of the purchase price to the applicable custodian into the Federal Funds wire system prior to such time. Company agrees that if it fails to provide funds to the Fund's custodian by the close of business on the next Business Day following the Trade Date, then, at the option of Distributors, (i) the transaction may be canceled, or (ii) the transaction may be processed at the next-determined net asset value for the applicable Fund after purchase order funds are received. In such event, the Company shall indemnify and hold harmless Distributors, Adviser and the Funds from any liabilities, costs and damages either may suffer as a result of such failure. (b) Redemptions. The Adviser will use its best efforts to cause to be transmitted to such custodial account as Company shall direct in writing, the proceeds of all redemption orders placed by Company by 9:00 a.m., Central time, on the Business Day immediately following the Trade Date, by wire transfer on that Business Day. Should Adviser need to extend the settlement on a trade, it will contact Company to discuss the extension. For purposes of determining the length of settlement, Adviser agrees to treat the Account no less favorably than other shareholders of the Funds. Each wire transfer of redemption proceeds shall indicate, on the Federal Funds wire system, the amount thereof attributable to each Fund; provided, however, that if the number of entries would be too great to be transmitted through the Federal Funds wire system, the Adviser shall, on the day the wire is sent, fax such entries to Company or if possible, send via direct or indirect systems access until otherwise directed by the Company in writing. (c) Authorized Persons. The following persons are each duly authorized to act on behalf of the Company under this Agreement. The Funds, Adviser and Distributors are entitled to conclusively rely on verbal or written instructions that Adviser or Distributors reasonably believes were originated by any one of said persons. The Company shall inform 3 4 Adviser and Distributors of additions to or subtractions from this list of authorized persons pursuant to Section 13, hereof: ---------------------------------------------- ---------------------------------------------- ---------------------------------------------- 3.4 Book Entry Only. Issuance and transfer of shares of a Fund will be by book entry only. Stock certificates will not be issued to the Company or the Account. Shares of the Funds ordered from Distributors will be recorded in the appropriate book entry title for the Account. 3.5 Distribution Information. The Adviser or Distributors shall provide the Company with all distribution announcement information as soon as it is announced by the Funds. The distribution information shall set forth, as applicable, ex-dates, record date, payable date, distribution rate per share, record date share balances, cash and reinvested payment amounts and all other information reasonably requested by the Company. Where possible, the Adviser or Distributors shall provide the Company with direct or indirect systems access to the Adviser's systems for obtaining such distribution information. 3.6 Reinvestment. All dividends and capital gains distributions will be automatically reinvested on the payable date in additional shares of the applicable Fund at net asset value in accordance with each Fund's then current prospectus. 3.7 Pricing Information. Distributors shall use its best efforts to furnish to the Company prior to 6:00 p.m., Central time, on each Business Day each Fund's closing net asset value for that day, and for those Funds for which such information is calculated, the daily accrual for interest rate factor (mil rate). Such information shall be communicated via fax, or indirect or direct systems access acceptable to the Company. 3.8 Price Errors. (a) Notification. If an adjustment is required in accordance with a Fund's then current policies on reimbursement ("Fund Reimbursement Policies") to correct any error in the computation of the net asset value of Fund shares ("Price Error"), Adviser or Distributors shall notify Company as soon as practicable after discovering the Price Error. Notice may be made via facsimile or via direct or indirect systems access and shall state the incorrect price, the correct price and, to the extent communicated to the Fund's shareholders, the reason for the price change. (b) Underpayments. If a Price Error causes an Account to receive less than the amount to which it otherwise would have been entitled, Adviser shall make all necessary adjustments (subject to the Fund Reimbursement Policies) so that the Account receives the amount to which it would have been entitled 4 5 (c) Overpayments. If a Price Error causes an Account to receive more than the amount to which it otherwise would have been entitled, Company, when requested by Adviser (in accordance with the Fund Reimbursement Policies), will use its best efforts to collect such excess amounts from the applicable Owners. (d) Fund Reimbursement Policies. Adviser agrees to treat Company's customers no less favorably than Adviser treats its retail shareholders in applying the provisions of paragraphs 3.8(b) and 3.8(c). (e) Expenses. Adviser shall reimburse Company for all reasonable and necessary out-of-pocket expenses incurred by Company for payroll overtime, stationery and postage in adjusting Owner accounts affected by a Price Error described in paragraphs 3.8(b) and 3.8(c). Company shall use its best efforts to mitigate all expenses which may be reimbursable under this section 3.8(e) and agrees that payroll overtime shall not include any time spent programming computers or otherwise customizing Company's recordkeeping system. Upon requesting reimbursement, Company shall present an itemized bill to Adviser detailing the costs for which it seeks reimbursement. 3.9 Agency. Distributors hereby appoints the Company as its agent for the limited purpose of accepting purchase and redemption instructions from the Owners for the purchase and redemption of shares of the Funds by the Company on behalf of Account. 3.10 Quarterly Reports. Adviser agrees to provide Company a statement of Fund assets as soon as practicable and in any event within 30 days after the end of each fiscal quarter, and a statement certifying the compliance by the Funds during that fiscal quarter with the diversification requirements and qualification as a regulated investment company. In the event of a breach of Section 6.4(a), Adviser will take all reasonable steps (a) to notify Company of such breach and (b) to adequately diversify the Fund so as to achieve compliance within the grace period afforded by Treasury Regulation 1.817-5. 4. Proxy Solicitations and Voting. The Company shall, at its expense, distribute or arrange for the distribution of all proxy materials furnished by the Funds to the Account and shall: (a) solicit voting instructions from Owners; (b) vote the Fund shares in accordance with instructions received from Owners; and (c) vote the Fund shares for which no instructions have been received, as well as shares attributable to it, in the same proportion as Fund shares for which instructions have been received from Owners, so long as and to the extent that the Securities and Exchange Commission (the "SEC") continues to interpret the Investment Company Act of 1940, as amended (the "1940 Act"), to require pass-through voting privileges for various contract owners. The Company and its agents will not recommend action in connection with, or oppose or interfere with, the solicitation of proxies for the Fund shares held for Owners. 5 6 5. Customer Communications. 5.1 Prospectuses. The Adviser or Distributors, at its expense, will provide the Company with as many copies of the current prospectus for the Funds as the Company may reasonably request for distribution, at the Company's expense, to existing or prospective Owners. 5.2 Shareholder Materials. The Adviser and Distributors shall, as applicable, provide in bulk to the Company or its authorized representative, at a single address and at no expense to the Company, the following shareholder communications materials prepared for circulation to Owners in quantities requested by the Company which are sufficient to allow mailing thereof by the Company and, to the extent required by applicable law, to all Owners: proxy or information statements, annual reports, semi-annual reports, and all initial and updated prospectuses, supplements and amendments thereof. None of the Funds, the Adviser or Distributors shall be responsible for the cost of distributing such materials to Owners. 6. Representations and Warranties. 6.1 The Company represents and warrants that: (a) It is an insurance company duly organized and in good standing under the laws of the State of Vermont and that it has legally and validly established the Account prior to any issuance or sale thereof as a segregated asset account and that the Company has and will maintain the capacity to issue all Contracts that may be sold; and that it is and will remain duly registered, licensed, qualified and in good standing to sell the Contracts in all the jurisdictions in which such Contracts are to be offered or sold; (b) It is and will remain duly registered and licensed in all material respects under all applicable federal and state securities and insurance laws and shall perform its obligations under this Agreement in compliance in all material respects with any applicable state and federal laws; (c) The Contracts are and will be registered under the Securities Act of 1933, as amended (the "1933 Act"), and are and will be registered and qualified for sale in the states where so required; and the Account is and will be registered as a unit investment trust in accordance with the 1940 Act and shall be a segregated investment account for the Contracts; (d) The Contracts are currently treated as annuity contracts, under applicable provisions of the Internal Revenue Code of 1986, as amended (the "Code"), and the Company will maintain such treatment and will notify Adviser, Distributors and Funds promptly upon having a reasonable basis for believing that the Contracts have ceased to be so treated or that they might not be so treated in the future; 6 7 (e) It is registered as a transfer agent pursuant to Section 17A of the Securities Exchange Act of 1934, as amended (the "1934 Act"), or is not required to be registered as such; (f) The arrangements provided for in this Agreement will be disclosed to the Owners; and (g) It is registered as a broker-dealer under the 1934 Act and any applicable state securities laws, including as a result of entering into and performing the Services set forth in this Agreement, or is not required to be registered as such. 6.2 The Funds each represent and warrant that Fund shares sold pursuant to this Agreement are and will be registered under the 1933 Act and the Fund is and will be registered as a registered investment company under the Investment Company Act of 1940, in each case, except to the extent the Company is so notified in writing; 6.3 Distributors represents and warrants that: (a) It is and will be a member in good standing of the National Association of Securities Dealers, Inc. ("NASD") and is and will be registered as a broker-dealer with the SEC; and (b) It will sell and distribute Fund shares in accordance with all applicable state and federal laws and regulations. 6.4 Adviser represents and warrants that: (a) It will cause each Fund to invest money from the Contracts in such a manner as to ensure that the Contracts will be treated as variable annuity contracts under the Code and the regulations issued thereunder, and that each Fund will comply with Section 817(h) of the Code as amended from time to time and with all applicable regulations promulgated thereunder; and (b) It is and will remain duly registered and licensed in all material respects under all applicable federal and state securities and insurance laws and shall perform its obligations under this Agreement in compliance in all material respects with any applicable state and federal laws. 6.5 Each of the Parties to this Agreement represents and warrants to the others that: (a) It has full power and authority under applicable law, and has taken all action necessary, to enter into and perform this Agreement and the person executing this Agreement on its behalf is duly authorized and empowered to execute and deliver this Agreement; 7 8 (b) This Agreement constitutes its legal, valid and binding obligation, enforceable against it in accordance with its terms and it shall comply in all material respects with all laws, rules and regulations applicable to it by virtue of entering into this Agreement; (c) No consent or authorization of, filing with, or other act by or in respect of any governmental authority, is required in connection with the execution, delivery, performance, validity or enforceability of this Agreement; (d) The execution, performance and delivery of this Agreement will not result in it violating any applicable law or breaching or otherwise impairing any of its contractual obligations; (e) Each Party to this Agreement is entitled to rely on any written records or instructions provided to it by another Party; and (f) Its directors, officers, employees, and investment advisers, and other individuals/entities dealing with the money or securities of a Fund are and shall continue to be at all times covered by a blanket fidelity bond or similar coverage for the benefit of the Fund in an amount not less than the amount required by the applicable rules of the NASD and the federal securities laws, which bond shall include coverage for larceny and embezzlement and shall be issued by a reputable bonding company. 7. Sales Material and Information 7.1 NASD Filings. The Company shall promptly inform Distributors as to the status of all sales literature filings pertaining to the Funds and shall promptly notify Distributors of all approvals or disapprovals of sales literature filings with the NASD. For purposes of this Section 7, the phrase "sales literature or other promotional material" shall be construed in accordance with all applicable securities laws and regulations. 7.2 Company Representations. The Company shall not make any material representations concerning the Adviser, the Distributors, or a Fund other than the information or representations contained in: (a) a registration statement of the Fund or prospectus of a Fund, as amended or supplemented from time to time; (b) published reports or statements of the Funds which are in the public domain or are approved by Distributors or the Funds; or (c) sales literature or other promotional material of the Funds. 7.3 Adviser, Distributors and Fund Representations. None of Adviser, Distributors or any Fund shall make any material representations concerning the Company other than the information or representations contained in: (a) a registration statement or prospectus for the Contracts, as amended or supplemented from time to time; (b) published reports or statements of 8 9 the Contracts or the Account which are in the public domain or are approved by the Company; or (c) sales literature or other promotional material of the Company. 7.4 Trademarks, etc. Except to the extent required by applicable law, no Party shall use any other Party's names, logos, trademarks or service marks, whether registered or unregistered, without the prior consent of such Party. 7.5 Information From Distributors and Adviser. Upon request, Distributors or Adviser will provide to Company at least one complete copy of all registration statements, prospectuses, Statements of Additional Information, reports, proxy statements, solicitations for voting instructions, applications for exemptions, requests for no action letters, and all amendments to any of the above, that relate to the Funds, in final form as filed with the SEC, NASD and other regulatory authorities. 7.6 Information From Company. Company will provide to Distributors at least one complete copy of all registration statements, prospectuses, Statements of Additional Information, reports, solicitations for voting instructions, sales literature and other promotional materials, applications for exemptions, requests for no action letters and all amendments to any of the above, that relate to a Fund and the Contracts, in final form as filed with the SEC, NASD and other regulatory authorities. 7.7 Review of Marketing Materials. If so requested by Company, the Adviser or Distributors will use its best efforts to review sales literature and other marketing materials prepared by Company which relate to the Funds, the Adviser or Distributors for factual accuracy as to such entities, provided that the Adviser or Distributors is provided at least five (5) Business Days to review such materials. Neither the Adviser nor Distributors will review such materials for compliance with applicable laws. Company shall provide the Adviser with copies of all sales literature and other marketing materials which refer to the Funds, the Adviser or Distributors within five (5) Business Days after their first use, regardless of whether the Adviser or Distributors has previously reviewed such materials. If so requested by the Adviser or Distributors, Company shall cease to use any sales literature or marketing materials which refer to the Funds, the Adviser or Distributors that the Adviser or Distributors determines to be inaccurate, misleading or otherwise unacceptable. 8. Fees and Expenses. 8.1 Fund Registration Expenses. Fund or Distributors shall bear the cost of registration and qualification of Fund shares; preparation and filing of Fund prospectuses and registration statements, proxy materials and reports; preparation of all other statements and notices relating to the Fund or Distributors required by any federal or state law; payment of all applicable fees, including, without limitation, any fees due under Rule 24f-2 of the 1940 Act, relating to a Fund; and all taxes on the issuance or transfer of Fund shares on the Fund's records. 9 10 8.2 Contract Registration Expenses. The Company shall bear the expenses for the costs of preparation and filing of the Company's prospectus and registration statement with respect to the Contracts; preparation of all other statements and notices relating to the Account or the Contracts required by any federal or state law; expenses for the solicitation and sale of the Contracts including all costs of printing and distributing all copies of advertisements, prospectuses, Statements of Additional Information, proxy materials, and reports to Owners or potential purchasers of the Contracts as required by applicable state and federal law; payment of all applicable fees relating to the Contracts; all costs of drafting, filing and obtaining approvals of the Contracts in the various states under applicable insurance laws; filing of annual reports on form N-SAR, and all other costs associated with ongoing compliance with all such laws and its obligations under this Agreement. 9. Indemnification. 9.1 Indemnification By Company. (a) Company agrees to indemnify and hold harmless the Funds, Adviser and Distributors and each of their directors, officers, employees and agents, and each person, if any, who controls any of them within the meaning of Section 15 of the 1933 Act (each, an "Indemnified Party" and collectively, the "Indemnified Parties" for purposes of this Section 9.1) from and against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of Company), and expenses including reasonable legal fees and expenses, (collectively, hereinafter "Losses"), to which the Indemnified Parties may become subject under any statute, regulation, at common law or otherwise insofar as such Losses: (i) arise out of or are based upon any untrue statements or alleged untrue statements of any material fact contained in the registration statement, prospectus or sales literature for the Contracts or contained in the Contracts (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that this paragraph 9.1(a) shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with written information furnished to Company by or on behalf of a Fund, Distributors or Adviser for use in the registration statement or prospectus for the Contracts or in the Contracts (or any amendment or supplement) or otherwise for use in connection with the sale of the Contracts or Fund shares; or (ii) arise out of, or as a result of, statements or representations or wrongful conduct of Company or its agents, with respect to the sale or distribution of the Contracts or Fund shares; or (iii) arise out of any untrue statement or alleged untrue statement of a material fact contained in a registration statement, prospectus, or sales literature covering a Fund 10 11 or any amendment thereof or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, if such a statement or omission was made in reliance upon written information furnished to a Fund, Adviser or Distributors by or on behalf of Company; or (iv) arise out of, or as a result of, any failure by Company or persons under its control to provide the Services and furnish the materials contemplated under the terms of this Agreement; or (v) arise out of, or result from, any material breach of any representation or warranty made by Company or persons under its control in this Agreement or arise out of or result from any other material breach of this Agreement by Company or persons under its control; as limited by and in accordance with the provisions of Sections 9.1(b) and 9.1(c) hereof; or (vi) arise out of, or as a result of, adherence by Adviser or Distributors to instructions that it reasonably believes were originated by persons specified in Section 3.3(c), hereof. This indemnification provision is in addition to any liability which the Company may otherwise have. (b) Company shall not be liable under this indemnification provision with respect to any Losses to which an Indemnified Party would otherwise be subject by reason of such Indemnified Party's willful misfeasance, bad faith, or gross negligence in the performance of such Indemnified Party's duties or by reason of such Indemnified Party's reckless disregard of obligations or duties under this Agreement. (c) Company shall not be liable under this indemnification provision with respect to any claim made against an Indemnified Party unless such Indemnified Party shall have notified Company in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon such Indemnified Party (or after such Indemnified Party shall have received notice of such service on any designated agent), but failure to notify Company of any such claim shall not relieve Company from any liability which it may have to the Indemnified Party otherwise than on account of this indemnification provision. In case any such action is brought against any Indemnified Party, and it notified the indemnifying Party of the commencement thereof, the indemnifying Party will be entitled to participate therein and, to the extent that it may wish, assume the defense thereof, with counsel satisfactory to such Indemnified Party. After notice from the indemnifying Party of its intention to assume the defense of an action, the Indemnified Party shall bear the expenses of any additional counsel obtained by it, and the indemnifying Party shall not be liable to such Indemnified Party under this Section for any legal or other expenses subsequently incurred by such Indemnified Party in connection with the defense thereof 11 12 other than reasonable costs of investigation. The Indemnified Party may not settle any action without the written consent of the indemnifying Party. The indemnifying Party may not settle any action without the written consent of the Indemnified Party unless such settlement completely and finally releases the Indemnified Party from any and all liability. In either event, consent shall not be unreasonably withheld. (d) The Indemnified Parties will promptly notify Company of the commencement of any litigation or proceedings against the Indemnified Parties in connection with the issuance or sale of Fund shares or the Contracts or the operation of a Fund. 9.2 Indemnification by Adviser and Distributors. (a) Adviser and Distributors agrees to indemnify and hold harmless Company and each of its directors, officers, employees and agents and each person, if any, who controls Company within the meaning of Section 15 of the 1933 Act (each, an "Indemnified Party" and collectively, the "Indemnified Parties" for purposes of this Section 9.2) from and against any and all Losses to which the Indemnified Parties may become subject under any statute, regulation, at common law or otherwise, insofar as such Losses: (i) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement or prospectus or sales literature of a Fund (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that this Section 9.2(a) shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with written information furnished to a Fund, Adviser or Distributors by or on behalf of Company for use in the registration statement or prospectus for a Fund or in sales literature (or any amendment or supplement) or otherwise for use in connection with the sale of the Contracts or Fund shares; or (ii) arise out of, or as a result of, statements or representations or wrongful conduct of Adviser or Distributors or persons under its control, with respect to the sale or distribution of Fund shares; or (iii) arise out of any untrue statement or alleged untrue statement of a material fact contained in a registration statement, prospectus, or sales literature covering the Contracts, or any amendment thereof or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, if such statement or omission was made in reliance upon written information furnished to Company by or on behalf of Adviser or Distributors; or 12 13 (iv) arise out of, or as a result of, any failure by Adviser or Distributors or persons under its control to provide the services and furnish the materials contemplated under the terms of this Agreement; or (v) arise out of or result from any material breach of any representation or warranty made by Adviser or Distributors or persons under its control in this Agreement or arise out of or result from any other material breach of this Agreement by Adviser or Distributors or persons under its control; as limited by and in accordance with the provisions of Sections 9.2(b) and 9.2(c) hereof. This indemnification provision is in addition to any liability which Adviser and Distributors may otherwise have. (b) Adviser and Distributors shall not be liable under this indemnification provision with respect to any Losses to which an Indemnified Party would otherwise be subject by reason of such Indemnified Party's willful misfeasance, bad faith, or gross negligence in the performance of such Indemnified Party's duties or by reason of such Indemnified Party's reckless disregard of obligations and duties under this Agreement. (c) Adviser and Distributors shall not be liable under this indemnification provision with respect to any claim made against an Indemnified Party unless such Indemnified Party shall have notified Adviser and Distributors in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon such Indemnified Party (or after such Indemnified Party shall have received notice of such service on any designated agent), but failure to notify Adviser and Distributors of any such claim shall not relieve Adviser and Distributors from any liability which it may have to the Indemnified Party otherwise than on account of this indemnification provision. In case any such action is brought against any Indemnified Party, and it notified the indemnifying Party of the commencement thereof, the indemnifying Party will be entitled to participate therein and, to the extent that it may wish, assume the defense thereof, with counsel satisfactory to such Indemnified Party. After notice from the indemnifying Party of its intention to assume the defense of an action, the Indemnified Party shall bear the expenses of any additional counsel obtained by it, and the indemnifying Party shall not be liable to such Indemnified Party under this Section for any legal or other expenses subsequently incurred by such Indemnified Party in connection with the defense thereof other than reasonable costs of investigation. The Indemnified Party may not settle any action without the written consent of the indemnifying Party. The indemnifying Party may not settle any action without the written consent of the Indemnified Party unless such settlement completely and finally releases the Indemnified Party from any and all liability. In either event, consent shall not be unreasonably withheld. (d) The Indemnified Parties will promptly notify Adviser and Distributors of the commencement of any litigation or proceedings against the Indemnified Parties in connection with the issuance or sale of the Contracts or the operation of the Account. 13 14 10. Potential Conflicts. 10.1 Monitoring by Directors for Conflicts of Interest. The Directors of each Fund will monitor the Fund for any potential or existing material irreconcilable conflict of interest between the interests of the contract owners of all separate accounts investing in the Fund, including such conflict of interest with any other separate account of any other insurance company investing in the Fund. An irreconcilable material conflict may arise for a variety of reasons, including: (a) an action by any state insurance regulatory authority; (b) a change in applicable federal or state insurance, tax, or securities laws or regulations, or a public ruling, private letter ruling, no-action or interpretive letter, or any similar action by insurance, tax or securities regulatory authorities; (c) an administrative or judicial decision in any relevant proceeding; (d) the manner in which the investments of the Fund are being managed; (e) a difference in voting instructions given by variable annuity contract owners and variable life insurance contract owners or by contract owners of different life insurance companies utilizing the Fund; or (f) a decision by Company to disregard the voting instructions of Owners. The Directors shall promptly inform the Company, in writing, if they determine that an irreconcilable material conflict exists and the implications thereof. 10.2 Monitoring by the Company for Conflicts of Interest. The Company will promptly notify the Directors, in writing, of any potential or existing material irreconcilable conflicts of interest, as described in Section 10.1 above, of which it is aware. The Company will assist the Directors in carrying out their responsibilities under any applicable provisions of the federal securities laws and any exemptive orders granted by the SEC ("Exemptive Order"), by providing the Directors, in a timely manner, with all information reasonably necessary for the Directors to consider any issues raised. This includes, but is not limited to, an obligation by the Company to inform the Directors whenever Owner voting instructions are disregarded. 10.3 Remedies. If it is determined by a majority of the Directors, or a majority of disinterested Directors, that a material irreconcilable conflict exists, as described in Section 10.1 above, the Company shall, at its own expense take whatever steps are necessary to remedy or eliminate the irreconcilable material conflict, up to and including, but not limited to: (a) withdrawing the assets allocable to some or all of the separate accounts from the applicable Fund and reinvesting such assets in a different investment medium, including (but not limited to) another fund managed by the Adviser, or submitting the question whether such segregation should be implemented to a vote of all affected Owners and, as appropriate, segregating the assets of any particular group that votes in favor of such segregation, or offering to the affected owners the option of making such a change; and (b) establishing a new registered management investment company or managed separate account. 10.4 Causes of Conflicts of Interest. 14 15 (a) State Insurance Regulators. If a material irreconcilable conflict arises because a particular state insurance regulator's decision applicable to the Company conflicts with the majority of other state regulators, then the Company will withdraw the affected Account's investment in the applicable Fund and terminate this Agreement with respect to such Account within the period of time permitted by such decision, but in no event later than six months after the Directors inform the Company in writing that it has determined that such decision has created an irreconcilable material conflict; provided, however, that such withdrawal and termination shall be limited to the extent required by the foregoing material irreconcilable conflict as determined by a majority of the disinterested Directors. Until the end of the foregoing period, the Distributors and Funds shall continue to accept and implement orders by the Company for the purchase (and redemption) of shares of the Fund to the extent such actions do not violate applicable law. (b) Disregard of Owner Voting. If a material irreconcilable conflict arises because of Company's decision to disregard Owner voting instructions and that decision represents a minority position or would preclude a majority vote, Company may be required, at the applicable Fund's election, to withdraw the Account's investment in said Fund. No charge or penalty will be imposed against the Account as a result of such withdrawal. 10.5 Limitations on Consequences. For purposes of Sections 10.3 through 10.5 of this Agreement, a majority of the disinterested Directors shall determine whether any proposed action adequately remedies any irreconcilable material conflict. In no event will a Fund, the Adviser or the Distributors be required to establish a new funding medium for any of the Contracts. The Company shall not be required by Section 10.3 to establish a new funding medium for the Contracts if an offer to do so has been declined by vote of a majority of Owners affected by the irreconcilable material conflict. In the event that the Directors determine that any proposed action does not adequately remedy any irreconcilable material conflict, then the Company will withdraw the Account's investment in the applicable Fund and terminate this Agreement as quickly as may be required to comply with applicable law, but in no event later than six (6) months after the Directors inform the Company in writing of the foregoing determination, provided, however, that such withdrawal and termination shall be limited to the extent required by any such material irreconcilable conflict. 10.6 Changes in Laws. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the Act or the rules promulgated thereunder with respect to mixed or shared funding (as defined in the Funds' Exemptive Order) on terms and conditions materially different from those contained in the Funds' Exemptive Order, then (a) the Funds and/or the Company, as appropriate, shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable; and (b) Sections 10.1, 10.2, 10.3 and 10.4 of this Agreement shall continue in effect only to the extent that terms and conditions substantially identical to such Sections are contained in such Rule(s) as so amended or adopted. 15 16 11. Maintenance of Records. (a) Recordkeeping and other administrative services to Owners shall be the responsibility of the Company and shall not be the responsibility of the Funds, Adviser or Distributors. None of the Funds, the Adviser or Distributors shall maintain separate accounts or records for Owners. Company shall maintain and preserve all records as required by law to be maintained and preserved in connection with providing the Services and in making shares of the Funds available to the Account. (b) Upon the request of the Adviser or Distributors, the Company shall provide copies of all the historical records relating to transactions between the Funds and the Account, written communications regarding the Funds to or from the Account and other materials, in each case (1) as are maintained by the Company in the ordinary course of its business and in compliance with applicable law, and (2) as may reasonably be requested to enable the Adviser and Distributors, or its representatives, including without limitation its auditors or legal counsel, to (A) monitor and review the Services, (B) comply with any request of a governmental body or self-regulatory organization or the Owners, (C) verify compliance by the Company with the terms of this Agreement, (D) make required regulatory reports, (E) verify to Advisor's reasonable satisfaction that all purchase and redemption orders aggregated for each Trade Date were received by Company prior to the close of trading on the NYSE on such Trade Date, or (F) perform general customer supervision. The Company agrees that it will permit the Adviser and Distributors or such representatives of either to have reasonable access to its personnel and records in order to facilitate the monitoring of the quality of the Services. (c) Upon the request of the Company, the Adviser and Distributors shall provide copies of all the historical records relating to transactions between the Funds and the Account, written communications regarding the Funds to or from the Account and other materials, in each case (1) as are maintained by the Adviser and Distributors, as the case may be, in the ordinary course of its business and in compliance with applicable law, and (2) as may reasonably be requested to enable the Company, or its representatives, including without limitation its auditors or legal counsel, to (A) comply with any request of a governmental body or self-regulatory organization or the Owners, (B) verify compliance by the Adviser and Distributors with the terms of this Agreement, (C) make required regulatory reports, or (D) perform general customer supervision. (d) The Parties agree to cooperate in good faith in providing records to one another pursuant to this Section 11. 12. Term and Termination. 12.1 Term and Termination Without Cause. The initial term of this Agreement shall be for a period of one year from the date hereof. Unless terminated as to any Fund upon not less than thirty (30) days prior written notice to the other Parties, this Agreement shall thereafter 16 17 automatically renew for the remaining Funds from year to year, subject to termination at the next applicable renewal date upon not less than 30 days prior written notice. Any Party may terminate this Agreement as to any Fund following the initial term upon six (6) months advance written notice to the other Parties. 12.2 Termination by Fund, Distributors or Adviser for Cause. Adviser, Fund or Distributors may terminate this Agreement by written notice to the Company, if any of them shall determine, in its sole judgment exercised in good faith, that (a) the Company has suffered a material adverse change in its business, operations, financial condition or prospects since the date of this Agreement or is the subject of material adverse publicity; or (b) any of the Contracts are not registered, issued or sold in accordance with applicable state and federal law or such law precludes the use of Fund shares as the underlying investment media of the Contracts issued or to be issued by the Company. 12.3 Termination by Company for Cause. Company may terminate this Agreement by written notice to the Adviser, Funds and Distributors in the event that (a) any of the Fund shares are not registered, issued or sold in accordance with applicable state or federal law or such law precludes the use of such shares as the underlying investment media of the Contracts issued or to be issued by the Company; (b) the Funds cease to qualify as Regulated Investment Companies under Subchapter M of the Code or under any successor or similar provision, or if the Company reasonably believes that the Funds may fail to so qualify; or (c) a Fund fails to meet the diversification requirements specified in Section 6.4(a). 12.4 Termination by any Party. This Agreement may be terminated as to any Fund by any Party at any time (a) by giving 30 days' written notice to the other Parties in the event of a material breach of this Agreement by the other Party or Parties that is not cured during such 30-day period, and (b) (i) upon institution of formal proceedings relating to the legality of the terms and conditions of this Agreement against the Account, Company, Funds, Adviser or Distributors by the NASD, the SEC or any other regulatory body provided that the terminating Party has a reasonable belief that the institution of formal proceedings is not without foundation and will have a material adverse impact on the terminating Party, (ii) by the non-assigning Party upon the assignment of this Agreement in contravention of the terms hereof, or (iii) as is required by law, order or instruction by a court of competent jurisdiction or a regulatory body or self-regulatory organization with jurisdiction over the terminating Party. 12.5 Limit on Termination. Notwithstanding the termination of this Agreement with respect to any or all Funds, for so long as any Contracts remain outstanding and invested in a Fund each Party to this Agreement shall continue to perform such of its duties under this Agreement as are necessary to ensure the continued tax deferred status thereof and the payment of benefits thereunder, except to the extent proscribed by law, the SEC or other regulatory body. Notwithstanding the foregoing, nothing in this Section 12.5 obligates a Fund to continue in existence. In the event that any Fund elects to terminate its operations, the Company shall, as 17 18 soon as practicable, obtain an exemptive order or order of substitution from the SEC to remove all Owners from the applicable Fund. 13. Notices. All notices under this Agreement shall be given in writing (and shall be deemed to have been duly given upon receipt) by delivery in person, by facsimile, by registered or certified mail 18 19 or by overnight delivery (postage prepaid, return receipt requested) to the respective Parties as follows: If to Strong Variable: Strong Variable Insurance Funds, Inc. 100 Heritage Reserve Milwaukee, WI 53051 Attention: General Counsel Facsimile No.: 414/359-3948 If to Opportunity Fund II: Strong Opportunity Fund II, Inc. 100 Heritage Reserve Milwaukee, WI 53051 Attention: General Counsel Facsimile No.: 414/359-3948 If to Adviser: Strong Capital Management, Inc. 100 Heritage Reserve Milwaukee, WI 53051 Attention: General Counsel Facsimile No.: 414/359-3948 If to Distributors: Strong Funds Distributors, Inc. 100 Heritage Reserve Milwaukee, WI 53051 Attention: General Counsel Facsimile No.: 414/359-3948 If to Company: National Life Insurance Company One National Life Drive Montpelier, VT 05604 Attention: Russell Morgan Facsimile No.: (802) 229-3743 19 20 14. Miscellaneous. 14.1. Captions. The captions in this Agreement are included for convenience of reference only and in no way affect the construction or effect of any provisions hereof. 14.2. Enforceability. If any portion of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Agreement shall not be affected thereby. 14.3. Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which taken together shall constitute one and the same instrument. 14.4. Remedies not Exclusive. The rights, remedies and obligations contained in this Agreement are cumulative and are in addition to any and all rights, remedies and obligations, at law or in equity, which the Parties to this Agreement are entitled to under state and federal laws. 14.5. Confidentiality. Subject to the requirements of legal process and regulatory authority, the Funds and Distributors shall treat as confidential the names and addresses of the owners of the Contracts and all information reasonably identified as confidential in writing by the Company to this Agreement and, except as permitted by this Agreement, shall not disclose, disseminate or utilize such names and addresses and other confidential information without the express written consent of the Company until such time as it may come into the public domain. 14.6. Governing Law. This Agreement shall be governed by and interpreted in accordance with the internal laws of the State of Wisconsin applicable to agreements fully executed and to be performed therein; exclusive of conflicts of laws. 14.7. Survivability. Sections 6, 7.2, 7.3, 7.4, 9, 11 and 12.5 hereof shall survive termination of this Agreement. In addition, all provisions of this Agreement shall survive termination of this Agreement in the event that any Contracts are invested in a Fund at the time the termination becomes effective and shall survive for so long as such Contracts remain so invested. 14.8. Amendment and Waiver. No modification of any provision of this Agreement will be binding unless in writing and executed by the Party to be bound thereby. No waiver of any provision of this Agreement will be binding unless in writing and executed by the Party granting such waiver. Notwithstanding anything in this Agreement to the contrary, the Adviser may unilaterally amend Exhibit A to this Agreement to add additional series of Strong Variable Funds ("New Funds") as Funds by sending to the Company a written notice of the New Funds. Any valid waiver of a provision set forth herein shall not constitute a waiver of any other provision of this Agreement. In addition, any such waiver shall constitute a present waiver of such provision and shall not constitute a permanent future waiver of such provision. 20 21 14.9. Assignment. This Agreement shall be binding upon and shall inure to the benefit of the Parties and their respective successors and assigns; provided, however, that neither this Agreement nor any rights, privileges, duties or obligations of the Parties may be assigned by any Party without the written consent of the other Parties or as expressly contemplated by this Agreement. 14.10. Entire Agreement. This Agreement contains the full and complete understanding between the Parties with respect to the transactions covered and contemplated under this Agreement, and supersedes all prior agreements and understandings between the Parties relating to the subject matter hereof, whether oral or written, express or implied. 14.11. Relationship of Parties; No Joint Venture, Etc. Except for the limited purpose provided in Section 3.8, it is understood and agreed that the Company shall be acting as an independent contractor and not as an employee or agent of the Adviser, Distributors or the Funds, and none of the Parties shall hold itself out as an agent of any other Party with the authority to bind such Party. Neither the execution nor performance of this Agreement shall be deemed to create a partnership or joint venture by and among any of the Company, Funds, Adviser, or Distributors. 14.12. Expenses. All expenses incident to the performance by each Party of its respective duties under this Agreement shall be paid by that Party. 14.13. Time of Essence. Time shall be of the essence in this Agreement. 14.14. Non-Exclusivity. Each of the Parties acknowledges and agrees that this Agreement and the arrangements described herein are intended to be non-exclusive and that each of the Parties is free to enter into similar agreements and arrangements with other entities. 21 22 14.15. Operations of Funds. In no way shall the provisions of this Agreement limit the authority of the Funds, the Adviser or Distributors to take such action as it may deem appropriate or advisable in connection with all matters relating to the operation of such Fund and the sale of its shares. In no way shall the provisions of this Agreement limit the authority of the Company to take such action as it may deem appropriate or advisable in connection with all matters relating to the provision of Services or the shares of funds other than the Funds offered to the Account. NATIONAL LIFE INSURANCE COMPANY ------------------------------------------------------ By: Name: Title: STRONG CAPITAL MANAGEMENT, INC. ------------------------------------------------------ Donald G. Tyler, Senior Vice President Strong Intermediary Services STRONG FUNDS DISTRIBUTORS, INC. ------------------------------------------------------ Stephen J. Shenkenberg, Vice President STRONG VARIABLE INSURANCE FUNDS, INC. on behalf of the Designated Portfolios ------------------------------------------------------ Stephen J. Shenkenberg, Vice President STRONG OPPORTUNITY FUND II, INC. ------------------------------------------------------ Stephen J. Shenkenberg, Vice President 22 23 EXHIBIT A The following is a list of Designated Portfolios under this Agreement: Strong Growth Fund II 23 24 EXHIBIT B THE SERVICES Company shall perform the following services. Such services shall be the responsibility of the Company and shall not be the responsibility of the Funds, Adviser or Distributors. 1. Maintain separate records for each Account, which records shall reflect Fund shares ("Shares") purchased and redeemed, including the date and price for all transactions, Share balances, and the name and address of each Owner, including zip codes and tax identification numbers. 2. Credit contributions to individual Owner accounts and invest such contributions in shares of the Funds to the extent so designated by the Owner. 3. Disburse or credit to the Owners, and maintain records of, all proceeds of redemptions of Fund shares and all other distributions not reinvested in shares. 4. Prepare and transmit to the Owners, periodic account statements showing, among other things, the total number of Fund shares owned as of the statement closing date, purchases and redemptions of shares during the period covered by the statement, the net asset value of the Funds as of a recent date, and the dividends and other distributions paid during the statement period (whether paid in cash or reinvested in shares). 5. Transmit to the Owners, as required by applicable law, prospectuses, proxy materials, shareholder reports, and other information provided by the Adviser, Distributors or Funds and required to be sent to shareholders under the Federal securities laws. 6. Transmit to Distributors purchase orders and redemption requests placed by the Account and arrange for the transmission of funds to and from the Funds. 7. Transmit to Distributors such periodic reports as Distributors shall reasonably conclude is necessary to enable the Funds to comply with applicable Federal securities and state Blue Sky requirements. 8. Transmit to each Account confirmations of purchase orders and redemption requests placed by each Account. 9. Maintain all account balance information for the Account and daily and monthly purchase summaries expressed in shares and dollar amounts. 10. Prepare, transmit and file any Federal, state and local government reports and returns as required by law with respect to each account maintained on behalf of the Account. 24 25 11. Respond to Owners' inquiries regarding, among other things, share prices, account balances, dividend options, dividend amounts, and dividend payment dates. 25 26 EXHIBIT C ACCOUNT INFORMATION 1. Entity in whose name each Account will be opened: ---------------------------------------- Mailing address: ---------------------------------------- ---------------------------------------- ---------------------------------------- 2. Employer ID number (For internal usage only): ----------------------------------------
3. Authorized contact persons: The following persons are authorized on behalf of the Company to effect transactions in each Account: Name: Name: ----------------------------- ------------------------------ Phone: Phone: ----------------------------- ------------------------------
4. Will the Accounts have telephone exchange? Yes No ---- ---- (This option lets Company redeem shares by telephone and apply the proceeds for purchase in another identically registered Strong Funds account.) 5. Will the Accounts have telephone redemption? Yes No ---- ---- (This option lets Company sell shares by telephone. The proceeds will be wired to the bank account specified below.) 6. All dividends and capital gains will be reinvested automatically. 7. Instructions for all outgoing wire transfers: ------------------------------------------ ------------------------------------------ ------------------------------------------ ------------------------------------------
8. If this Account Information Form contains changed information, the undersigned authorized officer has executed this amended Account Information Form as of the date set forth below and acknowledges the agreements and representations set forth in the Participation Agreement between the Company, the Funds, Adviser and Distributors: 26 27 9. Company represents under penalty of perjury that: (a) The employer ID number on this form is correct; and (b) Company is not subject to backup withholding because (i) Company is exempt from backup withholding, (ii) Company has not been notified by the IRS that it is subject to backup withholding as a result of failure to report all interest or dividends, or (iii) the IRS has notified the Company that it is no longer subject to backup withholding. (Cross out (b) if Company has been notified by the IRS that it is subject to backup withholding because of underreporting interest or dividends on its tax return.) -------------------------------------- ---------------------------- (Signature of Authorized Officer) (Date)
Please Note: Distributors employs reasonable procedures to confirm that instructions communicated by telephone are genuine and may not be liable for losses due to unauthorized or fraudulent instructions. Please see the prospectus for the applicable Fund for more information on the telephone exchange and redemption privileges. For Strong Internal Use: This Account Information Form may be a copy. The original Account Information Form is attached to the Participation Agreement with the Adviser and retained in the legal department. 27 EX-1.A.8.D.3 15 FORM OF AMENDMENT 2 TO PARTICIPATION AGREEMENT 1 EXHIBIT 8(d)3 AMENDMENT NO. 2 TO PARTICIPATION AGREEMENT AMONG VARIABLE INSURANCE PRODUCTS FUND II, FIDELITY DISTRIBUTORS CORPORATION AND NATIONAL LIFE INSURANCE COMPANY (AS SUCCESSOR TO VERMONT LIFE INSURANCE COMPANY) THIS AMENDMENT NO. 2 to the Participation Agreement by and among Vermont Life Insurance Company (since merged into National Life Insurance Company), Variable Insurance Products Fund II (the "Fund"), and Fidelity Distributors Corporation (the "Underwriter"), dated April 1, 1990 as amended by Amendment No. 1 to Participation Agreement dated April 28, 1997 (the "Participation Agreement"), and is made and entered into this ____ day of _______, 1998. 1. Schedule A is hereby further amended to add the following contract forms: National Life Contract Form 7461(0398) (Last Survivor Flexible Premium Adjustable Benefit Variable Life Insurance) 2. Pursuant to section 1.6 hereof, the Fund and the Distributor hereby consents to the investment of net amounts available under the variable contracts listed in paragraph 1 above in the following Funds other than the Fund: The Market Street Fund, Strong Opportunity Fund II, Inc., Strong Variable Insurance Funds, Inc., American Century Investment Management, Inc., Neuberger & Berman Advisers Managers Trust, J. P. Morgan Series Trust II and Goldman Sachs Variable Insurance Trust. IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment No. 2 to the Participation Agreement to be executed in its name and on its behalf by its duly authorized representative and its seal to be affixed hereto as of the date specified below. NATIONAL LIFE INSURANCE COMPANY by ----------------------------- Name: Title: VARIABLE INSURANCE PRODUCTS FUND II by ----------------------------- Name: Title: FIDELITY DISTRIBUTORS CORPORATION by ----------------------------- Name: Title: EX-1.A.8.E 16 FUND PARTICIPATION AGREEMENT WITH AMERICAN CENTURY 1 EXHIBIT 1a 8(e) SHAREHOLDER SERVICES AGREEMENT THIS SHAREHOLDER SERVICES AGREEMENT is made and entered into as of ___________, 1998 by and between National Life Insurance Company (the "Company"), and AMERICAN CENTURY INVESTMENT MANAGEMENT, INC. ("ACIM"). WHEREAS, the Company offers to the public certain group and individual variable annuity and variable life insurance contracts (the "Contracts"); and WHEREAS, the Company wishes to make available as investment options under the Contracts, VP Advantage, VP Balanced, VP Capital Appreciation, VP Income & Growth, VP International and VP Value (the "Funds"), each of which is a series of mutual fund shares registered under the Investment Company Act of 1940, as amended, and issued by American Century Variable Portfolios, Inc. (the "Issuer"); and WHEREAS, on the terms and conditions hereinafter set forth, ACIM desires to make shares of the Funds available as investment options under the Contracts and to retain the Company to perform certain administrative services on behalf of the Funds, and the Company is willing and able to furnish such services; NOW, THEREFORE, the Company and ACIM agree as follows: 1. TRANSACTIONS IN THE FUNDS. Subject to the terms and conditions of this Agreement, ACIM will cause the Issuer to make shares of the Funds available to be purchased, exchanged, or redeemed, by or on behalf of the Accounts (defined in SECTION 7(a) below) through a single account per Fund at the net asset value applicable to each order. The Funds' shares shall be purchased and redeemed on a net basis in such quantity and at such time as determined by the Company to satisfy the requirements of the Contracts for which the Funds serve as underlying investment media. Dividends and capital gains distributions will be automatically reinvested in full and fractional shares of the Funds. 2. ADMINISTRATIVE SERVICES. The Company agrees to provide all administrative services for the Contract owners, including but not limited to those services specified in EXHIBIT A (the "Administrative Services"). Neither ACIM nor the Issuer shall be required to provide Administrative Services for the benefit of Contract owners. The Company agrees that it will maintain and preserve all records as required by law to be maintained and preserved in connection with providing the Administrative Services, and will otherwise comply with all laws, rules and regulations applicable to the marketing of the Contracts and the provision of the Administrative Services. Upon request, the Company will provide ACIM or its representatives reasonable information regarding the quality of the Administrative Services being provided and its compliance with the terms of this Agreement. 1 2 3. TIMING OF TRANSACTIONS. ACIM hereby appoints the Company as agent for the Funds for the limited purpose of accepting purchase and redemption orders for Fund shares from the Contract owners. On each day the New York Stock Exchange (the "Exchange") is open for business (each, a "Business Day"), the Company may receive instructions from the Contract owners for the purchase or redemption of shares of the Funds ("Orders"). Orders received and accepted by the Company prior to the close of regular trading on the Exchange (the "Close of Trading") on any given Business Day (currently, 4:00 p.m. Eastern time) and transmitted to the Funds' transfer agent by 9:00 a.m. Eastern time on the next Business Day will be executed at the net asset value determined as of the Close of Trading on the prior Business Day. Any Orders received by the Company on such day but after the Close of Trading, and all Orders that are transmitted to the Funds' transfer agent after 9:00 a.m. Eastern time on the next Business Day, will be executed at the net asset value determined as of the Close of Trading on the next Business Day following the day of receipt of such Order. The day as of which an Order is executed by the Funds' transfer agent pursuant to the provisions set forth above is referred to herein as the "Trade Date". 4. PROCESSING OF TRANSACTIONS. (a) If transactions in Fund shares are to be settled through the National Securities Clearing Corporation's Mutual Fund Settlement, Entry, and Registration Verification (Fund/SERV) system, the terms of the FUND/SERV AGREEMENT, between Company and American Century Services Corporation, shall apply. (b) If transactions in Fund shares are to be settled directly with the Funds' transfer agent, the following provisions shall apply: (1) By 6:30 p.m. Eastern time on each Business Day, ACIM (or one of its affiliates) will provide to the Company via facsimile or other electronic transmission acceptable to the Company the Funds' net asset value, dividend and capital gain information and, in the case of income funds, the daily accrual for interest rate factor (mil rate), determined at the Close of Trading. (2) By 9:00 a.m. Eastern time on each Business Day, the Company will provide to ACIM via facsimile or other electronic transmission acceptable to ACIM a report stating whether the instructions received by the Company from Contract owners by the Close of Trading on such Business Day resulted in the Accounts being a net purchaser or net seller of shares of the Funds. As used in this Agreement, the phrase "other electronic transmission acceptable to ACIM" includes the use of remote computer terminals located at the premises of the Company, its agents or affiliates, which terminals may be linked electronically to the computer system of ACIM, its agents or affiliates (hereinafter, "Remote Computer Terminals"). (3) Upon the timely receipt from the Company of the report described in (2) above, the Funds' transfer agent will execute the purchase or redemption transactions (as the case 2 3 may be) at the net asset value computed as of the Close of Trading on the Trade Date. Payment for net purchase transactions shall be made by wire transfer to the applicable Fund custodial account designated by the Funds on the Business Day next following the Trade Date. Such wire transfers shall be initiated by the Company's bank prior to 4:00 p.m. Eastern time and received by the Funds prior to 6:00 p.m. Eastern time on the Business Day next following the Trade Date ("T+1"). If payment for a purchase Order is not timely received, such Order will be executed at the net asset value next computed following receipt of payment. Payments for net redemption transactions shall be made by wire transfer by the Issuer to the account(s) designated by the Company on T+1; provided, however, the Issuer reserves the right to settle redemption transactions within the time period set forth in the applicable Fund's then-current prospectus. On any Business Day when the Federal Reserve Wire Transfer System is closed, all communication and processing rules will be suspended for the settlement of Orders. Orders will be settled on the next Business Day on which the Federal Reserve Wire Transfer System is open and the original Trade Date will apply. 5. PROSPECTUS AND PROXY MATERIALS. (a) ACIM shall provide the Company with copies of the Issuer's proxy materials, periodic fund reports to shareholders and other materials that are required by law to be sent to the Issuer's shareholders. In addition, ACIM shall provide the Company with a sufficient quantity of prospectuses of the Funds to be used in conjunction with the transactions contemplated by this Agreement, together with such additional copies of the Issuer's prospectuses as may be reasonably requested by Company. If the Company provides for pass-through voting by the Contract owners, or if the Company determines that pass-through voting is required by law, ACIM will provide the Company with a sufficient quantity of proxy materials for each, as directed by the Company. (b) The cost of preparing, printing and shipping of the prospectuses, proxy materials, periodic fund reports and other materials of the Issuer to the Company shall be paid by ACIM or its agents or affiliates; provided, however, that if at any time ACIM or its agent reasonably deems the usage by the Company of such items to be excessive, it may, prior to the delivery of any quantity of materials in excess of what is deemed reasonable, request that the Company demonstrate the reasonableness of such usage. If ACIM believes the reasonableness of such usage has not been adequately demonstrated, it may request that the party responsible for such excess usage pay the cost of printing (including press time) and delivery of any excess copies of such materials. Unless the Company agrees to make such payments, ACIM may refuse to supply such additional materials and ACIM shall be deemed in compliance with this SECTION 5 if it delivers to the Company at least the number of prospectuses and other materials as may be required by the Issuer under applicable law. (c) The cost of any distribution of prospectuses, proxy materials, periodic fund reports and other materials of the Issuer to the Contract owners shall be paid by the Company and shall not be the responsibility of ACIM or the Issuer. 3 4 6. COMPENSATION AND EXPENSES. (a) Each Account shall be the sole shareholder of Fund shares purchased for the Contract owners pursuant to this Agreement (the "Record Owner"). The Record Owner shall properly complete any applications or other forms required by ACIM or the Issuer from time to time. (b) ACIM acknowledges that it will derive a substantial savings in administrative expenses, such as a reduction in expenses related to postage, shareholder communications and recordkeeping, by virtue of having a single shareholder account per Fund for the Accounts rather than having each Contract owner as a shareholder. In consideration of the Administrative Services and performance of all other obligations under this Agreement by the Company, ACIM will pay the Company a fee (the "Administrative Services Fee") equal to 20 basis points (0.20%) per annum of the average aggregate amount invested by the Company under this Agreement. (c) The payments received by the Company under this Agreement are for administrative and shareholder services only and do not constitute payment in any manner for investment advisory services or for costs of distribution. (d) For the purposes of computing the payment to the Company contemplated by this SECTION 6, the average aggregate amount invested by the Company on behalf of the Accounts in the Funds over a one month period shall be computed by totaling the Company's aggregate investment (share net asset value multiplied by total number of shares of the Funds held by the Company) on each Business Day during the month and dividing by the total number of Business Days during such month. (e) ACIM will calculate the amount of the payment to be made pursuant to this SECTION 6 at the end of each calendar quarter and will make such payment to the Company within 30 days thereafter. The check for such payment will be accompanied by a statement showing the calculation of the amounts being paid by ACIM for the relevant months and such other supporting data as may be reasonably requested by the Company and shall be mailed to: National Life Insurance Company --------------------------------------------------- National Life Drive --------------------------------------------------- Montpelier, VT 05604 --------------------------------------------------- Attention: Treasurer --------------------------------------- Phone No.: 802-229-7072 ---------------------------------------- Fax No.: 802-229-3750 ------------------------------------------- 4 5 7. REPRESENTATIONS. (a) The Company represents and warrants that (i) this Agreement has been duly authorized by all necessary corporate action and, when executed and delivered, shall constitute the legal, valid and binding obligation of the Company, enforceable in accordance with its terms; (ii) it has established the National Variable Life Insurance Account and the National Variable Annuity Account II (the "Accounts"), each of which is a duly authorized and established separate account under Vermont Insurance law, and has registered each Account as a unit investment trust under the Investment Company Act of 1940 (the "1940 Act") to serve as an investment vehicle for the Contracts; (iii) each Contract provides for the allocation of net amounts received by the Company to an Account for investment in the shares of one or more specified investment companies selected among those companies available through the Account to act as underlying investment media; (iv) selection of a particular investment company is made by the Contract owner under a particular Contract, who may change such selection from time to time in accordance with the terms of the applicable Contract; and (v) the activities of the Company contemplated by this Agreement comply in all material respects with all provisions of federal and state securities laws applicable to such activities. (b) ACIM represents that (i) this Agreement has been duly authorized by all necessary corporate action and, when executed and delivered, shall constitute the legal, valid and binding obligation of ACIM, enforceable in accordance with its terms; (ii) the prospectus of each Fund complies in all material respects with federal and state securities laws, and (iii) shares of the Issuer are registered and authorized for sale in accordance with all federal and state securities laws. 8. ADDITIONAL COVENANTS AND AGREEMENTS. (a) Each party shall comply with all provisions of federal and state laws applicable to its respective activities under this Agreement. All obligations of each party under this Agreement are subject to compliance with applicable federal and state laws. (b) Each party shall promptly notify the other parties in the event that it is, for any reason, unable to perform any of its obligations under this Agreement. (c) The Company covenants and agrees that all Orders accepted and transmitted by it hereunder with respect to each Account on any Business Day will be based upon instructions that it received from the Contract owners, in proper form prior to the Close of Trading of the Exchange on that Business Day. The Company shall time stamp all Orders or otherwise maintain records that will enable the Company to demonstrate compliance with SECTION 8(c) hereof. (d) The Company covenants and agrees that all Orders transmitted to the Issuer, whether by telephone, telecopy, or other electronic transmission acceptable to ACIM, shall be sent by or under the authority and direction of a person designated by the Company as being duly 5 6 authorized to act on behalf of the owner of the Accounts. ACIM shall be entitled to rely on the existence of such authority and to assume that any person transmitting Orders for the purchase, redemption or transfer of Fund shares on behalf of the Company is "an appropriate person" as used in Sections 8-107 and 8-401 of the Uniform Commercial Code with respect to the transmission of instructions regarding Fund shares on behalf of the owner of such Fund shares. The Company shall maintain the confidentiality of all passwords and security procedures issued, installed or otherwise put in place with respect to the use of Remote Computer Terminals and assumes full responsibility for the security therefor. The Company further agrees to be responsible for the accuracy, propriety and consequences of all data transmitted to ACIM by the Company by telephone, telecopy or other electronic transmission acceptable to ACIM. (e) The Company agrees that, to the extent it is able to do so, it will use its best efforts to give equal emphasis and promotion to shares of the Funds as is given to other underlying investments of the Accounts, subject to applicable Securities and Exchange Commission rules. In addition, the Company shall not impose any fee, condition, or requirement for the use of the Funds as investment options for the Contracts that operates to the specific prejudice of the Funds vis-a-vis the other investment media made available for the Contracts by the Company. (f) The Company shall not, without the written consent of ACIM, make representations concerning the Issuer or the shares of the Funds except those contained in the then-current prospectus and in current printed sales literature approved by ACIM or the Issuer. (g) Advertising and sales literature with respect to the Issuer or the Funds prepared by the Company or its agents, if any, for use in marketing shares of the Funds as underlying investment media to Contract owners shall be submitted to ACIM for review and approval before such material is used. 9. USE OF NAMES. Except as otherwise expressly provided for in this Agreement, neither ACIM nor any of its affiliates or the Funds shall use any trademark, trade name, service mark or logo of the Company, or any variation of any such trademark, trade name, service mark or logo, without the Company's prior written consent, the granting of which shall be at the Company's sole option. Except as otherwise expressly provided for in this Agreement, the Company shall not use any trademark, trade name, service mark or logo of the Issuer, ACIM or any of its affiliates or any variation of any such trademarks, trade names, service marks, or logos, without the prior written consent of either the Issuer or ACIM, as appropriate, the granting of which shall be at the sole option of ACIM and/or the Issuer. 10. PROXY VOTING. (a) The Company shall provide pass-through voting privileges to all Contract owners so long as the SEC continues to interpret the 1940 Act as requiring such privileges. It shall be the responsibility of the Company to assure that it and the separate accounts of the other Participating 6 7 Companies (as defined in SECTION 12(a) below) participating in any Fund calculate voting privileges in a consistent manner. (b) The Company will distribute to Contract owners all proxy material furnished by ACIM and will vote shares in accordance with instructions received from such Contract owners. The Company shall vote Fund shares for which no voting instructions are received in the same proportion as shares for which such instructions have been received. The Company and its agents shall not oppose or interfere with the solicitation of proxies for Fund shares held for such Contract owners. 11. INDEMNITY. (a) ACIM agrees to indemnify and hold harmless the Company and its officers, directors, employees, agents, affiliates and each person, if any, who controls the Company within the meaning of the Securities Act of 1933 (collectively, the "Indemnified Parties" for purposes of this SECTION 11(a)) against any losses, claims, expenses, damages or liabilities (including amounts paid in settlement thereof) or litigation expenses (including legal and other expenses) (collectively, "Losses"), to which the Indemnified Parties may become subject, insofar as such Losses result from (i) a breach by ACIM of a material provision of this Agreement or (ii) any untrue statement of any material fact contained in any registration statement, prospectus or statement of additional information of a Fund or the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading. ACIM will reimburse any legal or other expenses reasonably incurred by the Indemnified Parties in connection with investigating or defending any such Losses. ACIM shall not be liable for indemnification hereunder if such Losses are attributable to the negligence or misconduct of the Company in performing its obligations under this Agreement. (b) The Company agrees to indemnify and hold harmless ACIM and the Issuer, and their respective officers, directors, employees, agents, affiliates and each person, if any, who controls Issuer or ACIM within the meaning of the Securities Act of 1933 (collectively, the "Indemnified Parties" for purposes of this SECTION 11(b)) against any Losses to which the Indemnified Parties may become subject, insofar as such Losses result from (i) a breach by the Company of a material provision of this Agreement or the use by any person of the Remote Computer Terminals or (ii) any untrue statement of any material fact contained in any registration statement, prospectus or statement of additional information of a Contract, or the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading. The Company will reimburse any legal or other expenses reasonably incurred by the Indemnified Parties in connection with investigating or defending any such Losses. The Company shall not be liable for indemnification hereunder if such Losses are attributable to the negligence or misconduct of ACIM or the Issuer in performing their obligations under this Agreement. (c) Promptly after receipt by an indemnified party hereunder of notice of the commencement of action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party hereunder, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this SECTION 11. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the 7 8 commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish to, assume the defense thereof, with counsel satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this SECTION 11 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. (d) If the indemnifying party assumes the defense of any such action, the indemnifying party shall not, without the prior written consent of the indemnified parties in such action, settle or compromise the liability of the indemnified parties in such action, or permit a default or consent to the entry of any judgment in respect thereof, unless in connection with such settlement, compromise or consent, each indemnified party receives from such claimant an unconditional release from all liability in respect of such claim. 12. POTENTIAL CONFLICTS (a) The Company has received a copy of an application for exemptive relief, as amended, filed by the Issuer on December 21, 1987, with the SEC and the order issued by the SEC in response thereto (the "Shared Funding Exemptive Order"). The Company has reviewed the conditions to the requested relief set forth in such application for exemptive relief. As set forth in such application, the Board of Directors of the Issuer (the "Board") will monitor the Issuer for the existence of any material irreconcilable conflict between the interests of the contract owners of all separate accounts ("Participating Companies") investing in funds of the Issuer. An irreconcilable material conflict may arise for a variety of reasons, including: (i) an action by any state insurance regulatory authority; (ii) a change in applicable federal or state insurance, tax, or securities laws or regulations, or a public ruling, private letter ruling, no-action or interpretative letter, or any similar actions by insurance, tax or securities regulatory authorities; (iii) an administrative or judicial decision in any relevant proceeding; (iv) the manner in which the investments of any portfolio are being managed; (v) a difference in voting instructions given by variable annuity contract owners and variable life insurance contract owners; or (vi) a decision by an insurer to disregard the voting instructions of contract owners. The Board shall promptly inform the Company if it determines that an irreconcilable material conflict exists and the implications thereof. (b) The Company will report any potential or existing conflicts of which it is aware to the Board. The Company will assist the Board in carrying out its responsibilities under the Shared Funding Exemptive Order by providing the Board with all information reasonably necessary for the Board to consider any issues raised. This includes, but is not limited to, an obligation by the Company to inform the Board whenever contract owner voting instructions are disregarded. (c) If a majority of the Board, or a majority of its disinterested Board members, determines that a material irreconcilable conflict exists with regard to contract owner investments in 8 9 a Fund, the Board shall give prompt notice to all Participating Companies. If the Board determines that the Company is responsible for causing or creating said conflict, the Company shall at its sole cost and expense, and to the extent reasonably practicable (as determined by a majority of the disinterested Board members), take such action as is necessary to remedy or eliminate the irreconcilable material conflict. Such necessary action may include but shall not be limited to: (i) withdrawing the assets allocable to the Accounts from the Fund and reinvesting such assets in a different investment medium or submitting the question of whether such segregation should be implemented to a vote of all affected contract owners and as appropriate, segregating the assets of any appropriate group (i.e., annuity contract owners, life insurance contract owners, or variable contract owners of one or more Participating Companies) that votes in favor of such segregation, or offering to the affected contract owners the option of making such a change; and/or (ii) establishing a new registered management investment company or managed separate account. (d) If a material irreconcilable conflict arises as a result of a decision by the Company to disregard its contract owner voting instructions and said decision represents a minority position or would preclude a majority vote by all of its contract owners having an interest in the Issuer, the Company at its sole cost, may be required, at the Board's election, to withdraw an Account's investment in the Issuer and terminate this Agreement; provided, however, that such withdrawal and termination shall be limited to the extent required by the foregoing material irreconcilable conflict as determined by a majority of the disinterested members of the Board. (e) For the purpose of this SECTION 12, a majority of the disinterested Board members shall determine whether or not any proposed action adequately remedies any irreconcilable material conflict, but in no event will the Issuer be required to establish a new funding medium for any Contract. The Company shall not be required by this SECTION 12 to establish a new funding medium for any Contract if an offer to do so has been declined by vote of a majority of the Contract owners materially adversely affected by the irreconcilable material conflict. 13. TERMINATION; WITHDRAWAL OF OFFERING. This Agreement may be terminated by either party upon 180 days' prior written notice to the other parties. Notwithstanding the above, the Issuer reserves the right, without prior notice, to suspend sales of shares of any Fund, in whole or in part, or to make a limited offering of shares of any of the Funds in the event that (A) any regulatory body commences formal proceedings against the Company, ACIM, affiliates of ACIM, or the Issuer, which proceedings ACIM reasonably believes may have a material adverse impact on the ability of ACIM, the Issuer or the Company to perform its obligations under this Agreement or (B) in the judgment of ACIM, declining to accept any additional instructions for the purchase or sale of shares of any such Fund is warranted by market, economic or political conditions. Notwithstanding 9 10 the foregoing, this Agreement may be terminated immediately (i) by any party as a result of any other breach of this Agreement by another party, which breach is not cured within 30 days after receipt of notice from the other party, or (ii) by any party upon a determination that continuing to perform under this Agreement would, in the reasonable opinion of the terminating party's counsel, violate any applicable federal or state law, rule, regulation or judicial order. Termination of this Agreement shall not affect the obligations of the parties to make payments under SECTION 4 for Orders received by the Company prior to such termination and shall not affect the Issuer's obligation to maintain the Accounts as set forth by this Agreement. Following termination, ACIM shall not have any Administrative Services payment obligation to the Company (except for payment obligations accrued but not yet paid as of the termination date). 14. NON-EXCLUSIVITY. Each of the parties acknowledges and agrees that this Agreement and the arrangement described herein are intended to be non-exclusive and that each of the parties is free to enter into similar agreements and arrangements with other entities. 15. SURVIVAL. The provisions of SECTION 9 (use of names) and SECTION 11 (indemnity) of this Agreement shall survive termination of this Agreement. 16. AMENDMENT. Neither this Agreement, nor any provision hereof, may be amended, waived, discharged or terminated orally, but only by an instrument in writing signed by all of the parties hereto. 17. NOTICES. All notices and other communications hereunder shall be given or made in writing and shall be delivered personally, or sent by telex, 1telecopier, express delivery or registered or certified mail, postage prepaid, return receipt requested, to the party or parties to whom they are directed at the following addresses, or at such other addresses as may be designated by notice from such party to all other parties. To the Company: National Life Insurance Company ----------------------------------------------------- National Life Drive ----------------------------------------------------- Montpelier, VT 05604 ----------------------------------------------------- (802) 229-3113 (office number) ------------------ (802) 229-3743 (telecopy number) ------------------ 10 11 To the Issuer or ACIM: American Century Investment Management, Inc. 4500 Main Street Kansas City, Missouri 64111 Attention: Charles A. Etherington, Esq. (816) 340-4051 (office number) (816) 340-4964 (telecopy number) Any notice, demand or other communication given in a manner prescribed in this SECTION 17 shall be deemed to have been delivered on receipt. 18. SUCCESSORS AND ASSIGNS. This Agreement may not be assigned without the written consent of all parties to the Agreement at the time of such assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective permitted successors and assigns. 19. COUNTERPARTS. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any party hereto may execute this Agreement by signing any such counterpart. 20. SEVERABILITY. In case any one or more of the provisions contained in this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. 21. ENTIRE AGREEMENT. This Agreement, including the attachments hereto, constitutes the entire agreement between the parties with respect to the matters dealt with herein, and supersedes all previous agreements, written or oral, with respect to such matters. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date set forth above. National Life Insurance Company AMERICAN CENTURY INVESTMENT - --------------------------------------------------- MANAGEMENT, INC. By: By: ----------------------------------------------- ----------------------------------------------- Name: William M. Lyons --------------------------------------------- Executive Vice President Title: --------------------------------------------
11 12 EXHIBIT A ADMINISTRATIVE SERVICES Pursuant to the Agreement to which this is attached, the Company shall perform all administrative and shareholder services required or requested under the Contracts with respect to the Contract owners, including, but not limited to, the following: 1. Maintain separate records for each Contract owner, which records shall reflect the shares purchased and redeemed and share balances of such Contract owners. The Company will maintain a single master account with each Fund on behalf of the Contract owners of each Contract and such account shall be in the name of the Company (or its nominee) as the record owner of shares owned by the Contract owners. 2. Disburse or credit to the Contract owners all proceeds of redemptions of shares of the Funds and all dividends and other distributions not reinvested in shares of the Funds. 3. Prepare and transmit to the Contract owners, as required by law or the Contracts, periodic statements showing the total number of shares owned by the Contract owners as of the statement closing date, purchases and redemptions of Fund shares by the Contract owners during the period covered by the statement and the dividends and other distributions paid during the statement period (whether paid in cash or reinvested in Fund shares), and such other information as may be required, from time to time, by the Contracts. 4. Transmit purchase and redemption orders to the Funds on behalf of the Contract owners in accordance with the procedures set forth in SECTION 4 to the Agreement. 5. Distribute to the Contract owners copies of the Funds' prospectus, proxy materials, periodic fund reports to shareholders and other materials that the Funds are required by law or otherwise to provide to their shareholders or prospective shareholders. 6. Maintain and preserve all records as required by law to be maintained and preserved in connection with providing the Administrative Services for the Contracts. A-1 EX-1.A.8.F 17 PARTICIPATION AGREEMENT WITH NEUBERGER & BERMAN 1 EXH. 1a 8(f) FUND PARTICIPATION AGREEMENT THIS AGREEMENT made as of the ______________ day of ______, _________, by and between NEUBERGER&BERMAN ADVISERS MANAGEMENT TRUST ("TRUST"), a Delaware business trust, ADVISERS MANAGERS TRUST ("MANAGERS TRUST"), a New York common law trust, NEUBERGER&BERMAN MANAGEMENT INCORPORATED ("N&B MANAGEMENT"), a New York corporation, and NATIONAL LIFE INSURANCE COMPANY ("LIFE COMPANY"), a life insurance company organized under the laws of the State of Vermont. WHEREAS, TRUST and MANAGERS TRUST are registered with the Securities and Exchange Commission ("SEC") under the Investment Company Act of 1940, as amended ("40 Act") as open-end, diversified management investment companies; and WHEREAS, TRUST is organized as a series fund comprised of several portfolios ("Portfolios"), the currently available of which are listed on Appendix A hereto; and WHEREAS, MANAGERS TRUST is organized as a series fund, comprised of several portfolios ("Series"), the currently operational of which are listed on Appendix A hereto; and WHEREAS, each Portfolio of TRUST will invest all of its net investable assets in a corresponding Series of MANAGERS TRUST; and WHEREAS, TRUST was organized to act as the funding vehicle for certain variable life insurance and/or variable annuity contracts ("Variable Contracts") offered by life insurance companies through separate accounts of such life insurance companies ("Participating Insurance Companies") and also offers its shares to certain qualified pension and retirement plans; and WHEREAS, TRUST has received an order from the SEC, dated May 5,1995 (File No. 812-9164), granting Participating Insurance Companies and their separate accounts exemptions from the provisions of Sections 9(a), 13(a), 15(a) and 15(b) of the '40 Act, and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent necessary to permit shares of the Portfolios of the TRUST to be sold to and held by variable annuity and variable life insurance separate accounts of both affiliated and unaffiliated life insurance companies and certain qualified pension and retirement plans (the "Order"); and WHEREAS, LIFE COMPANY has established or will establish one or more separate accounts ("Separate Accounts") to offer Variable Contracts and is desirous of having TRUST as one of the underlying funding vehicles for such Variable Contracts; and WHEREAS, N&B MANAGEMENT is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940 and as a broker-dealer under the Securities Exchange Act of 1934, as amended; and 2 WHEREAS, N&B MANAGEMENT is the administrator and distributor of the shares of each Portfolio of TRUST and investment manager of the corresponding Series of MANAGERS TRUST; and WHEREAS, to the extent permitted by applicable insurance laws and regulations, LIFE COMPANY intends to purchase shares of TRUST to fund the aforementioned Variable Contracts and TRUST is authorized to sell such shares to LIFE COMPANY at net asset value; NOW, THEREFORE, in consideration of their mutual promises, LIFE COMPANY, TRUST, MANAGERS TRUST and N&B MANAGEMENT agree as follows: Article 1. SALE OF TRUST SHARES 1.1 TRUST agrees to make available to the Separate Accounts of LIFE COMPANY shares of the selected Portfolios as listed in Appendix B for investment of proceeds from Variable Contracts allocated to the designated Separate Accounts, such shares to be offered as provided in TRUST's Prospectus. 1.2 TRUST agrees to sell to LIFE COMPANY those shares of the selected Portfolios of TRUST which LIFE COMPANY orders, executing such orders on a daily basis at the net asset value next computed after receipt by TRUST or its designee of the order for the shares of TRUST. For purposes of this Section 1.2, LIFE COMPANY shall be the designee of TRUST for receipt of such orders from LIFE COMPANY and receipt by such designee shall constitute receipt by TRUST; provided that TRUST receives notice of such order by 8:30 a.m New York time on the next following Business Day. "Business Day" shall mean any day on which the New York Stock Exchange is open for trading and on which TRUST calculates its net asset value pursuant to the rules of the SEC. 1.3 TRUST agrees to redeem for cash, on LIFE COMPANY's request, any full or fractional shares of TRUST held by LIFE COMPANY, executing such requests on a daily basis at the net asset value next computed after receipt by TRUST or its designee of the request for redemption. For purposes of this Section 1.3, LIFE COMPANY shall be the designee of TRUST for receipt of requests for redemption from LIFE COMPANY and receipt by such designee shall constitute receipt by TRUST; provided that TRUST receives notice of such request for redemption by 8:30 a.m. New York time on the next following Business Day. 1.4 TRUST shall furnish, on or before the ex-dividend date, notice to LIFE COMPANY of any income dividends or capital gain distributions payable on the shares of any Portfolio of TRUST. LIFE COMPANY hereby elects to receive all such income dividends and capital gain distributions as are payable on a Portfolio's shares in additional shares of the Portfolio. TRUST shall notify LIFE COMPANY of the number of shares so issued as payment of such dividends and distributions. 2 3 1.5 TRUST shall make the net asset value per share for the selected Portfolio(s) available to LIFE COMPANY on a daily basis as soon as reasonably practicable after the net asset value per share is calculated but shall use its best efforts to make such net asset value available by 6:30 p.m. New York time. If TRUST provides LIFE COMPANY with materially incorrect share net asset value information through no fault of LIFE COMPANY, LIFE COMPANY on behalf of the Separate Accounts, shall be entitled to an adjustment to the number of shares purchased or redeemed to reflect the correct share net asset value. Any material error in the calculation of net asset value per share, dividend or capital gain information shall be reported promptly upon discovery to LIFE COMPANY. 1.6 At the end of each Business Day, LIFE COMPANY shall use the information described in Section 1.5 to calculate Separate Account unit values for the day. Using these unit values, LIFE COMPANY shall process each such Business Day's Separate Account transactions based on requests and premiums received by it by the close of trading on the floor of the New York Stock Exchange (currently 4:00 p.m. New York time) to determine the net dollar amount of TRUST shares which shall be purchased or redeemed at that day's closing net asset value per share. The net purchase or redemption orders so determined shall be transmitted to TRUST by LIFE COMPANY by 8:30 a.m. New York Time on the Business Day next following LIFE COMPANY's receipt of such requests and premiums in accordance with the terms of Sections 1.2 and 1.3 hereof. 1.7 If LIFE COMPANY's order requests the purchase of TRUST shares, LIFE COMPANY shall pay for such purchase by wiring federal funds to TRUST or its designated custodial account on the day the order is transmitted by LIFE COMPANY. If LIFE COMPANY's order requests a net redemption resulting in a payment of redemption proceeds to LIFE COMPANY, TRUST shall wire the redemption proceeds to LIFE COMPANY by the next Business Day, unless doing so would require TRUST to dispose of portfolio securities or otherwise incur additional costs, but in such event, proceeds shall be wired to LIFE COMPANY within seven days and TRUST shall notify the person designated in writing by LIFE COMPANY as the recipient for such notice of such delay by 3:00 p.m. New York Time the same Business Day that LIFE COMPANY transmits the redemption order to TRUST. If LIFE COMPANY's order requests the application of redemption proceeds from the redemption of shares to the purchase of shares of another fund administered or distributed by N&B MANAGEMENT, TRUST shall so apply such proceeds the same Business Day that LIFE COMPANY transmits such order to TRUST. 1.8 Notwithstanding Section 1.7, TRUST reserves the right to suspend the right of redemption or postpone the date of payment or satisfaction upon redemption consistent with Section 22(e) of the 40 Act and any rules thereunder. 1.9 TRUST agrees that all shares of the Portfolios of TRUST will be sold only to Participating Insurance Companies which have agreed to participate in TRUST to fund their Separate Accounts and/or to certain qualified pension and other retirement plans, all in accordance with the requirements of Section 817(h) of the Internal Revenue Code of 1986, as amended ("Code") and Treasury Regulation 1.817-5. Shares of the Portfolios of TRUST will not be sold directly to the general public. 3 4 1.10 TRUST may refuse to sell shares of any Portfolio to any person, or suspend or terminate the offering of the shares of any Portfolio if such action is required by law or by regulatory authorities having jurisdiction or is, in the sole discretion of the Board of Trustees of TRUST, acting in good faith and in light of its fiduciary duties under federal and any applicable state laws, deemed necessary and in the best interests of the shareholders of such Portfolios. Article II. REPRESENTATIONS AND WARRANTIES 2.1 LIFE COMPANY represents and warrants that it is an insurance company duly organized and in good standing under the laws of Vermont and that it has legally and validly established each Separate Account as a segregated asset account under such laws, and that Equity Services, Inc., the principal underwriter for the Variable Contracts, is registered as a broker-dealer under the Securities Exchange Act of 1934. 2.2 LIFE COMPANY represents and warrants that it has registered or, prior to any issuance or sale of the Variable Contracts, will register each Separate Account as a unit investment trust ("UIT") in accordance with the provisions of the '40 Act and cause each Separate Account to remain so registered to serve as a segregated asset account for the Variable Contracts, unless an exemption from registration is available. 2.2 LIFE COMPANY represents and warrants that the Variable Contracts will be registered under the Securities Act of 1933 (the "'33 Act") unless an exemption from registration is available prior to any issuance or sale of the Variable Contracts and that the Variable Contracts will be issued and sold in compliance in all material respects with all applicable federal and state laws and further that the sale of the Variable Contracts shall comply in all material respects with state insurance law suitability requirements. 2.4 LIFE COMPANY represents and warrants that the Variable Contracts are currently and at the time of issuance will be treated as life insurance, endowment or annuity contracts under applicable provisions of the Code, that it will maintain such treatment and that it will notify TRUST immediately upon having a reasonable basis for believing that the Variable Contracts have ceased to be so treated or that they might not be so treated in the future. 2.5 LIFE COMPANY represents and warrants that it shall deliver such prospectuses, statements of additional information, proxy statements and periodic reports of the Trust as required to be delivered under applicable federal or state law and interpretations of federal and state securities regulators thereunder in connection with the offer, sale or acquisition of the Variable Contracts. 2.6 TRUST represents and warrants that the Portfolio shares offered and sold pursuant to this Agreement will be registered under the '33 Act and sold in accordance with all applicable federal and state laws, and TRUST shall be registered under the '40 Act prior to and at the time of any issuance or sale of such shares. TRUST shall amend its registration statement under the '33 4 5 Act and the '40 Act from time to time as required in order to effect the continuous offering of its shares. TRUST shall register and qualify its shares for sale in accordance with the laws of the various states only if and to the extent deemed advisable by TRUST. 2.7 TRUST represents and warrants that each Portfolio will comply with the diversification requirements set forth in Section 817(h) of the Code, and the rules and regulations thereunder, including without limitation Treasury Regulation 1.817-5, and will notify LIFE COMPANY immediately upon having a reasonable basis for believing any Portfolio has ceased to comply or might not so comply and will immediately take all reasonable steps to adequately diversify the Portfolio to achieve compliance within the grace period afforded by Regulation 1.8175. 2.8 TRUST represents and warrants that each Portfolio invested in by the Separate Account is currently qualified as a "regulated investment company" under Subchapter M of the Code, that it will make every effort to maintain such qualification and will notify LIFE COMPANY immediately upon having a reasonable basis for believing it has ceased to so qualify or might not so qualify in the future. Article III. PROSPECTUS AND PROXY STATEMENTS 3.1 TRUST shall prepare and be responsible for filing with the SEC and any state regulators requiring such filing all shareholder reports, notices, proxy materials (or similar materials such as voting instruction solicitation materials), prospectuses and statements of additional information of TRUST. TRUST shall bear the costs of registration and qualification of shares of the Portfolios, preparation and filing of the documents listed in this Section 3.1 and all taxes to which an issuer is subject on the issuance and transfer of its shares. 3.2 TRUST will bear the printing costs (or duplicating costs with respect to the statement of additional information) and mailing costs associated with the delivery of the following TRUST (or individual Portfolio) documents, and any supplements thereto, to existing Variable Contract owners of LIFE COMPANY: (i) prospectuses and statements of additional information; (ii) annual and semi-annual reports; and (iii) proxy materials. LIFE COMPANY will submit any bills for printing, duplicating and/or mailing costs, relating to the TRUST documents described above, to TRUST for reimbursement by TRUST. LIFE COMPANY shall monitor such costs and shall use its best efforts to control these costs. LIFE COMPANY will provide TRUST on a semi-annual basis, or more frequently as reasonably requested by TRUST, with a current tabulation of the number of existing Variable Contract owners of LIFE COMPANY whose Variable Contract values are invested in TRUST. 5 6 This tabulation will be sent to TRUST in the form of a letter signed by a duly authorized officer of LIFE COMPANY attesting to the accuracy of the information contained in the letter. If requested by LIFE COMPANY, the TRUST shall provide such documentation (including a final copy of the TRUST's prospectus as set in type or in camera-ready copy) and other assistance as is reasonably necessary in order for LIFE COMPANY to print together in one document the current prospectus for the Variable Contracts issued by LIFE COMPANY and the current prospectus for the TRUST. Should LIFE COMPANY wish to print any of these documents in a format different from that provided by TRUST, LIFE COMPANY shall provide Trust with sixty (60) days' prior written notice and LIFE COMPANY shall bear the cost associated with any format change. 3.3 TRUST will provide, at its expense, LIFE COMPANY with the following TRUST (or individual Portfolio) documents, and any supplements thereto, with respect to prospective Variable Contract owners of LIFE COMPANY: (i) camera-ready copy of the current prospectus for printing by the LIFE COMPANY; (ii) a copy of the statement of additional information suitable for duplication; (iii) camera-ready copy of proxy material suitable for printing; and (iv) camera-ready copy of the annual and semi-annual reports for printing by the LIFE COMPANY. 3.4 TRUST will provide LIFE COMPANY with at least one complete copy of all prospectuses, statements of additional information, annual and semi-annual reports, proxy statements, exemptive applications and all amendments or supplements to any of the above that relate to the Portfolios promptly after the filing of each such document with the SEC or other regulatory authority. LIFE COMPANY will provide TRUST with at least one complete copy of all prospectuses, statements of additional information, annual and semi-annual reports, proxy statements, exemptive applications and all amendments or supplements to any of the above that relate to a Separate Account promptly after the filing of each such document with the SEC or other regulatory authority. Article IV. SALES MATERIALS 4.1 LIFE COMPANY will furnish, or will cause to be furnished, to TRUST and N&B MANAGEMENT, each piece of sales literature or other promotional material in which TRUST, MANAGERS TRUST or N&B MANAGEMENT is named, at least fifteen (15) Business Days prior to its intended use. No such material will be used if TRUST, MANAGERS TRUST or N&B MANAGEMENT objects to its use in writing within ten (10) Business Days after receipt of such material. 6 7 4.2 TRUST and N&B MANAGEMENT will furnish, or will cause to be furnished, to LIFE COMPANY, each piece of sales literature or other promotional material in which LIFE COMPANY or its Separate Accounts are named, at least fifteen (15) Business Days prior to its intended use. No such material will be used if LIFE COMPANY objects to its use in writing within ten (10) Business Days after receipt of such material. 4.3 TRUST and its affiliates and agents shall not give any information or make any representations on behalf of LIFE COMPANY or concerning LIFE COMPANY, the Separate Accounts, or the Variable Contracts issued by LIFE COMPANY, other than the information or representations contained in a registration statement or prospectus for such Variable Contracts, as such registration statement and prospectus may be amended or supplemented from time to time, or in reports of the Separate Accounts or reports prepared for distribution to owners of such Variable Contracts, or in sales literature or other promotional material approved by LIFE COMPANY or its designee, except with the written permission of LIFE COMPANY. 4.4 LIFE COMPANY and its affiliates and agents shall not give any information or make any representations on behalf of TRUST or concerning TRUST other than the information or representations contained in a registration statement or prospectus for TRUST, as such registration statement and prospectus may be amended or supplemented from time to time, or in sales literature or other promotional material approved by TRUST or its designee, except with the written permission of TRUST. 4.5 For purposes of this Agreement, the phrase "sales literature or other promotional material" or words of similar import include, without limitation, advertisements (such as material published, or designed for use, in a newspaper, magazine or other periodical, radio, television, telephone or tape recording, videotape display, signs or billboards, motion pictures or other public media), sales literature (such as any written communication distributed or made generally available to customers or the public, including brochures, circulars, research reports, market letters, form letters, seminar texts, or reprints or excerpts of any other advertisement, sales literature, or published article), educational or training materials or other communications distributed or made generally available to some or all agents or employees, registration statements, prospectuses, statements of additional information, shareholder reports and proxy materials, and any other material constituting sales literature or advertising under National Association of Securities Dealers, Inc. rules, the '40 Act or the '33 Act. Article V. POTENTIAL CONFLICTS 5.1 The Board of Trustees of TRUST and MANAGERS TRUST (the "Boards") will monitor TRUST and MANAGERS TRUST, respectively, (collectively the "Funds"), for the existence of any material irreconcilable conflict between the interests of the Variable Contract owners of Participating Insurance Company Separate Accounts investing in the Funds. A material irreconcilable conflict may arise for a variety of reasons, including: (a) state insurance regulatory authority action; (b) a change in applicable federal or state insurance, tax, or securities laws or regulations, or a public ruling, private letter ruling, or any similar action by insurance, tax, or 7 8 securities regulatory authorities; (c) an administrative or judicial decision in any relevant proceeding; (d) the manner in which the investments of the Funds are being managed; (e) a difference in voting instructions given by variable annuity and variable life insurance contract owners or by contract owners of different Participating Insurance Companies; or (f)a decision by a Participating Insurance Company to disregard voting instructions of Variable Contract owners. 5.2 LIFE COMPANY will report any potential or existing conflicts to the Boards. LIFE COMPANY will be responsible for assisting each appropriate Board in carrying out its responsibilities under the Conditions set forth in the notice issued by the SEC for the Funds on April 12, 1995 (the "Notice") (Investment Company Act Release No. 21003), which LIFE COMPANY has reviewed, by providing each appropriate Board with all information reasonably necessary for it to consider any issues raised. This responsibility includes, but is not limited to, an obligation by LIFE COMPANY to inform each appropriate Board whenever Variable Contract owner voting instructions are disregarded by LIFE COMPANY. These responsibilities will be carried out with a view only to the interests of the Variable Contract owners. 5.3 If a majority of the Board of a Fund or a majority of its disinterested trustees or directors, determines that a material irreconcilable conflict exists, affecting the LIFE COMPANY, LIFE COMPANY, at its expense and to the extent reasonably practicable (as determined by a majority of disinterested trustees or directors), will take any steps necessary to remedy or eliminate the irreconcilable material conflict, including: (a) withdrawing the assets allocable to some or all of the Separate Accounts from the Funds or any series thereof and reinvesting those assets in a different investment medium, which may include another series of TRUST or MANAGERS TRUST, or another investment company or submitting the question as to whether such segregation should be implemented to a vote of all affected Variable Contract owners and, as appropriate, segregating the assets of any appropriate group (i.e., Variable Contract owners of one or more Participating Insurance Companies) that votes in favor of such segregation, or offering to the affected Variable Contract owners the option of making such a change; and (b) establishing a new registered management investment company or managed separate account. If a material irreconcilable conflict arises because of LIFE COMPANY's decision to disregard Variable Contract owner voting instructions, and that decision represents a minority position or would preclude a majority vote, LIFE COMPANY may be required, at the election of the relevant Fund, to withdraw its Separate Account's investment in such Fund, and no charge or penalty will be imposed as a result of such withdrawal. The responsibility to take such remedial action shall be carried out with a view only to the interests of the Variable Contract owners. For the purposes of this Section 5.3, a majority of the disinterested members of the applicable Board shall determine whether or not any proposed action adequately remedies any irreconcilable material conflict, but in no event will the relevant Fund or N&B MANAGEMENT (or any other investment adviser of the Funds) be required to establish a new funding medium for any Variable Contract. Further, LIFE COMPANY shall not be required by this Section 5.3 to establish a new funding medium for any Variable Contract if any offer to do so has been declined by a vote of a majority of Variable Contract owners materially affected by the irreconcilable material conflict. 8 9 5.4 Any Board's determination of the existence of an irreconcilable material conflict and its implications shall be made known promptly and in writing to LIFE COMPANY. 5.5 No less than annually, LIFE COMPANY shall submit to the Boards such reports, materials or data as such Boards may reasonably request so that the Boards may fully carry out the obligations imposed upon them by these Conditions. Such reports, materials, and data shall be submitted more frequently if deemed appropriate by the applicable Boards. Article VI. VOTING 6.1 LIFE COMPANY will provide pass-through voting privileges to all Variable Contract owners so long as the SEC continues to interpret the '40 Act as requiring pass-through voting privileges for Variable Contract owners. This condition will apply to UIT Separate Accounts investing in TRUST and to managed separate accounts investing in MANAGERS TRUST to the extent a vote is required with respect to matters relating to MANAGERS TRUST. Accordingly, LIFE COMPANY, where applicable, will vote shares of a Fund held in its Separate Accounts in a manner consistent with voting instructions timely received from its Variable Contract owners. LIFE COMPANY will be responsible for assuring that each of its Separate Accounts that participates in any Fund calculates voting privileges in a manner consistent with other participants as defined in the Conditions set forth in the Notice ("Participants"). The obligation to calculate voting privileges in a manner consistent with all other Separate Accounts investing in a Fund will be a contractual obligation of all Participants under the agreements governing participation in the Funds. Each Participant will vote shares for which it has not received timely voting instructions, as well as shares it owns, in the same proportion as its votes those shares for which it has received voting instructions. 6.2 If and to the extent Rule 6e-2 and Rule 6e-3(T) are amended, or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the '40 Act or the rules thereunder with respect to mixed and shared funding on terms and conditions materially different from any exemptions granted in the Order, then TRUST, MANAGERS TRUST and/or the Participants, as appropriate, shall take such steps as may be necessary to comply with Rule 6e-2 and Rule 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such Rules are applicable. 9 10 Article VII. INDEMNIFICATION 7.1 Indemnification by LIFE COMPANY. LIFE COMPANY agrees to indemnify and hold harmless TRUST, MANAGERS TRUST, N&B MANAGEMENT and each of their Trustees, directors, officers, employees and agents and each person, if any, who controls TRUST or MANAGERS TRUST or N&B MANAGEMENT within the meaning of Section 15 of the '33 Act (collectively, the "Indemnified Parties" for purposes of this Article VII) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of LIFE COMPANY, which consent shall not be unreasonably withheld) or litigation (including legal and other expenses), to which the Indemnified Parties may become subject under any statute, regulation, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements are related to the offer, sale or acquisition of TRUST's shares or the Variable Contracts and: (a) arise out of or are based upon any untrue statements or alleged untrue statements of any material fact contained in the Registration Statement or prospectus for the Variable Contracts or contained in the Variable Contracts (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that this agreement to indemnify shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to LIFE COMPANY by or on behalf of TRUST for use in the registration statement or prospectus for the Variable Contracts or in the Variable Contracts or sales literature (or any amendment or supplement) or otherwise for use in connection with the sale of the Variable Contracts or TRUST shares; or (b) arise out of or as a result of statements or representations (other than statements or representations contained in the registration statement, prospectus or sales literature of TRUST not supplied by LIFE COMPANY, or persons under its control) or wrongful conduct of LIFE COMPANY or persons under its control, with respect to the sale or distribution of the Variable Contracts or TRUST shares; or (c) arise out of any untrue statement or alleged untrue statement of a material fact contained in a registration statement, prospectus, or sales literature of TRUST or any amendment thereof or supplement thereto or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to TRUST for inclusion therein by or on behalf of LIFE COMPANY; or 10 11 (d) arise as a result of any failure by LIFE COMPANY to substantially provide the services and furnish the materials under the terms of this Agreement; or (e) arise out of or result from any material breach of any representation and/or warranty made by LIFE COMPANY in this Agreement or arise out of or result from any other material breach of this Agreement by LIFE COMPANY. 7.2 LIFE COMPANY shall not be liable under this indemnification provision with respect to any losses, claims, damages, liabilities or litigation incurred or assessed against an Indemnified Party as such may arise from such Indemnified Party's willful misfeasance, bad faith, or gross negligence in the performance of such Indemnified Party's duties or by reason of such Indemnified Party's reckless disregard of obligations or duties under this Agreement or to TRUST, whichever is applicable. 7.3 LIFE COMPANY shall not be liable under this indemnification provision with respect to any claim made against an Indemnified Party unless such Indemnified Party shall have notified LIFE COMPANY in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon such Indemnified Party (or after such Indemnified Party shall have received notice of such service on any designated agent), but failure to notify LIFE COMPANY of any such claim shall not relieve LIFE COMPANY from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of this indemnification provision. In case any such action is brought against an Indemnified Party, LIFE COMPANY shall be entitled to participate at its own expense in the defense of such action. LIFE COMPANY also shall be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from LIFE COMPANY to such party of LIFE COMPANY's election to assume the defense thereof, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and LIFE COMPANY will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation. 7.4 Indemnification by N&B MANAGEMENT. N&B MANAGEMENT agrees to indemnify and hold harmless LIFE COMPANY and each of its directors, officers, employees, and agents and each person, if any, who controls LIFE COMPANY within the meaning of Section 15 of the '33 Act (collectively, the "Indemnified Parties" for the purposes of this Article VII) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of N&B MANAGEMENT which consent shall not be unreasonably withheld) or litigation (including legal and other expenses) to which the Indemnified Parties may become subject under any statute, or regulation, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements are related to the offer, sale or acquisition of TRUST's shares or the Variable Contracts and: 11 12 (a) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement or prospectus or sales literature of TRUST (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that this agreement to indemnify shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to N&B MANAGEMENT or TRUST by or on behalf of LIFE COMPANY for use in the registration statement or prospectus for TRUST or in sales literature (or any amendment or supplement) or otherwise for use in connection with the sale of the Variable Contracts or TRUST shares; or (b) arise out of or as a result of statements or representations (other than statements or representations contained in the registration statement, prospectus or sales literature for the Variable Contracts not supplied by N&B MANAGEMENT or persons under its control) or wrongful conduct of TRUST or N&B MANAGEMENT or persons under their control, with respect to the sale or distribution of the Variable Contracts or TRUST shares; or (c) arise out of any untrue statement or alleged untrue statement of a material fact contained in a registration statement, prospectus, or sales literature covering the Variable Contracts, or any amendment thereof or supplement thereto or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to LIFE COMPANY for inclusion therein by or on behalf of TRUST; or (d) arise as a result of (i) a failure by TRUST to substantially provide the services and furnish the materials under the terms of this Agreement; or (ii) a failure by a Portfolio(s) invested in by the Separate Account to comply with the diversification requirements of Section 817(h) of the Code; or (iii) a failure by a Portfolio(s) invested in by the Separate Account to qualify as a "regulated investment company" under Subchapter M of the Code; or (e) arise out of or result from any material breach of any representation and/or warranty made by N&B MANAGEMENT in this Agreement or arise out of or result from any other material breach of this Agreement by N&B MANAGEMENT. 12 13 7.5 N&B MANAGEMENT shall not be liable under this indemnification provision with respect to any losses, claims, damages, liabilities or litigation to which an Indemnified Party would otherwise be subject by reason of such Indemnified Party's willful misfeasance, bad faith, or gross negligence in the performance of such Indemnified Party's duties or by reason of such Indemnified Party's reckless disregard of obligations and duties under this Agreement or to LIFE COMPANY. 7.6 N&B MANAGEMENT shall not be liable under this indemnification provision with respect to any claim made against an Indemnified Party unless such Indemnified Party shall have notified N&B MANAGEMENT in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon such Indemnified Party (or after such Indemnified Party shall have received notice of such service on any designated agent), but failure to notify N&B MANAGEMENT of any such claim shall not relieve N&B MANAGEMENT from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of this indemnification provision. In case any such action is brought against the Indemnified Parties, N&B MANAGEMENT shall be entitled to participate at its own expense in the defense thereof. N&B MANAGEMENT also shall be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from N&B MANAGEMENT to such party of N&B MANAGEMENT's election to assume the defense thereof, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and N&B MANAGEMENT will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation. Article VIII. TERM; TERMINATION 8.1 This Agreement shall be effective as of the date hereof and shall continue in force until terminated in accordance with the provisions herein. 8.2 This Agreement shall terminate in accordance with the following provisions: (a) At the option of LIFE COMPANY or TRUST at any time from the date hereof upon 180 days' notice, unless a shorter time is agreed to by the parties; (b) At the option of LIFE COMPANY, if TRUST shares are not reasonably available to meet the requirements of the Variable Contracts as determined by LIFE COMPANY. Prompt notice of election to terminate shall be furnished by LIFE COMPANY, said termination to be effective ten days after receipt of notice unless TRUST makes available a sufficient number of shares to reasonably meet the requirements of the Variable Contracts within said ten-day period; 13 14 (c) At the option of LIFE COMPANY, upon the institution of formal proceedings against TRUST by the SEC, or any other regulatory body, the expected or anticipated ruling, judgment or outcome of which would, in LIFE COMPANY's reasonable judgment, materially impair TRUST's ability to meet and perform Trust's obligations and duties hereunder. Prompt notice of election to terminate shall be furnished by LIFE COMPANY with said termination to be effective upon receipt of notice; (d) At the option of TRUST, upon the institution of formal proceedings against LIFE COMPANY by the SEC, the National Association of Securities Dealers, Inc., or any other regulatory body, the expected or anticipated ruling, judgment or outcome of which would, in TRUST's reasonable judgment, materially impair LIFE COMPANY's ability to meet and perform its obligations and duties hereunder. Prompt notice of election to terminate shall be furnished by TRUST with said termination to be effective upon receipt of notice; (e) In the event TRUST's shares are not registered, issued or sold in accordance with applicable state or federal law, or such law precludes the use of such shares as the underlying investment medium of Variable Contracts issued or to be issued by LIFE COMPANY. Termination shall be effective upon such occurrence without notice; (f) At the option of TRUST if the Variable Contracts cease to qualify as annuity contracts or life insurance contracts, as applicable, under the Code, or if TRUST reasonably believes that the Variable Contracts may fail to so qualify. Termination shall be effective upon receipt of notice by LIFE COMPANY; (g) At the option of LIFE COMPANY, upon TRUST's breach of any material provision of this Agreement, which breach has not been cured to the satisfaction of LIFE COMPANY within ten days after written notice of such breach is delivered to TRUST; (h) At the option of TRUST, upon LIFE COMPANY's breach of any material provision of this Agreement, which breach has not been cured to the satisfaction of TRUST within ten days after written notice of such breach is delivered to LIFE COMPANY; (i) At the option of TRUST, if the Variable Contracts are not registered, issued or sold in accordance with applicable federal and/or state law. Termination shall be effective immediately upon such occurrence without notice; 14 15 (j) In the event this Agreement is assigned without the prior written consent of LIFE COMPANY, TRUST, MANAGERS TRUST and N&B MANAGEMENT, termination shall be effective immediately upon such occurrence without notice. 8.3 Notwithstanding any termination of this Agreement pursuant to Section 8.2 hereof, TRUST at its option may elect to continue to make available additional TRUST shares, as provided below, for so long as TRUST desires pursuant to the terms and conditions of this Agreement, for all Variable Contracts in effect on the effective date of termination of this Agreement (hereinafter referred to as "Existing Contracts"). Specifically, without limitation, if TRUST so elects to make additional TRUST shares available, the owners of the Existing Contracts or LIFE COMPANY, whichever shall have legal authority to do so, shall be permitted to reallocate investments in TRUST, redeem investments in TRUST and/or invest in TRUST upon the payment of additional premiums under the Existing Contracts. In the event of a termination of this Agreement pursuant to Section 8.2 hereof, TRUST and N&B MANAGEMENT, as promptly as is practicable under the circumstances, shall notify LIFE COMPANY whether TRUST elects to continue to make TRUST shares available after such termination. If TRUST shares continue to be made available after such termination, the provisions of this Agreement shall remain in effect and thereafter either TRUST or LIFE COMPANY may terminate the Agreement, as so continued pursuant to this Section 8.3, upon sixty (60) days prior written notice to the other party. 8.4 Except as necessary to implement Variable Contract owner initiated transactions, or as required by state insurance laws or regulations, LIFE COMPANY shall not redeem the shares attributable to the Variable Contracts (as opposed to the shares attributable to LIFE COMPANY's assets held in the Separate Accounts), and LIFE COMPANY shall not prevent Variable Contract owners from allocating payments to a Portfolio that was otherwise available under the Variable Contracts, until thirty (30) days after the LIFE COMPANY shall have notified TRUST of its intention to do so. Article IX. NOTICES Any notice hereunder shall be given by registered or certified mail return receipt requested to the other party at the address of such party set forth below or at such other address as such party may from time to time specify in writing to the other party. If to TRUST, MANAGERS TRUST or N&B MANAGEMENT: Neuberger&Berman Management Incorporated 605 Third Avenue New York, NY 10158-0006 Attention: Ellen Metzger, General Counsel 15 16 If to LIFE COMPANY: Notice shall be deemed given on the date of receipt by the addressee as evidenced by the return receipt. Article X. MISCELLANEOUS 10.1 The captions in this Agreement are included for convenience of reference only and in no way define or delineate any of the provisions hereof or otherwise affect their construction or effect. 10.2 This Agreement may be executed simultaneously in two or more counterparts, each of which taken together shall constitute one and the same instrument. 10.3 If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Agreement shall not be affected thereby. 10.4 This Agreement shall be construed and the provisions hereof interpreted under and in accordance with the laws of the State of New York. It shall also be subject to the provisions of the federal securities laws and the rules and regulations thereunder and to any orders of the SEC granting exemptive relief therefrom and the conditions of such orders. 10.5 The parties agree that the assets and liabilities of each Series are separate and distinct from the assets and liabilities of each other Series. No Series shall be liable or shall be charged for any debt, obligation or liability of any other Series. No Trustee, officer or agent shall be personally liable for such debt, obligation or liability of any Series or Portfolio and no Portfolio or other investor, other than the Portfolio or other investors investing in the Series which incurs a debt, obligation or liability, shall be liable therefor. 10.6 Each party shall cooperate with each other party and all appropriate governmental authorities (including without limitation the SEC, the National Association of Securities Dealers, Inc. and state insurance regulators) and shall permit such authorities reasonable access to its books and records in connection with any investigation or inquiry relating to this Agreement or the transactions contemplated hereby. 10.7 The rights, remedies and obligations contained in this Agreement are cumulative and are in addition to any and all rights, remedies and obligations, at law or in equity, which the parties hereto are entitled to under state and federal laws. 16 17 10.8 No provision of this Agreement may be amended or modified in any manner except by a written agreement properly authorized and executed by TRUST, MANAGERS TRUST, N&B MANAGEMENT and the LIFE COMPANY. IN WITNESS WHEREOF, the parties have caused their duly authorized officers to execute this Fund Participation Agreement as of the date and year first above written. NEUBERGER&BERMAN ADVISERS MANAGEMENT TRUST By: -------------------------- Name: Title: ADVISERS MANAGERS TRUST By: -------------------------- Name: Title: NEUBERGER&BERMAN MANAGEMENT INCORPORATED By: -------------------------- Name: Title: NATIONAL LIFE INSURANCE COMPANY By: -------------------------- Name: Title: 17 18
APPENDIX A Neuberger&Berman Advisers Corresponding Series of Management Trust and its Series (Portfolios) Advisers Managers Trust (Series) - -------------------------------------------- -------------------------------- Balanced Portfolio AMT Balanced Investments Government Income Portfolio AMT Government Income Investments Growth Portfolio AMT Growth Investments Guardian Portfolio AMT Guardian Investments Limited Maturity Bond Portfolio AMT Limited Maturity Bond Investments Liquid Asset Portfolio AMT Liquid Asset Investments Mid-Cap Growth Portfolio AMT Mid-Cap Growth Investments Partners Portfolio AMT Partners Investments International Portfolio AMT International Investments
18 19
Appendix B Separate Accounts Selected Portfolios - ----------------- -------------------
19 EX-1.A.8.G 18 FORM OF PARTICIPATION AGREEMENT WITH J.P. MORGAN 1 EXHIBIT 1 A 8(g) FUND PARTICIPATION AGREEMENT This Agreement is entered into as of the 23rd day of March, 1998, between National Life Insurance Company ("Insurance Company"), a life insurance company organized under the laws of the State of Vermont, and J. P. Morgan Series Trust II ("Fund"), a business trust organized under the laws of Delaware, with respect to the Fund's portfolio or portfolios set forth on Schedule 1 hereto, as such Schedule may be revised from time to time (the "Series"; if there are more than one Series to which this Agreement applies, the provisions herein shall apply severally to each such Series). ARTICLE I 1. DEFINITIONS 1.1 "Act" shall mean the Investment Company Act of 1940, as amended. 1.2 "Board" shall mean the Board of Trustees of the Fund having the responsibility for management and control of the Fund. 1.3 "Business Day" shall mean any day for which the Fund calculates net asset value per share as described in the Fund's Prospectus. 1.4 "Commission" shall mean the Securities and Exchange Commission. 1.5 "Contract" shall mean a variable annuity or variable life insurance contract that uses the Fund as an underlying investment medium. Individuals who participate under a group Contract are "Participants". 1.6 "Contractholder" shall mean any entity that is a party to a Contract with a Participating Company. 1.7 "Disinterested Board Members" shall mean those members of the Board that are not deemed to be "interested persons" of the Fund, as defined by the Act. 1.8 "Participating Companies" shall mean any insurance company (including Insurance Company), which offers variable annuity and/or variable life insurance contracts to the public and which has entered into an agreement with the Fund for the purpose of making Fund shares available to serve as the underlying investment medium for the aforesaid Contracts. 1.9 "Plans" shall mean qualified pension and retirement benefit plans. 1.10 "Prospectus" shall mean the Fund's current prospectus and statement of additional information, as most recently filed with the Commission, with respect to the Series. 1.11 "Separate Accounts" shall mean National Variable Life Insurance Account and National Variable Annuity Account, each a separate account established by Insurance Company in accordance with the laws of the State of Vermont, as set forth on Schedule II. 1.12 "Software Program" shall mean the software program used by the Fund for providing Fund and account balance information including net asset value per share. 1.13 "Insurance Company's General Account(s)" shall mean the general account(s) of Insurance Company and its affiliates which invest in the Fund. 2 ARTICLE II 2. REPRESENTATIONS 2.1 Insurance Company represents and warrants that (a) it is an insurance company duly organized and in good standing under applicable law; (b) it has legally and validly established the Separate Accounts pursuant to the Vermont Insurance Code for the purpose of offering to the public certain individual variable annuity contracts; (c) it has registered the Separate Accounts as a unit investment trust under the Act to serve as the segregated investment account for the Contracts; (d) each Separate Account is eligible to invest in shares of the Fund without such investment disqualifying the Fund as an investment medium for insurance company separate accounts supporting variable annuity contracts or variable life insurance contracts; and (e) each Separate Account shall comply with all applicable legal requirements. 2.2 Insurance Company represents and warrants that (a) the Contracts will be described in a registration statement filed under the Securities Act of 1933, as amended ("1933 Act"); (b) the Contracts will be issued and sold in compliance in all material respects with all applicable federal and state laws; and (c) the sale of the Contracts shall comply in all material respects with state insurance law requirements. Insurance Company agrees to inform the Fund promptly of any investment restrictions imposed by state insurance law and applicable to the Fund. 2.3 Insurance Company represents and warrants that the income, gains and losses, whether or not realized, from assets allocated to the Separate Accounts are, in accordance with the applicable Contracts, to be credited to or charged against such Separate Accounts without regard to other income, gains or losses from assets allocated to any other accounts of Insurance Company. Insurance Company represents and warrants that the assets of the Separate Accounts are and will be kept separate from Insurance Company's General Account and any other separate accounts Insurance Company may have, and will not be charged with liabilities from any business that Insurance Company may conduct or the liabilities of any companies affiliated with Insurance Company. 2.4 Fund represents that the Fund is registered with the Commission under the Act as an open-end management investment company and possesses, and shall maintain, all legal and regulatory licenses, approvals, consents and/or exemptions required for the Fund to operate and offer its shares as an underlying investment medium for Participating Companies. The Fund has established five portfolios and may in the future establish other portfolios. 2.5 Fund represents that it is currently qualified as a Regulated Investment Company under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and that it will make every effort to maintain such qualification (under Subchapter M or any successor or similar provision) and that it will notify Insurance Company immediately upon having a reasonable basis for believing that it has ceased to so qualify or that it might not so qualify in the future. 2.6 Insurance Company represents and agrees that the Contracts are currently, and at the time of issuance will be, treated as life insurance policies or annuity contracts, whichever is appropriate, under applicable provisions of the Code, and that it will make every effort to maintain such treatment and that it will notify the Fund and its investment adviser immediately upon having a reasonable basis for believing that the Contracts have ceased to be so treated or that they might not be so treated in the future. Insurance Company agrees that any prospectus offering a Contract that is a "modified endowment contract," as that term is defined in Section 7702A of the Code, will identify such Contract as a modified endowment contract (or policy). 3 2.7 Fund agrees that the Fund's assets shall be managed and invested in a manner that complies with the requirements of Section 817(h) of the Code. 2.8 Insurance Company agrees that the Fund shall be permitted (subject to the other terms of this Agreement) to make Series' shares available to other Participating Companies and contractholders and to Plans. 2.9 Fund represents and warrants that any of its trustees, officers, employees, investment advisers, and other individuals/entities who deal with the money and/or securities of the Fund are and shall continue to be at all times covered by a blanket fidelity bond or similar coverage for the benefit of the Fund in an amount not less than that required by Rule 17g-1 under the Act. The aforesaid Bond shall include coverage for larceny and embezzlement and shall be issued by a reputable bonding company. 2.10 Insurance Company represents and warrants that all of its employees and agents who deal with the money and/or securities of the Fund are and shall continue to be at all times covered by a blanket fidelity bond or similar coverage in an amount not less than the coverage required to be maintained by the Fund. The aforesaid Bond shall include coverage for larceny and embezzlement and shall be issued by a reputable bonding company. 2.11 Insurance Company agrees that the Fund's investment adviser shall be deemed a third party beneficiary under this Agreement and may enforce any and all rights conferred by virtue of this Agreement. ARTICLE III 3. FUND SHARES 3.1 The Contracts funded through the Separate Accounts will provide for the investment of certain amounts in the Series' shares. 3.2 Fund agrees to make the shares of its Series available for purchase at the then applicable net asset value per share by Insurance Company and the Separate Accounts on each Business Day pursuant to rules of the Commission. Notwithstanding the foregoing, the Fund may refuse to sell the shares of any Series to any person, or suspend or terminate the offering of the shares of any Series if such action is required by law or by regulatory authorities having jurisdiction or is, in the sole discretion of the Board, acting in good faith and in light of its fiduciary duties under federal and any applicable state laws, necessary and in the best interests of the shareholders of such Series. 3.3 Fund agrees that shares of the Fund will be sold only to Participating Companies and their separate accounts and to the general accounts of those Participating Companies and their affiliates and to Plans. No shares of any Series will be sold to the general public. 3.4 Fund shall use its best efforts to provide closing net asset value, dividend and capital gain information for each Series available on a per-share and Series basis to Insurance Company by 6:30 p.m. Eastern Time on each Business Day. Any material errors in the calculation of net asset value, dividend and capital gain information shall be reported immediately upon discovery to Insurance Company. Non-material errors will be corrected in the next Business Day's net asset value per share for the Series in question. 3.5 At the end of each Business Day, Insurance Company will use the information described in Sections 3.2 and 3.4 to calculate the Separate Account unit values for the day. Using this unit value, Insurance Company will process the day's Separate Account transactions received by it by the close of trading on the floor of the New York Stock Exchange (currently 4:00 p.m. Eastern time) to determine the net dollar amount of Series shares which will be purchased or redeemed at that day's closing net asset value per share for such Series. The net purchase or redemption orders 4 will be transmitted to the Fund by Insurance Company by 9:00 a.m. Eastern Time on the Business Day next following Insurance Company's receipt of that information. Subject to Sections 3.6 and 3.8, all purchase and redemption orders for Insurance Company's General Accounts shall be effected at the net asset value per share of the relevant Series next calculated after receipt of the order by the Fund or its Transfer Agent. 3.6 Fund appoints Insurance Company as its agent for the limited purpose of accepting orders for the purchase and redemption of shares of each Series for the Separate Account. Fund will execute orders for any Series at the applicable net asset value per share determined as of the close of trading on the day of receipt of such orders by Insurance Company acting as agent ("effective trade date"), provided that the Fund receives notice of such orders by 9:00 a.m. Eastern Time on the next following Business Day and, if such orders request the purchase of Series shares, the conditions specified in Section 3.8, as applicable, are satisfied. A redemption or purchase request for any Series that does not satisfy the conditions specified above and in Section 3.8, as applicable, will be effected at the net asset value computed for such Series on the Business Day immediately preceding the next following Business Day upon which such conditions have been satisfied. 3.7 Insurance Company will make its best efforts to notify Fund in advance of any unusually large purchase or redemption orders. 3.8 If Insurance Company's order requests the purchase of Series shares, Insurance Company will pay for such purchases by wiring Federal Funds to Fund or its designated custodial account on the day the order is transmitted. Insurance Company shall make all reasonable efforts to transmit to the Fund payment in Federal Funds by 12:00 noon Eastern Time on the Business Day the Fund receives the notice of the order pursuant to Section 3.5. Fund will execute such orders at the applicable net asset value per share determined as of the close of trading on the effective trade date if Fund receives payment in Federal Funds by 4:00 p.m. Eastern Time on the Business Day the Fund receives the notice of the order pursuant to Section 3.5. If payment in Federal Funds for any purchase is not received or is received by the Fund after 4:00 p.m. Eastern Time on such Business Day, Insurance Company shall promptly upon the Fund's request, reimburse the Fund for any charges, costs, fees, interest or other expenses incurred by the Fund in connection with any advances to, or borrowings or overdrafts by, the Fund, or any similar expenses incurred by the Fund, as a result of portfolio transactions effected by the Fund based upon such purchase request. If Insurance Company's order requests the redemption of Series shares valued at or greater than $1 million dollars, the Fund may wire such amount to Insurance Company within seven days of the order. 3.9 Fund has the obligation to ensure that Series shares are registered with applicable federal agencies at all times. 3.10 Fund will confirm each purchase or redemption order made by Insurance Company. Transfer of Series shares will be by book entry only. No share certificates will be issued to Insurance Company. Insurance Company will record shares ordered from Fund in an appropriate title for the corresponding account. 3.11 Fund shall credit Insurance Company with the appropriate number of shares. 3.12 On each ex-dividend date of the Fund or, if not a Business Day, on the first Business Day thereafter, Fund shall communicate to Insurance Company the amount of dividend and capital gain, if any, per share of each Series. All dividends and capital gains of any Series shall be automatically reinvested in additional shares of the relevant Series at the applicable net asset value per share of such Series on the payable date. Fund shall, on the day after the payable date or, if not a Business Day, on the first Business Day thereafter, notify Insurance Company of the number of shares so issued. 5 ARTICLE IV 4. STATEMENTS AND REPORTS 4.1 Fund shall provide monthly statements of account as of the end of each month for all of Insurance Company's accounts by the fifteenth (15th) Business Day of the following month. 4.2 Fund shall distribute to Insurance Company copies of the Fund's Prospectuses, proxy materials, notices, periodic reports and other printed materials (which the Fund customarily provides to its shareholders) in quantities as Insurance Company may reasonably request for distribution to each Contractholder and Participant. 4.3 Fund will provide to Insurance Company at least one complete copy of all registration statements, Prospectuses, reports, proxy statements, sales literature and other promotional materials, applications for exemptions, requests for no-action letters, and all amendments to any of the above, that relate to the Fund or its shares, contemporaneously with the filing of such document with the Commission or other regulatory authorities. 4.4 Insurance Company will provide to the Fund at least one copy of all registration statements, Prospectuses, reports, proxy statements, sales literature and other promotional materials, applications for exemptions, requests for no-action letters, and all amendments to any of the above, that relate to the Contracts or the Separate Accounts, contemporaneously with the filing of such document with the Commission. ARTICLE V 5. EXPENSES 5.1 The charge to the Fund for all expenses and costs of the Series, including but not limited to management fees, administrative expenses and legal and regulatory costs, will be made in the determination of the relevant Series' daily net asset value per share so as to accumulate to an annual charge at the rate set forth in the Fund's Prospectus. Excluded from the expense limitation described herein shall be brokerage commissions and transaction fees and extraordinary expenses. 5.2 Except as provided in this Article V and, in particular in the next sentence, Insurance Company shall not be required to pay directly any expenses of the Fund or expenses relating to the distribution of its shares. Insurance Company shall pay the following expenses or costs: a. Such amount of the production expenses of any Fund materials, including the cost of printing the Fund's Prospectus, or marketing materials for prospective Insurance Company Contractholders and Participants as the Fund's investment adviser and Insurance Company shall agree from time to time. b. Distribution expenses of any Fund materials or marketing materials for prospective Insurance Company Contractholders and Participants. c. Distribution expenses of Fund materials or marketing materials for Insurance Company Contractholders and Participants. Except as provided herein, all other Fund expenses shall not be borne by Insurance Company. ARTICLE VI 6. EXEMPTIVE RELIEF 6.1 Insurance Company has reviewed a copy of the order dated December, 1996 of the Securities and Exchange Commission under Section 6(c) of the Act and, in particular, has reviewed the 6 conditions to the relief set forth in the related Notice. As set forth therein, Insurance Company agrees to report any potential or existing conflicts promptly to the Board, and in particular whenever contract voting instructions are disregarded, and recognizes that it will be responsible for assisting the Board in carrying out its responsibilities under such application. Insurance Company agrees to carry out such responsibilities with a view to the interests of existing Contractholders. 6.2 If a majority of the Board, or a majority of Disinterested Board Members, determines that a material irreconcilable conflict exists with regard to Contractholder investments in the Fund, the Board shall give prompt notice to all Participating Companies. If the Board determines that Insurance Company is responsible for causing or creating said conflict, Insurance Company shall at its sole cost and expense, and to the extent reasonably practicable (as determined by a majority of the Disinterested Board Members), take such action as is necessary to remedy or eliminate the irreconcilable material conflict. Such necessary action may include, but shall not be limited to: a. Withdrawing the assets allocable to the Separate Accounts from the Series and reinvesting such assets in a different investment medium, or submitting the question of whether such segregation should be implemented to a vote or all affected Contractholders; and/or b. Establishing a new registered management investment company. 6.3 If a material irreconcilable conflict arises as a result of a decision by Insurance Company to disregard Contractholder voting instructions and said decision represents a minority position or would preclude a majority vote by all Contractholders having an interest in the Fund, Insurance Company may be required, at the Board's election, to withdraw the Separate Accounts' investment in the Fund. 6.4 For the purpose of this Article, a majority of the Disinterested Board Members shall determine whether or not any proposed action adequately remedies any irreconcilable material conflict, but in no event will the Fund be required to bear the expense of establishing a new funding medium for any Contract. Insurance Company shall not be required by this Article to establish a new funding medium for any Contract if an offer to do so has been declined by vote of a majority of the Contractholders materially adversely affected by the irreconcilable material conflict. 6.5 No action by Insurance Company taken or omitted, and no action by the Separate Accounts or the Fund taken or omitted as a result of any act or failure to act by Insurance Company pursuant to this Article VI shall relieve Insurance Company of its obligations under, or otherwise affect the operation of, Article V. ARTICLE VII 7. VOTING OF FUND SHARES 7.1 Fund shall provide Insurance Company with copies at no cost to Insurance Company, of the Fund's proxy material, reports to shareholders and other communications to shareholders in such quantity as Insurance Company shall reasonably require for distributing to Contractholders or Participants. 7 Insurance Company shall: (a) solicit voting instructions from Contractholders or Participants on a timely basis and in accordance with applicable law; (b) vote the Series shares in accordance with instructions received from Contractholders or Participants; and (c) vote Series shares for which no instructions have been received in the same proportion as Series shares for which instructions have been received. Insurance Company agrees at all times to votes its General Account shares in the same proportion as Series shares for which instructions have been received from Contractholders or Participants. Insurance Company further agrees to be responsible for assuring that voting Series shares for the Separate Account is conducted in a manner consistent with other Participating Companies. 7.2 Insurance Company agrees that it shall not, without the prior written consent of the Fund and its investment adviser, solicit, induce or encourage Contractholders to (a) change or supplement the Fund's current investment adviser or (b) change, modify, substitute, add to or delete the Fund from the current investment media for the Contracts. ARTICLE VIII 8. MARKETING AND REPRESENTATIONS 8.1 The Fund or its underwriter shall periodically furnish Insurance Company with the following documents, in quantities as Insurance Company may reasonably request: a. Current Prospectus and any supplements thereto; b. other marketing materials. Expenses for the production of such documents shall be borne by Insurance Company in accordance with Section 5.2 of this Agreement. 8.2 Insurance Company shall designate certain persons or entities which shall have the requisite licenses to solicit applications for the sale of Contracts. No representation is made as to the number or amount of Contracts that are to be sold by Insurance Company. Insurance Company shall make reasonable efforts to market the Contracts and shall comply with all applicable federal and state laws in connection therewith. 8.3 Insurance Company shall furnish, or shall cause to be furnished, to the Fund, each piece of sales literature or other promotional material in which the Fund, its investment adviser or the administrator is named, at least fifteen Business Days prior to its use. No such material shall be used unless the Fund approves such material. Such approval (if given) must be in writing and shall be presumed not given if not received within ten Business Days after receipt of such material. The Fund shall use all reasonable efforts to respond within ten days of receipt. 8.4 Insurance Company shall not give any information or make any representations or statements on behalf of the Fund or concerning the Fund or any Series in connection with the sale of the Contracts other than the information or representations contained in the registration statement or Prospectus, as may be amended or supplemented from time to time, or in reports or proxy statements for the Fund, or in sales literature or other promotional material approved by the Fund. 8 8.5 Fund shall furnish, or shall cause to be furnished, to Insurance Company, each piece of the Fund's sales literature or other promotional material in which Insurance Company or the Separate Accounts are named, at least fifteen Business Days prior to its use. No such material shall be used unless Insurance Company approves such material. Such approval (if given) must be in writing and shall be presumed not given if not received within ten Business Days after receipt of such material. Insurance Company shall use all reasonable efforts to respond within ten days of receipt. 8.6 Fund shall not, in connection with the sale of Series shares, give any information or make any representations on behalf of Insurance Company or concerning Insurance Company, the Separate Accounts, or the Contracts other than the information or representations contained in a registration statement or prospectus for the Contracts, as may be amended or supplemented from time to time, or in published reports for the Separate Accounts which are in the public domain or approved by Insurance Company for distribution to Contractholders or Participants, or in sales literature or other promotional material approved by Insurance Company. 8.7 For purposes of this Agreement, the phrase "sales literature or other promotional material" or words of similar import include, without limitation, advertisements (such as material published, or designed for use, in a newspaper, magazine or other periodical, radio, television, telephone or tape recording, videotape display, signs or billboards, motion pictures or other public media), sales literature (such as any written communication distributed or made generally available to customers or the public, including brochures, circulars, research reports, market letters, form letters, seminar texts, or reprints or excerpts of any other advertisement, sales literature, or published article), educational or training materials or other communications distributed or made generally available to some or all agents or employees, registration statements, prospectuses, statements of additional information, shareholder reports and proxy materials, and any other material constituting sales literature or advertising under National Association of Securities Dealers, Inc. rules, the Act or the 1933 Act. 9 ARTICLE IX 9. INDEMNIFICATION 9.1 Insurance Company agrees to indemnify and hold harmless the Fund, its investment adviser, any sub-investment adviser of a Series, and their affiliates, and each of their directors, trustees, officers, employees, agents and each person, if any, who controls or is associated with any of the foregoing entities or persons within the meaning of the 1933 Act (collectively, the "Indemnified Parties" for purposes of Section 9.1), against any and all losses, claims, damages or liabilities joint or several (including any investigative, legal and other expenses reasonably incurred in connection with, and any amounts paid in settlement of, any action, suit or proceeding or any claim asserted) for which the Indemnified Parties may become subject, under the 1933 Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect to thereof) (i) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in information furnished by Insurance Company for use in the registration statement or Prospectus or sales literature or advertisements of the Fund or with respect to the Separate Accounts or Contracts, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; (ii) arise out of or as a result of conduct, statements or representations (other than statements or representations contained in the Prospectus and sales literature or advertisements of the Fund) of Insurance Company or its agents, with respect to the sale and distribution of Contracts for which Series shares are an underlying investment; (iii) arise out of the wrongful conduct of Insurance Company or persons under its control with respect to the sale or distribution of the Contracts or Series shares; (iv) arise out of Insurance Company's incorrect calculation and/or untimely reporting of net purchase or redemption orders; or (v) arise out of any breach by Insurance Company of a material term of this Agreement or as a result of any failure by Insurance Company to provide the services and furnish the materials or to make any payments provided for in this Agreement. Insurance Company will reimburse any Indemnified Party in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that with respect to clauses (i) and (ii) above Insurance Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any untrue statement or omission or alleged omission made in such registration statement, prospectus, sales literature, or advertisement in conformity with written information furnished to Insurance Company by the Fund specifically for use therein; and provided, further, that the Insurance Company shall not be liable for special, consequential, or incidental damages. This indemnity agreement will be in addition to any liability which Insurance Company may otherwise have. 9.22 The Fund agrees to indemnify and hold harmless Insurance Company and each of its directors, officers, employees, agents and each person, if any, who controls Insurance Company within the meaning of the 1933 Act against any losses, claims, damages or liabilities to which Insurance Company or any such director, officer, employee, agent or controlling person may become subject, under the 1933 Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) (1) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement or Prospectus or sales literature or advertisements of the Fund; (2) arise out of or are based upon the omission to state in the registration statement or Prospectus or sales literature or advertisements of the Fund any material fact required to be stated therein or necessary to make the statements therein not misleading; or (3) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement or Prospectus or sales literature or advertisements with respect to the Separate Account or the Contracts and such statements were based on information provided to Insurance Company by the Fund; and the Fund will reimburse any legal or other expenses reasonably incurred by Insurance Company or any such director, officer, employee, agent or controlling person in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Fund will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or omission or alleged omission made in such Registration Statement, Prospectus, sales literature or advertisements in conformity with written information furnished to 10 the Fund by Insurance Company specifically for use therein; and provided, further, that the Fund shall not be liable for special, consequential or incidental damages. This indemnity agreement will be in addition to any liability which the Fund may otherwise have. 9.3 The Fund shall indemnify and hold Insurance Company harmless against any and all liability, loss, damages, costs or expenses which Insurance Company may incur, suffer or be required to pay due to the Fund's (1) incorrect calculation of the daily net asset value, dividend rate or capital gain distribution rate of a Series; (2) incorrect reporting of the daily net asset value, dividend rate or capital gain distribution rate; and (3) untimely reporting of the net asset value, dividend rate or capital gain distribution rate; provided that the Fund shall have no obligation to indemnify and hold harmless Insurance Company if the incorrect calculation or incorrect or untimely reporting was the result of incorrect information furnished by Insurance Company or information furnished untimely by Insurance Company or otherwise as a result of or relating to a breach of this Agreement by Insurance Company; and provided, further, that the Fund shall not be liable for special, consequential or incidental damages. 9.4 Promptly after receipt by an indemnified party under this Article of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Article, notify the indemnifying party of the commencement thereof. The omission to so notify the indemnifying party will not relieve the indemnifying party from any liability under this Article IX, except to the extent that the omission results in a failure of actual notice to the indemnifying party and such indemnifying party is damaged solely as a result of the failure to give such notice. In case any such action is brought against any indemnified party, and it notified the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, assume the defense thereof, with counsel reasonably satisfactory to such indemnified party, and to the extent that the indemnifying party has given notice to such effect to the indemnified party and is performing its obligations under this Article, the indemnifying party shall not be liable for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof, other than reasonable costs of investigation. Notwithstanding the foregoing, in any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent. A successor by law of the parties to this Agreement shall be entitled to the benefits of the indemnification contained in this Article IX. 9.5 Insurance Company shall indemnify and hold the Fund, its investment adviser and any sub-investment adviser of a Series harmless against any tax liability incurred by the Fund under Section 851 of the Code arising from purchases or redemptions by Insurance Company's General Accounts or the account of its affiliates. ARTICLE X 10. COMMENCEMENT AND TERMINATION 10.1 This Agreement shall be effective as of the date hereof and shall continue in force until terminated in accordance with the provisions herein. 10.2 This Agreement shall terminate without penalty as to one or more Series at the option of the terminating party: 11 a. At the option of Insurance Company or the Fund at any time from the date hereof upon 180 days' notice, unless a shorter time is agreed to by the parties; b. At the option of Insurance Company, if shares of any Series are not reasonably available to meet the requirements of the Contracts as determined by Insurance Company. Prompt notice of election to terminate shall be furnished by Insurance Company, said termination to be effective ten days after receipt of notice unless the Fund makes available a sufficient number of shares to meet the requirements of the Contracts within said ten-day period; c. At the option of Insurance Company, upon the institution of formal proceedings against the Fund by the Commission, National Association of Securities Dealers or any other regulatory body, the expected or anticipated ruling, judgment or outcome of which would, in Insurance Company's reasonable judgment, materially impair the Fund's ability to meet and perform the Fund's obligations and duties hereunder. Prompt notice of election to terminate shall be furnished by Insurance Company with said termination to be effective upon receipt of notice; d. At the option of the Fund, upon the institution of formal proceedings against Insurance Company by the Commission, National Association of Securities Dealers or any other regulatory body, the expected or anticipated ruling, judgment or outcome of which would, in the Fund's reasonable judgment, materially impair Insurance Company's ability to meet and perform Insurance Company's obligations and duties hereunder. Prompt notice of election to terminate shall be furnished by the Fund with said termination to be effective upon receipt of notice; e. At the option of the Fund, if the Fund shall determine, in its sole judgment reasonably exercised in good faith, that Insurance Company has suffered a material adverse change in its business or financial condition or is the subject of material adverse publicity and such material adverse change or material adverse publicity is likely to have a material adverse impact upon the business and operation of the Fund or its investment adviser, the Fund shall notify Insurance Company in writing of such determination and its intent to terminate this Agreement, and after considering the actions taken by Insurance Company and any other changes in circumstances since the giving of such notice, such determination of the Fund shall continue to apply on the sixtieth (60th) day following the giving of such notice, which sixtieth day shall be the effective date of termination; f. Upon termination of the Investment Advisory Agreement between the Fund and its investment adviser or its successors unless Insurance Company specifically approves the selection of a new Fund investment adviser. The Fund shall promptly furnish notice of such termination to Insurance Company; g. In the event the Fund's shares are not registered, issued or sold in accordance with applicable federal law, or such law precludes the use of such shares as the underlying investment medium of Contracts issued or to be issued by Insurance Company. Termination shall be effective immediately upon such occurrence without notice; h. At the option of the Fund upon a determination by the Board in good faith that it is no longer advisable and in the best interests of shareholders for the Fund to continue to operate pursuant to this Agreement. Termination pursuant to this Subsection (h) shall be effective upon notice by the Fund to Insurance Company of such termination; i. At the option of the Fund if the Contracts cease to qualify as annuity contracts or life insurance policies, as applicable, under the Code, or if the Fund reasonably believes that the Contracts may fail to so qualify; 12 j. At the option of either party to this Agreement, upon another party's breach of any material provision of this Agreement; k. At the option of the Fund, if the Contracts are not registered, issued or sold in accordance with applicable federal and/or state law; or l. Upon assignment of this Agreement, unless made with the written consent of the non-assigning party. Any such termination pursuant to Section 10.2a, 10.2d, 10.2e, 10.2f or 10.2k herein shall not affect the operation of Article V of this Agreement. Any termination of this Agreement shall not affect the operation of Article IX of this Agreement. 10.3 Notwithstanding any termination of this Agreement pursuant to Section 10.2 hereof, the Fund and its investment adviser may, at the option of the Fund, continue to make available additional Series shares for so long as the Fund desires pursuant to the terms and conditions of this Agreement as provided below, for all Contracts in effect on the effective date of termination of this Agreement (hereinafter referred to as "Existing Contracts"). Specifically, without limitation, if the Fund so elects to make additional Series shares available, the owners of the Existing Contracts or Insurance Company, whichever shall have legal authority to do so, shall be permitted to reallocate investments in the Series, redeem investments in the Fund and/or invest in the Fund upon the making of additional purchase payments under the Existing Contracts. In the event of a termination of this Agreement pursuant to Section 10.2 hereof, the Fund, as promptly as is practicable under the circumstances, shall notify Insurance Company whether the Fund will continue to make Series shares available after such termination. If Series shares continue to be made available after such termination, the provisions of this Agreement shall remain in effect and thereafter either the Fund or Insurance Company may terminate the Agreement, as so continued pursuant to this Section 10.3, upon prior written notice to the other party, such notice to be for a period that is reasonable under the circumstances but, if given by the Fund, need not be for more than six months. ARTICLE XI 11. AMENDMENTS 11.1 Any other changes in the terms of this Agreement shall be made by agreement in writing between Insurance Company and Fund. ARTICLE XII 12. NOTICE 12.1 Each notice required by this Agreement shall be given by certified mail, return receipt requested, to the appropriate parties at the following addresses: Insurance Company: National Life Insurance Company One National Life Drive Montpelier, Vermont 05604 Attention: D. Russell Morgan Fund: 13 J. P. Morgan Series Trust II c/o Morgan Guaranty Trust Company 522 Fifth Avenue New York, New York 10036 Attention: Sharon J. Weinberg Notice shall be deemed to be given on the date of receipt by the addresses as evidenced by the return receipt. ARTICLE XIII 13. MISCELLANEOUS 13.1 This Agreement has been executed on behalf of the Fund by the undersigned officer of the Fund in his capacity as an officer of the Fund. The obligations of this Agreement shall only be binding upon the assets and property of the Fund and shall not be binding upon any Trustee, officer or shareholder of the Fund individually. ARTICLE XIV 14. LAW 14.1 This Agreement shall be construed in accordance with the internal laws of the State of New York, without giving effect to principles of conflict of laws. IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be duly executed and attested as of the date first above written. NATIONAL LIFE INSURANCE COMPANY By: ------------------------------- Its: ------------------------------ J. P. MORGAN SERIES TRUST II By: ------------------------------- Its: ------------------------------ 14 SCHEDULE 1 Name of Series J. P. Morgan International Opportunities Portfolio J. P. Morgan Small Company Portfolio SCHEDULE II Separate Accounts National Variable Life Insurance Account National Variable Annuity Account II EX-1.A.8.H 19 PARTICIPATION AGREEMENT WITH GOLDMAN SACHS 1 EXHIBIT 1a 8(b) PARTICIPATION AGREEMENT THIS AGREEMENT, made and entered into this __ day of ________, 1998 by and between GOLDMAN SACHS VARIABLE INSURANCE TRUST, an unincorporated business trust formed under the laws of Delaware (the "Trust"), GOLDMAN, SACHS & CO., a New York limited partnership (the "Distributor"), and NATIONAL LIFE INSURANCE COMPANY, a Vermont life insurance company (the "Company"), on its own behalf and on behalf of each separate account of the Company identified herein. WHEREAS, the Trust is a series-type mutual fund offering shares of beneficial interest (the "Trust shares") consisting of one or more separate series ("Series") of shares, each such Series representing an interest in a particular investment portfolio of securities and other assets (a "Fund"), and which Series may be subdivided into various classes ("Classes") with each such Class supporting a distinct charge and expense arrangement; and WHEREAS, the Trust was established for the purpose of serving as an investment vehicle for insurance company separate accounts supporting variable annuity contracts and variable life insurance policies to be offered by insurance companies and may also be utilized by qualified retirement plans; and WHEREAS, the Distributor has the exclusive right to distribute Trust shares to qualifying investors; and WHEREAS, the Company desires that the Trust serve as an investment vehicle for a certain separate account(s) of the Company and the Distributor desires to sell shares of certain Series and/or Class(es) to such separate account(s); NOW, THEREFORE, in consideration of their mutual promises, the Trust, the Distributor and the Company agree as follows: ARTICLE I ADDITIONAL DEFINITIONS 1.1. "Account" -- the separate account of the Company described more specifically in Schedule 1 to this Agreement. If more than one separate account is described on Schedule 1, the term shall refer to each separate account so described. 1.2. "Business Day" -- each day that the Trust is open for business as provided in the Trust's Prospectus. 1.3. "Code" -- the Internal Revenue Code of 1986, as amended, and any successor thereto. 1.4. "Contracts" -- the class or classes of variable annuity contracts and/or variable life insurance policies issued by the Company and described more specifically on Schedule 2 to this Agreement. 1.5. "Contract Owners" -- the owners of the Contracts, as distinguished from all Product Owners. 1.6. "Participating Account" -- a separate account investing all or a portion of its assets in the Trust, including the Account. 2 1.7. "Participating Insurance Company" -- any insurance company investing in the Trust on its behalf or on behalf of a Participating Account, including the Company. 1.8. "Participating Plan" -- any qualified retirement plan investing in the Trust. 1.9. "Participating Investor" -- any Participating Account, Participating Insurance Company or Participating Plan, including the Account and the Company. 1.10. "Products" -- variable annuity contracts and variable life insurance policies supported by Participating Accounts, including the Contracts. 1.11. "Product Owners" -- owners of Products, including Contract Owners. 1.12. "Trust Board" -- the board of trustees of the Trust. 1.13. "Registration Statement" -- with respect to the Trust shares or a class of Contracts, the registration statement filed with the SEC to register such securities under the 1933 Act, or the most recently filed amendment thereto, in either case in the form in which it was declared or became effective. The Contracts' Registration Statement for each class of Contracts is described more specifically on Schedule 2 to this Agreement. The Trust's Registration Statement is filed on Form N-1A (File No. 333-35883). 1.14. "1940 Act Registration Statement" -- with respect to the Trust or the Account, the registration statement filed with the SEC to register such person as an investment company under the 1940 Act, or the most recently filed amendment thereto. The Account's 1940 Act Registration Statement is described more specifically on Schedule 2 to this Agreement. The Trust's 1940 Act Registration Statement is filed on Form N-1A (File No. 811-08361). 1.15. "Prospectus" -- with respect to shares of a Series (or Class) of the Trust or a class of Contracts, each version of the definitive prospectus or supplement thereto filed with the SEC pursuant to Rule 497 under the 1933 Act. With respect to any provision of this Agreement requiring a party to take action in accordance with a Prospectus, such reference thereto shall be deemed to be to the version for the applicable Series, Class or Contracts last so filed prior to the taking of such action. For purposes of Article IX, the term "Prospectus" shall include any statement of additional information incorporated therein. 1.16. "Statement of Additional Information" -- with respect to the shares of the Trust or a class of Contracts, each version of the definitive statement of additional information or supplement thereto filed with the SEC pursuant to Rule 497 under the 1933 Act. With respect to any provision of this Agreement requiring a party to take action in accordance with a Statement of Additional Information, such reference thereto shall be deemed to be the last version so filed prior to the taking of such action. 1.17. "SEC" -- the Securities and Exchange Commission. 1.18. "NASD" -- The National Association of Securities Dealers, Inc. 1.19. "1933 Act" -- the Securities Exchange Act of 1933, as amended. 1.20. "1940 Act" -- the Investment Company Act of 1940, as amended. 2 3 ARTICLE II SALE OF TRUST SHARES 2.1. AVAILABILITY OF SHARES (a) The Trust has granted to the Distributor exclusive authority to distribute the Trust shares and to select which Series or Classes of Trust shares shall be made available to Participating Investors. Pursuant to such authority, and subject to Article X hereof, the Distributor shall make available to the Company for purchase on behalf of the Account, shares of the Series and Classes listed on Schedule 3 to this Agreement, such purchases to be effected at net asset value in accordance with Section 2.3 of this Agreement. Such Series and Classes shall be made available to the Company in accordance with the terms and provisions of this Agreement until this Agreement is terminated pursuant to Article X or the Distributor suspends or terminates the offering of shares of such Series or Classes in the circumstances described in Article X. (b) Notwithstanding clause (a) of this Section 2.1, other Series or Classes of Trust shares in existence now or that may be established in the future will be made available to the Company only as the Distributor may so provide, subject to the Distributor's rights set forth in Article X to suspend or terminate the offering of shares of any Series or Class or to terminate this Agreement. (c) The parties acknowledge and agree that: (i) the Trust may revoke the Distributor's authority pursuant to the terms and conditions of its distribution agreement with the Distributor; and (ii) the Trust reserves the right in its sole discretion to refuse to accept a specific request for the purchase of Trust shares in accordance with the Trust's prospectus. 2.2. REDEMPTIONS. The Trust shall redeem, at the Company's request, any full or fractional Trust shares held by the Company on behalf of the Account, such redemptions to be effected at net asset value in accordance with Section 2.3 of this Agreement. Notwithstanding the foregoing, (i) the Company shall not redeem Trust shares attributable to Contract Owners except in the circumstances permitted in Article X of this Agreement, and (ii) the Trust may delay redemption of Trust shares of any Series or Class to the extent permitted by the 1940 Act, any rules, regulations or orders thereunder, or the Prospectus for such Series or Class. 2.3. PURCHASE AND REDEMPTION PROCEDURES (a) The Trust hereby appoints the Company as an agent of the Trust for the limited purpose of receiving purchase and redemption requests on behalf of the Account (but not with respect to any Trust shares that may be held in the general account of the Company) for shares of those Series or Classes made available hereunder, based on allocations of amounts to the Account or subaccounts thereof under the Contracts, other transactions relating to the Contracts or the Account and customary processing of the Contracts. Receipt of any such requests (or effectuation of such transaction or processing) on any Business Day by the Company as such limited agent of the Trust prior to the Trust's close of business as defined from time to time in the applicable Prospectus for such Series or Class (which as of the date of execution of this Agreement is defined as the close of regular trading on the New York Stock Exchange (normally 4:00 p.m. New York Time)) shall constitute receipt by the Trust on that same Business Day, [PROVIDED THAT THE COMPANY USES ITS BEST EFFORTS TO PROVIDE ACTUAL AND SUFFICIENT NOTICE OF SUCH REQUEST TO THE TRUST BY 8:00 A.M. NEW YORK TIME ON THE NEXT FOLLOWING BUSINESS DAY AND THE TRUST RECEIVES SUCH NOTICE NO LATER THAN 9:00 A.M. NEW YORK TIME ON 3 4 SUCH BUSINESS DAY.] Such notice may be communicated by telephone to the office or person designated for such notice by the Trust, and shall be confirmed by facsimile. (b) The Company shall pay for shares of each Series or Class on the same day that it provides actual notice to the Trust of a purchase request for such shares. Payment for Series or Class shares shall be made in Federal funds transmitted to the Trust by wire to be received by the Trust by [12:00 NOON] New York Time on the day the Trust receives actual notice of the purchase request for Series or Class shares (unless the Trust determines and so advises the Company that sufficient proceeds are available from redemption of shares of other Series or Classes effected pursuant to redemption requests tendered by the Company on behalf of the Account). In no event may proceeds from the redemption of shares requested pursuant to an order received by the Company after the Trust's close of business on any Business Day be applied to the payment for shares for which a purchase order was received prior to the Trust's close of business on such day. If the issuance of shares is canceled because Federal funds are not timely received, the Company shall indemnify the respective Fund and Distributor with respect to all costs, expenses and losses relating thereto. Upon the Trust's receipt of Federal funds so wired, such funds shall cease to be the responsibility of the Company and shall become the responsibility of the Trust. If Federal funds are not received on time, such funds will be invested, and Series or Class shares purchased thereby will be issued, as soon as practicable after actual receipt of such funds but in any event not on the same day that the purchase order was received. (c) Payment for Series or Class shares redeemed by the Account or the Company shall be made in Federal funds transmitted by wire to the Company or any other person properly designated in writing by the Company, such funds normally to be transmitted by 6:00 p.m. New York Time on the next Business Day after the Trust receives actual notice of the redemption order for Series or Class shares (unless redemption proceeds are to be applied to the purchase of Trust shares of other Series or Classes in accordance with Section 2.3(b) of this Agreement), except that the Trust reserves the right to redeem Series or Class shares in assets other than cash and to delay payment of redemption proceeds to the extent permitted by the 1940 Act, any rules or regulations or orders thereunder, or the applicable Prospectus. The Trust shall not bear any responsibility whatsoever for the proper disbursement or crediting of redemption proceeds by the Company; the Company alone shall be responsible for such action. (d) Any purchase or redemption request for Series or Class shares held or to be held in the Company's general account shall be effected at the net asset value per share next determined after the Trust's actual receipt of such request, provided that, in the case of a purchase request, payment for Trust shares so requested is received by the Trust in Federal funds prior to close of business for determination of such value, as defined from time to time in the Prospectus for such Series or Class. (e) Prior to the first purchase of any Trust shares hereunder, the Company and the Trust shall provide each other with all information necessary to effect wire transmissions of Federal funds to the other party and all other designated persons pursuant to such protocols and security procedures as the parties may agree upon. Should such information change thereafter, the Trust and the Company, as applicable, shall notify the other in writing of such changes, observing the same protocols and security procedures, at least three Business Days in advance of when such change is to take effect. The Company and the Trust shall observe customary procedures to protect the confidentiality and security of such information, but the Trust shall not be liable to the Company for any breach of security. 4 5 (f) The procedures set forth herein are subject to any additional terms set forth in the applicable Prospectus for the Series or Class or by the requirements of applicable law. 2.4. NET ASSET VALUE. The Trust shall use its best efforts to inform the Company of the net asset value per share for each Series or Class available to the Company as soon as reasonably practicable after the net asset value per share for such Series or Class is calculated. The Trust shall calculate such net asset value in accordance with the Prospectus for such Series or Class. 2.5. DIVIDENDS AND DISTRIBUTIONS. The Trust shall furnish notice to the Company as soon as reasonably practicable of any income dividends or capital gain distributions payable on any Series or Class shares. The Company, on its behalf and on behalf of the Account, hereby elects to receive all such dividends and distributions as are payable on any Series or Class shares in the form of additional shares of that Series or Class. The Company reserves the right, on its behalf and on behalf of the Account, to revoke this election and to receive all such dividends and capital gain distributions in cash; to be effective, such revocation must be made in writing and received by the Trust at least ten Business Days prior to a dividend or distribution date. The Trust shall notify the Company promptly of the number of Series or Class shares so issued as payment of such dividends and distributions. 2.6. BOOK ENTRY. Issuance and transfer of Trust shares shall be by book entry only. Stock certificates will not be issued to the Company or the Account. Purchase and redemption orders for Trust shares shall be recorded in an appropriate ledger for the Account or the appropriate subaccount of the Account. 2.7. PRICING ERRORS. Any material errors in the calculation of net asset value, dividends or capital gain information shall be reported immediately upon discovery to the Company. An error shall be deemed "material" based on our interpretation of the SEC's position and policy with regard to materiality, as it may be modified from time to time. Neither the Trust, any Fund, the Distributor, nor any of their affiliates shall be liable for any information provided to the Company pursuant to this Agreement which information is based on incorrect information supplied by or on behalf of the Company or any other Participating Company to the Trust or the Distributor. 2.8. LIMITS ON PURCHASERS. The Distributor and the Trust shall sell Trust shares only to insurance companies and their separate accounts and to persons or plans ("Qualified Persons") that qualify to purchase shares of the Trust under Section 817(h) of the Code and the regulations thereunder without impairing the ability of the Account to consider the portfolio investments of the Trust as constituting investments of the Account for the purpose of satisfying the diversification requirements of Section 817(h). The Distributor and the Trust shall not sell Trust shares to any insurance company or separate account unless an agreement complying with Article VIII of this Agreement is in effect to govern such sales. The Company hereby represents and warrants that it and the Account are Qualified Persons. ARTICLE III REPRESENTATIONS AND WARRANTIES 3.1. COMPANY. The Company represents and warrants that: (i) the Company is an insurance company duly organized and in good standing under Vermont insurance law; (ii) the Account is a validly existing separate account, duly established and maintained in accordance with applicable law; (iii) the Account's 1940 Act Registration Statement has been filed with the SEC in accordance with the provisions of the 1940 Act and the Account is duly registered as a unit investment trust thereunder; (iv) the Contracts' Registration Statement has been declared 5 6 effective by the SEC, or will be declared effective prior to the Company purchasing shares in respect of such Contract; (v) the Contracts will be issued in compliance in all material respects with all applicable Federal and state laws; (vi) the Contracts have been filed, qualified and/or approved for sale, as applicable, under the insurance laws and regulations of the states in which the Contracts will be offered; (vii) the Account will maintain its registration under the 1940 Act and will comply in all material respects with the 1940 Act; (viii) the Contracts currently are, and at the time of issuance and for so long as they are outstanding will be, treated as annuity contracts or life insurance policies, whichever is appropriate, under applicable provisions of the Code; and (ix) the Company's entering into and performing its obligations under this Agreement does not and will not violate its charter documents or by-laws, rules or regulations, or any agreement to which it is a party. The Company will notify the Trust promptly if for any reason it is unable to perform its obligations under this Agreement. 3.2. TRUST. The Trust represents and warrants that: (i) the Trust is an unincorporated business trust duly formed and validly existing under the Delaware law; (ii) the Trust's 1940 Act Registration Statement has been filed with the SEC in accordance with the provisions of the 1940 Act and the Trust is duly registered as an open-end management investment company thereunder; (iii) the Trust's Registration Statement has been declared effective by the SEC; (iv) the Trust shares will be issued in compliance in all material respects with all applicable federal laws; (v) the Trust will remain registered under and will comply in all material respects with the 1940 Act during the term of this Agreement; (vi) each Fund of the Trust intends to qualify as a "regulated investment company" under Subchapter M of the Code and to comply with the diversification standards prescribed in Section 817(h) of the Code and the regulations thereunder; and (vii) the investment policies of each Fund are in material compliance with any investment restrictions set forth on Schedule 4 to this Agreement. The Trust, however, makes no representation as to whether any aspect of its operations (including, but not limited to, fees and expenses and investment policies) otherwise complies with the insurance laws or regulations of any state. 3.3. DISTRIBUTOR. The Distributor represents and warrants that: (i) the Distributor is a limited partnership duly organized and in good standing under New York law; (ii) the Distributor is registered as a broker-dealer under federal and applicable state securities laws and is a member of the NASD; and (iii) the Distributor is registered as an investment adviser under federal securities laws. 3.4. LEGAL AUTHORITY. Each party represents and warrants that the execution and delivery of this Agreement and the consummation of the transactions contemplated herein have been duly authorized by all necessary corporate, partnership or trust action, as applicable, by such party, and, when so executed and delivered, this Agreement will be the valid and binding obligation of such party enforceable in accordance with its terms. 3.5. BONDING REQUIREMENT. Each party represents and warrants that all of its directors, officers, partners and employees dealing with the money and/or securities of the Trust are and shall continue to be at all times covered by a blanket fidelity bond or similar coverage for the benefit of the Trust in an amount not less than the amount required by the applicable rules of the NASD and the federal securities laws. The aforesaid bond shall include coverage for larceny and embezzlement and shall be issued by a reputable bonding company. All parties shall make all reasonable efforts to see that this bond or another bond containing these provisions is always in effect, shall provide evidence thereof promptly to any other party upon written request therefor, and shall notify the other parties promptly in the event that such coverage no longer applies. 6 7 ARTICLE IV REGULATORY REQUIREMENTS 4.1. TRUST FILINGS. The Trust shall amend the Trust's Registration Statement and the Trust's 1940 Act Registration Statement from time to time as required in order to effect the continuous offering of Trust shares in compliance with applicable law and to maintain the Trust's registration under the 1940 Act for so long as Trust shares are sold. 4.2. CONTRACTS FILINGS. The Company shall amend the Contracts' Registration Statement and the Account's 1940 Act Registration Statement from time to time as required in order to effect the continuous offering of the Contracts in compliance with applicable law or as may otherwise be required by applicable law, but in any event shall maintain a current effective Contracts' Registration Statement and the Account's registration under the 1940 Act for so long as the Contracts are outstanding unless the Company has supplied the Trust with an SEC no-action letter or opinion of counsel satisfactory to the Trust's counsel to the effect that maintaining such Registration Statement on a current basis is no longer required. The Company shall be responsible for filing all such Contract forms, applications, marketing materials and other documents relating to the Contracts and/or the Account with state insurance commissions, as required or customary, and shall use its best efforts: (i) to obtain any and all approvals thereof, under applicable state insurance law, of each state or other jurisdiction in which Contracts are or may be offered for sale; and (ii) to keep such approvals in effect for so long as the Contracts are outstanding. 4.3. VOTING OF TRUST SHARES. With respect to any matter put to vote by the holders of Trust shares ("Voting Shares"), the Company will provide "pass-through" voting privileges to owners of Contracts registered with the SEC as long as the 1940 Act requires such privileges in such cases. In cases in which "pass-through" privileges apply, the Company will (i) solicit voting instructions from Contract Owners of SEC-registered Contracts; (ii) vote Voting Shares attributable to Contract Owners in accordance with instructions or proxies timely received from such Contract Owners; and (iii) vote Voting Shares held by it that are not attributable to reserves for SEC-registered Contracts or for which it has not received timely voting instructions in the same proportion as instructions received in a timely fashion from Owners of SEC-registered Contracts. The Company shall be responsible for ensuring that it calculates "pass-through" votes for the Account in a manner consistent with the provisions set forth above and with other Participating Insurance Companies. Neither the Company nor any of its affiliates will in any way recommend action in connection with, or oppose or interfere with, the solicitation of proxies for the Trust shares held for such Contract Owners, except with respect to matters as to which the Company has the right under Rule 6e-2 or 6e-3(T) under the 1940 Act, to vote Voting Shares without regard to voting instructions from Contract Owners. 4.4. STATE INSURANCE RESTRICTIONS. The Company acknowledges and agrees that it is the responsibility of the Company and other Participating Insurance Companies to determine investment restrictions and any other restrictions, limitations or requirements under state insurance law applicable to any Fund or the Trust or the Distributor, and that neither the Trust nor the Distributor shall bear any responsibility to the Company, other Participating Insurance Companies or any Product Owners for any such determination or the correctness of such determination. Schedule 4 sets forth the investment restrictions that the Company and/or other Participating Insurance Companies have determined are applicable to any Fund and with which the Trust has agreed to comply as of the date of this Agreement. The Company shall inform the Trust of any investment restrictions imposed by state insurance law that the Company determines may become applicable to the Trust or a Fund from time to time as a result of the Account's investment therein, other than those set forth on Schedule 4 to this Agreement. Upon receipt of any such information from the Company or any other Participating Insurance Company, the Trust shall determine whether it is in the best interests of shareholders to comply with any such 7 8 restrictions. If the Trust determines that it is not in the best interests of shareholders (it being understood that "shareholders" for this purpose shall mean Product Owners) to comply with a restriction determined to be applicable by the Company, the Trust shall so inform the Company, and the Trust and the Company shall discuss alternative accommodations in the circumstances. If the Trust determines that it is in the best interests of shareholders to comply with such restrictions, the Trust and the Company shall amend Schedule 4 to this Agreement to reflect such restrictions, subject to obtaining any required shareholder approval thereof. 4.5. COMPLIANCE. Under no circumstances will the Trust, the Distributor or any of their affiliates (excluding Participating Investors) be held responsible or liable in any respect for any statements or representations made by them or their legal advisers to the Company or any Contract Owner concerning the applicability of any federal or state laws, regulations or other authorities to the activities contemplated by this Agreement. 4.6. DRAFTS OF FILINGS. The Trust and the Company shall provide to each other copies of draft versions of any Registration Statements, Prospectuses, Statements of Additional Information, periodic and other shareholder or Contract Owner reports, proxy statements, solicitations for voting instructions, applications for exemptions, requests for no-action letters, and all amendments or supplements to any of the above, prepared by or on behalf of either of them and that mentions the other party by name. Such drafts shall be provided to the other party sufficiently in advance of filing such materials with regulatory authorities in order to allow such other party a reasonable opportunity to review the materials. 4.7. COPIES OF FILINGS. The Trust and the Company shall provide to each other at least one complete copy of all Registration Statements, Prospectuses, Statements of Additional Information, periodic and other shareholder or Contract Owner reports, proxy statements, solicitations of voting instructions, applications for exemptions, requests for no-action letters, and all amendments or supplements to any of the above, that relate to the Trust, the Contracts or the Account, as the case may be, promptly after the filing by or on behalf of each such party of such document with the SEC or other regulatory authorities (it being understood that this provision is not intended to require the Trust to provide to the Company copies of any such documents prepared, filed or used by Participating Investors other than the Company and the Account). 4.8. REGULATORY RESPONSES. Each party shall promptly provide to all other parties copies of responses to no-action requests, notices, orders and other rulings received by such party with respect to any filing covered by Section 4.7 of this Agreement. 4.9. COMPLAINTS AND PROCEEDINGS (a) The Trust and/or the Distributor shall immediately notify the Company of: (i) the issuance by any court or regulatory body of any stop order, cease and desist order, or other similar order (but not including an order of a regulatory body exempting or approving a proposed transaction or arrangement) with respect to the Trust's Registration Statement or the Prospectus of any Series or Class; (ii) any request by the SEC for any amendment to the Trust's Registration Statement or the Prospectus of any Series or Class; (iii) the initiation of any proceedings for that purpose or for any other purposes relating to the registration or offering of the Trust shares; or (iv) any other action or circumstances that may prevent the lawful offer or sale of Trust shares or any Class or Series in any state or jurisdiction, including, without limitation, any circumstance in which (A) such shares are not registered and, in all material respects, issued and sold in accordance with applicable state and federal law or (B) such law precludes the use of such shares as an underlying investment medium for the Contracts. The Trust will make every reasonable effort to prevent the issuance of any such stop order, cease and desist order or similar 8 9 order and, if any such order is issued, to obtain the lifting thereof at the earliest possible time. (b) The Company shall immediately notify the Trust and the Distributor of: (i) the issuance by any court or regulatory body of any stop order, cease and desist order, or other similar order (but not including an order of a regulatory body exempting or approving a proposed transaction or arrangement) with respect to the Contracts' Registration Statement or the Contracts' Prospectus; (ii) any request by the SEC for any amendment to the Contracts' Registration Statement or Prospectus; (iii) the initiation of any proceedings for that purpose or for any other purposes relating to the registration or offering of the Contracts; or (iv) any other action or circumstances that may prevent the lawful offer or sale of the Contracts or any class of Contracts in any state or jurisdiction, including, without limitation, any circumstance in which such Contracts are not registered, qualified and approved, and, in all material respects, issued and sold in accordance with applicable state and federal laws. The Company will make every reasonable effort to prevent the issuance of any such stop order, cease and desist order or similar order and, if any such order is issued, to obtain the lifting thereof at the earliest possible time. (c) Each party shall immediately notify the other parties when it receives notice, or otherwise becomes aware of, the commencement of any litigation or proceeding against such party or a person affiliated therewith in connection with the issuance or sale of Trust shares or the Contracts. (d) The Company shall provide to the Trust and the Distributor any complaints it has received from Contract Owners pertaining to the Trust or a Fund, and the Trust and Distributor shall each provide to the Company any complaints it has received from Contract Owners relating to the Contracts. 4.10. COOPERATION. Each party hereto shall cooperate with the other parties and all appropriate government authorities (including without limitation the SEC, the NASD and state securities and insurance regulators) and shall permit such authorities reasonable access to its books and records in connection with any investigation or inquiry by any such authority relating to this Agreement or the transactions contemplated hereby. However, such access shall not extend to attorney-client privileged information. ARTICLE V SALE, ADMINISTRATION AND SERVICING OF THE CONTRACTS 5.1. SALE OF THE CONTRACTS. The Company shall be fully responsible as to the Trust and the Distributor for the sale and marketing of the Contracts. The Company shall provide Contracts, the Contracts' and Trust's Prospectuses, Contracts' and Trust's Statements of Additional Information, and all amendments or supplements to any of the foregoing to Contract Owners and prospective Contract Owners, all in accordance with federal and state laws. The Company shall ensure that all persons offering the Contracts are duly licensed and registered under applicable insurance and securities laws. The Company shall ensure that each sale of a Contract satisfies applicable suitability requirements under insurance and securities laws and regulations, including without limitation the rules of the NASD. The Company shall adopt and implement procedures reasonably designed to ensure that information concerning the Trust and the Distributor that is intended for use only by brokers or agents selling the Contracts (i.e., information that is not intended for distribution to Contract Owners or offerees) is so used. 5.2. ADMINISTRATION AND SERVICING OF THE CONTRACTS. The Company shall be fully responsible as to the Trust and the Distributor for the underwriting, issuance, service and 9 10 administration of the Contracts and for the administration of the Account, including, without limitation, the calculation of performance information for the Contracts, the timely payment of Contract Owner redemption requests and processing of Contract transactions, and the maintenance of a service center, such functions to be performed in all respects at a level commensurate with those standards prevailing in the variable insurance industry. The Company shall provide to Contract Owners all Trust reports, solicitations for voting instructions including any related Trust proxy solicitation materials, and updated Trust Prospectuses as required under the federal securities laws. 5.3. CUSTOMER COMPLAINTS. The Company shall promptly address all customer complaints and resolve such complaints consistent with high ethical standards and principles of ethical conduct. 5.4. TRUST PROSPECTUSES AND REPORTS. In order to enable the Company to fulfill its obligations under this Agreement and the federal securities laws, the Trust shall provide the Company with a copy, in camera-ready form or form otherwise suitable for printing or duplication of: (i) the Trust's Prospectus for the Series and Classes listed on Schedule 3 and any supplement thereto; (ii) each Statement of Additional Information and any supplement thereto; (iii) any Trust proxy soliciting material for such Series or Classes; and (iv) any Trust periodic shareholder reports. The Trust and the Company may agree upon alternate arrangements, but in all cases, the Trust reserves the right to approve the printing of any such material. The Trust shall provide the Company at least 10 days advance written notice when any such material shall become available, provided, however, that in the case of a supplement, the Trust shall provide the Company notice reasonable in the circumstances, it being understood that circumstances surrounding such supplement may not allow for advance notice. The Company may not alter any material so provided by the Trust or the Distributor (including without limitation presenting or delivering such material in a different medium, e.g., electronic or Internet) without the prior written consent of the Distributor. 5.5. TRUST ADVERTISING MATERIAL. No piece of advertising or sales literature or other promotional material in which the Trust or the Distributor is named (including, without limitation, material for prospects, existing Contract Owners, brokers, rating or ranking agencies, or the press, whether in print, radio, television, video, Internet, or other electronic medium) shall be used by the Company or any person directly or indirectly authorized by the Company, including without limitation, underwriters, distributors, and sellers of the Contracts, except with the prior written consent of the Trust or the Distributor, as applicable, as to the form, content and medium of such material. Any such piece shall be furnished to the Trust for such consent prior to its use. The Trust or the Distributor shall respond to any request for written consent on a prompt and timely basis, but failure to respond shall not relieve the Company of the obligation to obtain the prior written consent of the Trust or the Distributor. After receiving the Trust's or Distributor's consent to the use of any such material, no further changes may be made without obtaining the Trust's or Distributor's consent to such changes. The Trust or Distributor may at any time in its sole discretion revoke such written consent, and upon notification of such revocation, the Company shall no longer use the material subject to such revocation. Until further notice to the Company, the Trust has delegated its rights and responsibilities under this provision to the Distributor. 5.6. CONTRACTS ADVERTISING MATERIAL. No piece of advertising or sales literature or other promotional material in which the Company is named shall be used by the Trust or the Distributor, except with the prior written consent of the Company. Any such piece shall be furnished to the Company for such consent prior to its use. The Company shall respond to any request for written consent on a prompt and timely basis, but failure to respond shall not relieve the Company of the obligation to obtain the prior written consent of the Company. The Company may at any time in its sole discretion revoke any written consent, and upon notification 10 11 of such revocation, neither the Trust nor the Distributor shall use the material subject to such revocation. The Company, upon prior written notice to the Trust, may delegate its rights and responsibilities under this provision to the principal underwriter for the Contracts. 5.7. TRADE NAMES. No party shall use any other party's names, logos, trademarks or service marks, whether registered or unregistered, without the prior written consent of such other party, or after written consent therefor has been revoked. The Company shall not use in advertising, publicity or otherwise the name of the Trust, Distributor, or any of their affiliates nor any trade name, trademark, trade device, service mark, symbol or any abbreviation, contraction or simulation thereof of the Trust, Distributor, or their affiliates without the prior written consent of the Trust or the Distributor in each instance. 5.8. REPRESENTATIONS BY COMPANY. Except with the prior written consent of the Trust, the Company shall not give any information or make any representations or statements about the Trust or the Funds nor shall it authorize or allow any other person to do so except information or representations contained in the Trust's Registration Statement or the Trust's Prospectuses or in reports or proxy statements for the Trust, or in sales literature or other promotional material approved in writing by the Trust or its designee in accordance with this Article V, or in published reports or statements of the Trust in the public domain. 5.9. REPRESENTATIONS BY TRUST. Except with the prior written consent of the Company, the Trust shall not give any information or make any representations on behalf of the Company or concerning the Company, the Account or the Contracts other than the information or representations contained in the Contracts' Registration Statement or Contracts' Prospectus or in published reports of the Account which are in the public domain or in sales literature or other promotional material approved in writing by the Company in accordance with this Article V. 5.10. ADVERTISING. For purposes of this Article V, the phrase "sales literature or other promotional material" includes, but is not limited to, any material constituting sales literature or advertising under the NASD rules, the 1940 Act or the 1933 Act. ARTICLE VI COMPLIANCE WITH CODE 6.1. SECTION 817(h). Each Fund of the Trust shall comply with Section 817(h) of the Code and the regulations issued thereunder to the extent applicable to the Fund as an investment company underlying the Account, and the Trust shall notify the Company immediately upon having a reasonable basis for believing that a Fund has ceased to so qualify or that it might not so qualify in the future. 6.2. SUBCHAPTER M. Each Fund of the Trust shall maintain the qualification of the Fund as a registered investment company (under Subchapter M or any successor or similar provision), and the Trust shall notify the Company immediately upon having a reasonable basis for believing that a Fund has ceased to so qualify or that it might not so qualify in the future. 6.3. CONTRACTS. The Company shall ensure the continued treatment of the Contracts as annuity contracts or life insurance policies, whichever is appropriate, under applicable provisions of the Code and shall notify the Trust and the Distributor immediately upon having a reasonable basis for believing that the Contracts have ceased to be so treated or that they might not be so treated in the future. 11 12 ARTICLE VII EXPENSES 7.1. EXPENSES. All expenses incident to each party's performance under this Agreement (including expenses expressly assumed by such party pursuant to this Agreement) shall be paid by such party to the extent permitted by law. 7.2. TRUST EXPENSES. Expenses incident to the Trust's performance of its duties and obligations under this Agreement include, but are not limited to, the costs of: (a) registration and qualification of the Trust shares under the federal securities laws; (b) preparation and filing with the SEC of the Trust's Prospectuses, Trust's Statement of Additional Information, Trust's Registration Statement, Trust proxy materials and shareholder reports, and preparation of a camera-ready copy of the foregoing; (c) preparation of all statements and notices required by any Federal or state securities law; (d) printing and mailing of all materials and reports required to be provided by the Trust to its existing shareholders; (e) all taxes on the issuance or transfer of Trust shares; (f) payment of all applicable fees relating to the Trust, including, without limitation, all fees due under Rule 24f-2 in connection with sales of Trust shares to qualified retirement plans, custodial, auditing, transfer agent and advisory fees, fees for insurance coverage and Trustees' fees; and (g) any expenses permitted to be paid or assumed by the Trust pursuant to a plan, if any, under Rule 12b-1 under the 1940 Act. 7.3. COMPANY EXPENSES. Expenses incident to the Company's performance of its duties and obligations under this Agreement include, but are not limited to, the costs of: (a) registration and qualification of the Contracts under the federal securities laws; (b) preparation and filing with the SEC of the Contracts' Prospectus and Contracts' Registration Statement; (c) the sale, marketing and distribution of the Contracts, including printing and dissemination of Contracts' and the Trust's Prospectuses and compensation for Contract sales; (d) administration of the Contracts; (e) solicitation of voting instructions with respect to Trust proxy materials; (f) payment of all applicable fees relating to the Contracts, including, without limitation, all fees due under Rule 24f-2; (g) preparation, printing and dissemination of all statements and notices to Contract Owners required by any Federal or state insurance law other than those paid for by the Trust; and 12 13 (h) preparation, printing and dissemination of all marketing materials for the Contracts and Trust except where other arrangements are made in advance. 7.4. 12b-1 PAYMENTS. The Trust shall pay no fee or other compensation to the Company under this Agreement, except that if the Trust or any Series or Class adopts and implements a plan pursuant to Rule 12b-1 under the 1940 Act to finance distribution expenses, then payments may be made to the Company in accordance with such plan. The Trust currently does not intend to make any payments to finance distribution expenses pursuant to Rule 12b-1 under the 1940 Act or in contravention of such rule, although it may make payments pursuant to Rule 12b-1 in the future. To the extent that it decides to finance distribution expenses pursuant to Rule 12b-1 and such formulation is required by the 1940 Act or any rules or order thereunder, the Trust undertakes to have a Board of Trustees, a majority of whom are not interested persons of the Trust, formulate and approve any plan under Rule 12b-1 to finance distribution expenses. ARTICLE VIII POTENTIAL CONFLICTS 8.1. EXEMPTIVE ORDER. The parties to this Agreement acknowledge that the Trust has filed an application with the SEC to request an order (the "Exemptive Order") granting relief from various provisions of the 1940 Act and the rules thereunder to the extent necessary to permit Trust shares to be sold to and held by variable annuity and variable life insurance separate accounts of both affiliated and unaffiliated Participating Insurance Companies and other Qualified Persons (as defined in Section 2.8 hereof). It is anticipated that the Exemptive Order, when and if issued, shall require the Trust and each Participating Insurance Company to comply with conditions and undertakings substantially as provided in this Article VIII. The Trust will not enter into a participation agreement with any other Participating Insurance Company unless it imposes the same conditions and undertakings on that company as are imposed on the Company pursuant to this Article VIII. 8.2. COMPANY MONITORING REQUIREMENTS. The Company will monitor its operations and those of the Trust for the purpose of identifying any material irreconcilable conflicts or potential material irreconcilable conflicts between or among the interests of Participating Plans, Product Owners of variable life insurance policies and Product Owners of variable annuity contracts. 8.3. COMPANY REPORTING REQUIREMENTS. The Company shall report any conflicts or potential conflicts to the Trust Board and will provide the Trust Board, at least annually, with all information reasonably necessary for the Trust Board to consider any issues raised by such existing or potential conflicts or by the conditions and undertakings required by the Exemptive Order. The Company also shall assist the Trust Board in carrying out its obligations including, but not limited to: (a) informing the Trust Board whenever it disregards Contract Owner voting instructions with respect to variable life insurance policies, and (b) providing such other information and reports as the Trust Board may reasonably request. The Company will carry out these obligations with a view only to the interests of Contract Owners. 8.4. TRUST BOARD MONITORING AND DETERMINATION. The Trust Board shall monitor the Trust for the existence of any material irreconcilable conflicts between or among the interests of Participating Plans, Product Owners of variable life insurance policies and Product Owners of variable annuity contracts and determine what action, if any, should be taken in response to those conflicts. A majority vote of Trustees who are not interested persons of the Trust as defined in the 1940 Act (the "disinterested trustees") shall represent a conclusive determination as to the existence of a material irreconcilable conflict between or among the interests of Product Owners and Participating Plans and as to whether any proposed action adequately remedies any material 13 14 irreconcilable conflict. The Trust Board shall give prompt written notice to the Company and Participating Plan of any such determination. 8.5. UNDERTAKING TO RESOLVE CONFLICT. In the event that a material irreconcilable conflict of interest arises between Product Owners of variable life insurance policies or Product Owners of variable annuity contracts and Participating Plans, the Company will, at its own expense, take whatever action is necessary to remedy such conflict as it adversely affects Contract Owners up to and including (1) establishing a new registered management investment company, and (2) withdrawing assets from the Trust attributable to reserves for the Contracts subject to the conflict and reinvesting such assets in a different investment medium (including another Fund of the Trust) or submitting the question of whether such withdrawal should be implemented to a vote of all affected Contract Owners, and, as appropriate, segregating the assets supporting the Contracts of any group of such owners that votes in favor of such withdrawal, or offering to such owners the option of making such a change. The Company will carry out the responsibility to take the foregoing action with a view only to the interests of Contract Owners. 8.6. WITHDRAWAL. If a material irreconcilable conflict arises because of the Company's decision to disregard the voting instructions of Contract Owners of variable life insurance policies and that decision represents a minority position or would preclude a majority vote at any Fund shareholder meeting, then, at the request of the Trust Board, the Company will redeem the shares of the Trust to which the disregarded voting instructions relate. No charge or penalty, however, will be imposed in connection with such a redemption. 8.7. EXPENSES ASSOCIATED WITH REMEDIAL ACTION. In no event shall the Trust be required to bear the expense of establishing a new funding medium for any Contract. The Company shall not be required by this Article to establish a new funding medium for any Contract if an offer to do so has been declined by vote of a majority of the Contract Owners materially adversely affected by the irreconcilable material conflict. 8.8. SUCCESSOR RULES. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or Rule 6e-3 is adopted, to provide exemptive relief from any provisions of the 1940 Act or the rules promulgated thereunder with respect to mixed and shared funding on terms and conditions materially different from those contained in the Exemptive Order, then (i) the Trust and/or the Company, as appropriate, shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, or Rule 6e-3, as adopted, as applicable, to the extent such rules are applicable, and (ii) Sections 8.2 through 8.5 of this Agreement shall continue in effect only to the extent that terms and conditions substantially identical to such Sections are contained in such Rule(s) as so amended or adopted. ARTICLE IX INDEMNIFICATION 9.1. INDEMNIFICATION BY THE COMPANY. The Company hereby agrees to, and shall, indemnify and hold harmless the Trust, the Distributor and each person who controls or is affiliated with the Trust or the Distributor within the meaning of such terms under the 1933 Act or 1940 Act (but not any Participating Insurance Companies or Qualified Persons) and any officer, trustee, partner, director, employee or agent of the foregoing, against any and all losses, claims, damages or liabilities, joint or several (including any investigative, legal and other expenses reasonably incurred in connection with, and any amounts paid in settlement of, any action, suit or proceeding or any claim asserted), to which they or any of them may become subject under any statute or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities: 14 15 (a) arise out of or are based upon any untrue statement of any material fact contained in the Contracts Registration Statement, Contracts Prospectus, sales literature or other promotional material for the Contracts or the Contracts themselves (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances in which they were made; provided that this obligation to indemnify shall not apply if such statement or omission was made in reliance upon and in conformity with information furnished in writing to the Company by the Trust or the Distributor for use in the Contracts Registration Statement, Contracts Prospectus or in the Contracts or sales literature or promotional material for the Contracts (or any amendment or supplement to any of the foregoing) or otherwise for use in connection with the sale of the Contracts or Trust shares; or (b) arise out of any untrue statement of a material fact contained in the Trust Registration Statement, any Prospectus for Series or Classes or sales literature or other promotional material of the Trust (or any amendment or supplement to any of the foregoing), or the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances in which they were made, if such statement or omission was made in reliance upon and in conformity with information furnished to the Trust or Distributor in writing by or on behalf of the Company; or (c) arise out of or are based upon any wrongful conduct of, or violation of federal or state law by, the Company or persons under its control or subject to its authorization, including without limitation, any broker-dealers or agents authorized to sell the Contracts, with respect to the sale, marketing or distribution of the Contracts or Trust shares, including, without limitation, any impermissible use of broker-only material, unsuitable or improper sales of the Contracts or unauthorized representations about the Contracts or the Trust; or (d) arise as a result of any failure by the Company or persons under its control (or subject to its authorization) to provide services, furnish materials or make payments as required under this Agreement; or (e) arise out of any material breach by the Company or persons under its control (or subject to its authorization) of this Agreement; or (f) any breach of any warranties contained in Article III hereof, any failure to transmit a request for redemption or purchase of Trust shares or payment therefor on a timely basis in accordance with the procedures set forth in Article II, or any unauthorized use of the names or trade names of the Trust or the Distributor. This indemnification is in addition to any liability that the Company may otherwise have; provided, however, that no party shall be entitled to indemnification if such loss, claim, damage or liability is caused by the wilful misfeasance, bad faith, gross negligence or reckless disregard of duty by the party seeking indemnification. 9.2. INDEMNIFICATION BY THE TRUST. The Trust hereby agrees to, and shall, indemnify and hold harmless the Company and each person who controls or is affiliated with the Company within the meaning of such terms under the 1933 Act or 1940 Act and any officer, director, employee or agent of the foregoing, against any and all losses, claims, damages or liabilities, joint or several (including any investigative, legal and other expenses reasonably incurred in connection with, and any amounts paid in settlement of, any action, suit or proceeding or any 15 16 claim asserted), to which they or any of them may become subject under any statute or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities: (a) arise out of or are based upon any untrue statement of any material fact contained in the Trust Registration Statement, any Prospectus for Series or Classes or sales literature or other promotional material of the Trust (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances in which they were made; provided that this obligation to indemnify shall not apply if such statement or omission was made in reliance upon and in conformity with information furnished in writing by the Company to the Trust or the Distributor for use in the Trust Registration Statement, Trust Prospectus or sales literature or promotional material for the Trust (or any amendment or supplement to any of the foregoing) or otherwise for use in connection with the sale of the Contracts or Trust shares; or (b) arise out of any untrue statement of a material fact contained in the Contracts Registration Statement, Contracts Prospectus or sales literature or other promotional material for the Contracts (or any amendment or supplement to any of the foregoing), or the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances in which they were made, if such statement or omission was made in reliance upon information furnished in writing by the Trust to the Company; or (c) arise out of or are based upon wrongful conduct of the Trust or its Trustees or officers with respect to the sale of Trust shares; or (d) arise as a result of any failure by the Trust to provide services, furnish materials or make payments as required under the terms of this Agreement; or (e) arise out of any material breach by the Trust of this Agreement (including any breach of Section 6.1 of this Agreement and any warranties contained in Article III hereof); it being understood that in no way shall the Trust be liable to the Company with respect to any violation of insurance law, compliance with which is a responsibility of the Company under this Agreement or otherwise or as to which the Company failed to inform the Trust in accordance with Section 4.4 hereof. This indemnification is in addition to any liability that the Trust may otherwise have; provided, however, that no party shall be entitled to indemnification if such loss, claim, damage or liability is caused by the wilful misfeasance, bad faith, gross negligence or reckless disregard of duty by the party seeking indemnification. 9.3. INDEMNIFICATION BY THE DISTRIBUTOR. The Distributor hereby agrees to, and shall, indemnify and hold harmless the Company and each person who controls or is affiliated with the Company within the meaning of such terms under the 1933 Act or 1940 Act and any officer, director, employee or agent of the foregoing, against any and all losses, claims, damages or liabilities, joint or several (including any investigative, legal and other expenses reasonably incurred in connection with, and any amounts paid in settlement of, any action, suit or proceeding or any claim asserted), to which they or any of them may become subject under any statute or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities: 16 17 (a) arise out of or are based upon any untrue statement of any material fact contained in the Trust Registration Statement, any Prospectus for Series or Classes or sales literature or other promotional material of the Trust (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances in which they were made; provided that this obligation to indemnify shall not apply if such statement or omission was made in reliance upon and in conformity with information furnished in writing by the Company to the Trust or Distributor for use in the Trust Registration Statement, Trust Prospectus or sales literature or promotional material for the Trust (or any amendment or supplement to any of the foregoing) or otherwise for use in connection with the sale of the Contracts or Trust shares; or (b) arise out of any untrue statement of a material fact contained in the Contracts Registration Statement, Contracts Prospectus or sales literature or other promotional material for the Contracts (or any amendment or supplement to any of the foregoing), or the omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances in which they were made, if such statement or omission was made in reliance upon information furnished in writing by the Distributor to the Company; or (c) arise out of or are based upon wrongful conduct of the Distributor or persons under its control with respect to the sale of Trust shares; or (d) arise as a result of any failure by the Distributor or persons under its control to provide services, furnish materials or make payments as required under the terms of this Agreement; or (e) arise out of any material breach by the Distributor or persons under its control of this Agreement (including any breach of Section 6.1 of this Agreement and any warranties contained in Article III hereof); it being understood that in no way shall the Distributor be liable to the Company with respect to any violation of insurance law, compliance with which is a responsibility of the Company under this Agreement or otherwise or as to which the Company failed to inform the Distributor in accordance with Section 4.4 hereof. This indemnification is in addition to any liability that the Distributor may otherwise have; provided, however, that no party shall be entitled to indemnification if such loss, claim, damage or liability is caused by the wilful misfeasance, bad faith, gross negligence or reckless disregard of duty by the party seeking indemnification. 9.4. RULE OF CONSTRUCTION. It is the parties' intention that, in the event of an occurrence for which the Trust has agreed to indemnify the Company, the Company shall seek indemnification from the Trust only in circumstances in which the Trust is entitled to seek indemnification from a third party with respect to the same event or cause thereof. 9.5. INDEMNIFICATION PROCEDURES. After receipt by a party entitled to indemnification ("indemnified party") under this Article IX of notice of the commencement of any action, if a claim in respect thereof is to be made by the indemnified party against any person obligated to provide indemnification under this Article IX ("indemnifying party"), such indemnified party will notify the indemnifying party in writing of the commencement thereof as soon as practicable thereafter, provided that the omission to so notify the indemnifying party will not relieve it from any liability under this Article IX, except to the extent that the omission results in a failure of 17 18 actual notice to the indemnifying party and such indemnifying party is damaged solely as a result of the failure to give such notice. The indemnifying party, upon the request of the indemnified party, shall retain counsel reasonably satisfactory to the indemnified party to represent the indemnified party and any others the indemnifying party may designate in such proceeding and shall pay the reasonable fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel, but the fees and expenses of such counsel shall be at the expense of such indemnified party unless (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. A successor by law of the parties to this Agreement shall be entitled to the benefits of the indemnification contained in this Article IX. The indemnification provisions contained in this Article IX shall survive any termination of this Agreement. ARTICLE X RELATIONSHIP OF THE PARTIES; TERMINATION 10.1. RELATIONSHIP OF PARTIES. The Company is to be an independent contractor vis-a-vis the Trust, the Distributor, or any of their affiliates for all purposes hereunder and will have no authority to act for or represent any of them (except to the limited extent the Company acts as agent of the Trust pursuant to Section 2.3(a) of this Agreement). In addition, no officer or employee of the Company will be deemed to be an employee or agent of the Trust, Distributor, or any of their affiliates. The Company will not act as an "underwriter" or "distributor" of the Trust, as those terms variously are used in the 1940 Act, the 1933 Act, and rules and regulations promulgated thereunder. 10.2. NON-EXCLUSIVITY AND NON-INTERFERENCE. The parties hereto acknowledge that the arrangement contemplated by this Agreement is not exclusive; the Trust shares may be sold to other insurance companies and investors (subject to Section 2.8 hereof) and the cash value of the Contracts may be invested in other investment companies, provided, however, that until this Agreement is terminated pursuant to this Article X: (a) the Company shall promote the Trust and the Funds made available hereunder on the same basis as other funding vehicles available under the Contracts; (b) the Company shall not, without prior notice to the Distributor (unless otherwise required by applicable law), take any action to operate the Account as a management investment company under the 1940 Act; (c) the Company shall not, without the prior written consent of the Distributor (unless otherwise required by applicable law), solicit, induce or encourage Contract Owners to change or modify the Trust to change the Trust's distributor or investment adviser, to transfer or withdraw Contract Values allocated to a Fund, or to exchange their Contracts for contracts not allowing for investment in the Trust; 18 19 (d) the Company shall not substitute another investment company for one or more Funds without providing written notice to the Distributor at least 60 days in advance of effecting any such substitution; and (e) the Company shall not withdraw the Account's investment in the Trust or a Fund of the Trust except as necessary to facilitate Contract Owner requests and routine Contract processing. 10.3. TERMINATION OF AGREEMENT. This Agreement shall not terminate until (i) the Trust is dissolved, liquidated, or merged into another entity, or (ii) as to any Fund that has been made available hereunder, the Account no longer invests in that Fund and the Company has confirmed in writing to the Distributor, if so requested by the Distributor, that it no longer intends to invest in such Fund. However, certain obligations of, or restrictions on, the parties to this Agreement may terminate as provided in Sections 10.4 through 10.6 and the Company may be required to redeem Trust shares pursuant to Section 10.7 or in the circumstances contemplated by Article VIII. Article IX and Sections 5.7, 10.8 and 10.9 shall survive any termination of this Agreement. 10.4. TERMINATION OF OFFERING OF TRUST SHARES. The obligation of the Trust and the Distributor to make Trust shares available to the Company for purchase pursuant to Article II of this Agreement shall terminate at the option of the Distributor upon written notice to the Company as provided below: (a) upon institution of formal proceedings against the Company, or the Distributor's reasonable determination that institution of such proceedings is being considered by the NASD, the SEC, the insurance commission of any state or any other regulatory body regarding the Company's duties under this Agreement or related to the sale of the Contracts, the operation of the Account, the administration of the Contracts or the purchase of Trust shares, or an expected or anticipated ruling, judgment or outcome which would, in the Distributor's reasonable judgment exercised in good faith, materially impair the Company's or Trust's ability to meet and perform the Company's or Trust's obligations and duties hereunder, such termination effective upon 15 days prior written notice; (b) in the event any of the Contracts are not registered, issued or sold in accordance with applicable federal and/or state law, such termination effective immediately upon receipt of written notice; (c) if the Distributor shall determine, in its sole judgment exercised in good faith, that either (1) the Company shall have suffered a material adverse change in its business or financial condition or (2) the Company shall have been the subject of material adverse publicity which is likely to have a material adverse impact upon the business and operations of either the Trust or the Distributor, such termination effective upon 30 days prior written notice; (d) if the Distributor suspends or terminates the offering of Trust shares of any Series or Class to all Participating Investors or only designated Participating Investors, if such action is required by law or by regulatory authorities having jurisdiction or if, in the sole discretion of the Distributor acting in good faith, suspension or termination is necessary in the best interests of the shareholders of any Series or Class (it being understood that "shareholders" for this purpose shall mean Product Owners), such notice effective immediately upon receipt of written notice, it being understood that a lack of Participating Investor interest in a Series or Class 19 20 may be grounds for a suspension or termination as to such Series or Class and that a suspension or termination shall apply only to the specified Series or Class; (e) upon the Company's assignment of this Agreement (including, without limitation, any transfer of the Contracts or the Account to another insurance company pursuant to an assumption reinsurance agreement) unless the Trust consents thereto, such termination effective upon 30 days prior written notice; (f) if the Company is in material breach of any provision of this Agreement, which breach has not been cured to the satisfaction of the Trust within 10 days after written notice of such breach has been delivered to the Company, such termination effective upon expiration of such 10-day period; (g) upon the determination of the Trust s Board to dissolve, liquidate or merge the Trust as contemplated by Section 10.3(i), upon termination of the Agreement pursuant to Section 10.3(ii), or upon notice from the Company pursuant to Section 10.5 or 10.6, such termination pursuant hereto to be effective upon 15 days prior written notice; or (h) at any time more than 18 months after the date of this Agreement, upon six months prior written notice. Except in the case of an option exercised under clause (b), (d) or (g), the obligations shall terminate only as to new Contracts and the Distributor shall continue to make Trust shares available to the extent necessary to permit owners of Contracts in effect on the effective date of such termination (hereinafter referred to as "Existing Contracts") to reallocate investments in the Trust, redeem investments in the Trust and/or invest in the Trust upon the making of additional purchase payments under the Existing Contracts. 10.5. TERMINATION OF INVESTMENT IN A FUND. The Company may elect to cease investing in a Fund, promoting a Fund as an investment option under the Contracts, or withdraw its investment or the Account's investment in a Fund, subject to compliance with applicable law, upon written notice to the Trust within 15 days of the occurrence of any of the following events (unless provided otherwise below): (a) if the Trust informs the Company pursuant to Section 4.4 that it will not cause such Fund to comply with investment restrictions as requested by the Company and the Trust and the Company are unable to agree upon any reasonable alternative accommodations; (b) if shares in such Fund are not reasonably available to meet the requirements of the Contracts as determined by the Company (including any non-availability as a result of notice given by the Distributor pursuant to Section 10.4(d)), and the Distributor, after receiving written notice from the Company of such non-availability, fails to make available, within 10 days after receipt of such notice, a sufficient number of shares in such Fund or an alternate Fund to meet the requirements of the Contracts; or (c) if such Fund fails to meet the diversification requirements specified in Section 817(h) of the Code and any regulations thereunder and the Trust, upon written request, fails to provide reasonable assurance that it will take action to cure or correct such failure; 20 21 Such termination shall apply only as to the affected Fund and shall not apply to any other Fund in which the Company or the Account invests. 10.6. TERMINATION OF INVESTMENT BY THE COMPANY. The Company may elect to cease investing in all Series or Classes of the Trust made available hereunder, promoting the Trust as an investment option under the Contracts, or withdraw its investment or the Account s investment in the Trust, subject to compliance with applicable law, upon written notice to the Trust within 15 days of the occurrence of any of the following events (unless provided otherwise below): (a) upon institution of formal proceedings against the Trust or the Distributor (but only with regard to the Trust) by the NASD, the SEC or any state securities or insurance commission or any other regulatory body; (b) if, with respect to the Trust or a Fund, the Trust or the Fund ceases to qualify as a regulated investment company under Subchapter M of the Code, as defined therein, or any successor or similar provision, or if the Company reasonably believes that the Trust may fail to so qualify, and the Trust, upon written request, fails to provide reasonable assurance that it will take action to cure or correct such failure within 30 days; (c) if the Trust or Distributor is in material breach of a provision of this Agreement, which breach has not been cured to the satisfaction of the Company within 10 days after written notice of such breach has been delivered to the Trust or the Distributor, as the case may be; or (d) at any time more than 18 months after the date of this Agreement, upon six months prior written notice. 10.7. COMPANY REQUIRED TO REDEEM. The parties understand and acknowledge that it is essential for compliance with Section 817(h) of the Code that the Contracts qualify as annuity contracts or life insurance policies, as applicable, under the Code. Accordingly, if any of the Contracts cease to qualify as annuity contracts or life insurance policies, as applicable, under the Code, or if the Trust reasonably believes that any such Contracts may fail to so qualify, the Trust shall have the right to require the Company to redeem Trust shares attributable to such Contracts upon notice to the Company and the Company shall so redeem such Trust shares in order to ensure that the Trust complies with the provisions of Section 817(h) of the Code applicable to ownership of Trust shares. Notice to the Company shall specify the period of time the Company has to redeem the Trust shares or to make other arrangements satisfactory to the Trust and its counsel, such period of time to be determined with reference to the requirements of Section 817(h) of the Code. In addition, the Company may be required to redeem Trust shares pursuant to action taken or request made by the Trust Board in accordance with the Exemptive Order described in Article VIII or any conditions or undertakings set forth or referenced therein, or other SEC rule, regulation or order that may be adopted after the date hereof. The Company agrees to redeem shares in the circumstances described herein and to comply with applicable terms and provisions. Also, in the event that the Distributor suspends or terminates the offering of a Series or Class pursuant to Section 10.4(d) of this Agreement, the Company, upon request by the Distributor, will cooperate in taking appropriate action to withdraw the Account's investment in the respective Fund. 10.8. MINIMUM INVESTMENT. The Company acknowledges its intention to make the selected Funds of the Trust available under the Contracts for a significant period of time and acknowledges further that a termination of this Agreement or the availability of a Fund would prevent the Trust from benefitting from the anticipated economies of scale and the Distributor 21 22 from recovering its up-front costs in establishing the systems and interface required under the terms of this Agreement. Accordingly, in the event that the Company withdraws all or substantially all of its investment in the Trust or a Fund less than two years after the initial investment in the Trust or Fund (other than in response to actions by the Distributor pursuant to Section 10.4(d) of this Agreement), the Company, upon request, shall reimburse the Distributor for reasonably identifiable costs attributable to the start-up of the Trust or Fund, as applicable, and establishing the systems and interface contemplated by this Agreement. 10.9. CONFIDENTIALITY. The Company will keep confidential any information acquired as a result of this Agreement regarding the business and affairs of the Trust, the Distributor, and their affiliates. ARTICLE XI APPLICABILITY TO NEW ACCOUNTS AND NEW CONTRACTS The parties to this Agreement may amend the schedules to this Agreement from time to time to reflect, as appropriate, changes in or relating to the Contracts, any Series or Class, additions of new classes of Contracts to be issued by the Company and separate accounts therefor investing in the Trust. Such amendments may be made effective by executing the form of amendment included on each schedule attached hereto. The provisions of this Agreement shall be equally applicable to each such class of Contracts, Series, Class or separate account, as applicable, effective as of the date of amendment of such Schedule, unless the context otherwise requires. The parties to this Agreement may amend this Agreement from time to time by written agreement signed by all of the parties. ARTICLE XII NOTICE, REQUEST OR CONSENT Any notice, request or consent to be provided pursuant to this Agreement is to be made in writing and shall be given: If to the Trust: Douglas C. Grip President Goldman Sachs Variable Insurance Trust One New York Plaza New York, NY 10004 If to the Distributor: Douglas C. Grip Vice President Goldman Sachs & Co. One New York Plaza New York, NY 10004 If to the Company: D. Russell Morgan Counsel National Life Insurance Company One National Life Drive Montpelier, Vermont 05604 or at such other address as such party may from time to time specify in writing to the other party. Each such notice, request or consent to a party shall be sent by registered or certified United 22 23 States mail with return receipt requested or by overnight delivery with a nationally recognized courier, and shall be effective upon receipt. Notices pursuant to the provisions of Article II may be sent by facsimile to the person designated in writing for such notices. ARTICLE XIII MISCELLANEOUS 13.1. INTERPRETATION. This Agreement shall be construed and the provisions hereof interpreted under and in accordance with the laws of the state of Delaware, without giving effect to the principles of conflicts of laws, subject to the following rules: (a) This Agreement shall be subject to the provisions of the 1933 Act, 1940 Act and Securities Exchange Act of 1934, as amended, and the rules, regulations and rulings thereunder, including such exemptions from those statutes, rules, and regulations as the SEC may grant, and the terms hereof shall be limited, interpreted and construed in accordance therewith. (b) The captions in this Agreement are included for convenience of reference only and in no way define or delineate any of the provisions hereof or otherwise affect their construction or effect. (c) If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Agreement shall not be affected thereby. (d) The rights, remedies and obligations contained in this Agreement are cumulative and are in addition to any and all rights, remedies and obligations, at law or in equity, which the parties hereto are entitled to under state and federal laws. 13.2. COUNTERPARTS. This Agreement may be executed simultaneously in two or more counterparts, each of which together shall constitute one and the same instrument. 13.3. NO ASSIGNMENT. Neither this Agreement nor any of the rights and obligations hereunder may be assigned by the Company, the Distributor or the Trust without the prior written consent of the other parties. 13.4. DECLARATION OF TRUST. A copy of the Declaration of Trust of the Trust is on file with the Secretary of State of the state of Delaware, and notice is hereby given that this instrument is executed on behalf of the Trustees of the Trust as trustees, and is not binding upon any of the Trustees, officers or shareholders of the Trust individually, but binding only upon the assets and property of the Trust. No Series of the Trust shall be liable for the obligations of any other Series of the Trust. 23 24 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed in its name and behalf by its duly authorized officer on the date specified below. GOLDMAN SACHS VARIABLE INSURANCE TRUST (Trust) Date: By: ------------------- --------------------------------------------------- Name: Title: GOLDMAN, SACHS & CO. (Distributor) Date: By: ------------------- --------------------------------------------------- Name: Title: NATIONAL LIFE INSURANCE COMPANY (Company) Date: By: ------------------- --------------------------------------------------- Name: Title:
24 25 SCHEDULE 1 Accounts of the Company Investing in the Trust Effective as of the date the Agreement was executed, the following separate accounts of the Company are subject to the Agreement:
============================================================================================================== Date Established by Name of Account and Board of Directors of the SEC 1940 Act Registration Type of Product Subaccounts Company Number Supported by Account ============================================================================================================== National Variable Life Insurance Account February 1, 1985 811-9044 Variable Life - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- ==============================================================================================================
[Form of Amendment to Schedule 1] Effective as of_____________ , the following separate accounts of the Company are hereby added to this Schedule 1 and made subject to the Agreement:
============================================================================================================== Date Established by Name of Account and Board of Directors of the SEC 1940 Act Registration Type of Product Subaccounts Company Number Supported by Account ============================================================================================================== - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- ==============================================================================================================
IN WITNESS WHEREOF, the Trust, the Distributor and the Company hereby amend this Schedule 1 in accordance with Article XI of the Agreement. - --------------------------------------------------- --------------------------------------------------- Goldman Sachs Variable Insurance Trust National Life Insurance Company - --------------------------------------------------- Goldman, Sachs & Co.
25 26 SCHEDULE 2 Classes of Contracts Supported by Separate Accounts Listed on Schedule 1 Effective as of the date the Agreement was executed, the following classes of Contracts are subject to the Agreement:
============================================================================================================== SEC 1933 Act Registration Policy Marketing Name Number Contract Form Number Annuity or Life ============================================================================================================== Sentinel Estate Provider Variable Life - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- ==============================================================================================================
[Form of Amendment to Schedule 2] Effective as of _______, the following classes of Contracts are hereby added to this Schedule 2 and made subject to the Agreement:
============================================================================================================== SEC 1933 Act Policy Marketing Name Registration Number Contract Form Number Annuity or Life ============================================================================================================== - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------- ==============================================================================================================
IN WITNESS WHEREOF, the Trust, the Distributor and the Company hereby amend this Schedule 2 in accordance with Article XI of the Agreement. - --------------------------------------------------- --------------------------------------------------- Goldman Sachs Variable Insurance Trust National Life Insurance Company - --------------------------------------------------- Goldman, Sachs & Co.
26 27 SCHEDULE 3 Trust Classes and Series Available Under Each Class of Contracts Effective as of the date the Agreement was executed, the following Trust Classes and Series are available under the Contracts:
================================================================================== Contracts Marketing Name Trust Classes and Series ================================================================================== Sentinel Estate Provider International Equity Fund Global Income Fund CORE Small Cap Equity Fund Mid Cap Equity Fund ---------------------------------------------------------------------------------- ---------------------------------------------------------------------------------- ---------------------------------------------------------------------------------- ==================================================================================
[Form of Amendment to Schedule 3] Effective as of __________________, this Schedule 3 is hereby amended to reflect the following changes in Trust Classes and Series:
================================================================================== Contracts Marketing Name Trust Classes and Series ================================================================================== ---------------------------------------------------------------------------------- ---------------------------------------------------------------------------------- ---------------------------------------------------------------------------------- ==================================================================================
IN WITNESS WHEREOF, the Trust, the Distributor and the Company hereby amend this Schedule 3 in accordance with Article XI of the Agreement. - --------------------------------------------------- --------------------------------------------------- Goldman Sachs Variable Insurance Trust National Life Insurance Company - --------------------------------------------------- Goldman, Sachs & Co.
27 28 SCHEDULE 4 Investment Restrictions Applicable to the Trust Effective as of the date the Agreement was executed, the following investment restrictions are applicable to the Trust: [Form of Amendment to Schedule 4] Effective as of ___________________, this Schedule 4 is hereby amended to reflect the following changes: IN WITNESS WHEREOF, the Trust, the Distributor and the Company hereby amend this Schedule 4 in accordance with Article XI of the Agreement. - --------------------------------------------------- --------------------------------------------------- Goldman Sachs Variable Insurance Trust National Life Insurance Company - --------------------------------------------------- Goldman, Sachs & Co.
28 EX-1.A.10 20 SENTINAL ESTATE PROVIDER APPLICATION FORM 1 EXHIBIT 1.A.10
[LOGO] NATIONAL LIFE National Life Insurance Company OF VERMONT Montpelier, Vermont 05604 JOINT LIFE INSURANCE Tel: 802 229-3333 APPLICATION - PART A ==================================================================================================================================== Read instructions before completing this application. Check the appropriate use of this application: [ ] Life Application [ ] Qualified Retirement Plan - Code: - ------------------------------------------------------------------------------------------------------------------------------------ Agency/Branch Name and Number: Policy Number: ==================================================================================================================================== A-1. PRIMARY INSURED INFORMATION 1.1. Name: (Print first, middle, last) 1-10. Smoker Status: Does the First Proposed Insured now use nicotine products in any form (including ------------------------------------------------------ cigarettes, cigars, chewing tobacco, smokeless 1.2. Social Security Number: tobacco, pipe, "the patch", snuff or nicotine gum) or has the First Proposed Insured used nicotine ------------------------------------------------------ products in any form within the last 12 months? 1.3. Birthdate: (mm/dd/yyyy) [ ] Yes [ ] No If 'Yes,' details: ------------------------------------------------------ 1.4. Birthplace: (State or Foreign Country) ------------------------------------------------------ 1.5. Sex: [ ] Male [ ] Female ------------------------------------------------------ 1.6. Issue Policy at age: 1-11. Have you ever applied for life, health or disability insurance or reinstatement of life, health or ------------------------------------------------------ disability insurance which was declined, postponed, 1-7. Residence Address: (Give street and number, city rated or modified in any way? [ ] Yes [ ] No or town, state and zip code.) If 'Yes,' details: ------------------------------------------------------ 1-8. In case further information is required please give residence telephone number and best time of day to ---------------------------------------------------- call: 1-12. Are you or do you have any intention of becoming a member of a military organization? [ ] Yes [ ] No ------------------------------------------------------ If 'Yes,' details: 1-9. Employment Information: a. Employer: ---------------------------------------------------- b. Kind of Business: 1-13. a. Driver's License Number: ------------------------- c. Business Address: b. State Licensed in: ------------------------------- c. Have you had any moving vehicle violations or had d. How long employed by present employer: your motor vehicle driving license suspended or revoked during the last three years or have you been convicted of Driving Under the Influence e. Occupation: during the last five years? [ ] Yes [ ] No If 'Yes,' details: f. Specific duties: g. Length of time in present position: ----------------------------------------------------- h. Any change contemplated? [ ] Yes [ ] No 1-14. In the past six months have there been or are If 'Yes', details: there now pending other negotiations for life or disability insurance? [ ] Yes [ ] No i. Is the First Proposed Insured actively at work at the If 'Yes,' list companies, amount, purpose and customary workplace and actually doing the total amount to be purchased. usual duties and functions required by the position during the normal work hours and weekly period? [ ] Yes [ ] No If 'No,' details: j. In case further information is required please give business telephone number and best time of day to call: ====================================================================================================================================
7500(0298)A Page 1 of 9 Cat. No. 45268 2
JOINT LIFE INSURANCE APPLICATION - PART A - Continued ==================================================================================================================================== A-1. FIRST PROPOSED INSURED INFORMATION - Continued (The Agent will provide you with any Replacement (If 'Yes', is selected for questions 1-15, 1-16 or 1- 17, forms required by law or National Life.) complete form 1480, Avocation, Aviation & Foreign 1-19. Has there been or will there be a lapse, Travel Supplemental Application.) surrender, replacement, reissue, conversion, or change to reduce amount, premium or period of 1-15. Have you within the last three years participated in coverage of any existing life, disability or or do you intend to participate in any motor powered annuity contract if the applied for policy or racing, scuba, skin or sky diving, rodeos, hang rider is issued? [ ] Yes [ ] No gliding, or any other avocation generally considered If 'Yes,' list Company Name(s) and Policy hazardous? [ ] Yes [ ] No Number(s): ------------------------------------------------------------ 1-16. Have you within the last three years been or do you have any intention of becoming a pilot, student pilot or crew member of any type of aircraft? [ ] Yes [ ] No ------------------------------------------------------------ ------------------------------------------------------ 1-17. Do you intend to travel or reside outside the USA for 1-20. Will there be any substantial borrowing on any life more than two weeks in a year? [ ] Yes [ ] No insurance policy if the applied for policy or rider ------------------------------------------------------------ is issued? [ ] Yes [ ] No 1-18. Are there any insolvency or bankruptcy proceedings If 'Yes,' list Company Name(s) and Policy Number(s): now pending against the First Proposed Insured, or has there been any such proceedings during the last seven years? [ ] Yes [ ] No If "yes," give details: ------------------------------------------------------------------------------------------------------------------------------ 1-21. LIFE INSURANCE IN FORCE ON LIFE OF FIRST PROPOSED INSURED: Indicate Type of Insurance: B = Business, G = Group, P = Personal. MUST indicate 'None,' if no insurance. Total Coverage Total Amount Protected by Total Accidental Date of Paid to Company Name: Type: Life Insurance: Waiver of Premiums: Death Benefit: Issue: Date: $ $ $ - ------------------------------------------------------------------------------------------------------------------------------------ ====================================================================================================================================
7500(0298)A Page 2 of 9 3
JOINT LIFE INSURANCE APPLICATION - PART A - Continued ==================================================================================================================================== A-2. SECOND PROPOSED INSURED INFORMATION 2.1. Name: (Print first, middle, last) 2-10. Smoker Status: Does the Second Proposd Insured now use nicotine products in any form (including ---------------------------------------------------- cigarettes, cigars, chewing tobacco, smokeless 2.2. Social Security Number: tobacco, pipe, "the patch", snuff or nicotine gum) or has the Second Proposed Insured used nicotine ---------------------------------------------------- products in any form within the last 12 months? 2.3. Birthdate: (mm/dd/yyyy) [ ] Yes [ ] No If 'Yes,' details: ---------------------------------------------------- 2.4. Birthplace: (State or Foreign Country) ---------------------------------------------------- 2.5. Sex: [ ] Male [ ] Female ---------------------------------------------------- ------------------------------------------------------ 2.6. Issue Policy at age: 2-11. Have you ever applied for life, health or disability insurance or reinstatement of life, health or ---------------------------------------------------- disability insurance which was declined, postponed, 2-7. Residence Address: (Give street and number, city rated or modified in any way? [ ] Yes [ ] No or town, state and zip code.) If 'Yes,' details: ---------------------------------------------------- 2.8. In case further information is required please give residence telephone number and best time of day 2-12. Are you or do you have any intention of becoming to call: a member of a military organization? [ ] Yes [ ] No If 'Yes,' details: ---------------------------------------------------- 2-9. Employment Information: a. Employer: ------------------------------------------------------ 2-13. a. Driver's License Number: b. Kind of Business: --------------------------- b. State Licensed in: c. Business Address: --------------------------------- c. Have you had any moving vehicle violations or had d. How long employed by present employer: your motor vehicle driving license suspended or revoked during the last three years or have you e. Occupation: been convicted of Driving Under the Influence during the last five years? [ ] Yes [ ] No f. Specific duties: If 'Yes,' details: g. Length of time in present position: ------------------------------------------------------ h. Any change contemplated? [ ] Yes [ ] No 2-14. In the past six months have there been or are there If 'Yes', details: now pending other negotiations for life or disability insurance? [ ] Yes [ ] No If 'Yes,' list companies, amount, purpose and total i. Is the Second Proposed Insured actively at work amount to be purchased. at the customary workplace and actually doing the usual duties and functions required by the position during the normal work hours and weekly period? [ ] Yes [ ] No If 'No', details: j. In case further information is required please give business telephone number and best time to call: ====================================================================================================================================
7500(0298)A Page 3 of 9 4
JOINT LIFE INSURANCE APPLICATION - PART A - Continued ==================================================================================================================================== A-2. SECOND PROPOSED INSURED INFORMATION - Continued (The Agent will provide you with any Replacement forms required by law or National Life.) (If 'Yes', is selected for questions 2-15, 2-16 or 2-17, complete form 1480, Avocation, Aviation & Foreign 2-19. Has there been or will there be a lapse, surrender, Travel Supplemental Application.) replacement, reissue, conversion, or change to reduce amount, premium or period of coverage of any existing 2-15. Have you within the last three years participated in life, disability or annuity contract if the applied or do you intend to participate in any motor powered for policy or rider is issued? [ ] Yes [ ] No racing, scuba, skin or sky diving, rodeos, hang gliding, or any other avocation generally considered If 'Yes,' list Company Name(s) and Policy Number(s): hazardous? [ ] Yes [ ] No --------------------------------------------------------------- 2-16. Have you within the last three years been or do you have any intention of becoming a pilot, student pilot or crew member of any type of aircraft? [ ] Yes [ ] No --------------------------------------------------------------- ------------------------------------------------------ 2-17. Do you intend to travel or reside outside the USA for 2-20. Will there be any substantial borrowing on any life more than two weeks in a year? [ ] Yes [ ] No insurance policy if the applied for policy or rider is issued? [ ] Yes [ ] No --------------------------------------------------------------- 2-18. Are there any insolvency or bankruptcy proceedings If 'Yes,' list Company Name(s) and Policy Number(s): now pending against the Second Proposed Insured, or has there been any such proceedings during the last seven years? [ ] Yes [ ] No If "yes," give details ------------------------------------------------------------------------------------------------------------------------------ 2-21. LIFE INSURANCE IN FORCE ON LIFE OF SECOND PROPOSED INSURED: Indicate Type of Insurance: B = Business, G = Group, P = Personal. MUST indicate 'None,' if no insurance. Total Coverage Total Amount Protected by Total Accidental Date of Paid to Company Name: Type: Life Insurance: Waiver of Premiums: Death Benefit: Issue: Date: $ $ $ - ------------------------------------------------------------------------------------------------------------------------------------ ====================================================================================================================================
7500(0298)A Page 4 of 9 5
JOINT LIFE INSURANCE APPLICATION - PART A - Continued ==================================================================================================================================== B.POLICY INFORMATION: 4. Special Billing Type: 1. Plan: (Not applicable for Qualified Retirement Business) ------------------------------------------------------- [ ] Group No.: 2. Amount: $ ------------------------------- [ ] Government Allotment ------------------------------------------------------- [ ] Payroll Deduction No.: 3. Premium Interval: ------------------------------------------------------- (Check one box and provide requested information.) 5. Send premium notices to: (Check one box) [ ] Annual 12 Months [ ] Residence (A-1-7) [ ] Residence (A-2-7) [ ] Semiannual 6 Months [ ] Business (A-1-9.c.) [ ] Business (A-2-9.c.) [ ] Quarterly 3 Months [ ] Owner [ ] Monthly (for Variable and Universal 1 Month [ ] Other: (Give name and address.) allowed only if in Group or Qualified --------------------- Retirement cases.) [ ] COM (No., if existing): 1 Month ------------------------------------------------------- ----------------- 6. Are the two Proposed Insureds legally married to [ ] Single Premium (Variable & Universal only) each other? [ ] Yes [ ] No (This question must be answered if either EPR or PSO is requested.) - ------------------------------------------------------------------------------------------------------------------------------------ COMPLETE EITHER QUESTION 7 OR 8, NEVER BOTH, 7. ADDITIONAL VARIABLE & UNIVERSAL PRODUCT OPTIONS: 8. ADDITIONAL TRADITIONAL PRODUCT OPTIONS: a. Additional Benefits: a. Additional Benefits: [ ] Additional Protection [ ] Accelerated Benefits Rider (ABR) (1st to Die Only) Benefit (APB) $ [ ] Annual Premium (APAR) $ [ ] Automatic Increase ------------------- ------------------------- Rider (AIR) [ ] Payable on a Modal Basis [ ] 5% [ ] 10% [ ] Stipulated [ ] Business Exchange Rider $ [ ] Continuing Coverage Rider (CCR) ------------------------ [ ] Enhanced Death Benefit Rider (EDBR) [ ] Policy Continuation Rider (1st to Die Only) Target Age [ ] Single Premium (SPAR) ------------------ [ ] Rider for Split of Policy (PSO) (2nd to Die Only) [ ] Estate Preservation [ ] Waiver of Premiums Rider (1st to Die Only) Rider (EPR) $ [ ] Other: ------------------- --------------------------------------------------------- [ ] Guaranteed Death Benefit (GDB) (Variable only) b. Life insurance policy loan interest rate: [ ] 80 years [ ] Lifetime Variable Limit on loan interest rate, if any _____ % [ ] Rider for Split of Policy (PSO) --------------------------------------------------------- [ ] Term Rider on First Proposed Insured: c. Automatic payment of premium is: [ ] requested [ ] Level Amount $ [ ] not requested ___________________ --------------------------------------------------------- [ ] Increasing: Dur Yrs d. Use of Dividends: (Check one box and provide ___________________ requested information.) [ ] Decreasing: Dur Yrs [ ] Cash ___________________ [ ] Applied [ ] Term Rider on Second Proposed Insured: [ ] Held [ ] Additions [ ] Level Amount $___________________ [ ] Dividend Protection Riders: (Check one box.) [ ] One Yr. Term + Adds = $ [ ] Increasing: Dur Yrs -------------------- ___________________ (Flex Term I / B Decreasing) [ ] Decreasing: Dur Yrs ___________________ [ ] One Yr. Term = $ , Adds [ ] Other: -------------------- -------------------------------------------------------- (Flex Term II / A Level) b. Death Benefit Option: [ ] Dividend Term Option balance to: [ ] Option A - Face Amount ------------------ [ ] Option B - Face Amount, plus Accumulated Value ---------------------------------------------------------- 9. Qualified Retirement Business ONLY: a. Issue Date: (mm/dd/yyyy) -------------------------------- ---------------------------------------------------------- b. Sex Issue Class: (Check one.) c. Planned Periodic Premium:$ [ ] Sex Distinct ------------------------------ [ ] Sex Neutral ====================================================================================================================================
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JOINT LIFE INSURANCE APPLICATION - PART A - Continued ==================================================================================================================================== C. INVESTMENT INFORMATION: (For Variable use ONLY) C. INVESTMENT INFORMATION: Continued 1. Has Applicant received a prospectus? 4. b. Allocation - Continued [ ] Yes [ ] No Otherwise, the Monthly Deduction charges will ------------------------------------------------------- be deducted from the Fixed Account and 2. Does the Applicant understand that the Cash all Sub-Accounts of the Variable Account in Surrender Value and Death Benefit may increase or proportion to the distribution of the decrease based on the policy's investment return? Accumulated Value on the date of the deduction. [ ] Yes [ ] No ------------------------------------------------------ 5. Portfolio Rebalancing: ------------------------------------------------------- a. Does the Applicant request Portfolio Rebalancing 3. Does the Applicant believe that this policy will meet through which the Accumulated Values in the his or her insurance needs and financial objectives? Sub-Accounts of the Variable Account will be [ ] Yes [ ] No automatically reallocated according to the fund ------------------------------------------------------- allocation percentages? [ ] Yes [ ] No 4. Allocation: a. Allocate net premium accordingly: (Use only whole b. Frequency: [ ] Annual [ ] Semi-Annual [ ] Quarterly percentages. Allocation may not be less than 5%.) ------------------------------------------------------ SENTINEL/MARKET STREET FUND: 6. Dollar Cost Averaging: % Money Market Sub-Account Once each month, the Accumulated Value in the ----- amount designated below is to be transferred from % Growth Sub-Account the MONEY MARKET SUB-ACCOUNT to the other ----- Sub-Accounts as apportioned below. % Aggressive Growth Sub-Account a. Allocation: ----- (Total allocation amount may not be less than $100.) % Managed Sub-Account SENTINEL/MARKET STREET FUNDS: ----- $ Growth Sub-Account % Bond Sub-Account ----- ----- $ Aggressive Growth Sub-Account % International Sub-Account ----- ----- $ Managed Sub-Account % Sentinel Growth Sub-Account ----- ----- $ Bond Sub-Account AMERICAN CENTURY VP SERIES: ----- % Value Sub-Account $ International Sub-Account ----- ----- % Income & Growth Sub-Account $ Sentinel Growth Sub-Account ----- ----- JP MORGAN SERIES TRUST II: AMERICAN CENTURY VP SERIES: % International Opportunities Sub-Account $ Value Sub-Account ----- ----- % Small Company Sub-Account $ Income & Growth Sub-Account ----- ----- STRONG VARIABLE PRODUCTS FUNDS: JP MORGAN SERIES TRUST II: % Opportunity Fund II Sub-Account $ International Opportunities Sub-Account ----- ----- % Growth Fund II Sub-Account $ Small Company Sub-Account ----- ----- NEUBERGER & BERMAN ADVISERS MANAGERS TRUST: STRONG VARIABLE PRODUCTS FUNDS: % Partners Sub-Account $ Opportunity Fund II Sub-Account ----- ----- GOLDMAN SACHS VARIABLE INSURANCE TRUST: $ Growth Fund II Sub-Account % International Equity Sub-Account ----- ----- NEUBERGER & BERMAN ADVISERS MANAGERS TRUST: % Global Income Sub-Account $ Partners Sub-Account ----- ----- % CORE Small Cap Equity Sub-Account GOLDMAN SACHS VARIABLE INSURANCE TRUST: ----- $ International Equity Sub-Account % Mid Cap Equity Sub-Account ----- ----- $ Global Income Sub-Account FIDELITY VIP SERIES: ----- % Growth Sub-Account $ CORE Small Cap Equity Sub-Account ----- ----- % High Income Sub-Account $ Mid Cap Equity Sub-Account ----- ----- % Index 500 Sub-Account FIDELITY VIP SERIES: ----- $ Growth Sub-Account % Contrafund Sub-Account ----- ----- $ High Income Sub-Account NATIONAL LIFE INSURANCE COMPANY: ----- % Fixed Account $ Index 500 Sub-Account ----- ----- OTHER (As available.) $ Contrafund Sub-Account % ----- ----- ---------------------------------------------- OTHER: (As available.) % $ ----- ---------------------------------------------- ----- ---------------------------------------------- %100 TOTAL $ ------------------------------------------------------ ----- ---------------------------------------------- b. Does the Applicant elect that all Monthly Deduction $ TOTAL ALLOCATION charges be deducted from the Money Market ----- Sub-Account to the extent the Accumulated Value in such Sub-Account is sufficient to pay such charges? [ ] Yes [ ] No ====================================================================================================================================
7500(0298)A Page 6 of 9 7
JOINT LIFE INSURANCE APPLICATION - PART A - Continued ==================================================================================================================================== C. INVESTMENT INFORMATION: Continued D. OWNER INFORMATION: Continued 7. Telephone Transaction Privilege: c.[ ] CORPORATION (Full Legal Name) (Note: If C.7.b is answered "Yes.," then C.7.a. MUST ------------------------- be answered "Yes" also.) a. Does the Applicant authorize the Company to accept ------------------------------------------------------ telephone requests by the Owner to: incorporated in (State), = Transfer unloaned Accumulated Value among the ------------------------------ Fixed Account and Sub-Accounts of the Variable its successors or assigns. Account; and [ ] PARTNERSHIP (Full Legal Name) = Effect Policy Loans up to $25,000 and; ------------------------- = Change the premium allocation percentages; and = Change the distribution of fund allocations ------------------------------------------------------ according to the Portfolio Rebalancing feature? a partnership of (City & State) [ ] Yes [ ] No b. If Owner was given authorization in 7.a. above, ------------------------------------------------------ does the Applicant authorize the Company to or any successor partnership doing business in said accept telephone requests by the representative city under said name. for the same excluding effecting Policy Loans? [ ] LIMITED PARTNERSHIP (Full Legal Name) Name of Representative: (Print) [ ] Yes [ ] No ----------------- - ------------------------------------------------------------------- D. OWNER INFORMATION: ------------------------------------------------------ 1. Owner: (Select either a, b or c and provide requested a (State), information. If Owner is a minor, complete "Limitations -------------------------------------------- of Ownership," form 1481. If this is a Variable Policy, the Limited Partnership, its successors or assigns. Owner may NOT be a minor.) a. (Complete ONLY when death benefit is payable at the demise [ ] LIMITED LIABILITY COMPANY (Full Legal Name) of the FIRST INSURED TO DIE.) ------------------------------------------------------ [ ] INSURED (Name of only one of the Insureds) a (State), -------------------------------------------- Limited Liability Company, its successors or assigns. --------------------------------------------------------- [ ] ALL INSUREDS, Jointly [ ] TRUST (Name of Trustee(s)) [ ] OTHER INDIVIDUAL (Name & Relationship) ---------------------------- ------------------- ------------------------------------------------------ --------------------------------------------------------- trustee(s) under an instrument of trust between while living, thereafter (Name & Relationship) (Name of Trustor) ------------------------------------- --------------------------------------------------------- contingent owner, while living, and thereafter ------------------------------------------------------ (Check one box.) and said trustee(s), named (Name of Trust) [ ] Insured (Name of only one of the Insureds) --------------------------------------------------------- ------------------------------------------------------ [ ] All Insureds, Jointly [ ] Estate of last survivor of the named owners. ------------------------------------------------------ b. (Complete ONLY when death benefit is payable at the demise and dated (Date of Trust) of the LAST INSURED TO DIE.) ----------------------------- as heretofore or hereafter amended if trust is amend- [ ] INSURED (Name of only one of the Insureds) able, or the successor(s) in said trust or assigns. [ ] QUALIFIED PENSION OR PROFIT SHARING TRUST --------------------------------------------------------- (Name of Trust Agreement) while living, and thereafter the estate of such Insured. ------------------------ [ ] OTHER INDIVIDUAL (Name & Relationship of first Owner, who may be one of the Insureds) ------------------------------------------------- --------------------------------------------------------- ------------------------------------------------- thereafter (Name & Relationship of the contingent Owner, who may be another Insured) [ ] AS PER SUPPLEMENTAL REQUEST. ------------------------------------------------------- --------------------------------------------------------- 2. Address: (Give street and number, city or town, contingent owner, while living, and thereafter the state and zip code.) estate of the last surviver of the named owners. NOTE: If either A OR B are NOT completed, one choice MUST be made in the following Section D.1.c. and 3. Social Security or Taxpayer ID Number if Owner the requested information provided. is other than Insured: (Complete IRS form W-9.) ====================================================================================================================================
7500(0298)A Page 7 of 9 8 JOINT LIFE INSURANCE APPLICATION - PART A - Continued =============================================================================== E. BENEFICIARY INFORMATION: 1. Beneficiary: (Check one box or fill in the First and Second Beneficiary information.) The right to change the beneficiary is reserved. [ ] AS PER SUPPLEMENTAL REQUEST. [ ] QUALIFIED PENSION AND PROFIT SHARING ONLY: Unless otherwise provided in this section, the Beneficiary of this policy is the Owner. [ ] When death benefit is payable at the demise of the FIRST INSURED TO DIE ONLY: unless otherwise provided in this section, payment will be made in equal shares to the surviving insured(s). [ ] CORPORATION described in section D. [ ] PARTNERSHIP described in section D. [ ] LIMITED PARTNERSHIP described in section D. [ ] LIMITED LIABILITY COMPANY described in section D. [ ] TRUST described in section D. OTHER: (Give each beneficiary's name, address, date of birth, Social Security Number and relationship to Insured(s).) FIRST - SECOND - When death benefit is payable at the demise of the FIRST INSURED TO DIE, payment will be shared equally by all first beneficiaries who survive the FIRST TO DIE OF THE INSUREDS; if none by all second beneficiaries who so survive; if none, payment will be made to the Owner or the Owner's estate. When death benefit is payable at the demise of the LAST INSURED TO DIE, payment will be shared equally by all first beneficiaries who survive the LAST TO DIE OF THE INSUREDS; if none, by all second beneficiaries who so survive; if none, payment will be made to the Owner or the Owner's estate. - ------------------------------------------------------------------------------- F. REMARKS: - ------------------------------------------------------------------------------- G. PROPOSED INSUREDS' AND APPLICANT'S CERTIFICATION AND AGREEMENT: The statements and answers on Part A of this application are, to the best knowledge and belief of the respective Proposed Insureds, complete and true. They, together with the statements and answers on Part B of this application, shall be a part of the contract of insurance if one is issued. The Applicant, if someone other than the Proposed Insureds, agrees to be bound by all statements and answers signed by the Proposed Insureds in Parts A and B of this application. ================================================================================ 7500(0298)A Page 8 of 9 9 JOINT LIFE INSURANCE APPLICATION - PART A - Continued ================================================================================ H. APPLICANT'S AGREEMENT: National Life Insurance Company (the Company) may make administrative corrections and changes to this application. These, if any, are noted on the "Application Amendment" page which is attached to the policy at issue. Acceptance of any policy issued on this application will ratify and will be notice of any such change made. If the laws where the application is made so require, any change of amount, age at issue, class of risk, plan of insurance or benefits must be made in writing. The Agent taking this application has no authority to make, change or discharge any contract hereby applied for. The Agent may not extend credit on behalf of the Company. No statement made to or information acquired by any representative of the Company shall bind the Company unless set out in writing in Parts A and B of this application. If I have purchased variable insurance coverage and have elected the Telephone Transaction Privilege, I appoint the Company as my agent to act upon telephoned instructions reasonably believed to be authorized by me. I hereby ratify any telephone instructions so given and consent to the tape recording of these instructions. So long as the Company employs reasonable procedures to confirm that the instructions are genuine, I agree that I will not hold the Company liable for any unauthorized telephone instructions. The Company shall incur no liability under any policy issued on this application unless and until: a. such policy is delivered to the Owner, and b. the first premium is paid prior to any change in either Proposed Insured's good health and insurability. I have paid $___________________ for Life Insurance with this application, and I have received the Receipt. I have read the Receipt and understand it. ============================================================================== I. AUTHORIZATION TO RELEASE INFORMATION: We, the Proposed Insureds, hereby authorize any licensed physician, medical practitioner, hospital, clinic or other medical or medically related facility, insurance company, the Medical Information Bureau or other organization, institution or person, that has any records or knowledge of us or our health, to give to the National Life Insurance Company or its reinsurers any such infomation. We authorize National Life to request a copy of our driving records from the state motor vehicle department. In addition, we authorize the National Life Insurance Company to obtain investigative consumer reports. We also acknowledge receipt of copies of the Prenotifications relating to investigative consumer reports and the Medical Information Bureau. A photographic copy of this authorization shall be as valid as the original. ============================================================================== J. SIGNATURES: 1. Signed at: (City & State) date (mm/dd/yyyy) . ---------------------- -------- 2. Sign names in If Applicant is a Business Entity or Pension or Profit full below: Sharing Trust, include full legal name and title. If Applicant is a Personal/Business Trust, include "Trustee" in signature. If Applicant is an Individual other than Proposed Insureds, print name below Applicant's signature. FIRST PROPOSED SECOND PROPOSED INSURED: INSURED: ------------------------------------------------------ ----------------------------------------------------- SOLICITING APPLICANT: REPRESENTIVE/AGENT: ------------------------------------------------------ -----------------------------------------------------
================================================================================ 7500(0298)A Page 9 of 9 EX-1.A.11 21 MEMO DESCRIBING ISSUANCE TRANSFER & REDEMPTION 1 EXHIBIT 1(A)(11)) DESCRIPTION OF ISSUANCE, TRANSFER AND REDEMPTION PROCEDURES FOR POLICIES PURSUANT TO RULE 6e-3(T)(b)(12)(iii) FOR SENTINEL ESTATE PROVIDER LAST SURVIVOR FLEXIBLE PREMIUM LIFE INSURANCE POLICIES ISSUED BY NATIONAL LIFE INSURANCE COMPANY This document sets forth the administrative procedures that will be followed by National Life Insurance Company ("National Life") in connection with the issuance of its last survivor flexible premium variable adjustable benefit life insurance policy ("Policy" or "Policies"), the transfer of assets held thereunder, and the redemption by Policy owners ("Owners") of their interests in those Policies. Capitalized terms used herein have the same meaning as in the prospectus for the Policy that is included in the current registration statement on Form S-6 for the Policy as filed with the Securities and Exchange Commission ("Commission" or "SEC"). I. PROCEDURES RELATING TO PURCHASE AND ISSUANCE OF THE POLICIES AND ACCEPTANCE OF PREMIUMS A. OFFER OF THE POLICIES, APPLICATIONS, MINIMUM INITIAL PREMIUMS, AND ISSUANCE 1. Offer of the Policies. The Policies will be offered and sold subject to established cost of insurance schedules and underwriting standards in accordance with state insurance laws. Insurance charges will not be the same for all Owners selecting the same Face Amount. Survivorship insurance is based on the principle of pooling and distribution of mortality risks, which assumes that each Owner pays insurance charges commensurate with the two Insureds' joint mortality risk as actuarially determined utilizing factors such as age, sex and health and occupation. A uniform insurance charge for all sets of Insureds would discriminate unfairly in favor of those sets of Insureds representing greater risk. Although there will be no uniform insurance charges for all sets of Insureds, there will be a uniform insurance rate for all sets of Insureds of the same Rate Classes, ages, sexes, Policy duration, if the Face Amount is divided among Basic Coverage and Additional Coverage in the same way. A description of the Monthly Deduction under the Policy, which includes charges for cost of insurance, for the Variable Account Charge, the Monthly Administrative Charge and for supplemental benefits, is at Appendix A to this memorandum. 2. Application. Persons wishing to purchase a Policy must complete an application and submit it to National Life through a National Life authorized agent. This agent will also be a registered representative of a securities broker-dealer registered with the U.S. Securities and Exchange Commission. The applicant must specify the two Insureds, and provide certain required information about the two Insureds. The applicant will also specify a plan for paying Planned Periodic Premiums, which are level premiums of a specified amount at specified intervals, either quarterly, semi-annually or annually, and may request that National Life send reminder notices at the appropriate intervals. Also, under the Check-O-Matic plan, the Owner can select a monthly payment schedule pursuant to which premium payments will be automatically deducted from a bank account or other source, rather than being "billed." An application will not be deemed to be complete unless all required information, including without limitation age, sex, and medical and other background information with respect to each of the two Insureds, has been provided in the application. 3. Minimum Initial Premium. An applicant for a new Policy must pay at least a Minimum Initial Premium, which if not submitted with the application or during the underwriting period, must be submitted when the Policy is delivered. (Generally, policy coverage does not become 2 effective until the application has been accepted and the Minimum Initial Premium is received in good order at National Life's home office ("Home Office"). If, however, a premium less than the Minimum Initial Premium has been received at the Home Office, a Policy may be issued, but the agent delivering the Policy to the Owner will collect the balance due before leaving the Policy with the Owner). National Life may specify the form in which a premium payment must be made in order for the premium to be in "good order." Ordinarily, a check will be deemed to be in good order upon receipt, although National Life may require that the check first be converted into federal funds. In addition, for a premium to be received in "good order," it must be accompanied by all required supporting documentation, in whatever form required. The Minimum Initial Premium is equal to two times the Minimum Monthly Premium (or in the case where the Guaranteed Death Benefit Rider is elected, two times the Monthly Guarantee Premium). The Minimum Monthly Premium depends on a number of factors, such as the two Insureds' sexes, Issue Ages, and Rate Classes, the Death Benefit Option selected, requested Initial Face Amount and any optional benefits selected. The Minimum Monthly Premium is used for purposes of determining whether, during the first five Policy Years, the Policy will not lapse regardless of investment performance. During the first five Policy Years, the Cumulative Minimum Monthly Premium is the sum of the Minimum Monthly Premiums in effect on each Monthly Policy Date, plus all Withdrawals and outstanding Policy loans and accrued interest. The Minimum Monthly Premium may change if, for example, a Face Amount Change or Death Benefit Option Change is elected by the Owner. 4. Minimum Basic Coverage Amount. The minimum Basic Coverage amount for which National Life will issue a Policy is generally $100,000. 5. Receipt of Application and Underwriting. Upon receipt of a completed application in good order from an applicant, National Life will follow certain insurance underwriting (risk evaluation) procedures designed to determine whether the two proposed Insureds are jointly insurable. This process may involve such verification procedures as medical examinations and may require that further information be provided about a proposed Insured before a determination can be made. The underwriting process determines the Rate Class to which an Insured is assigned. This original Rate Class applies to the Initial Face Amount. The Rate Class may change upon an increase in Face Amount, as to the increase (see Death Benefits below). A Policy cannot be issued until the initial underwriting procedure has been completed, and any supplemental beneficiary forms and forms required in accordance with state insurance laws have been received. The Date of Issue occurs when the above steps have been completed, the application has been accepted, the Minimum Initial Premium has been received, and the computerized issue system has generated a printed Policy. National Life reserves the right to reject an application for any reason permitted by law. If an application is rejected, any premium received will be returned, without interest. 6. Acceptance of Application and Date of Issue. If an application is accepted, insurance coverage under the Policy is effective as of the Date of Issue. The Date of Issue is set forth in the Policy. From the time the application for a Policy is signed until the time the Policy is issued, an applicant can, subject to National Life's underwriting rules, obtain temporary last survivor insurance protection, pending issuance of the Policy, by answering "no" with respect to both Insureds to the Health Questions of the Receipt & Temporary Life Insurance Agreement and submitting (a) a complete application including any medical questionnaire required, and (b) payment of the Minimum Initial Premium. 2 3 The Date of Issue is used to determine Policy Years and Monthly Policy Dates, as well as to measure suicide and contestability periods. B. ADDITIONAL PREMIUMS 1. Additional Premiums Permitted. Additional premiums may be paid in any amount, frequency and time period, subject to the following limits: - A premium must be at least $100 and must be sent to the Home Office. National Life may require satisfactory evidence of insurability before accepting any premium if it increases the Unadjusted Death Benefit more than it increases the Accumulated Value (although National Life will not limit premiums paid as Planned Periodic Premiums). - Total premiums paid on a cumulative basis also may not exceed guideline premium limitations for life insurance set forth in the Internal Revenue Code. - No premium will be accepted after the younger Insured reaches Attained Age 100 (although loan payments will be permitted after the younger Insured's Attained Age 100). - National Life will monitor Policies and will attempt to notify an owner on a timely basis if the Owner's Policy is in jeopardy of becoming a modified endowment contract under the Internal Revenue Code. 2. Refund of Excess Premium Amounts. If at any time a premium is paid that would result in total premiums exceeding limits established by law to qualify a Policy as a life insurance policy, National Life will only accept that portion of the premium that would make total premiums equal the maximum amount that may be paid under the Policy. The excess will be promptly refunded, and if paid by check, after such check has cleared. If there is an outstanding loan on the Policy, the excess may instead be applied as a loan repayment. Excess amounts under $3 will not be refunded. 3. Planned Premiums. At the time of application, the Owner will select a Planned Periodic Premium schedule, based on annual, semi-annual, or quarterly payments. The Owner may request National Life to send a premium reminder notice from National Life at the specified interval. The Owner may change the Planned Periodic Premium frequency and amount by notification to National Life at its Home Office ot to a National life authorized agent. Also, under the Check-O-Matic plan, the Owner can select a monthly payment schedule pursuant to which premium payments will be automatically deducted from a bank account or other source, rather than being "billed." 4. Crediting Additional Premiums Premiums will be credited to the Policy and the Net Premiums will be invested as requested on the Valuation Date that the premium is received in good order by the Home Office in accordance with the procedures described below in Section I.F. National Life may specify the form in which a premium payment must be made in order for the premium to be in "good order." Ordinarily, a check will be deemed to be in good order upon receipt, although National Life may require that the check first be converted into federal funds. In addition, for an additional premium to be received in "good order," it must be accompanied by all required supporting documentation in whatever form required. 3 4 C. OVERPAYMENTS AND UNDERPAYMENTS. In accordance with industry practice, National Life will establish procedures to handle errors in initial and additional premium payments to refund overpayments and collect underpayments, except for amounts under $3, or such other threshhold as may be established from time to time. D. SPECIAL PREMIUMS -- PREMIUMS UPON INCREASE IN FACE AMOUNT, DURING A GRACE PERIOD, OR UPON REINSTATEMENT 1. Upon Increase in Face Amount. Depending on the Accumulated Value at the time of an increase in the Face Amount and the amount of the increase requested, an additional premium or change in the amount of Planned Periodic Premiums may be advisable. National Life will notify the Owner if a premium is necessary or a change appropriate. 2. During a Grace Period. If the Cash Surrender Value is insufficient to cover the Monthly Deductions and other charges under the Policy and the Grace Period (as described below) expires without a sufficient payment, the Policy will lapse. During the first five Policy Years, however, the Policy will not lapse if the Cumulative Minimum Monthly Premium has been paid. In addition, if the Owner has elected at issue the Guaranteed Death Benefit Rider, and has paid premiums at all times at least equal to the Cumulative Guarantee Premium, the Policy will not lapse either for the entire lifetimes of the Insureds, or prior to the younger Insured's Attained Age 80, regardless of whether the Cash Surrender Value is sufficient to cover the Monthly Deductions. - The Policy provides for a 61-day Grace Period that is measured from the date on which notice is sent by National Life. Thus, the Policy does not lapse, and the insurance coverage continues, until the expiration of this Grace Period. - In order to prevent lapse, the Owner must, during the Grace Period, make a premium payment equal to the sum of any amount by which the past Monthly Deductions have been in excess of Cash Surrender Value, plus three times the Monthly Deduction due the date the Grace Period began. This amount will be identified in the notice sent out pursuant to the immediately preceding paragraph. - Failure to make a sufficient payment within the Grace Period will result in lapse of the Policy without value. 3. Upon Reinstatement. A Policy that lapses without value may be reinstated at any time within five years (or longer period if required in a particular state) after the beginning of the Grace Period by submitting evidence of both Insureds' insurability satisfactory to National Life and payment of an amount sufficient to provide for two times the Monthly Deduction due on the date the Grace Period began plus three times the Monthly Deduction due on the effective date of reinstatement. The effective date of the reinstatement will be the Monthly Policy Date on or next following the date the reinstatement application is approved. - Upon reinstatement, the Accumulated Value will be based upon the premium paid to reinstate the Policy and the Policy will be reinstated with the same Date of Issue as it had prior to the lapse. - Neither the five year no lapse guarantee nor the Guaranteed Death Benefit Rider may be reinstated. E. REPAYMENT OF A POLICY LOAN 4 5 1. Loan Repayments Permitted. While the Insured is living, the Owner may repay all or a portion of a loan and accrued interest. 2. Repayment Crediting and Allocation. National Life will assume that any payments made while there is an outstanding loan on the Policy are premium payments, rather than loan repayments, unless it receives written instructions that a payment is a loan repayment. In the event of a loan repayment, the amount held as collateral in the Fixed Account will be reduced by an amount equal to the repayment, and such amount will be transferred to the Subaccounts of the Variable Account and to the non-loaned portion of the Fixed Account based on the net premium allocations in effect at the time of the repayment. F. ALLOCATIONS OF PREMIUMS AMONG THE ACCOUNTS 1. The Variable Account, Subaccounts, and Fixed Account. The variable benefits under the Policies are supported by National Variable Life Insurance Account (the "Variable Account"). The Variable Account currently consists of twenty two Subaccounts, the assets of which are used to purchase shares of a designated corresponding mutual fund Portfolio that is part of one of the following Funds: the Market Street Fund, Variable Insurance Products Fund, Variable Insurance products Fund II, JP Morgan Series Trust II, American Century VP Series, Neuberger & Berman Advisers Managers Trust, Goldman Sachs Variable Insurance Trust, Strong Variable Insurance Funds II and Strong Opportunity Fund II. Each Fund is registered under the Investment Company Act of 1940 as an open-end management investment company. Owners also may allocate Net Premiums to the Fixed Account. Additional Subaccounts may be added from time to time to invest in portfolios of the above investment companies, or any other investment company. 2. Allocations Among the Accounts. Net Premiums are allocated to the Subaccounts and the Fixed Account in accordance with the following procedures. a. General. The Net Premium equals the premium paid less the Premium Expense Charge. In the application for the Policy, the Owner will indicate how Net Premiums should be allocated among the Subaccounts of the Variable Account and/or the Fixed Account. Such allocations may be changed at any time by the Owner by written notice to National Life at the Home Office, or if the telephone transaction privilege has been elected, by telephone instructions. The percentages of each Net Premium that may be allocated to any Subaccount must be a whole number not less than 5%, and the sum of the allocation percentages must be 100%. b. Premium Expense Charge. The Premium Expense Charge consists of two portions. The first is that a deduction of 3.40% of the premium will be made from each premium payment prior to allocation of Net Premiums, to cover state premium taxes and the federal DAC Tax. The Premium Expense Charge will also include, during the first 10 Policy Years, a deduction of 7.0% of the premium up to the Target Premium, and 4.0% of premium in excess of the Target Premium, from each premium payment prior to allocation of Net Premiums, to compensate National Life for the expenses incurred in distributing the Policies, including commissions to selling agents. National Life reserves the right to increase the charge for premiums in excess of the Target Premium from 4.0% to 5.0% of such premiums. National Life currently intends to reduce this deduction from premiums paid after the tenth Policy Anniversary to 4.0% of all premiums, although it reserves the right to make a deduction of up to the maximum permitted during the first ten years. 5 6 c. Initial Premiums. Any portion of the initial Net Premium and any subsequent premiums received by National Life before National Life before expiration of the "free look" period that are to be allocated to the Variable Account will be allocated to the Money Market Subaccount. At the end of such period, which National Life will assume for such purpose to be the date 20 days after the Date of Issue, National Life will allocate the amount in the Money Market Subaccount to each of the Subaccounts selected in the application based on the proportion that the allocation percentage for such Subaccount bears to the sum of the Variable Account premium allocation percentages. d. Additional Premiums. Additional Net Premiums will be allocated to the Accounts in accordance with the allocation percentages then in effect on the Valuation Date that the premium is received in good order at the Home Office, unless other instructions accompany the premium, in which case the net premium will be allocated in accordance with those instructions. If those instructions do not comply with National Life's allocation rules, crediting and allocation will not be implemented until further instructions are received from Owners. II. TRANSFERS AMONG SUB-ACCOUNTS A. TRANSFERS AMONG THE ACCOUNTS. The Owner may transfer the Accumulated Value between and among the Subaccounts of the Variable Account and the Fixed Account by making a written transfer request to National Life, or if the telephone transaction privilege has been elected, by telephone instructions to National Life. Transfers between and among the Subaccounts of the Variable Account and the Fixed Account are made as of the Valuation Day that the request for transfer is received in good order at the Home Office. The Owner may, at any time, transfer all or part of the amount in one of the Subaccounts of the Variable Account to another Subaccount and/or to the Fixed Account. One transfer in each Policy Year is allowed from the Fixed Account to any or all of the Subaccounts of the Variable Account. The amount transferred from the Fixed Account may not exceed the greater of 25% of the value of such account at the time of transfer, or $1,000. The transfer will be made as of the date National Life receives the written or telephone request at its Home Office. Currently, an unlimited number of transfers are permitted without charge, and National Life has no current intent to impose a transfer charge in the foreseeable future. However, National Life reserves the right to deduct a $25 transfer charge from each transfer in excess of the twelfth transfer during any one Policy Year. If such a charge is adopted in the future, the following transfers will not be subject to a transfer charge and will not count against the twelve free transfers in any Policy Year: (1) transfers resulting from Policy loans, (2) the exercise of the special transfer whereby the Owner may transfer the entire Accumulated Value in the Variable Account to the Fixed Account during the first two years following the Policy issue without regard to limits on free transfers, (3) the special transfer right whereby an Owner may transfer the portion of the Accumulated Value in a Subaccount the investment policy of which is changed, without regard to any limits on transfers or free transfers, (4) transfers pursuant to automated Dollar Cost Averaging or Portfolio Rebalancing transactions, and (5) the reallocation from the Money Market Subaccount following the "free look" period. All transfers requested during one Valuation Period are treated as one transfer transaction. B. DOLLAR COST AVERAGING 6 7 This feature permits an Owner to automatically transfer funds from the Money Market Subaccount to any other Subaccounts on a monthly basis. 1. Election of Dollar Cost Averaging. Dollar Cost Averaging may be elected at issue by marking the appropriate box on the initial application and completing the appropriate instructions, or, after issue, by filling out similar information on a change request form and sending it by mail to the Home Office. 2. Operation of the Program. If this feature is elected, the amount to be transferred will be taken from the Money Market Subaccount and transferred to the Subaccount or Subaccounts designated to receive the funds, each month on the Monthly Policy Date (starting with the Monthly Policy Date next following the date that the reallocation of the Accumulated Value out of the Money Market Subaccount and into the other Subaccounts would normally have occurred after expiration of the "free look" period), until the amount in the Money Market Fund is depleted. The minimum monthly transfer by Dollar Cost Averaging is $100, except for the transfer that reduces the amount in the Money Market Subaccount to zero. An Owner may discontinue Dollar Cost Averaging at any time by sending an appropriate change request form to the Home Office. C. PORTFOLIO REBALANCING This feature permits an Owner to automatically rebalance the value in the Subaccounts on a quarterly, semi-annual or annual basis, based on the Owner's premium allocation percentages in effect at the time of the rebalancing. 1. Election of Portfolio Rebalancing. Portfolio rebalancing may be elected at issue by marking the appropriate box on the initial application, or, after issue, by completing a change request form and sending it by mail to the Home Office. 2. Operation of the Program. In Policies utilizing Portfolio Rebalancing from the Date of Issue, an automatic transfer will take place that causes the percentages of the current values in each Subaccount to match the current premium allocation percentages, starting with the Monthly Policy Date three, six or twelve months after the Date of Issue, and then on each Policy Anniversary, and each Monthly Policy Date three, six or twelve months thereafter. Policies electing Portfolio Rebalancing after issue will have the first automated transfer occur as of the Valuation Date on or next following the date that the election is received at the Home Office, and subsequent rebalancing transfers will occur every three, six or twelve months from such date. An Owner may discontinue Portfolio Rebalancing at any time by submitting an appropriate change request form to the Home Office by mail. In the event that an Owner changes the Policy's premium allocation percentages, Portfolio Rebalancing will automatically be discontinued unless the Owner specifically directs otherwise. Portfolio Rebalancing and Dollar Cost Averaging may not be in operation simultaneously on the same Policy. III. "REDEMPTION" PROCEDURES: SURRENDERS, WITHDRAWALS, DEATH BENEFITS, AND LOANS A. "FREE-LOOK" PERIOD The Policy provides for an initial "free-look" period. The Owner may cancel the Policy before 10 days after the Owner receives the Policy (or longer period provided by state law). Upon returning 7 8 the Policy to National Life or to an agent of National Life within such time with a written request for cancellation, the Owner will receive a refund equal to the gross premiums paid on the Policy. B. REQUEST FOR CASH SURRENDER VALUE 1. Requests for Cash Surrender Value Permitted. At any time before the death of both Insureds, the Owner may surrender the Policy for its Cash Surrender Value. The Cash Surrender Value is the Accumulated Value minus any Policy loan and accrued interest and less any applicable Surrender Charge. The Cash Surrender Value will be determined by National Life on the date it receives, at the Home Office, a written surrender request signed by the Owner, and the Policy. A surrender may not be requested over the telephone. Coverage under the Policy will end on the day the Owner mails or otherwise sends the written surrender request and the Policy to National Life. Surrender proceeds will ordinarily be mailed by National Life to the Owner within seven days of receipt of the request, unless a payment option was selected (see Section III.H. below). 2. Surrender of Policy -- Surrender Charges. A Surrender Charge is imposed if the Policy is surrendered or lapses at any time before the end of the tenth Policy Year, or the ten years after an increase in the Basic Coverage. The Surrender Charge will initially be equal to the Policy's Target Premium, as shown in Appendix B to this Prospectus. The Surrender Charge will be level for the first five years, and then decline linearly by month until it is zero at the beginning of Policy Year 11. For increases in Basic Coverage, the Surrender Charge will initially be the Target Premium associated with the increase. It will be level for five years from the date of the increase, and then decline linearly by month until it is zero at the beginning of the eleventh year after the date of the increase. The Surrender Charge will not decrease in the event of a decrease in Basic Coverage. The actual Surrender Charge for your Policy will be stated in the Policy. C. REQUEST FOR WITHDRAWALS 1. When Withdrawals are Permitted. At any time before the death of the last to die of the two Insureds and after the first Policy Anniversary, the Owner may withdraw a portion of the Policy's Cash Surrender Value, subject to the following conditions: - The minimum amount which may be withdrawn is $500. - The maximum Withdrawal is the Cash Surrender Value minus three times the Monthly Deduction for the most recent Monthly Policy Date. A Withdrawal Charge will be deducted from the amount of the Withdrawal. - Withdrawals may be requested only by sending a written request, signed by the Owner, to National Life at its Home Office. A Withdrawal may not be requested over the telephone. 2. Withdrawal Charge. At the time of a Withdrawal, National Life will assess a charge equal to the lesser of 2% of the Withdrawal amount and $25. This Withdrawal Charge will be deducted from the Withdrawal amount. 3. Allocation of Withdrawals. The Withdrawal will be taken from the Subaccounts of the Variable Account based upon the instructions of the Owner at the time of the Withdrawal. If specific allocation instructions have not been received from the Owner, the Withdrawal will be allocated to the Subaccounts based on the proportion that each Subaccount's value bears to the total Accumulated Value in the Variable Account. If the Accumulated Value in one or more 8 9 Subaccounts is insufficient to carry out the Owner's instructions, the Withdrawal will not be processed until further instructions are received from the Owner. Withdrawals will be taken from the Fixed Account only to the extent that Accumulated Value in the Variable Account is insufficient. 4. Effect of a Withdrawal on Face Amount. The effect of a Withdrawal on the Death Benefit and Face Amount will vary depending upon the Death Benefit Option in effect and whether the Unadjusted Death Benefit is based on the applicable percentage of Accumulated Value. a. Option A. If the Face Amount divided by the applicable percentage of Accumulated Value exceeds the Accumulated Value just after the Withdrawal, a Withdrawal will reduce the Face Amount and the Unadjusted Death Benefit by the lesser of such excess and the amount of the Withdrawal, effective on the date of the Withdrawal. If the Face Amount divided by the applicable percentage of Accumulated Value does not exceed the Accumulated Value just after the Withdrawal, then the Face Amount is not reduced. The Unadjusted Death Benefit will be reduced by an amount equal to the reduction in Accumulated Value times the applicable percentage (or equivalently, the Unadjusted Death Benefit is equal to the new Accumulated Value times the applicable percentage). b. Option B. The Face Amount will never be decreased by a Withdrawal. A Withdrawal will, however, always decrease the Death Benefit. If the Unadjusted Death Benefit equals the Face Amount plus the Accumulated Value, a Withdrawal will reduce the Accumulated Value by the amount of the Withdrawal, and thus the Unadjusted Death Benefit will also be reduced by the amount of the Withdrawal. If the Unadjusted Death Benefit immediately prior to the Withdrawal is based on the applicable percentage of Accumulated Value, the Unadjusted Death Benefit will be reduced to equal the greater of (a) the Face Amount plus the Accumulated Value after deducting the amount of the Withdrawal and (b) the applicable percentage of Accumulated Value after deducting the amount of the Withdrawal. 5. Other Effects of Withdrawals. Any decrease in Face Amount due to a Withdrawal will first reduce the most recent increase in Face Amount, then the most recent increases, successively, and lastly, the Initial Face Amount. In the case of simultaneously added coverages, a Withdrawal will first reduce the amount added through operation of the Automatic Increase Rider, then Additional Coverage, and finally Basic Coverage. Because a Withdrawal can affect the Face Amount (or increase in Face Amount) and the Unadjusted Death Benefit as described above, a Withdrawal may also affect the Net Amount(s) at Risk that is used to calculate the Cost of Insurance Charge(s) under the Policy. Since a Withdrawal reduces the Accumulated Value, the Cash Surrender Value of the Policy is reduced, thereby increasing the likelihood that the Policy will lapse. 6. When a Withdrawal Is Not Permitted. A request for Withdrawal may not be allowed if such Withdrawal would reduce the Basic Coverage below the Minimum Basic Coverage for the Policy. Also, if a Withdrawal would result in cumulative premiums exceeding the maximum premium limitations applicable under the Code for life insurance, National Life will not allow the Withdrawal. D. MONTHLY DEDUCTIONS On the Date of Issue and on each Monthly Policy Date, a redemption will be made from Accumulated Value for the Monthly Deduction, which is a charge compensating National Life for 9 10 distribution and administrative expenses and for the insurance coverage provided by the Policy. The Monthly Deduction consists of four components: (a) the Cost of Insurance Charge, (b) the Variable Account Charge, (c) the Monthly Administrative Charge, and (d) the cost of any additional benefits provided by rider. These charges are discussed in more detail in Appendix A hereto. Because portions of the Monthly Deduction, such as the Cost of Insurance Charge, can vary from month to month, the Monthly Deduction may vary in amount from month to month. The Monthly Deduction will be deducted on a pro rata basis from the Subaccounts of the Variable Account and the Fixed Account, unless the Owner has elected at the time of application, or later requests in writing, that the Monthly Deduction be made from the Money Market Subaccount. If a Monthly Deduction cannot be made from the Money Market Subaccount, when that has been elected, the amount of the deduction in excess of the Accumulated Value available in the Money Market Subaccount will be made on a pro rata basis from the Subaccounts of the Variable Account and the Fixed Account. E. DEATH BENEFITS 1. Payment of Death Benefit. As long as the Policy remains in force, the Death Benefit of the Policy will, upon the Company's receipt of due proof of the both Insureds' deaths and a Claimant's Statement signed by or on behalf of the Beneficiary, as well as any other necessary documentation, be paid to the named Beneficiary in accordance with the designated Death Benefit Option, unless the claim is contestable in accordance with the terms of the Policy. The proceeds may be paid in cash or under one of the Settlement Options set forth in the Policy. The amount payable under the designated Death Benefit Option will be increased by any additional benefits, any dividend payable, and by interest from the date National Life receives proof of the last survivor of the Insureds' death and all other required information to the payment date at a National Life declared interest rate or any higher legal requirement, and will be decreased by any outstanding Policy loan and accrued interest and by any unpaid Monthly Deductions. The Face Amount of a Policy, on which the Unadjusted Death Benefit is based, may be made up of either Basic Coverage or Additional Coverage. Additional Coverage is provided by the Additional Protection Benefit Rider. 2. Death Benefit Options. The Policy provides two Death Benefit Options: Option A and Option B. The Owner designates the Death Benefit Option in the application and may change it as described below. At the younger Insured's Attained Age 100, Option B automatically becomes Option A. a. Option A. The Unadjusted Death Benefit is equal to the greater of (a) the Face Amount of the Policy and (b) the Accumulated Value multiplied by the specified percentage shown in the table below. For Attained Ages not shown, the percentages will decrease by a ratable portion of each full year.
Younger Insured's Attained Age Percentage ------------ ---------- 40 and under 250% 45 215% 50 185% 55 150% 60 130% 65 120% 70 115% 75-90 105% 91 104%
10 11 92 103% 93 102% 94 and over 101%
b. Option B. The Unadjusted Death Benefit is equal to the greater of (a) the Face Amount of the Policy plus the Accumulated Value and (b) the Accumulated Value multiplied by the specified percentage shown in the table above. 3. Change in Death Benefit Option. After the first Policy Year, the Death Benefit Option in effect may be changed by sending National Life a written request. No charges will be imposed to make a change in the Death Benefit Option. The effective date of any such change will be the Monthly Policy Date on or next following the date National Life receives the written request. Only one change in Death Benefit Option is permitted in any one Policy Year. - If the Death Benefit Option is changed from Option A to Option B, on the effective date of the change, the Death Benefit will not change but the Face Amount will be decreased by the Accumulated Value on that date. The order in which decreases will be applied is the same as descibed below as the order in which decreases in Face Amount are applied. However, this change may not be made if it would reduce the Basic Coverage to less than the Minimum Basic Coverage. - If the Death Benefit Option is changed from Option B to Option A, on the effective date of the change, the Death Benefit will not change but the Face Amount will be increased by the Accumulated Value on that date. - A change in the Death Benefit Option may affect the Net Amount at Risk over time which, in turn, would affect the monthly Cost of Insurance Charge. Changing from Option A to Option B will generally result in a Net Amount at Risk that remains level. Such a change will result in a relative increase in the Cost of Insurance Charges over time because the Net Amount at Risk will, unless the Unadjusted Death Benefit is based on the applicable percentage of Accumulated Value, remain level as cost of insurance rates increase over time, rather than the Net Amount at Risk decreasing as the Accumulated Value increases. Changing from Option B to Option A will, if the Accumulated Value increases, decrease the Net Amount at Risk over time, thereby partially offsetting the effect of increases over time in the Cost of Insurance Charge to the extent the decrease in Net Amount at Risk more than offsets the increase in rates as the Insureds age. - If a change in the Death Benefit Option would result in cumulative premiums exceeding the maximum premium limitations under the Internal Revenue Code for life insurance, National Life will not effect the change. 4. How the Death Benefit May Vary. The amount of the Death Benefit may vary with the Accumulated Value. The Death Benefit under Option A will vary with the Accumulated Value whenever the specified percentage of Accumulated Value exceeds the Face Amount of the Policy. The Death Benefit under Option B will always vary with the Accumulated Value because the Unadjusted Death Benefit equals the greater of (a) the Face Amount plus the Accumulated Value and (b) the Accumulated Value multiplied by the specified percentage. 5. Ability to Adjust Face Amount. Subject to certain limitations, an Owner may generally, at any time after the first Policy Year, increase or decrease the Policy's Face Amount by 11 12 submitting a written application to National Life. The effective date of an increase will be the Monthly Policy Date on or next following National Life's approval of the request, and the effective date of a decrease is the Monthly Policy Date on or next following the date that National Life receives the written request. The effect of changes in Face Amount on Policy charges, as well as other considerations, are described below. a. Increase. A request for an increase in Face Amount may not be for less than $50,000, or such lesser amount required in a particular state. The Owner may not increase the Face Amount after the older of the two Insureds' Attained Age 90, or if the Joint Age of the Insureds is greater than 90. To obtain the increase, the Owner must submit an application for the increase and provide evidence satisfactory to National Life of both Insureds' insurability. On the effective date of an increase, and taking the increase into account, the Cash Surrender Value must be equal to the Monthly Deductions then due. If the Cash Surrender Value is not sufficient, the increase will not take effect until the Owner makes a sufficient additional premium payment to increase the Cash Surrender Value to the required level. An increase in the Face Amount will generally have the effect of increasing the total Net Amount at Risk, which in turn will increase the monthly Cost of Insurance Charges. In addition, either or both of the Insureds may be in a different Rate Class as to the increase in insurance coverage. b. Decrease. The amount of the Face Amount after a decrease (a) cannot be less than 75% of the largest Face Amount in force at any time in the twelve months immediately preceding National Life's receipt of the request and (b) may not be less than the Minimum Basic Coverage, which is $100,000. To the extent a decrease in the Face Amount could result in cumulative premiums exceeding the maximum premium limitations applicable for life insurance under the Internal Revenue Code, National Life will not effect the decrease. A decrease in the Face Amount generally will decrease the total Net Amount at Risk, which generally will decrease an Owner's monthly Cost of Insurance Charges. For purposes of determining the Cost of Insurance Charge, any decrease in the Face Amount will reduce the Face Amount in the following order: (a) the Face Amount provided by the most recent increase; (b) the next most recent increases, successively; and (c) the Initial Face Amount. For simulataneously added coverages, a decrease will be applied first to the increase provided by the Automatic Increase Rider, then to Additional Coverage, and finally to Basic Coverage. 12 13 G. LOANS 1. When Loans are Permitted. An Owner may at any time after the first anniversary of the Date of Issue borrow money from National Life using the Policy as the only security for the loan. The Owner may obtain Policy loans in an amount not exceeding the Policy's Cash Surrender Value on the date of the loan, minus three times the Monthly Deduction for the most recent Monthly Policy Date. While either Insured is living, the Owner may repay all or a portion of a loan and accrued interest. Loans may be taken by making a written request to National Life at the Home Office, or, if the telephone transaction privilege has been elected, by providing telephone instructions to National Life at the Home Office. National Life limits the amount of a Policy loan taken pursuant to telephone instructions to $25,000. 2. Interest Rate Charged. The interest rate charged on Policy loans will be at the fixed rate of 6% per year. Interest is charged from the date of the loan and is due at the end of each Policy Year. Interest due will be added to the loan balance and bear interest at the same rate. 3. Allocation of Loans and Collateral. When a Policy loan is taken, Accumulated Value is transferred to and held in the Fixed Account as Collateral for the Policy loan. Accumulated Value to be held as Collateral is taken from the Subaccounts of the Variable Account based upon the instructions of the Owner at the time the loan is taken. If specific allocation instructions have not been received from the Owner, Accumulated Value to be held as Collateral will taken from the Subaccounts based on the proportion that each Subaccount's value bears to the total Accumulated Value in the Variable Account. If the Accumulated Value in one or more of the Subaccounts is insufficient to carry out the Owner's instructions, the loan will not be processed until further instructions are received from the Owner. Non-loaned Accumulated Value in the Fixed Account will become Collateral for a loan only to the extent that the Accumulated Value in the Variable Account is insufficient. Loan interest due will be allocated among and transferred first from the Subaccounts of the Variable Account in proportion to the Accumulated Values held in the Subaccounts, and then from the Fixed Account. The Collateral for a Policy loan will initially be equal to the loan amount. Loan interest due will be added to the Collateral for the Policy loan. National Life will take additional Collateral for the loan interest so added pro rata from the Subaccounts of the Variable Account, and then, if the amounts in the Variable Account are insufficient, from the portion of the Fixed Account not held as Collateral, and hold the Collateral in the Fixed Account. At any time, the amount of the outstanding loan under a Policy equals the sum of all loans (including interest added to the loan balance) minus any loan repayments. 4. Interest Credited to Amounts Held as Collateral. As long as the Policy is in force, National Life will credit the amount in the Fixed Account as Collateral with interest at effective annual rates it determines, but not less than 4% or such higher minimum rate required under state law. The rate will apply to the calendar year that follows the date of determination. 5. Preferred Policy Loans. In Policy Years 11 and thereafter, National Life currently intends to make preferred Policy loans available, for which the rate of interest charged on the loan will be 4.25% and amounts held as Collateral in the Fixed Account will be credited with interest at an annual rate of 4.00%. Availability of preferred Policy loans is not guaranteed, however. If preferred loans are available, then all existing non-preferred loans will become preferred. 6. Effect of Policy Loan. Policy loans, whether or not repaid, will have a permanent effect on the Accumulated Value and the Cash Surrender Value, and may permanently affect the Death Benefit under the Policy. The effect on the Accumulated Value and Death Benefit could be favorable or unfavorable, depending on whether the investment performance of the Subaccounts 13 14 and the interest credited to the non-loaned Accumulated Value in the Fixed Account is less than or greater than the interest being credited on the amounts held as Collateral in the Fixed Account while the loan is outstanding. Compared to a Policy under which no loan is made, values under a Policy will be lower when the credited interest rate is less than the investment experience of assets held in the Variable Account and interest credited to the non-loaned Accumulated Value in the Fixed Account. The longer a loan is outstanding, the greater the effect a Policy loan is likely to have. The Death Benefit and Cash Surrender Value will be reduced by the amount of any outstanding Policy loan and accrued interest. H. SETTLEMENT OPTIONS In lieu of a single sum payment on death or surrender, an election may be made to apply the amount under any one of the fixed benefit Settlement Options provided in the Policy. I. DELAY IN REDEMPTIONS OR TRANSFERS Any amounts payable as a result of surrender, Withdrawal, or Policy loan will ordinarily be paid within seven days of receipt of written request at National Life's Home Office in a form satisfactory to National Life. Generally, the amount of a payment will be determined as of the date of receipt by National Life of all required documents. However, National Life may defer the determination or payment of such amounts if the date for determining such amounts falls within any period during which: (1) the disposal or valuation of a Subaccount's assets is not reasonably practicable because the New York Stock Exchange is closed or conditions are such that, under the SEC's rules and regulations, trading is restricted or an emergency is deemed to exist; or (2) the SEC by order permits postponement of such actions for the protection of National Life policyholders. National Life also may defer the determination or payment of amounts from the Fixed Account for up to six months. National Life may postpone any payment under the Policy derived from an amount paid by check or draft until National Life is satisfied that the check or draft has been paid by the bank upon which it was drawn. J. 24-MONTH TRANSFER RIGHT Policy Owners may during the first two years following Policy issue and on one occasion, transfer the entire Accumulated Value in the Variable Account to the Fixed Account, without regard to any limits on transfers or free transfers. Since a new policy, under which payments (or charges), dividends, and cash values could vary from those under the existing Policy, will not be issued, no adjustment in payments and cash values under the Policy would be required to address such variances. 14 15 APPENDIX A Charges will be deducted from the Accumulated Value on the Date of Issue and on each Monthly Policy Date to compensate National Life for distribution and administrative expenses and for the insurance coverage provided by the Policy. The Monthly Deduction consists of four components: (a) the Cost of Insurance Charge, (b) the Variable Account Charge, (c) the Monthly Administrative Charge, and (d) the cost of any additional benefits provided by rider. Because portions of the Monthly Deduction, such as the Cost of Insurance Charge, can vary from month to month, the Monthly Deduction may vary in amount from month to month. The Monthly Deduction will be deducted on a pro rata basis from the Subaccounts of the Variable Account and the Fixed Account, unless the Owner has elected at the time of application, or later requests in writing, that the Monthly Deduction be made from the Money Market Subaccount. If a Monthly Deduction cannot be made from the Money Market Subaccount, when that has been elected, the amount of the deduction in excess of the Accumulated Value available in the Money Market Subaccount will be made on a pro rata basis from the Subaccounts of the Variable Account and the Fixed Account. Cost of Insurance Charge. Because the Cost of Insurance Charge depends upon several variables, the cost for each Policy Month can vary. National Life will determine the monthly Cost of Insurance Charge by multiplying the applicable cost of insurance rate or rates by the Net Amount at Risk for each Policy Month. The Net Amount at Risk on any Monthly Policy Date is the amount by which the Unadjusted Death Benefit on that Monthly Policy Date, adjusted by a factor, exceeds the Accumulated Value. This factor is 1.00327234, and is used to reduce the Net Amount at Risk, solely for purposes of computing the Cost of Insurance Charge, by taking into account assumed monthly earnings at an annual rate of 4%. The Net Amount at Risk is determined separately for the Initial Face Amount and any increases in Face Amount. In determining the Net Amount at Risk for each increment of Face Amount, the Accumulated Value is first considered part of the Initial Face Amount. If the Accumulated Value exceeds the Initial Face Amount, it is considered as part of any increases in Face Amount in the order such increases took effect. If the Policy includes both Basic Coverage and Additional Coverage, the Net Amount at Risk is separated into portions applicable to each type of coverage. For this purpose, Accumulated Value is applied against Basic Coverage first for Basic Coverage and Additional Coverage which began at the same time. Any change in the Net Amount at Risk will affect the total Cost of Insurance Charges paid by the Owner. A cost of insurance rate is also determined separately for the Initial Face Amount and any increases in Face Amount. In calculating the Cost of Insurance Charge, a rate based on the Rate Classes of the two Insureds on the Date of Issue is applied to the Net Amount at Risk for the Initial Face Amount. For each increase in Face Amount, a rate based on the Rate Classes of the two Insureds applicable at the time of the increase is used. If, however, the Unadjusted Death Benefit is calculated as the Accumulated Value times the specified percentage, the rate based on the Rate Classes for the Initial Face Amount will be used for the amount of the Unadjusted Death Benefit in excess of the total Face Amount. Again, if any time segment includes both Basic Coverage and Additional Coverage, separate cost of insurance rates are applied to each type of coverage. Cost of Insurance Rate. The guaranteed maximum cost of insurance rates are set forth in the Policy, and will depend on each Insured's Issue Age, sex, substandard or uninsurable status, the Duration of the coverage, and the 1980 Commissioners Standard Ordinary Mortality Table. Guaranteed maximum cost of insurance rates will also vary depending on whether the coverage is Basic Coverage or Additional Coverage, with higher rates being applicable to Additional Coverage. The actual cost of insurance rates used ("current rates") will depend on each Insured's Issue Age, sex, and Rate Class, as well as the Duration of the coverage, and whether the coverage is Basic Coverage or Additional Coverage (however, current rates applicable to Additional Coverage may be higher or lower than for Basic Coverage). National Life periodically reviews the adequacy of its current cost of insurance rates and may adjust their level. However, they will never exceed guaranteed maximum cost of insurance rates. Any change in the current cost of insurance rates will apply to all sets of persons of the same Issue Ages, sexes, and Rate Classes, and with coverages of the same Duration. A-1 16 Rate Class. The Rate Classes of the two Insureds will affect the current cost of insurance rates. National Life currently places Insureds into preferred nonsmoker, nonsmoker, preferred smoker, smoker, substandard, and uninsurable classes. Smoker, substandard, and uninsurable classes reflect higher mortality risks. In an otherwise identical Policy, Insureds in a preferred or standard class will have a lower Cost of Insurance Charge than Insureds in a substandard class with higher mortality risks. Nonsmoking Insureds will generally incur lower cost of insurance rates than Insureds who are classified as smokers. Classification of an Insured as substandard or uninsurable will also affect the guaranteed cost of insurance rates. Variable Account Charge. The Variable Account Charge varies by the amount of Basic Coverage in the Policy. It is a percentage of the Accumulated Value in the Variable Account, and does not apply to Accumulated Value in the Fixed Account. During the first 10 Policy Years, for Policies with Basic Coverage less than $1,000,000, the current annual charge is 0.90%; for Policies with Basic Coverage from $1,000,000 to $2,999,999, the current annual charge is 0.80%, and for Policies with Basic Coverage of $3 million or more, the current annual charge is 0.75%. In all cases, National Life reserves the right to increase this charge to an amount not to exceed 0.90%. For years after Policy Year 10, National Life currently intends to reduce this charge to the following rates: for Polices with Basic Coverage of less than $1,000,000, an annual charge of 0.35%; for Policies with Basic Coverage from $1,000,000 to $2,999,999, an annual charge of 0.30%, and for Policies with Basic Coverage of $3 million or more, an annual charge of 0.25%. However, National Life reserves the right to continue to charge a Variable Account Charge in an annual amount up to 0.90% in years after Policy Year 10. Monthly Administrative Charge. The amount of the Monthly Administrative Charge during the first ten Policy Years is $15.00, plus $0.08 per $1000 of Basic Coverage (this per $1000 portion of the Monthly Administrative Charge is lower for Joint Ages 38 and under). The per $1000 portion of this charge during the first ten Policy Years will be increased by $.005 per $1000 of Basic Coverage for each Insured who is a smoker. National Life classifies all nicotine users as smokers, including cigarette, cigar, pipe, chewing tobacco, snuff, nicotine patches and nicotine gum. After the first ten Policy Years, National Life currently intends to charge a Monthly Administrative Charge in the amount of $7.50, with no additional amount per $1000 of Basic Coverage, and during this period the Monthly Administrative Charge is guaranteed not to exceed $15.00, plus $0.08 per $1000 of Basic Coverage, and plus $.005 per smoker. The per $1000 portion of the Monthly Administrative Fee will apply to increases in Basic Coverage for 10 years after the effective date of the increase. Optional Benefit Charges. The Monthly Deduction will include charges for any additional benefits added to the Policy. The cost of the Guaranteed Death Benefit Rider is $0.01 per thousand of Face Amount per month. The cost of the Continuing Coverage Rider is $2.50 (current) and $3.00 (guaranteed) per thousand of Net Amount at Risk, beginning at the younger Insured's Attained Age 90. There is no specific cost for the Policy Split Option (other than a fixed charge of $200 if the option is exercised), the Additional Protection Benefit, the Estate Preservation Rider, the Term Rider, the Enhanced Death Benefit Rider, or the Automatic Increase Rider, except that the an additional charge may be assessed relating to additional insurance provided by these riders. A-2 EX-2 22 OPINION AND CONSENT OF JEFFREY P. JOHNSON, ESQ. 1 EXHIBIT 2 April 13, 1998 National Life Insurance Company National Life Drive Montpelier, Vermont 05604 Dear Sirs: This opinion is furnished in connection with the filing of a Pre-Effective Amendment No. 1 to a Registration Statement on Form S-6 ("Registration Statement") under the Securities Act of 1933, as amended, of National Variable Life Insurance Account (the "Separate Account") and National Life Insurance Company ("National Life"), covering an indefinite amount of premiums expected to be received under certain last survivor flexible premium adjustable benefit individual variable life insurance policies ("Policies") to be offered by National Life. Under the Policies, amounts will be allocated by National Life to the Separate Account as described in the prospectus included in the Registration Statement to support reserves for such Policies. In my capacity as General Counsel of National Life, I have examined all such corporate records of National Life and such other documents and laws as I consider appropriate as a basis for the opinion hereinafter expressed. Based upon such examination, I am of the opinion that: 1. National Life is a corporation duly organized and validly existing under the laws of the State of Vermont. 2. The Separate Account has been duly created and is validly existing as a separate account pursuant to Title 8, Vermont Statutes Annotated, Sections 3855 to 3859. 3. The portion of the assets to be held in the Separate Account equal to the reserves and other liabilities under the Policies is not chargeable with liabilities arising out of any other business National Life may conduct. 4. The Policies have been duly authorized by National Life and, when issued as contemplated by the Registration Statement, will constitute legal, validly issued and binding obligations of National Life in accordance with their terms. I hereby consent to the use of this opinion as an exhibit to the Registration Statement and to the reference to my name under the heading "Legal Matters" in the prospectus. Very truly yours, Jeffrey P. Johnson General Counsel EX-6 23 OPINION AND CONSENT OF ELIZABETH MCGOWAN, F.S.A. 1 Exhibit 6 April 13, 1998 Ladies and Gentlemen: In my capacity as Associate Actuary - Development of National Life Insurance Company, I have provided actuarial advice concerning: (a) the preparation of Pre-Effective Amendment No. 1 to a registration statement for National Variable Life Insurance Account filed on Form S-6 with the Securities and Exchange Commission under the Securities Act of 1933 (the "Registration Statement") regarding the offer and sale of Last Survivor Flexible Premium Adjustable Benefit Variable Life Insurance Policies (the "Policies"); and (b) the preparation of policy forms for the Policies described in the Registration Statement. It is my professional opinion that: (1) The illustrations of Death Benefits, Cash Surrender Values, and accumulated premiums in Appendix A of the prospectuses (the "Prospectuses") contained in the Registration Statement, based on the assumptions stated in the illustrations, are consistent with the assumptions stated in the Policies. The rate structure of the Policies has not been designed so as to make the relationship between premiums and benefits as shown in the illustrations, appear to be correspondingly more favorable to the prospective purchasers of Policies, who are male non-smokers age 40 in the preferred rate class, than to prospective purchasers of Policies for males or females at other ages or other rate classes. (2) The information contained in the examples in the sections of the prospectuses entitled "Detailed Description of Policy Provisions," "Charges and Deductions," and "Policy Rights," based on the assumptions stated in the examples, is consistent with the provisions of the Policies. I hereby consent to the filing of this opinion as an exhibit to Pre-Effective Amendment No. 1 to the Registration Statement and the use of my name under the heading "Experts" in the prospectuses contained in the Registration Statement. Sincerely, Elizabeth H. MacGowan, F.S.A., M.A.A.A. Associate Actuary EX-7.A 24 CONSENT OF PRICE WATERHOUSE LLP 1 Exhibit 7(a) Consent of Independent Accountants We hereby consent to the use in the Prospectus constituting part of this Pre-Effective Amendment No. 1 to the registration statement on Form S-6 (the "Registration Statement") of our report dated April 7, 1998, related to the consolidated financial statements of National Life Insurance Company, which appear in such Prospectus. We also consent to the reference to us under the heading "Experts" in the Prospectus. PRICE WATERHOUSE LLP Hartford, Connecticut April 10, 1998 EX-7.B 25 CONSENT OF SUTHERLAND, ASBILL & BRENNAN 1 EXHIBIT 7(b) [SUTHERLAND, ASBILL & BRENNAN, L.L.P. LETTERHEAD] April 7, 1998 National Life Insurance Company One National Life Drive Montpelier, Vermont 05604 Re: National Variable Life Insurance Account Registration Statement on Form S-6 File No. 333-44723 Ladies and Gentlemen: We hereby consent to the reference to our name under the caption "Legal Matters" in the Prospectus filed as part of Pre-Effective Amendment No. 1 to Form S-6 for National Variable Life Insurance Account, which Prospectus describes certain last survivor flexible premium adjustable benefit variable life insurance policies. In giving this consent, we do not admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act of 1933. Very truly yours, SUTHERLAND, ASBILL & BRENNAN LLP By: /s/ STEPHEN E. ROTH -------------------------- Stephen E. Roth -----END PRIVACY-ENHANCED MESSAGE-----