-----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, ALhK/v5cHgpYxiHkwGkbxPvsxwvEEoubG3H0mXk1f4nBSmYjPkdGx/xp2YZHBxbn olH+51duUU4St28hw5xCoA== 0000950133-01-500810.txt : 20010502 0000950133-01-500810.hdr.sgml : 20010502 ACCESSION NUMBER: 0000950133-01-500810 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 20010501 EFFECTIVENESS DATE: 20010501 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: 485BPOS SEC ACT: SEC FILE NUMBER: 333-67003 FILM NUMBER: 1618292 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: SEC FILE NUMBER: 811-09044 FILM NUMBER: 1618293 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 485BPOS 1 w48261e485bpos.txt 485BPOS 1 As filed with the Securities and Exchange Commission on May 1, 2001. Registration No. 333-67003 File No. 811-9044 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 POST-EFFECTIVE AMENDMENT NO. 3 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 Assistant General 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 LLP 1275 Pennsylvania Avenue, NW Washington, DC 20004-2415 ----------------------------- It is proposed that this filing will become effective: X on May 1, 2001 pursuant to paragraph (b) of Rule 485 - ---- 60 days after filing pursuant to paragraph (a) of Rule 485 - ---- on May 1, 2001 pursuant to paragraph (a) of Rule 485 - ---- ------------------------------ Title of Securities being registered: variable life insurance policies intended for the corporate market issued by a separate account. 2 [PHOTO] SENTINEL BENEFIT PROVIDER A Variable Universal Life Insurance Policy Intended Primarily for the Corporate Market PROSPECTUS Dated May 1, 2001 - ------------------------------------------------------------------------------- National Life Insurance Company - Home Office: National Life Drive, Montpelier, Vermont 05604 - 1-800-278-3413 National Variable Life Insurance Account - ------------------------------------------------------------------------------- This Prospectus describes the Sentinel Benefit Provider Policy, a flexible premium variable universal life insurance policy offered by National Life Insurance Company. The policy has an insurance component and an investment component. Owners of policies can make premium payments at various times and in various amounts. You can also allocate premiums among a number of funds with different investment objectives and you can increase or decrease the death benefit payable under your policy. You may also choose between two death benefit compliance tests at the time your policy is issued. We make certain deductions from premium payments. Then these premium payments go to the National Variable Life Insurance Account, a separate account of National Life. This separate account currently has thirty subaccounts, each of which buys shares of specific fund portfolios. The available funds are shown below. - ------------------------------------------------------------------------------------------------------------------------------------ SENTINEL VARIABLE PRODUCTS ALGER AMERICAN FUND AMERICAN CENTURY VARIABLE DEUTSCHE ASSET TRUST PORTFOLIOS, INC. MANAGEMENT FUNDS - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCK FUND GROWTH PORTFOLIO VP INCOME & GROWTH PORTFOLIO EAFE(R) EQUITY INDEX FUND MID CAP GROWTH FUND LEVERAGED ALLCAP PORTFOLIO VP VALUE PORTFOLIO EQUITY 500 INDEX FUND SMALL COMPANY FUND SMALL CAPITALIZATION PORTFOLIO SMALL CAP INDEX FUND GROWTH INDEX FUND MONEY MARKET FUND Managed by National Life Investment Management Company, Managed by Fred Alger Managed by American Century Managed by Bankers Trust Inc. Management, Inc Investment Management, Inc. Company - ------------------------------------------------------------------------------------------------------------------------------------ DREYFUS SOCIALLY RESPONSIBLE FIDELITY VARIABLE INSURANCE FIDELITY VARIABLE INSURANCE INVESCO VARIABLE GROWTH FUND, INC. PRODUCTS FUND PRODUCTS FUND II INSURANCE FUNDS, INC. - ------------------------------------------------------------------------------------------------------------------------------------ SOCIALLY RESPONSIBLE GROWTH OVERSEAS PORTFOLIO INVESTMENT GRADE BOND VIF - DYNAMICS FUND FUND, INC. PORTFOLIO VIF - HEALTH SCIENCES FUND VIF - TECHNOLOGY FUND Managed by The Dreyfus Managed by INVESCO Funds Corporation Managed by Fidelity Investments Managed by Fidelity Investments Group, Inc. - ------------------------------------------------------------------------------------------------------------------------------------ J.P. MORGAN SERIES TRUST II MARKET STREET FUND, INC. MORGAN STANLEY DEAN WITTER NEUBERGER BERMAN UNIVERSAL INSTITUTIONAL FUNDS ADVISERS MANAGEMENT INC. TRUST - ------------------------------------------------------------------------------------------------------------------------------------ INTERNATIONAL OPPORTUNITIES BOND PORTFOLIO EMERGING MARKETS EQUITY PORTFOLIO* PARTNERS PORTFOLIO PORTFOLIO MANAGED PORTFOLIO FIXED INCOME PORTFOLIO** SMALL COMPANY PORTFOLIO HIGH YIELD PORTFOLIO** U. S. REAL ESTATE PORTFOLIO* *Managed by Morgan Stanley Asset Management Managed by J. P. Morgan Managed by Market Street **Managed by Miller Anderson & Managed by Neuberger Investment Management, Inc. Investment Management Company Sherrerd, LLP Berman Management, Inc. - ------------------------------------------------------------------------------------------------------------------------------------ STRONG VARIABLE INSURANCE STRONG OPPORTUNITY FUND II. FUNDS, INC. - ------------------------------------------------------------------------------------------------------------------------------------ MID CAP GROWTH FUND II OPPORTUNITY FUND II Managed by Strong Capital Managed by Strong Capital Management, Inc. Management, Inc - ------------------------------------------------------------------------------------------------------------------------------------
The value in each subaccount will depend upon the investment results of the funds you select. You bear the entire investment risk for all amounts allocated to the various funds; there is no guaranteed minimum value for any of the funds, and the value of your policy may be more or less than premiums paid. You must receive, with this prospectus, current prospectuses for all of the fund choices. They describe the investment objectives and the risks of the funds. The value of your policy will also reflects our charges which include cost of insurance charges, the policy administration charge, the mortality and expense risk charge, the separate account administration charge, and certain other charges. During the first five years your policy will remain in force if specified premiums are paid on time, or if the policy has enough value to pay the monthly charges as they become due. After the fifth year, the Policy will remain in force only so long as it has enough value to pay the monthly charges as they become due. We recommend that you read this prospectus carefully. It may also be useful to keep it to refer to later. It may not be advantageous to purchase this policy as a replacement for another type of life insurance or as a means to obtain additional insurance protection if you already own another variable universal life insurance policy. THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE POLICY OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. 3 TABLE OF CONTENTS
PAGE Summary Description of the Policy..............................................................1 The Policy Offered....................................................................1 The Separate Account..................................................................1 Availability of Policy................................................................2 The Death Benefit.....................................................................2 Flexibility to Adjust Amount of Death Benefit.........................................2 Account Value.........................................................................3 Allocation of Net Premiums............................................................3 Transfers.............................................................................3 Free-Look Privilege...................................................................3 Charges Assessed in Connection with the Policy........................................4 Summary of Policy Expenses...................................................4 Premium Loads................................................................6 Monthly Deductions...........................................................7 Daily Charges Against the Separate Account...................................7 Transfer Charge..............................................................7 Other Charges................................................................7 Allocation of Charges to the Subaccounts.....................................7 Policy Lapse and Reinstatement........................................................7 Loan Privilege........................................................................8 Withdrawal of Net Account Value.......................................................8 Surrender of the Policy...............................................................9 Available Automated Fund Management Features..........................................9 Tax Treatment.........................................................................9 Illustrations of Death Benefits, Account Value and Net Cash Surrender Value...........9 National Life Insurance Company, The Separate Account, and The Funds...........................10 National Life Insurance Company.......................................................10 The Separate Account..................................................................10 Sentinel Variable Products Trust......................................................11 Common Stock Fund............................................................11 Mid Cap Growth Fund..........................................................11 Small Company Fund...........................................................11 Growth Index Fund............................................................11 Money Market Fund............................................................11 Alger American Fund...................................................................11 Alger American Growth Portfolio..............................................12 Alger American Leveraged AllCap Portfolio....................................12 Alger American Small Capitalization Portfolio................................12 American Century Variable Portfolios, Inc.............................................12 VP Income & Growth Portfolio.................................................12 VP Value Portfolio...........................................................12 Deutsche Asset Management VIT Funds...................................................13 EAFE(R) Equity Index Fund....................................................13 Equity 500 Index Fund........................................................13 Small Cap Index Fun..........................................................13 Dreyfus Socially Responsible Growth Fund, Inc.........................................13 Fidelity Variable Insurance Products Fund and Fidelity Variable Insurance Products Fund II...................................................................14 VIP I Overseas Portfolio.....................................................14 VIP II Investment Grade Bond Portfolio.......................................14 INVESCO Variable Insurance Funds, Inc.................................................14 VIF-Dynamics Fund............................................................15 VIF-Health Sciences Fund.....................................................15 VIF-Technology Fund..........................................................15
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PAGE J. P. Morgan Series Trust II..........................................................15 International Opportunities Portfolio........................................15 Small Company Portfolio......................................................16 Market Street Fund,...................................................................16 Bond Portfolio...............................................................16 Balanced Portfolio...........................................................16 Morgan Stanley Universal Institutional Funds..........................................16 Emerging Markets Equity Portfolio............................................17 Fixed Income Portfolio.......................................................17 High Yield Portfolio.........................................................17 U. S. Real Estate Portfolio..................................................17 Neuberger Berman Advisers Management Trust............................................17 Partners Portfolio...........................................................17 Strong Variable Insurance Funds, Inc. and Strong Opportunity Fund, Inc................18 Mid Cap Growth Fund II ......................................................18 Strong Opportunity Fund II...................................................18 Resolving Material Conflicts..........................................................18 Other Matters Relating to the Funds...................................................19 Detailed Description of Policy Provisions.............................................19 Death Benefit.........................................................................19 General......................................................................19 Federal Income Tax Law Compliance Test Options...............................19 Death Benefit Options........................................................20 Option A.....................................................................20 Option B.....................................................................21 Change in Death Benefit Option...............................................21 How the Death Benefit May Vary...............................................22 Ability to Adjust Face Amount.........................................................22 Increase.....................................................................22 Decrease.....................................................................22 How the Duration of the Policy May Vary...............................................23 Account Value.........................................................................23 Determination of Number of Units for the Separate Account....................23 Determination of Unit Value..................................................23 Net Investment Factor........................................................23 Calculation of Account Value.................................................23 Payment and Allocation of Premiums....................................................24 Issuance of a Policy.........................................................24 Amount and Timing of Premiums................................................24 Premium Limitations..........................................................25 Allocation of Net Premiums...................................................25 Transfers....................................................................25 Policy Lapse.................................................................26 Reinstatement................................................................26 Charges and Deductions.........................................................................26 Premium Loads.........................................................................27 Monthly Deductions....................................................................27 Cost of Insurance Charge.....................................................27 Cost of Insurance Rate.......................................................28 Rate Class...................................................................28 Cost of Term Insurance.......................................................28 Policy Administration Charge.................................................29 Underwriting Charge..........................................................29 Mortality and Expense Risk Charge.....................................................29 Separate Account Administration Charge................................................29 Transfer Charge.......................................................................29
iii 5
PAGE Other Charges.........................................................................29 Possible Charge for National Life's Taxes.............................................30 Policy Rights and Privileges...................................................................30 Loan Privileges.......................................................................30 General......................................................................30 Interest Rate Charged........................................................30 Allocation of Loans and Collateral...........................................30 Interest Credited to Amounts Held as Collateral..............................30 Effect of Policy Loan........................................................30 Loan Repayments..............................................................31 Lapse With Loans Outstanding.................................................31 Tax Considerations...........................................................31 Surrender Privilege...................................................................31 Withdrawal of Net Account Value.......................................................31 Option A.....................................................................31 Option B.....................................................................32 Free-Look Privilege...................................................................33 Transfer Right for Change in Investment Policy........................................33 Available Automated Fund Management Features..........................................33 Other Policy Provisions........................................................................34 Indefinite Policy Duration...................................................34 Payment of Policy Benefits...................................................35 The Policy...................................................................35 Split Dollar Arrangements....................................................35 Assignments..................................................................36 Misstatement of Age and Sex..................................................36 Suicide......................................................................36 Incontestability.............................................................36 Dividends....................................................................36 Correspondence...............................................................36 Settlement Options...........................................................36 Payment of Interest Only.....................................................36 Payments for a Stated Time...................................................36 Payments for Life............................................................37 Payments of a Stated Amount..................................................37 Life Annuity.................................................................37 Joint and Two Thirds Annuity.................................................37 50% Survivor Annuity.........................................................37 Supplemental Term Insurance Rider..............................................................37 Federal Income Tax Considerations..............................................................37 Introduction..........................................................................37 Tax Status of the Policy..............................................................38 Tax Treatment of Policy Benefits......................................................38 In General...................................................................38 Modified Endowment Contracts.................................................39 Distributions Other Than Death Benefits from Modified Endowment Contracts....39 Distributions Other Than Death Benefits from Policies that are not Modified Endowment Contracts............................................39 Investment in the Policy.....................................................39 Policy Loan Interest.........................................................39 Multiple Policies............................................................40 Business Uses of the Policy..................................................40 Continuation Beyond Age 100..................................................40 Special Rules for Employee Benefit Plans..............................................40
iv 6
PAGE Possible Tax Law Changes..............................................................40 Possible Charges for National Life's Taxes............................................40 Legal Developments Regarding Unisex Actuarial Tables...........................................41 Voting Rights..................................................................................41 Changes in Applicable Law, Funding and Otherwise...............................................42 Officers and Directors of National Life........................................................42 Distribution of Policies.......................................................................44 Policy Reports.................................................................................45 Third Party Administrator......................................................................45 State Regulation.............................................................................. 45 Experts........................................................................................45 Legal Matters..................................................................................46 Financial Statements...........................................................................46 Glossary.......................................................................................47 Appendix A-Illustration of Death Benefits, Account Values and Net Cash Surrender Values.............................................................A-1 Financial Statements...........................................................................F-1
THE POLICY MAY NOT BE AVAILABLE IN ALL STATES. THIS PROSPECTUS DOES NOT OFFER THE POLICY IN ANY STATE IN WHICH WE MAY NOT LEGALLY OFFER THE POLICY. YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. THE PRIMARY PURPOSE OF THIS VARIABLE LIFE INSURANCE POLICY IS TO PROVIDE INSURANCE PROTECTION. WE DO NOT CLAIM THAT THE POLICY IS IN ANY WAY SIMILAR OR COMPARABLE TO AN INVESTMENT IN A MUTUAL FUND. v 7 SUMMARY DESCRIPTION OF THE POLICY You should read this summary of the policy provisions together with the detailed information appearing later in this Prospectus. Unless otherwise noted, this Prospectus assumes the Insured is alive. The precise meanings of the few capitalized terms used in this summary can be found in the Glossary, on pages 47 to 50. THE POLICY OFFERED The Sentinel Benefit Provider flexible premium variable universal life insurance policy offered by this Prospectus is issued by National Life. Its primary market is the corporate market. The policy allows you, subject to certain limitations, to make premium payments in any amount and whenever you like. As long as the policy remains in force, it will provide for: (1) Life insurance coverage on the named insured person; (2) A cash surrender value; and (3) Surrender and withdrawal rights and policy loan privileges; and (4) A variety of additional insurance benefits. Life insurance is a long-term investment. You should consider your need for insurance coverage and the policy's investment potential on a long-term basis. There is no fixed schedule for premium payments. You may, within limits, increase or decrease the Face Amount and, if you have selected the Guideline Premium Test to determine compliance with federal income tax law (see "Federal Income Tax Law Compliance Test Options", page 19), you may change the Death Benefit Option. The policy's value will fluctuate based on the investment results of the chosen fund portfolios, as well as other factors. The death benefit may also rise and fall, but not below the face amount as long as the policy remains in force. The failure to pay any particular amounts of 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 it does not have enough value to pay the monthly charges as they become due. During the first five years, the policy will not lapse even if its value is not enough to pay the monthly charges as they become due, if at least specified amounts of premiums have been paid (these amounts are defined in the Glossary as the Cumulative Minimum Monthly Premium). THE SEPARATE ACCOUNT The National Variable Life Insurance Account is divided into subaccounts, thirty of which are available under this policy. Each of these subaccounts purchases shares of a designated corresponding Portfolio that is part of one of the following Funds: the Sentinel Variable Products Trust, the Alger American Fund, the American Century Variable Portfolios, Inc., the Deutsche Asset Management VIF Funds, the Dreyfus Socially Responsible Growth Fund, the Fidelity Variable Insurance Products Fund I and the Fidelity Variable Insurance Products Fund II, the INVESCO Variable Insurance Funds, Inc., the J.P. Morgan Series Trust II, the Market Street Fund, the Morgan Stanley Universal Institutional Funds., the Neuberger Berman Advisers Management Trust, and the Strong Variable Insurance Funds, Inc., and Strong 1 8 Opportunity Fund II There is no assurance that the investment objectives of a particular Portfolio will be met. You bear the entire investment risk on the value of your policy. AVAILABILITY OF POLICY This Policy can be issued for Insureds with Issue Ages of at least 20. The insured person must be 85 years old or younger for policies underwritten on the basis of full medical underwriting (65 or younger for guaranteed issue and simplified issue). The Minimum Face Amount per Policy is $5000. The Minimum Initial Premium per set of Policies purchased at the same time and associated with a corporation or its affiliates, a trust or a partnership, or for a Policy sold to an individual, is $50,000. The Policies are available on a full medical underwriting basis, a simplified issue basis, or a guaranteed issue basis. Before issuing a Policy on a full medical underwriting basis, we will require that the person to be insured meets certain underwriting standards satisfactory to us. The rate classes available are Male non-smoker, Female non-smoker, Unisex non-smoker, Male smoker, Female smoker, Unisex smoker, Male unismoker, female unismoker, and Unisex unismoker. For full medical underwriting cases, preferred and substandard rate classes may also apply. (See "Issuance of a Policy," Page 24.) In simplified issue cases, the application will ask 3 medical questions about the person to be insured. THE DEATH BENEFIT As long as the Policy remains in force, we will pay the death benefit to the beneficiary when we receive proof of the insured person's death. When you purchase the policy, you must choose between two different death benefit compliance tests used to qualify the policy as life insurance under the Internal Revenue Code: the cash value accumulation test or the guideline premium test. Once chosen, the death benefit compliance test that applies to the Policy cannot be changed. If the Guideline Premium Test is chosen, then two death benefit options are available. Option A provides for the greater of (a) the policy's face amount and (b) the Death Benefit Factor times the Cash Surrender Value. Option B provides for the greater of (a) the policy's face amount plus the Account Value and (b) the Death Benefit Factor times the Cash Surrender Value. (See "Death Benefit Options," Page 20). If the cash value accumulation test is chosen, only Option A is available. The total death benefit will be the amount provided for under Option A or Option B, plus any dividends payable and any coverage provided by the optional term rider, and minus any outstanding policy loans and accrued interest, and any unpaid monthly charges. FLEXIBILITY TO ADJUST AMOUNT OF DEATH BENEFIT You will have the ability to increase or decrease the face amount of the policy. If you have elected the guideline premium test to qualify the policy as life insurance for federal income tax purposes, you will also be able to change the death benefit option from Option A to Option B, or from Option B to Option A. (See "Change in Death Benefit Option," Page 21, and "Ability to Adjust Face Amount," Page 22.) 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 monthly charges, since the policy will be providing more insurance coverage. A decrease in face amount may also change the monthly deductions. (See "Cost of Insurance Charge," Page 27) If you have elected the guideline premium test and you request a decrease in face amount that would result in total premiums exceeding the maximum premium limitations applicable under the Internal Revenue Code for life insurance, we will not allow the decrease. 2 9 ACCOUNT VALUE The Account Value is the total amount of value held in your policy at any time. It equals the sum of the amounts held in the subaccounts of the separate account, plus amounts held in the Loan Account. (See "Calculation of Account Value," Page 23.) The Account Value in the separate account will reflect the investment performance of the chosen funds, any premiums paid, any transfers, any withdrawals, any loans, any loan repayments, any loan interest charged and any charges assessed on the policy. You bear the entire investment risk for amounts in the separate account. There is no guaranteed minimum for the portion of the Account Value in the separate account. Account Value in the separate account may be more or less than the premiums allocated to the separate account. The Account Value in the Loan Account will reflect any amounts transferred from the separate account as collateral for policy loans, plus interest at 4%. The Loan Account will be reduced by loan repayments. (See "Loan Privileges," Page 30.) The Account Value affects the death benefit and the level of cost of insurance charges. ALLOCATION OF NET PREMIUMS Net premiums (that is, premiums you pay minus the deductions we make from premium payments) will generally go to the subaccounts of the separate account in accordance with the percentages you have specified, either in the application or as subsequently changed. Account Value cannot be allocated to more than ten subaccounts at any one time. Any net premiums received before the end of the "free look" period will go initially to the Money Market Subaccount. For this purpose we will assume that the free look period will end on the earliest of (a) the end of the tenth day following receipt of the Policy by you, if we receive at our Home Office or at the office of the Third Party Administrator a signed delivery receipt for the Policy on or before that date; (b) the end of the day on which we receive at the Home Office or at the office of the Third Party Administrator a signed delivery receipt for the Policy, if on or between the eleventh and nineteenth days after the date the Policy is issued; or (c) 20 days after the date the Policy is issued. On the first Valuation Date on or after the earliest of the dates forth above, the amount in the Money Market Subaccount (including investment experience) will go to each of the chosen subaccounts based on your chosen percentages. (See "Allocation of Net Premiums," Page 25.) TRANSFERS You may transfer the amounts in the subaccounts of the separate account among the subaccounts on any business day. Transfer requests must be in writing and in a form acceptable to us. Currently you are allowed an unlimited number of transfers without charge. However, we may in the future impose a maximum charge of $25 on each transfer in excess of twelve transfers in any one year. (See "Transfers," Page 25.) FREE-LOOK PRIVILEGE The policy provides for an initial "free-look" period, during which you may cancel the policy and receive a refund equal to the premiums paid on your policy. This free-look period ends on the later of the end of the tenth day after you receive the policy, or any longer period provided by state law. To cancel the policy, you must return the policy to National Life or to an agent of National Life within this period with a written request for cancellation. (See "Free-Look Privilege," Page 33.) 3 10 CHARGES ASSESSED IN CONNECTION WITH THE POLICY Summary of Policy Expenses. Transaction Expenses Premium Loads (as a percentage of Year 1: 13% of premiums premiums paid)...............................paid up to the Target Premium, 0.5% of premiums paid in excess of Target Premium; Years 2 to 7: 15% of premiums paid up to Target Premium, 2.5% of premiums paid in excess of Target Premium; and Years 8 and thereafter: 5% of premiums paid up to Target Premium, 2.5% of premiums paid in excess of Target Premium; in each case plus an amount equal to the state and local premium taxes actually assessed by the jurisdiction in which the insured person resides. Transfer Charge..............................No current charge(1) Daily Charges Mortality and Expense Risk Charge............For years 1 - 7: 0.22% of Account Value in the separate account For years 8 -10: 0.12% of Account Value in the separate account For years 11-20: 0.02% of Account Value in the separate account For year 21 and thereafter: 0.00% of Account Value in the separate account(2) Separate Account Administration Charge.......................................0.10% of Account Value in the separate account per year Monthly Deductions Cost of Insurance Charge.....................Varies by age, sex, rate class-See below Policy Administration Charge.................$66 per year(3) Underwriting Charge..........................$20 in the first year, $45 in each of years 2 - 5; only applies to policies issued on the basis of full medical underwriting. Supplemental Term Insurance Rider Charge..........Varies by age, sex, rate class-See below
(1) We reserve the right to impose in the future a transfer charge of up to $25 for each transfer in excess of twelve transfers in any year. (2) We reserve the right to increase the Mortality and Expense Risk Charge to rates up to 0.60% annually of Account Value in the separate account at any time. (3) We reserve the right to increase the Policy Administration Charge up to an amount equal to $96 per year. 4 11 Annual Charges of Underlying Funds (for the year ended December 31, 2000 and after expense reimbursement)(1)
Management Other Total Fee, after Expenses, Expenses, expense after expense after expense reimbursement reimbursement reimbursement Sentinel Variable Products Trust Common Stock Fund 0.00% 0.48% 0.48% Mid Cap Growth Fund 0.15% 0.56% 0.71% Small Company Fund 0.00% 0.57% 0.57% Growth Index Fund 0.00% 0.60% 0.60% Money Market Fund 0.00% 0.40% 0.40% Alger: Alger American Growth Portfolio 0.75% 0.04% 0.79% Alger American Leveraged AllCap Portfolio 0.85% 0.05% 0.90% Alger American Small Capitalization 0.85% 0.05% 0.90% American Century Variable Portfolios, Inc. VP Income & Growth Portfolio 0.70% 0.00% 0.70% VP Value Portfolio 1.00% 0.00% 1.00% Deutsche Asset Management VIT Funds EAFE(R) Equity Index Fund 0.45% 0.20% 0.65% Equity 500 Index Fund 0.20% 0.10% 0.30% Small Cap Index Fund 0.35% 0.10% 0.45% Dreyfus Socially Responsible Growth Fund, Inc., Initial Shares Socially Responsible Growth Fund, Inc. 0.75% 0.03% 0.78%(a) Fidelity: Variable Insurance Products Fund I Overseas Portfolio 0.72% 0.15% 0.87% Fidelity: Variable Insurance Products Fund II Investment Grade Bond Portfolio 0.43% 0.11% 0.54% INVESCO Variable Insurance Funds, Inc. VIF - Dynamics Fund 0.75% 0.34% 1.09% VIF - Health Sciences Fund 0.75% 0.32% 1.07% VIF - Technology Fund 0.72% 0.30% 1.02% J.P. Morgan Series Trust II International Opportunities Portfolio 0.60% 0.60% 1.20% Small Company Portfolio 0.60% 0.55% 1.15% Market Street Fund Bond Portfolio(2) 0.40% 0.27% 0.67% Balanced Portfolio(2) 0.55% 0.27% 0.82% Morgan Stanley Universal Institutional Funds Emerging Markets Equity Portfolio 1.09% 0.71% 1.80% Fixed Income Portfolio 0.21% 0.49% 0.70% High Yield Portfolio 0.26% 0.54% 0.80% U. S. Real Estate Portfolio .74%% 0.36% 1.10% Neuberger Berman Advisers Management Trust Partners Portfolio 0.52% 0.40% 0.92% Strong Variable Insurance Funds, Inc. Mid Cap Growth Fund II 1.00% 0.20% 1.20% Strong Opportunity Fund II 1.00% 0.10% 1.10%
(a) The figures in the above Expense Table are for the initial share class for the fiscal year ended December 31, 2000. Actual expenses in future years may be higher or lower than the figures given above. 5 12 (1) The fund expenses shown above are assessed at the underlying fund level and are not direct charges against the subaccounts. These underlying fund expenses are taken into consideration in computing each underlying fund's net asset value, which is the share price used to calculate the unit values of the subaccounts. The management fees and other expenses are more fully described in the prospectuses for each individual underlying fund. The information relating to the underlying fund expenses was provided by the underlying funds. We did not independently verify it. In the absence of any voluntary fee waivers or expense reimbursements, the management fees, other expenses, and total expenses of the funds listed below would have been as follows:
- ------------------------------------------------------------------------------------------------- Management Fee Other Expenses Total Expenses - ------------------------------------------------------------------------------------------------- Sentinel Variable Products Trust: - ------------------------------------------------------------------------------------------------- Common Stock Fund 0.47% 0.57% 1.04% - ------------------------------------------------------------------------------------------------- Mid Cap Growth Fund 0.49% 0.56% 1.05% - ------------------------------------------------------------------------------------------------- Small Company Fund 0.50% 0.66% 1.16% - ------------------------------------------------------------------------------------------------- Growth Index Portfolio 0.30% 1.05% 1.35% - ------------------------------------------------------------------------------------------------- Money Market Fund 0.25% 0.57% 0.82% - ------------------------------------------------------------------------------------------------- Deutsche Asset Management VIT Funds - ------------------------------------------------------------------------------------------------- EAFE(R) Equity Index Fund 0.45% 0.47% 0.92% - ------------------------------------------------------------------------------------------------- Equity 500 Index Fund 0.20% 0.14% 0.34% - ------------------------------------------------------------------------------------------------- Small Cap Index Fund 0.35% 0.34% 0.69% - ------------------------------------------------------------------------------------------------- Fidelity Variable Insurance Funds I: Overseas Portfolio 0.72% 0.17 0.89(a) - ------------------------------------------------------------------------------------------------- J. P . Morgan International Opportunities Portfolio 0.60% 1.13% 1.73% - ------------------------------------------------------------------------------------------------- J. P. Morgan Small Company Portfolio 0.60% 0.72% 1.32% - ------------------------------------------------------------------------------------------------- Morgan Stanley Universal Institutional Funds - ------------------------------------------------------------------------------------------------- Emerging Markets Equity Portfolio 1.25% 0.71% 1.96% - ------------------------------------------------------------------------------------------------- Fixed Income Portfolio 0.40% 0.49% 0.89% - ------------------------------------------------------------------------------------------------- High Yield Portfolio 0.50% 0.54% 1.04% - ------------------------------------------------------------------------------------------------- U.S. Real Estate Portfolio 0.80% 0.36% 1.16% - ------------------------------------------------------------------------------------------------- Strong Opportunity Fund II 1.00% 0.20% 1.20% - -------------------------------------------------------------------------------------------------
(a) Actual annual class operating expenses were lower because a portion of the brokerage commissions that the fund paid was used to reduce the fund's expenses, and/or because through arrangements with the fund's custodian, credits realized as a result of uninvested cash balances were used to reduce a portion of the fund's custodian expenses. See the accompanying fund prospectus for details. We anticipate that these reimbursement arrangements will continue, but there are no legal obligations to continue these arrangements for any particular period of time, except that a National Life affiliate has committed to the SEC to maintain the above expense reimbursement arrangements for Sentinel Variable Products Trust until December 31, 2002. If they are terminated, the affected portfolios' expenses may increase. Premium Loads. We will deduct a Premium Load from each premium payment. The Premium Load consists of the Distribution Charge and the Premium Tax Charge. The Distribution Charge is equal to, in the first year, 13% of the premiums paid during the year up to the Target Premium, and 0.5% of premiums paid in excess of the Target Premium. In the second through seventh years, the Distribution Charge is equal to 15% of premiums paid during a year up to the Target Premium, and 2.5% of premiums paid in excess of the Target Premium in a year. After the seventh year, the Distribution Charge will be 5% of premiums paid during a year up to the Target Premium, and 2.5% of premiums paid in excess of the Target Premium in a year. 6 13 The Premium Tax Charge will vary from state to state, and will be equal to the actual amount of premium tax or retaliatory tax assessed on sales in the jurisdiction in which the insured person resides. (See "Premium Loads," Page 27.) Monthly Deductions. Starting on the day the policy is issued and in each following month, we will assess the Cost of Insurance Charge, the Policy Administration Charge, and, for policies issued on the basis of full medical underwriting, the Underwriting Charge. Any applicable charge for the Term Rider will also be assessed monthly. The monthly Cost of Insurance Charge will be determined by multiplying the Net Amount at Risk by the applicable cost of insurance rate(s). See "Cost of Insurance Charge," Page 27. The Policy Administration Charge is $5.50 per month, This Charge may be changed but is guaranteed never to be greater than $8.00 per month. (See "Policy Administration Charge," Page 29.) If a policy is issued with full medical underwriting. we will assess an Underwriting Charge each month in the first five years. The Underwriting Charge totals $20 in Policy Year 1, and $45 in each of the next four Policy Years. Policies issued on the basis of guaranteed issue or simplified issue will not be assessed an Underwriting Charge. (See "Underwriting Charge", Page 29.) Daily Charges Against the Separate Account. We will assess a daily charge for our assumption of certain mortality and expense risks we accept on the Policy. The current annual rates are set forth below. For years 1 - 7: 0.22% of Account Value in the separate account For years 8 -10: 0.12% of Account Value in the separate account For years 11-20: 0.02% of Account Value in the separate account; and For year 21 and thereafter: 0.00% of Account Value in the separate account. We may increase the above rates for the Mortality and Expense Risk Charge, but the charge is guaranteed not to exceed 0.60% of Account Value in the separate account at all times. (See "Mortality and Expense Risk Charge," Page 29.) We also assess a daily separate account administration charge to cover the expense of separate account administration. The annual rate of this charge is 0.10% of Account Value in the separate account. (See "Separate Account Administration Charge", page 29.) Transfer Charge. Currently you are allowed an unlimited number of transfers without charge. We have no current intent to impose a transfer charge in the foreseeable future; however, we reserve the right to impose in the future a charge of up to $25 for each transfer in excess of twelve transfers in any year. (See "Transfer Charge," Page 29.) Other Charges. The subaccounts of the separate account purchase shares of the funds at net asset value, which reflects management fees and expenses deducted from the assets of the funds. We pay compensation to broker-dealers who sell the Policies. (See "Distribution of Policies,", Page ). Allocation of Charges to the Subaccounts. All of the above charges will be allocated to the subaccounts of the separate account based on the proportion that each subaccount's value bears to the total Account Value in the separate account. POLICY LAPSE AND REINSTATEMENT During the first five Policy Years, a policy will not lapse if premiums in a specified amount (defined in the Glossary as the Cumulative Minimum Monthly Premium) have been paid, no matter what happens to the value of the policy. If, however, the specified premiums have not been paid or the policy is more than five years old, and the policy's value is not enough to pay the 7 14 monthly charges as they become due, the policy will lapse after a 61-day grace period unless a sufficient premium is paid. You may reinstate a lapsed policy at any time within five years after the beginning of the grace period, if you meet certain conditions, including providing evidence of insurability satisfactory to us and the payment of a sufficient premium. (See "Reinstatement," Page 26.) LOAN PRIVILEGE You may borrow against the policy. The maximum amount of all loans is the Net Account Value less three times the next monthly deduction, and less the loan interest due until the next policy anniversary. Policy loans and repayments may be taken or made on any business day. Policy loans will bear interest at the following fixed rates: For years 1 - 7: 4.60% For years 8 - 10: 4.50% For years 11 - 20: 4.40% For year 21 and thereafter: 4.35%. Interest is payable at the end of each policy year. If interest is not paid when due, it will be added to the outstanding loan balance. You may repay policy loans at any time and in any amount. When the death benefit becomes payable or the policy is surrendered we will deduct policy loans and accrued interest from the proceeds otherwise payable. When you take a policy loan, we will hold Account Value in the Loan Account as collateral for the Policy loan. We will take Account Value from the subaccounts of the separate account in proportion to the values in the subaccounts. Account Value held in the Loan Account as collateral will earn interest at an effective annual rate of 4%. (See "Loan Privileges," Page 30.) Loans may cause a policy to lapse, depending upon the investment performance of the Account Value and the amount of the loan. If a policy is not a Modified Endowment Contract, lapse of a policy with loans outstanding may result in adverse tax consequences. (See "Tax Treatment of Policy Benefits," Page 38.) WITHDRAWAL OF NET ACCOUNT VALUE After the first policy anniversary, you may request a withdrawal of Net Account Value on any business day. The withdrawal amount will be taken from the subaccounts of the separate account in proportion to the values in the subaccounts. If the guideline premium test for federal tax law compliance and death benefit option A are in effect, we will reduce the face amount of the policy by an amount equal to the lesser of (a) the amount of the withdrawal and (b) the excess of the face amount plus any term insurance amount provided by the Term Rider, divided by the Death Benefit Factor, over the Cash Surrender Value just after the withdrawal, but in any case not less than zero. If death benefit option B is in effect, the withdrawal will not decrease the face amount. If the cash value accumulation test is in effect, the withdrawal will result in a decrease in the face amount plus any term insurance amount provided by the Term Rider of an amount equal to the withdrawal amount times 1.00327374 (See "Withdrawal of Net Account Value," Page 31) If a requested withdrawal would reduce the face amount below $5000, the withdrawal will not be allowed. 8 15 SURRENDER OF THE POLICY You may at any time fully surrender your policy and receive the Net Cash Surrender Value, if any, which will take into account any outstanding policy loans and accrued interest (See "Surrender Privilege," Page 31.) AVAILABLE AUTOMATED FUND MANAGEMENT FEATURES We currently offer, at no charge to you, two automated fund management programs, Dollar Cost Averaging and Portfolio Rebalancing. For a description of these features, see "Available Automated Fund Management Features," Page 33. TAX TREATMENT We believe that a Policy issued on a standard rate class basis generally should meet the Section 7702 definition of a life insurance contract. For policies issued on a substandard basis, there is insufficient guidance to determine if such a policy would in all situations satisfy the Section 7702 definition of a life insurance contract. Assuming that a policy qualifies as a life insurance contract for Federal income tax purposes, you should not be deemed to be in constructive receipt of value under your policy until there is a distribution from the policy. 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 38.) Under certain circumstances, a policy may be treated as a "Modified Endowment Contract." If a policy is a Modified Endowment Contract, then all 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 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 38.) If a 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 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 39.) ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUE AND NET CASH SURRENDER VALUE Illustrations of how investment performance of the separate account may cause the death benefit, the Account Value and the Net Cash Surrender Value to vary are included in Appendix A commencing on Page A-1. These illustrations of hypothetical values may help you to understand the long-term effects of different levels of investment performance, of charges and deductions, of electing one or the other death benefit option or death benefit compliance test, and generally comparing and contrasting this policy to other life insurance policies. Nonetheless, the illustrations are based on hypothetical investment rates of return. THEY ARE NOT GUARANTEED. Illustrations 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 differ from those illustrated. 9 16 The following detailed description of the policy uses certain precise terms which are capitalized. These terms have the meanings set out in the Glossary, on pages 47 to 50. NATIONAL LIFE INSURANCE COMPANY, THE SEPARATE ACCOUNT, AND THE FUNDS. NATIONAL LIFE INSURANCE COMPANY National Life Insurance Company ("National Life", or "we") is authorized to transact life insurance and annuity business in Vermont and in 50 other jurisdictions. National Life was originally chartered as a mutual life insurance company in 1848 under Vermont law. It is now a stock life insurance company, all of the outstanding stock of which is indirectly owned by National Life Holding Company, a mutual insurance holding company established under Vermont law on January 1, 1999. All policyholders of National Life, including all the Owners of the Policies, are voting members of National Life Holding Company. National Life assumes all insurance risks under the Sentinel Benefit Provider policy offered by this Prospectus (the "Policy") and its assets support the Policy's benefits. On December 31, 2000, National Life's consolidated assets were over $9.6 billion. (See "Financial Statements," Page F-1.) THE SEPARATE ACCOUNT The National Variable Life Insurance Account (the "Separate 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. The Separate Account's assets are the property of National Life. Each Policy provides that the portion of the Separate Account's assets equal to the reserves and other liabilities under the Policies (and other policies) supported by the Separate Account will not be chargeable with liabilities arising out of any other business that National Life may conduct. The portion of the Separate 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 Separate Account that fund other variable life insurance policies. In addition to the net assets and other liabilities for the Policies (and other policies), the Separate Account's net assets include amounts derived from expenses charged to the Policies (and the other policies) by National Life which it currently holds in the Separate 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 general account. The Separate 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 Separate Account by the SEC. The Separate Account meets the definition of a "Separate Account" under Federal securities laws. You may choose among the Subaccount options described below. However, a Policy may not allocate Account Value to more than ten Subaccounts at any one time. The investment experience of each of the Subaccounts of the Separate Account depends on the investment performance of the corresponding Fund portfolio. The Separate Account purchases and redeems shares of the portfolios at net asset value. The Separate Account automatically reinvests all dividend and capital gain distributions of the portfolios in shares of the distributing portfolios at their net asset value on the date of distribution. In other words, the Separate Account does not pay portfolio dividends or portfolio distributions out to you as additional units, but instead reflects them in unit values. Before choosing to allocate your net premium payments and Account Value, carefully read the prospectus for each Fund, along with this Prospectus. We summarize the investment objectives of each portfolio below. There is no assurance that any of the portfolios will meet these objectives. We do not guarantee any minimum value for the amounts allocated to the Separate Account. You bear the investment risk of investing in the portfolios. Not all portfolios may be available in all states or in all markets. 10 17 SENTINEL VARIABLE PRODUCTS TRUST The Common Stock, Mid Cap Growth, Small Company, Growth Index and Money Market Subaccounts of the Variable Account invest in shares of Sentinel Variable Products Trust, a "series" type of mutual fund which is registered with the SEC under the 1940 Act as a diversified open-end management investment company. Each series of Sentinel Variable Products Trust shares represents an interest in a separate portfolio within the Trust. The investment objectives of Sentinel Variable Products Trust's Funds are set forth below. The Common Stock Fund. The Common Stock Fund seeks a combination of growth of capital, current income, growth of income and relatively low risk as compared with the stock market as a whole, by investing in a diverse group of common stocks of well-established companies. The Mid Cap Growth Fund. The Mid Cap Growth Fund seeks growth of capital, by focusing its investments on common stocks of mid-sized growing companies. Income is not a factor in selecting stocks. The Small Company Fund. The Small Company Fund seeks growth of capital, by investing mainly in common stocks of small companies that National Life Investment Management believes have attractive growth potential and are attractively valued. Income is not a factor in selecting stocks. The Growth Index Fund. The Growth Index Fund seeks to match, as closely as possible before expenses, the performance of the S&P 500/BARRA Growth Index, by investing in common stocks of the companies comprising the Index in approximately the same weightings as the Index. The Money Market Fund. The Money Market Fund seeks as high a level of current income as is consistent with stable principal values and liquidity by investing exclusively in dollar-denominated money market instruments, including U.S. government securities, bank obligations, repurchase agreements, commercial paper, and other corporate debt obligations. National Life Investment Management Company, Inc. ("NLIMC") manages each of the Funds of Sentinel Variable Products Trust. NLIMC is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. NLIMC is a wholly owned subsidiary of National Life. ALGER AMERICAN FUND The Separate Account has three Subaccounts which invest exclusively in shares of Portfolios of the Alger American Fund. The Alger American Fund is a "series" type mutual fund registered with the SEC as a diversified open-end management investment company issuing a number of series of shares, each of which represents an interest in a Portfolio of the Alger American Fund. 11 18 The investment objectives of the Portfolios of the Alger American Fund in which the Subaccounts invest are set forth below. Alger American Growth Portfolio. This Portfolio seeks long-term capital appreciation by focusing on growing companies that generally have broad product lines, markets, financial resources and depth of management. Under normal circumstances, the portfolio invests primarily in the equity securities of large companies. The portfolio considers a large company to have a market capitalization of $1 billion or greater. Alger American Leveraged AllCap Portfolio. This Portfolio seeks long-term capital appreciation. It invests in the equity securities of companies of any size which demonstrate promising growth potential. This Portfolio can leverage, that is, borrow money, up to one-third of its total assets to buy additional securities. By borrowing money, the portfolio has the potential to increase its returns if the increase in the value of the securities purchased exceeds the cost of borrowing, including interest paid on the money borrowed. Alger American Small Capitalization Portfolio. This Portfolio seeks long-term capital appreciation by focusing on small, fast-growing companies that offer innovative products, services or technologies to a rapidly expanding marketplace. Under normal circumstances, the portfolio invests primarily in the equity securities of small capitalization companies. A small capitalization company is one that has a market capitalization within the range of the Russell(R) 2000 Growth Index or the S&P(R) SmallCap 600 Index. The Alger American Alger American Growth Portfolio, the Alger American Leveraged AllCap Portfolio and the Alger American Small Capitalization Portfolio are managed by Fred Alger Management, Inc. AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. The Separate Account has one Subaccount which invests exclusively in shares of the VP Value portfolio, and one Subaccount which invests exclusively in shares of VP Income & Growth portfolio, 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. The investment objectives of the Portfolios of American Century Variable Portfolios, Inc. in which the Subaccounts are expected to invest are set forth below. VP Value. To seek long-term capital growth. Income is a secondary objective. The Portfolio 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 Portfolio will seek to achieve its investment objective by investing in common stocks. The VP Value Portfolio and the VP Income & Growth Portfolio of the American Century Variable Portfolios, Inc. are managed by American Century Investment Management, Inc. 12 19 DEUTSCHE ASSET MANAGEMENT VIT FUNDS The Separate Account has three Subaccounts which invest exclusively in shares of funds of Deutsche Asset Management VIT Funds. Deutsche Asset Management VIT Funds is a "series" type mutual fund registered with the SEC as a diversified open-end management investment company issuing a number of series of shares, each of which represents an interest in a fund of Deutsche Asset Management VIT Funds. The Deutsche VIT Equity 500 Index Subaccount, the Deutsche VIT Small Cap Index Subaccount and the Deutsche VIT EAFE(R) Equity Index Subaccount of the Separate Account invest in shares of the Equity 500 Index Fund, the Small Cap Index Fund and the EAFE(R) Equity Index Fund, respectively, of Deutsche Asset Management VIT Funds. The investment objectives of the funds of Deutsche Asset Management VIT Funds in which the Subaccounts invest are set forth below. The EAFE(R) Equity Index Fund seeks to match, as closely as possible, before expenses, the performance of the Morgan Stanley Capital International (MCSI) EAFE(R) Index ("EAFE(R) Index") which emphasizes stocks of companies in major markets in Europe, Australia and the Far East performance. The investment adviser attempts to invest in stocks and other securities that are representative of the EAFE(R) Index as a whole. The Equity 500 Index Fund seeks to match, as closely as possible, before expenses, the performance of the Standard & Poor's 500 Composite Stock Price Index (the "S&P 500 Index"), which emphasizes stocks of large U.S companies. The investment adviser invests in a statistically selected sample of the securities found in the S&P 500 Index. The Small Cap Index Fund seeks to match, as closely as possible, before expenses, the performance of the Russell 2000 Small Stock Index (the "Russell 2000 Index"), which emphasizes stocks of small U.S. companies. The investment adviser invests in a statistically selected sample of the securities found in the Russell 2000 Index. The EAFE(R) Equity Index Fund, the Equity 500 Index Fund, and the Small Cap Index Fund and, are managed by Deutsche Asset Management, Inc. THE DREYFUS SOCIALLY RESPONSIBLE GROWTH FUND, INC. The Variable Account has one Subaccount which invests exclusively in shares of The Dreyfus Socially Responsible Growth Fund, Inc. This Fund is registered with the SEC as a diversified open-end management investment company. The investment objective of The Dreyfus Socially Responsible Growth Fund, Inc. is set forth below. 13 20 The Dreyfus Socially Responsible Growth Fund, Inc. The Fund seeks to provide capital growth, with current income as a secondary goal. To pursue these goals, the Fund invests primarily in the common stock of companies that, in the opinion of the Fund's management, meet traditional investment standards and conduct their business in a manner that contributes to the enhancement of the quality of life in America. The Dreyfus Socially Responsible Growth Fund, Inc. is managed by The Dreyfus Corporation. FIDELITY VARIABLE INSURANCE PRODUCTS FUND AND FIDELITY VARIABLE INSURANCE PRODUCTS FUND II The Separate Account has one Subaccount which invests exclusively in shares of Portfolios of the Variable Insurance Products Fund (the "VIP Fund") and one Subaccount which invests exclusively in shares of Portfolios of the Variable Insurance Products Fund II ("VIP Fund II"). 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 Overseas Portfolio of the VIP Fund and the Investment Grade Bond Portfolio of the VIP Fund II are managed by Fidelity Management and Research Company ("FMR"). FMR has entered into a sub-advisory agreement with Fidelity International Investment Advisors for the Overseas Portfolio. The investment objectives of the Portfolios of the VIP Fund and the VIP Fund II in which the Subaccounts invest are set forth below. Overseas Portfolio. This Portfolio seeks long term growth of capital. FMR normally invests at least 65% of the Portfolio's total assets in foreign securities. FMR normally invests the Portfolio's assets primarily in common stocks. Investment Grade Bond Portfolio. This Portfolio seeks as high a level of current income as is consistent with the preservation of capital. It normally invests in U.S. dollar-denominated investment-grade bonds (those of medium and high quality). INVESCO VARIABLE INVESTMENT FUNDS, INC. The Variable Account has three Subaccounts which invests exclusively in shares of the following three series of INVESCO Variable Investment Funds, Inc.: INVESCO VIF - Dynamics Fund INVESCO VIF - Health Sciences Fund INVESCO VIF - Technology Fund 14 21 INVESCO Variable Investment Funds, Inc. is a mutual fund registered with the SEC as a diversified open-end management investment company issuing shares of a number of Funds. The investment objectives of the INVESCO Variable Investment Funds, Inc. Funds in which the Subaccounts invest are set forth below. INVESCO VIF - Dynamics Fund. This Fund seeks to make an investment grow. It is actively managed. The Fund invests primarily in equity securities that INVESCO believes will rise in price faster than other securities, as well as in options and other investments whose values are based upon the values of equity securities. The Fund invests primarily in common stocks of mid-sized U.S. companies - those with market capitalizations between $2 billion and $15 billion at the time of purchase - but also has the flexibility to invest in other types of securities, including preferred stocks, convertible securities and bonds. INVESCO VIF - Health Sciences Fund. This Fund seeks to make an investment grow. It is aggressively managed. Although the Fund can invest in debt securities, it primarily invests in equity securities that INVESCO believes will rise in price faster than other securities, as well as in options and other investments whose values are based upon the values of equity securities. The Fund invests primarily in equity securities of companies that develop, produce or distribute products or services related to health care. These companies include, but are not limited to, medical equipment or supplies, pharmaceuticals, health care facilities, and applied research and development of new products or services. INVESCO VIF - Technology Fund. This Fund seeks to make an investment grow. It is aggressively managed. Although the Fund can invest in debt securities, it primarily invests in equity securities that INVESCO believes will rise in price faster than other securities, as well as in options and other investments whose values are based upon the values of equity securities. The Fund invests primarily in equity securities of companies engaged in technology-related industries. These include, but are not limited to, applied technology, biotechnology, communications, computers, electronics, Internet, IT services and consulting, oceanography, office and factory automation, networking, robotics, and video. The INVESCO VIF Dynamics Fund, Health Sciences Fund and Technology Fund are managed by INVESCO Funds Group, Inc. J.P. MORGAN SERIES TRUST II The Separate 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 Trust 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. The investment objectives of the J.P. Morgan Series Trust II Portfolios in which the Subaccounts invest are set forth below. 15 22 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. MARKET STREET FUND The Bond and Balanced Subaccounts of the Separate Account invest in shares of Market Street Fund, a "series" type of mutual fund which is registered with the SEC under the 1940 Act as a diversified open-end management investment company. Each series of Market Street Fund shares represents an interest in a separate portfolio within the Fund. The investment objectives of the Market Street Fund's Portfolios you may choose for your Policy are set forth below. The Bond Portfolio. The Bond Portfolio seeks to generate a high level of current income consistent with prudent investment risk by investing primarily in a diversified portfolio of fixed income securities of U.S. and foreign issuers. The Balanced Portfolio. The Balanced Portfolio seeks 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. Market Street Investment Management Company ("MSIM") serves as the investment adviser to both the Balanced and Bond Portfolios. MSIM uses a "specialist" investment subadviser to manage each of the Portfolios. The subadviser for the Balanced Portfolio is Fred Alger Management Inc., and the subadviser for the Bond Portfolio is Western Asset Management Company. MORGAN STANLEY UNIVERSAL INSTITUTIONAL FUNDS The Variable Account has four Subaccounts which invests exclusively in shares of the following four series of The Morgan Stanley Universal Institutional Funds, Inc.: 16 23 Emerging Markets Equity Portfolio Fixed Income Portfolio High Yield Portfolio U.S. Real Estate Portfolio The Universal Institutional Funds, Inc. is a "series" type mutual fund registered with the SEC as a diversified open-end management investment company issuing a multiple series of shares. The investment objectives of The Universal Institutional Funds, Inc. Portfolios in which the Subaccounts invest are set forth below. Emerging Markets Equity Portfolio. This Portfolio seeks long term capital appreciation by investing primarily in growth-oriented equity securities of issuers in emerging market countries. Fixed Income Portfolio. This Portfolio seeks above-average total return over a market cycle of three to five years by investing primarily in a diversified portfolio of fixed income securities. High Yield Portfolio. This Portfolio seeks above-average total return over a market cycle of three to five years by investing primarily in a diversified portfolio of high yield securities. U.S. Real Estate Portfolio. This Portfolio above average current income and long-term capital appreciation by investing primarily in equity securities of companies in the U.S. real estate industry, including real estate investment trusts. The Universal Institutional Funds, Inc. Emerging Markets Equity Portfolio and U.S. Real Estate Portfolio are managed by Morgan Stanley Asset Management. Morgan Stanley Asset Management Inc. changed its name to Morgan Stanley Investment Management Inc. but continues to do business in certain instances using the name Morgan Stanley Asset Management. The Universal Institutional Funds, Inc. Fixed Income Portfolio and High Yield Portfolio are managed by Miller Anderson & Sherrerd, LLP, an affiliate of Morgan Stanley Asset Management. NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST The Separate 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 ("AMT") is registered with the SEC as a diversified open-end management investment company. AMT has nine separate series, which are called Portfolios. Shares of each Portfolio represent an interest in that Portfolio. The investment objectives of the Partners Portfolio are set forth below. Partners Portfolio. To seek growth of capital. This Portfolio invests mainly in common stock of mid-to large-capitalization companies. Its investment co-managers seek securities believed to be undervalued based on fundamentals such as low price-to-earnings ratios, consistent cash flows, and the company's track record through all points of the market cycle. The Portfolio generally considers selling a stock when it reaches the managers' target price, when it fails to perform as expected, or when other opportunities appear 17 24 more attractive. The Portfolio has the ability to change its goal without shareholder approval, although it does not currently intend to do so. The Partners Portfolio of Neuberger Berman Advisers Management Trust is managed by Neuberger Berman Management Inc. Neuberger Berman, LLC is the sub-adviser. STRONG VARIABLE INSURANCE FUNDS, INC. AND STRONG OPPORTUNITY FUND II, INC. The Separate Account has one Subaccount which invests exclusively in shares of the Mid Cap Growth Fund II 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 registered with the SEC as a diversified open-end management investment company issuing a number of series or classes of shares, 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 investment objectives of the Strong Funds in which the Subaccounts invest are set forth below. Mid Cap Growth Fund II . This Portfolio 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 Mid Cap Growth Fund II series of Strong Variable Insurance Funds, Inc., and Strong Opportunity Fund, Inc. are managed by Strong Capital Management, Inc. RESOLVING MATERIAL CONFLICTS The participation agreements pursuant to which the Funds sell their shares to Subaccounts of the Separate Account contain varying provisions regarding termination. In general, each party may terminate a participation agreement 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, you 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, we will not be able to honor your requests to allocate cash values or net premiums to Subaccounts investing in shares of that Fund or Portfolio. 18 25 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 of Policies with Account Value allocated to the Separate 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 Separate 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. OTHER MATTERS RELATING TO THE FUNDS We have entered into or may enter into agreements with Funds pursuant to which the adviser 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 Separate Account and other separate accounts of National Life. These percentages may differ, and National Life may be paid a greater percentage by some investment advisers or distributors than other advisers or distributors. These agreements reflect administrative services provided by National Life. The amount of this compensation with respect to the Policy during 2000, which is based upon the indicated percentages of assets of each Fund attributable to the Policy, is shown below:
- -------------------------------------------------- ------------------ --------------------------- Revenues National Life Portfolios of the % of Assets Received During 2000 - -------------------------------------------------- ------------------ --------------------------- Alger American Fund 0.10% $ 58.00 - -------------------------------------------------- ------------------ --------------------------- American Century Variable Portfolios, Inc. 0.20% $ 424.70 - -------------------------------------------------- ------------------ --------------------------- Deutsche Asset Management VIT Funds 0.15%* $1,939.25 - -------------------------------------------------- ------------------ --------------------------- Dreyfus Socially Responsible Growth Fund, Inc. 0.20% $ 0.00 - -------------------------------------------------- ------------------ --------------------------- Fidelity VIP Fund and VIP II Fund 0.10% $ 3.00 - -------------------------------------------------- ------------------ --------------------------- INVESCO Variable Insurance Funds, Inc. 0.25% $ 0.00 - -------------------------------------------------- ------------------ --------------------------- J.P. Morgan Series Trust II 0.20% $ 92.02 - -------------------------------------------------- ------------------ --------------------------- Morgan Stanley Universal Institutional Funds 0.25% $ 0.00 - -------------------------------------------------- ------------------ --------------------------- Neuberger Berman Advisers Management Trust 0.15% $ 0.32 - -------------------------------------------------- ------------------ --------------------------- Strong VIF and Opportunity Fund II 0.20% $ 1.62 - -------------------------------------------------- ------------------ ---------------------------
*0.13% with respect to the Equity 500 Index Fund. These arrangements may change from time to time, and may include more Funds in the future. The investment objectives and policies of certain Portfolios of the Funds 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 Portfolios will be comparable to the investment results of any other portfolio, even if the other portfolio has the same investment adviser or manager. We describe our basic Policy below. There may be differences in your Policy (such as differences in fees, charges, and benefits) from the one described in this prospectus because of the requirements of the state where we issued your Policy. Please consult your Policy for its specific terms. 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 Insured's death (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 35.) The Death Benefit payable under Option A will be the greater of the Face Amount or the Death Benefit Factor times the Cash Surrender Value on the date of death; under Option B, the Death Benefit will be the greater of the Face Amount plus the Account Value on the date of death, or the Death Benefit Factor times the Cash Surrender Value on the date of death, in each case plus any Supplemental Term Insurance Amount, less any outstanding Policy loan and accrued interest, and less any unpaid Monthly Deductions. Federal Income Tax Law Compliance Test Options. The Policy must satisfy either of two death benefit compliance tests in order to qualify as life insurance under section 7702 of the Internal Revenue Code: the Cash Value Accumulation Test or the Guideline Premium Test. Each test effectively requires that the Policy's Death Benefit, plus any outstanding Policy loans and accrued interest, and any unpaid Monthly Deductions, must always be equal to or greater than the Cash Surrender Value multiplied by a certain percentage (the "Death Benefit Factor"). Thus, the Policy has been structured so that the Death Benefit may increase above the Face Amount in order to comply with the applicable test. The Death Benefit Factor for the Guideline Premium Test varies only by age, as shown below: 19 26
Death Death Attained Age Benefit Factor Attained Age Benefit Factor ------------ -------------- ------------ -------------- 40 and under 250% 70 115% 45 215% 75-90 105% 50 185% 91 104% 55 150% 92 103% 60 130% 93 102% 65 120% 94 101% 95+ 100%
For Attained Ages not shown, the percentages will decrease by a ratable portion of each full year. The Death Benefit Factor for the Cash Value Accumulation Test varies by age and sex, and generally such Death Benefit Factors are different from those for the Guideline Premium Test. The Guideline Premium Test also imposes maximum premium limits, whereas the Cash Value Accumulation test does not. You must select and specify on the application which of the two federal tax death benefit compliance tests will apply. Once the Policy is issued, you may not change this selection. In general, where maximum accumulation of Account Value during the initial Policy Years is a primary objective, the Cash Value Accumulation Test is more appropriate. If your primary objective is the most economically efficient method of obtaining a specified amount of coverage, the Guideline Premium Test is generally more appropriate. You should take into account in considering the Guideline Premium Test that both Option A and Option B are available, and that it is possible to change from time to time between Option A and Option B. Since the selection of the federal tax death benefit compliance test depends on complex factors and may not be changed, prospective purchasers of the Policy should consult with a qualified tax adviser before making this election. Death Benefit Options. The Policy provides two Death Benefit Options: Option A and Option B. Policies which use the Guideline Premium Test as the federal tax death benefit compliance test may select either Death Benefit Option A or Option B. You designate the Death Benefit Option in the application, and you may change it as described in "Change in Death Benefit Option," Page 21. Only Option A is available for Policies which use the Cash Value Accumulation Test as the federal tax death benefit compliance test. Option A. The Death Benefit is equal to the greater of (a) the Face Amount of the Policy and (b) the Cash Surrender Value on the Valuation Date on or next following the Insured's date of death multiplied by the applicable Death Benefit Factor, in each case less any outstanding Policy loan and accrued interest thereon, and less any unpaid Monthly Deductions. Illustration of Option A -- For purposes of this illustration, assume that the Insured is under Attained Age 40, the Guideline Premium Test has been elected, and there is no Policy loan outstanding. Under Option A, a Policy with a Face Amount of $200,000 will generally have a Death Benefit of $200,000, assuming no Policy loans outstanding and no unpaid Monthly Deductions. The Death Benefit Factor for an Insured under Attained Age 40 on the Policy Anniversary prior to the date of death is 250%. Because the Death Benefit must be equal to or greater than 2.50 times the Cash Surrender Value, any time the Cash Surrender Value exceeds $80,000 the Death Benefit will exceed the Face Amount. Each additional dollar added to the Cash Surrender Value will increase the Death Benefit by $2.50. Thus, a 35 year old Insured with a Cash Surrender Value of $90,000 will have an Death Benefit of $225,000 (2.50 x $90,000, and a Cash Surrender Value of $150,000 will have an Death Benefit of $375,000 (2.50 x $150,000). 20 27 Similarly, any time the Cash Surrender Value exceeds $80,000, each dollar taken out of the Cash Surrender Value will reduce the Death Benefit by $2.50. If at any time, however, the Cash Surrender Value multiplied by the specified percentage is less than the Face Amount, the Death Benefit will be the Face Amount of the Policy. If the Cash Value Accumulation Test for tax compliance applies to a Policy, the Death Benefit Factors will be different but the above example otherwise applies. Option B. The Death Benefit is equal to the greater of (a) the Face Amount of the Policy plus the Account Value and (b) the Cash Surrender Value on the Valuation Date on or next following the Insured's date of death multiplied by the applicable Death Benefit Factor (shown in the table above), in each case less any outstanding Policy loan and accrued interest thereon, and less any unpaid Monthly Deductions. As noted above, Option B is only available for Policies on which the Guideline Premium Test has been elected. Illustration of Option B -- For purposes of this illustration, assume that the 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 have an Death Benefit of $200,000 plus the Cash Surrender Value, assuming no Policy loans outstanding and no unpaid Monthly Deductions. Thus, for example, a Policy with a $50,000 Cash Surrender Value will have a Death Benefit of $250,000 ($200,000 plus $50,000). Since the applicable Death Benefit Factor is 250%, the Death Benefit will be at least 2.50 times the Cash Surrender Value. As a result, if the Cash Surrender Value exceeds $133,333, the Death Benefit will be greater than the Face Amount plus the Cash Surrender Value. Each additional dollar added to the Cash Surrender Value above $133,333 will increase the Death Benefit by $2.50. An Insured with a Cash Surrender Value of $150,000 will have a Death Benefit of $375,000 (2.50 x $150,000), and a Cash Surrender Value of $200,000 will yield a Death Benefit of $500,000 (2.50 x $200,000). Similarly, any time the Cash Surrender Value exceeds $133,333, each dollar taken out of the Cash Surrender Value will reduce the Death Benefit by $2.50. If at any time, however, the Cash Surrender Value multiplied by the specified percentage is less than the Face Amount plus the Cash Surrender Value, the Death Benefit will be the Face Amount plus the Cash Surrender Value. At Attained Age 99, Option B automatically becomes Option A. Change in Death Benefit Option. After the first Policy Year, the Death Benefit Option in effect for Policies which have elected the Guideline Premium Test as the federal tax death benefit compliance test 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 Policy Anniversary on or next following the date we receive the written request. Only one change in Death Benefit Option is permitted in any one Policy Year. On the effective date of a change in Death Benefit Option, the Face Amount is adjusted so that there will be no change in the Death Benefit or the Net Amount at Risk. In the case of a change from Option B to Option A, the Face Amount must be increased by the Account Value. In the case of a change from Option A to Option B, the Face Amount must be decreased by the Account Value. The change from Option A to Option B will not be allowed if it would reduce the Face Amount to less than the Minimum Face Amount. On the effective date of the change, the Death Benefit, Account Value and Net Amount at Risk (and therefore the Cost of Insurance Charges) are unchanged. However, after the effective date of the change, the pattern of future Death Benefits, Account Value, Net Amount at Risk and Cost of Insurance Charges will be different than if the change had not been made.. 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 (such limitations apply only to 21 28 Policies to which the Guideline Premium Test for federal income tax law compliance has been elected), we 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 38.) How the Death Benefit May Vary. The amount of the Death Benefit may vary with the Account Value in the following circumstances. The Death Benefit under Option A will vary with the Account Value whenever the Death Benefit Factor multiplied by the Cash Surrender Value exceeds the Face Amount of the Policy. The Death Benefit under Option B will always vary with the Account Value because the Death Benefit equals the greater of (a) the Face Amount plus the Account Value and (b) the Cash Surrender Value multiplied by the Death Benefit Factor. Supplemental term insurance. As discussed in more detail under "Supplemental Term Insurance Rider" on page , we offer optional term insurance. This rider provides a death benefit upon death of the Insured that supplements the Death Benefit under the base Policy. The death benefit under this rider generally may be more cost effective to you than increasing your Face Amount under the Policy. ABILITY TO ADJUST FACE AMOUNT Subject to certain limitations, you may 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 our approval of the request, and the effective date of a decrease is the Monthly Policy Date on or next following the date that we receive the written request. An increase or decrease in Face Amount may have federal tax consequences. (See "Tax Treatment Of Policy Benefits," Page 38.) The effect of changes in Face Amount on Policy charges, as well as other considerations, are described below. The Face Amount, and any change in Face Amount, do not include any coverage provided by the Term Rider, if it has been elected. Increase. To obtain an increase in the Face Amount, you should submit an application for the increase. We reserve the right to require evidence satisfactory to us of the Insured's insurability, if the Net Amount at Risk would increase. For Policies issued on the basis of guaranteed issue underwriting, increases in Face Amount are limited to a maximum of 10% without medical underwriting. Automated annual increases in Face Amount of specified percentages may be elected. You may not increase the Face Amount after the Insured's Attained Age 85 (Attained Age 65 in the case of guaranteed issue or simplified issue underwriting). On the effective date of an increase, and taking the increase into account, the Net Account Value must be greater than the Monthly Deductions then due. If the Net Account Value is not sufficient, the increase will not take effect until you make a sufficient additional premium payment to increase the Net Account 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 Insured may be in a different Rate Class 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 27.) Decrease. By providing a written request, you may decrease the Face Amount of the Policy. The Face Amount after any decrease may not be less than the Minimum Face Amount, which is generally currently $5000, or may not be less than the minimum amount for which the Policy qualify as life insurance for federal income tax purposes under the Internal Revenue Code. A decrease in the Face Amount generally will decrease the total Net Amount at Risk, which will decrease your 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 increase in Face Amount provided by the most recent increase; (b) the next most recent increases, in inverse chronological order; and (c) the Face Amount on the Date of Issue. 22 29 HOW THE DURATION OF THE POLICY MAY VARY The Policy will remain in force as long as the Net Account Value of the Policy is sufficient to pay the Monthly Deductions and the charges under the Policy. When the Net Account Value is insufficient to pay the charges and the Grace Period expires without an adequate premium payment 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 Net Account Value of the Policy first becomes insufficient to pay the charges, the Cumulative Minimum Monthly Premium has been paid. You have certain rights to reinstate the Policy, if it should lapse. (See "Reinstatement," Page 26.) ACCOUNT VALUE The Account 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 Separate Account and the Loan Account. In Policy Years one and two, the Cash Surrender Value is the Account Value reflecting the Distribution Charge Refund. After the second Policy Anniversary, the Cash Surrender Value is equal to the Account Value. There is no guaranteed minimum for the Account Value in any of the Subaccounts of the Separate Account and, because the Account Value on any future date depends upon a number of variables, it cannot be predetermined. The Net Account Value and Net Cash Surrender Value will reflect the Net Premiums paid, investment performance of the chosen Subaccounts of the Separate Account, any transfers, any Withdrawals, any loans, any loan repayments, any loan interest, and charges assessed in connection with the Policy. Determination of Number of Units for the Separate Account. Amounts allocated, transferred or added to a Subaccount of the Separate 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 Date multiplied by the Net Investment Factor for that Subaccount on that Valuation Date. Net Investment Factor. Each Subaccount of the Separate 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. The asset charges for mortality and expense risks and for separate account administration will be deducted in determining the applicable Net Investment Factor. (See "Charges and Deductions - Mortality and Expense Risk Charge," Page 29, and "Charges and Deductions - Separate Account Administration Charge," Page 29.) Calculation of Account Value. The Account Value is determined first on the Date of Issue and thereafter on each Valuation Date. On the Date of Issue, the Account Value will be the Net Premiums received, plus any earnings prior to the Date of Issue, less the Monthly Deduction due on the Date of Issue. On each Valuation Date after the Date of Issue, the Account Value will be: (1) The aggregate of the values attributable to the Policy in the Separate Account, determined by multiplying the number of units the Policy has in each Subaccount of the Separate Account by such Subaccount's unit value on that date; plus (2) The value attributable to the Policy in the Loan Account. 23 30 PAYMENT AND ALLOCATION OF PREMIUMS Issuance of a Policy. To purchase a Policy, you must apply to us 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. The Minimum Initial Premium must be submitted when the Policy is delivered. The Minimum Face Amount of a Policy is generally $5000. The Minimum Initial Premium per set of Policies purchased at the same time and associated with a corporation or its affiliates, a trust or a partnership, or for a Policy owned by an individual, is $50,000. This Policy can be issued for Insureds with Issue Ages of at least 20. The maximum Issue Age for full medical underwriting is 85. The maximum Issue Age for guaranteed underwriting and simplified issue underwriting is 65. The Minimum Face Amount is $5000. The Policies are available on a full medical underwriting basis, a simplified issue basis, or a guaranteed issue basis. Before issuing a Policy on a full medical underwriting basis, we will require that the proposed Insured meet certain underwriting standards satisfactory to us. In simplified issue cases, the application will ask 3 medical questions about the Insured. We reserve the right to revise our rules from time to time to specify a different Minimum Face Amount for subsequently issued policies. Acceptance is subject to our underwriting rules. We reserve the right to reject an application for any reason permitted by law. Amount and Timing of Premiums. Each subsequent premium payment must be at least $300. Subject to certain limitations described below, you have considerable flexibility in determining the amount and frequency of premium payments. At the time of application, you may select a Planned Periodic Premium schedule, based on a periodic billing mode of annual, semi-annual, or quarterly payments. You may request us to send a premium reminder notice at the specified interval. You may change the Planned Periodic Premium frequency and amount. Payments may be made by wire transfer or by check. You are not required to pay the Planned Periodic Premiums in accordance with the specified schedule. You may pay premiums in any amount (subject to the $300 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). Instead, the duration of the Policy depends upon the Policy's Net Account Value. Thus, even if Planned Periodic Premiums are paid, the Policy will lapse whenever the Net Account 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 you (unless the Policy is in its first five years, and the Cumulative Minimum Monthly Premium has been paid). Any payments made while there is an outstanding Policy loan will be applied as premium payments rather than loan repayments, unless we are notified in writing that the amount is to be applied as a loan repayment. No premium payments may be made after the Insured reaches Attained Age 99. However, loan repayments will be permitted after Attained Age 99. Higher premium payments under Death Benefit Option A, until the Death Benefit Factor times the Cash Surrender 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 Death Benefit Factor times the Cash Surrender Value exceeds the Face Amount plus the Account Value, the level of premium payments will not affect the Net Amount at Risk. (However, both the Account Value and Death Benefit will be higher if premium payments are higher, and lower if premium payments are lower.) 24 31 Under either Death Benefit Option, if the Death Benefit is based on the Death Benefit Factor times the Cash Surrender Value, then higher premium payments will result in a higher Net Amount at Risk, and higher 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, in the case of Policies to which the Guideline Premium Test for federal income tax law compliance applies, the Internal Revenue Code of 1986 (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 such a Policy exceed such limits. If at any time a premium is paid which would result in total premiums exceeding such limits, we 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. The maximum premium limitations set forth in the Code depend in part upon the amount of the Death Benefit at any time. As a result, any Policy changes which affect the amount of the 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, we will not effect such change. (See "Federal Income Tax Considerations," Page 37.) Unless the Insured provides satisfactory evidence of insurability, we reserve the right to limit the amount of any premium payment if it increases the Net Amount at Risk. For Policies to which the Cash Value Accumulation Test for federal income tax law compliance applies, the Internal Revenue Code does not provide any limits on premium payments in determining whether a policy qualifies as life insurance under the Code. Allocation of Net Premiums. The Net Premium equals the premium paid less the Premium Loads. In the application for the Policy, you will indicate how Net Premiums should be allocated among the Subaccounts of the Separate Account. You may change these allocations at any time by written notice to the Third Party Administrator. 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 will be allocated to the Money Market Subaccount. For this purpose, we will assume that the free-look period will end on the earliest of (a) the end of the tenth day following receipt of the Policy by you, if we receive at our Home Office or at the office of the Third Party Administrator a signed delivery receipt for the Policy on or before that date; (b) the end of the day on which we receive at the Home Office or at the office of the Third Party Administrator a signed delivery receipt for the Policy, if on or between the eleventh and nineteenth days after the date the Policy is issued; or (c) 20 days after the date the Policy is issued. On the earliest Valuation Date set forth above, we will allocate the amount in the Money Market Subaccount to each of the Subaccounts selected in the application based on the allocation percentage set forth in the application for such Subaccount. The values of the Subaccounts will vary with their investment experience. You bear the entire investment risk. You should periodically review your allocation percentages in light of market conditions and your overall financial objectives. Transfers. You may transfer the Account Value among the Subaccounts of the Separate Account on any business day by making a written transfer request to us. Transfer requests must be in a form acceptable to us. Transfers among the Subaccounts of the Separate Account are made as of the Valuation 25 32 Date on which the request for transfer is received at the office of the Third Party Administrator. You may transfer all or part of the amount in one of the Subaccounts of the Separate Account to another Subaccount or Subaccounts. However, Account Value may not be allocated to more than ten Subaccounts at any one time. Currently an unlimited number of transfers is permitted without charge, and we have no current intent to impose a transfer charge in the foreseeable future. However, we reserve the right, upon prior notice to Policy Owners, to change this policy so as to deduct a transfer charge of up to $25 from each transfer in excess of the twelfth transfer during any one Policy Year. All transfers effected on the same Valuation Date are treated as one transfer transaction. Transfers resulting from Policy loans, the exercise of the transfer right for change of investment policy, and the reallocation from the Money Market Subaccount following the free look 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 Net Account 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. 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, you would have to 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 Net Account 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 after the beginning of the Grace Period by submitting evidence of the Insured's 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 Account 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. The Policy Protection Period may not be reinstated. For Policies that are intended to be used in multiple employer welfare benefit plans established under Section 419A(f)(6) of the Internal Revenue Code, you should be aware that there is a risk that the intended tax consequences of such a plan may not be realized. Congress is currently considering legislation that might remove some or all of the tax advantage of these plans and the Internal Revenue Service has raised questions about certain of these arrangements under existing law. We do not guarantee any particular tax consequences of any use of the Policies, including but not limited to use in these so-called "Section 419 plans." We recommend that you seek independent tax advice with respect to applications in which you seek particular tax consequences. Also, this Policy may be used with certain tax-qualified retirement plans. The Policy includes attributes such as tax deferral on accumulated earnings. Qualified retirement plans provide their own tax-deferral benefits; the purchase of the Policy does not provide additional tax-deferral benefits beyond those provided in the qualified plan. Accordingly, if you are purchasing this Policy through a qualified plan, you should consider purchasing this Policy for its death benefit and other non-tax related benefits. Please consult a tax advisor for information specific to your circumstances to determine whether this Policy is an appropriate investment for you. 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) 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 26 33 Life may realize a profit from any charges. Any such profit may be used for any purpose, including payment of distribution expenses. PREMIUM LOADS A Premium Load will be deducted from each premium payment. The Premium Load consists of the Distribution Charge and the Premium Tax Charge. The Distribution Charge is equal to, in Policy Year 1, 13% of premiums paid during the Policy Year up to the Target Premium, and 0.5% of premiums paid in excess of the Target Premium. In Policy Years 2 through 7, the Distribution Charge is equal to 15% of premiums paid during a Policy Year up to the Target Premium, and 2.5% of premiums paid in excess of the Target Premium in any such Policy Year. In Policy Years 8 and thereafter, the Distribution Charge will be 5% of premiums paid during a Policy Year up to the Target Premium, and 2.5% of premiums paid in excess of the Target Premium in any such Policy Year. For this purpose, the Target Premium equals 1.25 times the annual whole life premium which would be calculated for the Policy using the applicable 1980 Commissioners Standard Ordinary Mortality Table and an interest rate of 3.5%. The Premium Tax Charge will vary from state to state, and will be equal to the actual amount of premium tax or retaliatory tax assessed on sales in the jurisdiction in which the Policy is sold. Currently Vermont-domiciled insurance companies are assessed a premium tax or a retaliatory tax on sales of life insurance in all states. Premium taxes generally range from 2% to 3.5%. Premium taxes may range up to 4% for certain cities in South Carolina and 12% for certain jurisdictions in Kentucky. MONTHLY DEDUCTIONS Charges will be deducted from the Account 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 Policy Administration Charge, (c) for Policies issued on the basis of full medical underwriting, the Underwriting Charge, and (d) for Policies containing a Term Rider, the charges associated with the Term 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 Separate Account. Cost of Insurance Charge. The monthly Cost of Insurance Charge is calculated by multiplying the cost of insurance rate or rates by the Net Amount at Risk for each Policy Month. Because both the Net Amount at Risk and the variables that determine the cost of insurance rate, such as the Insured's age and the Duration of the Policy, may vary, the Cost of Insurance Charge will likely be different from month to month. (1) Net Amount At Risk. The Net Amount at Risk on any Monthly Policy Date is approximately the amount by which the Death Benefit exceeds the Account Value. It measures the amount that National Life would have to pay in excess of the Policy's Account Value if the Insured died. The actual calculation uses the Death Benefit divided by 1.00327234 to take into account assumed monthly earnings at an annual rate of 4%. The Net Amount at Risk is determined separately for the Face Amount on the Date of Issue and any increases in Face Amount. In determining the Net Amount at Risk for each increment of Face Amount, the Account Value is first applied to the Face Amount on the Date of Issue. If the Account Value exceeds the Face Amount on the Date of Issue, the excess is then applied to any increases in Face Amount in the order such increases took effect. If the Net Amount at Risk increases, your monthly Cost of Insurance Charge will increase proportionately. The Net Amount at Risk may increase if, for example, the Death Benefit is based on the Face Amount and the Account Value decreases because of negative investment results. The Net Amount at Risk may also increase if the Death Benefit is based on the Death Benefit Factor times the Cash Surrender Value and the Account Value rises because of positive investment results. The Net Amount at Risk may 27 34 decrease in the opposite situations, and if it does, your monthly Cost of Insurance Charge will decrease proportionately. (2) Cost of Insurance Rate. Policies may be issued (a) after full medical underwriting of the proposed Insured, (b) on a guaranteed issue basis, where no medical underwriting is required prior to issuance of a Policy, or (c) on a simplified underwriting basis, under which medical underwriting is limited to requiring the proposed Insured to answer three medical questions on the application. Current cost of insurance rates for Policies issued on a guaranteed issue basis or a simplified underwriting basis are higher than current standard cost of insurance rates for healthy Insureds who undergo medical underwriting. Guaranteed Rates. The guaranteed maximum cost of insurance rates are set forth in the Policy, and will depend on the Insured's Attained Age, Rate Class, and the applicable 1980 Commissioners Standard Ordinary Smoker/Nonsmoker/Unismoker Mortality Table. If you are based in Montana you must generally select a "unisex" Rate Class. Current Rates and How They are Determined. The actual cost of insurance rates used ("current rates") will depend on the Insured's Attained Age, Rate Class, underwriting method, and Duration. These current cost of insurance rates are set based on National Life's anticipated mortality experience. Generally rates are higher for an older insured, if the Insured is a smoker, or if the Insured is in a substandard rate class (usually because of a health issue). Generally rates are lower for insureds in a fully medically underwritten preferred rate class. Rates may also be higher for a Policy that has a longer Duration, compared to another Policy with identical characteristics and a shorter Duration. As noted above, rates for Policies issued on the basis of guaranteed issue or simplified issue will generally be higher. We periodically review the adequacy of our current cost of insurance rates and may adjust their level if our anticipated mortality experience changes. However, our cost of insurance rates will never exceed guaranteed maximum cost of insurance rates. Any change in the current cost of insurance rates will apply to all persons of the same Issue Age, Rate Class, underwriting method, and with Policies of the same Duration. A cost of insurance rate is determined separately for the Face Amount on the Date of Issue and any increases in Face Amount. In calculating the Cost of Insurance Charge, the rate for the Rate Class on the Date of Issue is applied to the Net Amount at Risk for the Face Amount on the Date of Issue (see "Rate Class", below). For each increase in Face Amount, the rate for the Rate Class applicable to the increase is used. If, however, the Death Benefit is based on the Cash Surrender Value times the Death Benefit Factor, the rate for the Rate Class for the Face Amount on the Date of Issue will be used for the amount of the Death Benefit in excess of the total Face Amount. Rate Class. The Rate Class of the Insured will affect the guaranteed and current cost of insurance rates. National Life currently places Insureds into, for each of guaranteed issue, simplified issue, and full medical underwriting, male non-smoker, female non-smoker, unisex non-smoker, male smoker, female smoker, unisex nonsmoker, unisex unismoker, male unismoker, and female unismoker Rate Classes. For full medical underwriting cases, preferred and substandard rate classes may also apply. Substandard, Smoker, male, guaranteed issue and simplified issue Rate Classes reflect higher mortality risks. The unisex Rate Classes are not available in certain states. Cost of Term Insurance. For Policies which include the Term Rider, the cost of term insurance under the Rider will be the Supplemental Term Insurance Amount, divided by 1.00327234, times the same cost of insurance rates that apply to the Net Amount at Risk for the Face Amount. 28 35 Policy Administration Charge. The Policy Administration Charge, which is currently $5.50 per month, will be deducted from the Account Value on the Date of Issue and each Monthly Policy Date as part of the Monthly Deduction. The Policy Administration Charge may be increased, but is guaranteed never to exceed $8.00 per month. Underwriting Charge. Policies issued on the basis on full medical underwriting will be assessed an Underwriting Charge, deducted monthly as part of the Monthly Deduction. The Underwriting Charge totals $20 in Policy Year 1, and $45 in each of the next four Policy Years. Policies issued on the basis of guaranteed issue or simplified issue will not be assessed an Underwriting Charge. MORTALITY AND EXPENSE RISK CHARGE A daily Mortality and Expense Risk Charge will be assessed against the Separate Account. The current annual rates are set forth below for the various Policy Years of a Policy. For Policy Years 1 - 7: 0.22% of Account Value in the Separate Account For Policy Years 8 -10: 0.12% of Account Value in the Separate Account For Policy Years 11-20: 0.02% of Account Value in the Separate Account; and For Policy Year 21 and thereafter: 0.00% of Account Value in the Separate Account. We may increase the above rates for the Mortality and Expense Risk Charge, but the charge is guaranteed not to exceed 0.60% of Account Value in the Separate Account at all times. SEPARATE ACCOUNT ADMINISTRATION CHARGE A daily Separate Account Administration Charge is assessed against the Separate Account for our expenses incurred in connection with separate account administration. This daily charge is assessed at an annual rate of 0.10% of the Account Value in each Subaccount of the Separate Account. This charge is guaranteed not to increase. TRANSFER CHARGE Currently, unlimited transfers are permitted among the Subaccounts. We have no present intention to impose a transfer charge in the foreseeable future. However, we reserve the right to impose in the future a transfer charge of up to $25 on each transfer in excess of twelve transfers in any Policy Year. If imposed, the transfer charge will be deducted from the Subaccounts based on the proportion that each Subaccount's value bears to the total Account Value in the Separate Account. All transfers effected on the same Valuation Date would be treated as one transfer transaction. The transfer charge will not apply to transfers resulting from Policy loans, the exercise of the transfer right due to the change in investment policy of a Subaccount, or the initial reallocation of Account Values from the Money Market Subaccount to other Subaccounts, These transfers will not count against the twelve free transfers in any Policy Year. OTHER CHARGES The Separate 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. We sell the Policies through registered representatives of broker-dealers. These registered representatives are also appointed and licensed as insurance agents of ours. We pay commissions to the broker-dealers for selling the Policies. You do not pay directly these commissions. We do. We intend to recoup commissions and other sales expenses through fees and charges imposed under the Policies. (See "Distribution of Policies", Page ). More detailed information is contained in the Funds' Prospectuses which accompany this Prospectus. 29 36 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 Separate 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 from the Separate Account to National Life's general account. Any investment earnings on tax charges accumulated in the Separate Account will be retained by National Life. POLICY RIGHTS AND PRIVILEGES LOAN PRIVILEGES General. You may, on any Valuation Date, borrow money from National Life using the Policy as the only security for the loan. The amount of these loans may not exceed the Policy's Net Account Value on the date of receipt of the loan request, minus three times the Monthly Deduction for the next Monthly Policy Date. While the Insured is living, you may repay all or a portion of a loan and accrued interest. Loans may be taken by making a written request to the Third Party Administrator. Loan proceeds will be paid within seven days of the Valuation Date on which a valid loan request is received at the office of the Third Party Administrator. Interest Rate Charged. The interest rate charged on Policy loans will be as follows: Policy Years 1 - 7 : 4.60% per year Policy Years 8 - 10 : 4.50% per year Policy Years 11 - 20 : 4.40% per year Policy Years 21 and thereafter: 4.35% per year Interest is charged from the date of the loan and will be added to the loan balance at the end of the Policy Year and bear interest at the same rate. The tax treatment of preferred rate loans is uncertain (see "Tax Treatment of Policy Benefits, Page ). Allocation of Loans and Collateral. When a Policy loan is taken, Account Value is held in the Loan Account as Collateral for the Policy loan. Account Value is taken from the Subaccounts of the Separate Account based upon the proportion that each Subaccount's value bears to the total Account Value in the Separate Account. The Collateral for a Policy loan will initially be the loan amount. Any loan interest due and unpaid will be added to the Policy loan. We will take additional Collateral for such loan interest so added pro rata from the Subaccounts of the Separate Account, and hold the Collateral in the Loan Account. At any time, the amount of the outstanding loan under a Policy equals the sum of all loans (including due and unpaid interest added to the loan balance) minus any loan repayments. Interest Credited to Amounts Held as Collateral. We will credit the amount held in the Loan Account as Collateral with interest at an effective annual rate of 4%. Effect of Policy Loan. Policy loans, whether or not repaid, will have a permanent effect on the Account Value, and may permanently affect the Death Benefit under the Policy. The effect on the Account Value and Death Benefit could be favorable or unfavorable, depending on whether the investment performance of the Subaccounts is less than or greater than the interest being credited on the amounts held as Collateral in the Loan 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 Separate Account. The longer a loan is outstanding, the greater 30 37 the effect a Policy loan is likely to have. The Death Benefit will be reduced by the amount of any outstanding Policy loan. Loan Repayments. We 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 Loan Account will be reduced by an amount equal to the repayment, and such amount will be transferred to the Subaccounts of the Separate Account based on the proportion that each Subaccount's value bears to the total Account Value in the Separate Account. Lapse With Loans Outstanding. The amount of an outstanding loan under a Policy plus any accrued interest on outstanding loans is not part of Net Account 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 23 and "Policy Lapse," Page 26.) 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 38.) 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 39.) SURRENDER PRIVILEGE At any time before the death of the Insured, you may surrender the Policy for its Net Cash Surrender Value. The Net Cash Surrender Value will equal the Cash Surrender Value less any Policy loan and accrued interest. The Net Cash Surrender Value will be determined by National Life on the Valuation Date it receives, at its Home Office or at the office of the Third Party Administrator, a written surrender request signed by the Owner, and the Policy. Coverage under the Policy will end on the day you mail or otherwise send the written surrender request and the Policy to National Life. We will ordinarily mail surrender proceeds to you within seven days of receipt of the request. (See "Other Policy Provisions - Payment of Policy Benefits", Page 35.) A surrender may have Federal income tax consequences. (See "Tax Treatment of Policy Benefits," Page 38). WITHDRAWAL OF NET ACCOUNT VALUE Before the death of the Insured and on any Valuation Date after the first Policy Anniversary, you may withdraw a portion of the Policy's Net Account Value. The maximum Withdrawal is the Net Account Value on the date of receipt of the Withdrawal request, minus three times the Monthly Deduction on the most recent Monthly Policy Date. The Withdrawal will be taken from the Subaccounts of the Separate Account based upon the proportion that each Subaccount's value bears to the total Account Value in the Separate Account. The effect of a Withdrawal on the Death Benefit and Face Amount will vary depending upon the Death Benefit Option and federal tax death benefit compliance test in effect and whether the Death Benefit is based on the applicable Death Benefit Factor times the Cash Surrender Value. (See "Death Benefit Options," Page 20.) Option A. The effect of a Withdrawal on the Face Amount and Death Benefit under Option A and the Guideline Premium Test for tax law compliance is as follows: 31 38 If the Face Amount divided by the Death Benefit Factor times the Cash Surrender Value exceeds the Account Value just after the Withdrawal, a Withdrawal will reduce the Face Amount 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 Insured is under 40, there is no indebtedness and there is no Term Insurance Amount. The applicable Death Benefit Factor is 250% for an Insured with an Attained Age under 40, if the Guideline Premium Test is in effect as the federal tax death benefit compliance test. Under Option A, a Policy with a Face Amount of $300,000 and an Account Value of $30,000 will have a Death Benefit of $300,000. Assume that the Owner takes a Withdrawal of $10,000 The Withdrawal will reduce the Account Value to $20,000 ($30,000 - $10,000) after the Withdrawal. The Face Amount divided by the Death Benefit Factor is $120,000 ($300,000 / 2.50), which exceeds the Account 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 Face Amount will be reduced by $10,000 to $290,000. If the Face Amount plus the Term Insurance Amount, divided by the applicable Death Benefit Factor times the Cash Surrender Value does not exceed the Cash Surrender Value just after the Withdrawal, then the Face Amount is not reduced. The Face Amount will be reduced by the lesser of such excess or the amount of the Withdrawal. A decrease in total insurance coverage shall apply first to any Supplemental Term Insurance Amount provided by a Term Rider on this Policy, then to any increase in Face Amount in reverse order in which they were made, and then to the Face Amount on the Date of Issue. Under Option A, a policy with a Face Amount of $300,000, an Account Value of $150,000, and no Term Insurance Amount will have a Death Benefit of $375,000 ($150,000 x 2.50). Assume that the Owner takes a Withdrawal of $10,000. The Withdrawal will reduce the Account Value to $140,000 ($150,000 - $10,000). The Face Amount divided by the applicable Death Benefit Factor is $120,000, which does not exceed the Account Value after the Withdrawal. Therefore, the Face Amount stays at $300,000 and the 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 Death Benefit plus any outstanding Policy loans and any unpaid Monthly Deductions equals the Face Amount plus the Account Value, a Withdrawal will reduce the Account Value by the amount of the Withdrawal and thus the Death Benefit will also be reduced by the amount of the Withdrawal. Under Option B, a Policy with a Face Amount of $300,000 and an Account Value of $90,000 will have a Death Benefit of $390,000 ($300,000 + $90,000), assuming no outstanding Policy loans and no unpaid Monthly Deductions. Assume the Owner takes a Withdrawal of $20,000. The Withdrawal will reduce the Account Value to $70,000 ($90,000 - $20,000) and the Death Benefit to $370,000 ($300,000 + $70,000). The Face Amount is unchanged. If the Death Benefit immediately prior to the Withdrawal is based on the applicable Death Benefit Factor times the Cash Surrender Value, the Death Benefit will be reduced to equal the greater of (a) the Face Amount plus the Account Value after deducting the amount of the Withdrawal and Withdrawal Charge and (b) the applicable Death Benefit Factor times the Cash Surrender Value after deducting the amount of the Withdrawal. 32 39 Under Option B, a Policy with a Face Amount of $300,000 and an Account Value of $210,000 will have a Death Benefit of $525,000 ($210,000 X 2.5), assuming no Policy loans outstanding and no unpaid Monthly Deductions. Assume the Owner takes a Withdrawal of $60,000. The Withdrawal will reduce the Account Value to $150,000 ($210,000 - $60,000), and the Death Benefit to the greater of (a) the Face Amount plus the Account Value, or $450,000 ($300,000 + $150,000) and (b) the Death Benefit based on the applicable Death Benefit Factor times the Cash Surrender Value, or $375,000 ($150,000 X 2.50). Therefore, the Death Benefit will be $450,000. The Face Amount is unchanged. If you have elected the Cash Value Accumulation Test for tax law compliance, a Withdrawal will decrease Face Amount by an amount equal to the amount withdrawn times 1.00327374. Because a Withdrawal can affect the Face Amount and the 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," 26.) Since a Withdrawal reduces the Net Account Value, the likelihood that the Policy will lapse is increased. (See "Policy Lapse," Page 26.) A request for Withdrawal may not be allowed if such Withdrawal would reduce the Face Amount below the Minimum Face Amount for the Policy. Also, if a Withdrawal would result in cumulative premiums exceeding the maximum premium limitations applicable under the Code for life insurance under the Guideline Premium Test, we will not allow such Withdrawal. You may request a Withdrawal only by sending a signed written request to the Third Party Administrator. A Withdrawal will ordinarily be paid within seven days of the Valuation Date on which a valid Withdrawal request is received. A Withdrawal of Net Account Value may have Federal income tax consequences. (See "Tax Treatment of Policy Benefits," Page 38.) FREE-LOOK PRIVILEGE The Policy provides for a "free-look" period, during which you may cancel the Policy and receive a refund equal to the premiums paid on the Policy. This free-look period ends on the later of the end of the 10th day after you receive the Policy, or any longer period provided by state law. To cancel the Policy, you must return the Policy to National Life or to an agent of National Life within this period with a written request for cancellation. TRANSFER RIGHT FOR CHANGE IN INVESTMENT POLICY If the investment policy of a Subaccount of the Separate Account is materially changed, you may transfer the portion of the Account Value in such Subaccount to another Subaccount, without regard to any limits on transfers or free transfers. AVAILABLE AUTOMATED FUND MANAGEMENT FEATURES We currently offer, at no charge to you, two automated fund management features. Only one of these features may be active for any single Policy at any time. We are not legally obligated to continue to offer these features. Although we have no current intention to do so, we may cease offering one or both these features at any time, after providing 60 days prior written notice to all Owners who are then utilizing the features being discontinued Dollar Cost Averaging. This feature permits you to automatically transfer funds from the Money Market Subaccount to any other Subaccounts on a monthly basis. You may elect Dollar Cost Averaging at issue by marking the appropriate box on the initial application, and completing the appropriate instructions. You may also begin a Dollar Cost Averaging program after issue by filling out similar information on a change request form and sending it to us at our Home Office. 33 40 If you elect this feature, we will take the amount to be transferred from the Money Market Subaccount and transfer it to the Subaccount or Subaccounts designated to receive the funds, each month on the Monthly Policy Date. If you elect Dollar Cost Averaging on your application for the Policy, it will start with the Monthly Policy Date after the date that is 20 days after issue. If you begin a Dollar Cost Averaging program after the free look period is over, it will start on the next Monthly Policy Date. Dollar Cost Averaging will continue until the amount in the Money Market Subaccount 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. You may discontinue Dollar Cost Averaging at any time by sending an appropriate change request form to the Home Office. You may not use the dollar cost averaging feature to transfer Accumulated Value to the General Account. Dollar Cost Averaging allows you to move funds into the various investment types on a more gradual and systematic basis than the frequency on which you pay premiums. The dollar cost averaging method of investment is designed to reduce the risk of making purchases only when the price of units is high. 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 technique will not, however, assure a profit or protect against a loss in declining markets. Moreover, for 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 you to automatically rebalance the value in the Subaccounts on a semi-annual basis, based on your premium allocation percentages in effect at the time of the rebalancing. You may elect it at issue by marking the appropriate box on the application, or, after issue, by completing a change request form and sending it to our 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 six months after the Date of Issue, and then on each Monthly Policy Date six 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 we receive the election at our Home Office, and subsequent rebalancing transfers will occur every six months from that date. You may discontinue Portfolio Rebalancing at any time by submitting an appropriate change request form to us at our Home Office. If you change your Policy's premium allocation percentages, Portfolio Rebalancing will automatically be discontinued unless you specifically direct 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. Portfolio rebalancing does not guarantee a profit or protect against a loss. OTHER POLICY PROVISIONS Indefinite Policy Duration. The Policy can remain in force indefinitely (in Texas and Maryland, however, the Policy matures at Attained Age 99 at which time National Life will pay the Net 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 Insured reaches Attained Age 99, if the Face Amount is greater than the Account Value, the Face Amount will automatically be decreased to the current Account Value. Also, at Attained Age 99 Option B automatically becomes Option A, and no premium payments are allowed after Attained Age 99, although loan repayments are allowed. The tax treatment of a Policy's Account Value after Age 100 is unclear, and you may wish to discuss this treatment with a tax advisor. 34 41 Payment of Policy Benefits. You may decide the form in which Death Benefit proceeds will be paid. During the Insured's lifetime, you 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 Net 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 Beneficiary within seven days after National Life receives proof of the Insured's death 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 Insured's death at its Home Office and all other requirements are satisfied. Interest at the annual rate of 4% or any higher rate declared by us or required by law is paid on the Death Benefit from the date of death until payment is made. Any amounts payable as a result of surrender, will ordinarily be paid within seven days of receipt of written request at National Life's Home Office or the office of the Third Party Administrator in a form satisfactory to National Life. Any amounts payable as a result of a Withdrawal or Policy loan will ordinarily be paid within seven days of the Valuation Date on which such Withdrawal or Policy loan is validly requested. Generally, the amount of a payment will be determined as of the date of receipt by National Life or the Third Party Administrator 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. We may postpone any payment under the Policy derived from an amount paid by check or draft until we are is satisfied that the check or draft has been paid by the bank upon which it was drawn. The Policy. 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. 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., Net Cash Surrender Value or Death Benefit) are split between the parties. There are different ways of allocating such rights. For example, an employer and employee might agree that under a Policy on the life of the employee, the employer will pay the premiums and will have the right to receive the Net Cash Surrender Value. The employee may designate the Beneficiary to receive any Death Benefit in excess of the Net Cash Surrender Value. If the employee dies 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. National Life does not impose any fee with respect to split dollar arrangements. 35 42 The IRS has recently issued new guidance affecting Split Dollar Arrangements. Any 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. You may assign any and all rights under the Policy. No assignment binds National Life unless in writing and received by us. 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 it is found that the amount of any benefit provided by the Policy is incorrect because of misstatement as to age or sex (if applicable), the Account Value and the Death Benefit will be equitably adjusted on the basis of the correct facts. When adjusting the Account Value, the adjustment will take effect on the Monthly Policy Date on or next following the date we have proof to our satisfaction of such misstatement. When adjusting the Death Benefit the adjustment shall take effect as of the Monthly Policy Date preceding the date of death. Suicide. In the event of the Insured's 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 the Insured commits suicide within two years (or shorter period required by state law) from the effective date of any Policy change which increases the 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 the Insured's lifetime 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 the Insured's lifetime for two years from its effective date. Before such times, however, we may contest the validity of the Policy (or changes) based on material misstatements in the initial or any subsequent application. 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. At the time of the Insured person's death, the Death Benefit will be increased by dividends payable, if any. Correspondence. All correspondence to you will be deemed to have been sent to you if mailed to you at your 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 to the payee or his or her estate. 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. 36 43 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. We 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. We may require proof of the ages of the chosen persons. We may pay interest in excess of the stated amounts under the first four options listed above, but not the last three. Under the first two, and fourth options above, the payee has the right to change options or to withdraw all or part of the remaining proceeds. For additional information concerning the payment options, see the Policy. SUPPLEMENTAL TERM INSURANCE RIDER At your option, the Term Rider, which is subject to the restrictions and limitations set forth in the Rider, may be included in a Policy. Election of the Term Rider will result in the Death Benefit including the Supplemental Term Insurance Amount. The charge for the Term Rider will be an amount included in the Monthly Deduction equal to the Supplemental Term Insurance Amount, divided by 1.00327234, times the cost of insurance rates which apply based on the Insured's then Attained Age, sex (if applicable) and Rate Class applicable to the Insured on the date of issue of the Term Rider. At issue, costs can be decreased by purchasing a higher Supplemental Term Insurance Amount through the use of the Term Rider, since there is no Target Premium associated with the Supplemental Term Insurance Amount, which may have the effect of reducing the Premium Loads. For Policies issued in the State of Florida, the Supplemental Term Insurance Rider is not available after age 95. 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 tax 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 understanding of the present Federal income tax laws. No representation is made as to the likelihood of continuation of the present Federal income tax laws or as to how they may be interpreted by the Internal Revenue Service. 37 44 TAX STATUS OF THE POLICY In order to qualify as a life insurance contract for Federal income tax purposes and to receive the tax treatment normally accorded life insurance contracts under Federal tax law, a life insurance policy must satisfy certain requirements which are set forth in the Internal Revenue Code. Guidance as to how these requirements are to be applied is limited. Nevertheless, National Life believes that a Policy issued on the basis of a standard rate class should satisfy the applicable requirements. There is less guidance, however, with respect to a policy issued on a substandard basis (i.e., a rate class involving higher than standard mortality risk) and it is not clear whether such a policy will in all cases satisfy the applicable requirements, particularly if the Owner pays the full amount of premiums permitted under the Policy. Nevertheless, National Life believes it reasonable to conclude that such a Policy should be treated as a life insurance contract for Federal income tax purposes. If it is subsequently determined that a Policy does not satisfy the applicable requirements, National Life may take appropriate steps to bring the policy into compliance with such requirements and National Life reserves the right to modify the policy as necessary in order to do so. In certain circumstances, owners of variable life insurance policies have been considered for Federal income tax purposes to be the owners of the assets of separate accounts supporting their contracts due to their ability to exercise investment control over those assets. Where this is the case, the policyowners have been currently taxed on income and gains attributable to separate account assets. There is little guidance in this area, and some features of the policy, such as the flexibility of Policy Owners to allocate premium payments and Accumulated Values, have not been explicitly addressed in published rulings. While National Life believes that the policy does not give Policy Owners investment control over Separate Account assets, we reserve the right to modify the policy as necessary to prevent the Policy Owner from being treated as the owner of the Separate Account assets supporting the Policy. In addition, the Code requires that the investments of the Separate Account be "adequately diversified" in order for the policy to be treated as a life insurance contract for Federal income tax purposes. It is intended that the Separate Account, through the Funds, will satisfy these diversification requirements. 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 death benefit under a Policy should be excludible from the gross income of the beneficiary. Federal, state and local estate, inheritance, transfer, and other tax consequences of ownership or receipt of Policy proceeds depend on the circumstances of each Policy Owner or beneficiary. A tax advisor should be consulted on these consequences. Depending on the circumstances, the exchange of a Policy, an increase or decrease of a Policy's Face Amount, 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. A tax advisor should be consulted before effecting any of these policy changes. Generally, as long as you are not subject to the Alternative Minimum Tax, you will not be deemed to be in constructive receipt of the Account 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 upon 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 38 45 Modified Endowment Contracts. Under the Internal Revenue Code, certain life insurance contracts are classified as "Modified Endowment Contracts," with less favorable tax treatment than other life insurance contracts. Due to the flexibility of the Policy as to premium payments and benefits, the individual circumstances of each Policy will determine whether it is classified as a Modified Endowment Contract. The rules are too complex to be summarized here, but generally depend on the amount of premium payments made during the first seven policy years. Certain changes in a policy after it is issued could also cause it to be classified as a Modified Endowment Contract. A current or prospective Policy Owner should consult with a competent advisor to determine whether a policy transaction will cause the Policy to be classified as a Modified Endowment Contract. Distributions Other Than Death Benefits from Modified Endowment Contracts. Policies classified as Modified Endowment Contracts are subject to the following tax rules: (1) All distributions other than death benefits from a Modified Endowment Contract, including distributions upon surrender and withdrawals, will be treated first as distributions of gain taxable as ordinary income and as tax-free recovery of the Policy Owner's investment in the Policy only after all gain has been distributed. (2) Loans taken from or secured by a Policy classified as a Modified Endowment Contract are treated as distributions and taxed accordingly. (3) A 10 percent additional income tax is imposed on the amount subject to tax except where the distribution or loan is made when the Policy Owner has attained age 59 1/2 or is disabled, or where the distribution is part of a series of substantially equal periodic payments for the life (or life expectancy) of the Policy Owner or the joint lives (or joint life expectancies) of the Policy Owner and the Policy Owner's beneficiary or designated beneficiary. If a Contract becomes a modified endowment contract, distributions that occur during the contract year will be taxed as distributions from a modified endowment contract. In addition, distributions from a Contract within two years before it becomes a modified endowment contract will be taxed in this manner. This means that a distribution made from a Contract that is not a modified endowment contract could later become taxable as a distribution from a modified endowment contract. Distributions Other Than Death Benefits from Policies that are not Modified Endowment Contracts. Distributions other than death benefits from a Policy that is not classified as a Modified Endowment Contract are generally treated first as a recovery of the Policy Owner's investment in the policy and only after the recovery of all investment in the policy as taxable income. However, certain distributions which must be made in order to enable the Policy to continue to qualify as a life insurance contract for Federal income tax purposes if policy benefits are reduced during the first 15 policy years may be treated in whole or in part as ordinary income subject to tax. Loans from or secured by a Policy that is not classified as a Modified Endowment Contract are generally not treated as distributions. However, the tax consequences associated with preferred Policy loans is less clear and a tax adviser should be consulted about such loans. Finally, neither distributions from nor loans from or secured by a Policy that is not a Modified Endowment Contract are subject to the 10 percent additional income tax. Investment in the Policy. Your investment in the Policy is generally your aggregate premium payments. When a distribution is taken from the Policy, your investment in the Policy is reduced by the amount of the distribution that is tax-free. Policy Loan Interest. In general, interest paid on any loan under a Policy will not be deductible. 39 46 Multiple Policies. All Modified Endowment Contracts that are issued by National Life (or its affiliates) to the same Policy Owner during any calendar year are treated as one Modified Endowment Contract for purposes of determining the amount includible in the Policy Owner's income when a taxable distribution occurs. Business Uses of the Policy. Businesses can use the Policy in various arrangements, including nonqualified deferred compensation or salary continuance plans, split dollar insurance plans, executive bonus plans, tax exempt and nonexempt welfare benefit plans, retiree medical benefit plans and others. The tax consequences of such plans may vary depending on the particular facts and circumstances. If you are purchasing the Policy for any arrangement the value of which depends in part on its tax consequences, you should consult a qualified tax adviser. In recent years, moreover, Congress has adopted new rules relating to life insurance owned by businesses, and the IRS has recently issued guidance regarding split dollar insurance. Any business contemplating the purchase of a new Policy or a change in an existing Policy should consult a tax adviser. Continuation Beyond Age 100. The tax consequences of continuing the Policy beyond the Insured's 100th year are unclear. You should consult a tax adviser if you intend to keep the Policy in force beyond the Insured's 100th year. SPECIAL RULES FOR EMPLOYEE BENEFIT PLANS If a trustee under a pension or profit-sharing plan, or similar deferred compensation arrangement, owns a Policy, the Federal and state income and estate tax consequences could differ. A tax adviser should be consulted with respect to such consequences. Policies owned under these types of plans may also be subject to restrictions under the Employee Retirement Income Security Act of 1974 ("ERISA"). You should consult a qualified adviser regarding ERISA. The amounts of life insurance that may be purchased on behalf of a participant in a pension or profit-sharing plan are limited. The current cost of insurance for the net amount at risk is treated as a "current fringe benefit" and must be included annually in the plan participant's gross income. We report this cost (generally referred to as the "P.S. 58" cost) to the participant annually. If the plan participant dies while covered by the plan and the Policy proceeds are paid to the participant's beneficiary, then the excess of the death benefit over the Accumulated Value is not taxable. However, the Accumulated Value will generally be taxable to the extent it exceeds the participant's cost basis in the Policy. POSSIBLE TAX LAW CHANGES Although the likelihood of legislative changes is uncertain, there is always the possibility that the tax treatment of the policy could change by legislation or otherwise. Consult a tax adviser with respect to legislative developments and their effect on the Policy. POSSIBLE CHARGES FOR NATIONAL LIFE'S TAXES At the present time, National Life makes no charge for any Federal, state or local taxes (other than the charge for state premium taxes and the DAC tax) that may be attributable to the Subaccounts or to the policies. National Life reserves the right to charge the Subaccounts for any future taxes or economic burden National Life may incur. 40 47 LEGAL DEVELOPMENTS REGARDING UNISEX ACTUARIAL TABLES In 1983, the United States Supreme Court held in Arizona Governing Committee v. Norris that optional annuity benefits provided under an employee's deferred compensation plan could not, under Title VII of the Civil Rights Act of 1964, vary between men and women on the basis of sex. In that case, the Court applied its decision only to benefits derived from contributions made on or after August 1, 1983. Subsequent decisions of lower federal courts indicate that in other factual circumstances the Title VII prohibition of sex-distinct benefits may apply at an earlier date. In addition, legislative, regulatory, or decisional authority of some states may prohibit use of sex-distinct mortality tables under certain circumstances. The Policies offered by this Prospectus, other than employee benefit plan Policies (see "Special Rules For Employee Benefit Plans," Page 40) are based upon actuarial tables which distinguish between men and women and, thus, the Policy provides different benefits to men and women of the same age. Accordingly, employers and employee organizations should consider, in consultation with legal counsel, the impact of these authorities on any employment-related insurance or benefits program before purchasing the Policy and in determining whether an employee benefit plan Policy is appropriate. VOTING RIGHTS All of the assets held in the Subaccounts of the Separate 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, we 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 Separate Account for which no timely instructions from Owners are received will be voted by us 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 you may provide voting instructions will be determined by dividing your Policy's Account Value in that Subaccount 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, we 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 we do disregard voting instructions, we will advise you of that action and its reasons for such action in the next semi-annual report to you. 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 your voting instructions. 41 48 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 Separate Account, if in its judgment such changes would serve the interests of Owners or would be appropriate in carrying out the purposes of the Policies, for example: (i) operating the Separate Account as a management company under the 1940 Act; (ii) deregistering the Separate Account under the 1940 Act if registration is no longer required; (iii) combining or substituting separate accounts; (iv) transferring the assets of the Separate Account to another separate 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 (the new Portfolio may have higher fees and expenses than the ones they replaced); (3) to eliminate, combine, or substitute Subaccounts and establish new Subaccounts, if in its judgment marketing needs, tax considerations, or investment conditions so warrant (the new Subaccounts may not be available in all classes of Policies); and (4) to transfer assets from a Subaccount to another Subaccount or separate account if the transfer in our 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. We have 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 your Policy has Account Value in a Subaccount that is eliminated, we will give you at least 30 days notice before the elimination, and will request that you designate the Subaccount or Subaccounts to which the Account 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 Account 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 Chief President, Chief Operating Officer; 1993 to 1996 - Operating Officer, Executive Vice President & Chief and Director Financial Officer.
42 49 Robert E. Boardman 1994 to present - Chairman of Hickok & Director Boardman Financial Network 1967 to present - President of Hickok & Boardman Realty, Inc. Earle H. Harbison, Jr. 1993 to present: Chairman of Director Harbison Walker, Inc. A. Gary Shilling 1978 to present - President of A. Director Gary Shilling & Company, Inc. James A. Mallon 1998 to present: Executive Vice President Executive Vice President & Chief Marketing Officer; 1996 to 1998: Chief Marketing Officer President & Chief Executive Officer - Integon Life Insurance Corporation; 1993 to 1996: Senior Vice President & Chief Marketing Officer - Commercial Union Life Insurance Company of America. William A. Smith 1998 to present: Executive Vice President Executive Vice President & & Chief Financial Officer; 1994 to 1998 - Chief Financial Officer Vice President and Controller, American Express Financial Advisors Rodney A. Buck 2000 to present - Executive Vice President Executive Vice President & and Chief Investment Officer; 1996 to 2000 Chief Investment Officer - Senior Vice President and Chief Investment Officer; 1996 to present - Chairman, President & Chief Executive Officer, National Life Investment Management Company, Inc. ("NLIMC"); 1998 to present - Chief Executive Office - Sentinel Advisors Company ("SAC"); 1987 to 1997 - Senior Vice President - SAC. Gregory H. Doremus 1998 to present: Senior Vice President - Senior Vice President - New New Business & Customer Services; 1994 to Business & Customer Services 1998 - Vice President - Customer Services. Michele S. Gatto 1999 to present: Senior Vice President & Senior Vice President & General Counsel; 1997 to 1999 - Vice General Counsel President, General Counsel and Secretary, Massachusetts Casualty Insurance Company; 1986 to 1997 - Vice President, Assistant General Counsel, Assistant Secretary/ Treasurer, and other legal positions, The Paul Revere Corporation.
43 50 Charles C. Kittredge 2000 to present: Senior Vice President - Senior Vice President - Marketing Marketing Development and Operations; 1997 Development and Operations to 2000: Senior Vice President - Sales and Distribution; 1993 to 1997: - Vice President - Agency Financial Planning & Services. Wade H. Mayo 2000 to present: Senior Vice President; Senior Vice President 1993 to present: President and Chief Executive Officer - Life Insurance Company of the Southwest ("LSW"); 1996 to present: President - LSW National Holdings, Inc. 1989 to present: President & Director - Insurance Investors Life Insurance Company Joseph A. Miller 2000 to present: Senior Vice President; 1997 Senior Vice President to 2000: Vice President & Director of Agencies; 1990 to 1997: Vice President - Southern Regional Office Michael A. Tahan 1998 to present: Senior Vice President & Senior Vice President & Chief Information Officer; 1991 to 1998 - Chief Information Officer First Vice President & Chief Information Officer-Merrill Lynch Asset Management.
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, a Vermont corporation formed on October 7, 1968, 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"). More information about ESI and its registered persons available at http://www.nasdr.com or by calling 1-800-289-9999. You can also obtain an investor brochure from NASDR Regulation describing its Public Disclosure Program. 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 Separate Account pursuant to an Underwriting Agreement to which the Separate Account, ESI and National Life are parties. National Life is seeking approval to sell the Policies in all states and the District of Columbia. However, all approvals may not be obtained. 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. Dealers are compensated for sales of the Policies by dealer concessions. During the first seven Policy Years, the gross dealer concession will not be more than 15% of the premiums paid up to the target Premium and 2.5% of the premiums paid in excess of the Target Premium. For Policy Years after Policy Year 7, the gross dealer concession will not be more than 5% of the premiums paid, up to the Target Premium, and 2.5% of the premiums in excess of the Target Premium. In addition, dealers will be paid amounts equal to 0.10% per annum of the Account Value in the Separate Account for the first twenty Policy Years, and 0.05% per annum of such amount thereafter. Full time agents of National Life who achieve specified annual sales goals may be eligible for compensation in addition to the amounts stated above, including bonuses, fringe benefits, financing arrangements, conferences, trips, prizes and awards. 44 51 The directors of ESI are Thomas H. MacLeay, Rodney A. Buck, and William A. Smith all of whose principal occupations are disclosed under "Directors and Officers of National Life" above, and Joseph M. Rob, the Chairman and Chief Executive Officer of ESI. ESI's other officers are: Kenneth R. Ehinger President & Chief Operating Officer John M. Grab, Jr. Senior Vice President & Chief Financial Officer Stephen A. Englese Senior Vice President - Financial Products Gregory D. Teese Vice President - Compliance Budd A. Shedaker Assistant Vice President - Communications D. Russell Morgan Counsel Sharon E. Bernard Treasurer & Controller James K. McQueston Secretary
The principal business address of all these individuals is National Life Drive, Montpelier, Vermont 05604. POLICY REPORTS Within 30 days after each Policy Anniversary, a statement will be sent to you describing the status of your Policy, including setting forth the Face Amount, the current Death Benefit, any Policy loans and accrued interest, the current Account Value, the amount held as Collateral in the Loan Account, the value in each Subaccount of the Separate Account, premiums paid since the last report, charges deducted since the last report, any Withdrawals since the last report, and the current Net Cash Surrender Value. In addition, a statement will be sent to you showing the status of your Policy following the transfer of amounts from one Subaccount of a Separate Account to another, 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). You will receive a semi-annual report containing the financial statements of each Fund in which your Policy has Account Value, as required by the 1940 Act. THIRD PARTY ADMINISTRATOR McCamish Systems, LLC, which is located at 6425 Powers Ferry Road, Third Floor, Atlanta, Georgia 30339, will act as administrator of the Policies on behalf of National Life. 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. EXPERTS The Financial Statements listed on Page F-1 have been included in this Prospectus, in reliance on the reports of PricewaterhouseCoopers 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 Kiri Parankirinathan, A.S.A., M.A.A.A., President of Life Product Developers, Inc. 45 52 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 Michele S. Gatto, Senior Vice President and General Counsel of National Life. The Company, like other life insurance companies, is involved in lawsuits, including class action lawsuits. In some class action and other lawsuits involving insurance companies, substantial damages have been sought and/or material settlement payments have been made. Although the Company cannot predict the outcome of any litigation with certainty, the Company believes that at the present time, there are no pending or threatened lawsuits that are reasonably likely to have a material adverse impact on it or the Variable Account. FINANCIAL STATEMENTS The financial statements of National Life and of the relevant Subaccounts of the Separate Account appear on the following pages. The financial statements of National Life should be distinguished from the financial statements of the Separate Account and should be considered only as bearing upon National Life's ability to meet its obligations under the Policies. 46 53 GLOSSARY ACCOUNT VALUE The sum of the Policy's values in the Separate Account and the Loan Account. ATTAINED AGE The Issue Age of the Insured plus the number of full Policy Years which have passed since the Date of Issue. BENEFICIARY The person(s) or entity(ies) designated to receive all or some of the Death Benefit when the Insured dies. 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 Insured shall vest in the Owner unless otherwise stated. CASH SURRENDER VALUE The Account Value of the Policy reflecting, in Policy Years 1 and 2, the Distribution Charge Refund. The Cash Surrender Value is equal to the Account Value on the second Policy Anniversary and thereafter. COLLATERAL The Account Value in the Loan Account which secures the amount of any Policy loan. 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). DAC TAX A tax attributable to Specified Policy Acquisition Expenses under Internal Revenue Code Section 848. 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. DEATH BENEFIT Under Option A, the greater of (a) the Face Amount or (b) the Death Benefit Factor times the Cash Surrender Value on the date of death; under Option B, the greater of (a) the Face Amount plus the Account Value on the date of death, or (b) the Death Benefit Factor times the Cash Surrender Value on the date of death; in each case plus any Supplemental Term Insurance Amount, less any outstanding Policy loan and accrued interest, and less any unpaid Monthly Deductions. DEATH BENEFIT FACTOR A percentage specified in either the Cash Value Accumulation Test or the Guideline Premium Test for qualification of a Policy as life insurance under the Internal Revenue Code, which when multiplied by the Cash Surrender Value, must always be less than or equal to the Death Benefit plus any outstanding Policy loans, accrued interest thereon, and any unpaid Monthly Deductions, and minus any dividends payable and any Supplemental term Insurance Amount. DEATH BENEFIT STANDARD The Death Benefit Factor multiplied by the Cash Surrender Value of the Policy on the date of the Insured's death, less the amount of any Monthly Deductions then due, and less any outstanding Policy loans plus accrued interest. 47 54 DISTRIBUTION CHARGE An amount deducted from each premium to cover the cost of distribution of the Policy. The Distribution Charge is equal to, in Policy Year 1, 13% of premiums paid during the Policy Year up to the Target Premium, and 0.5% of premiums paid in excess of the target premium during the Policy Year. In Policy Years 2 through 7, the Distribution Charge is equal to 15% of premiums paid during a Policy Year up to the Target Premium, and 2.5% of premiums paid in excess of the Target Premium in any such Policy Year. In Policy Years 8 and thereafter, the Distribution Charge will be 5% of premiums paid during a Policy Year up to the Target Premium, and 2.5% of premiums paid in excess of the Target Premium in any such Policy Year. DISTRIBUTION CHARGE REFUND An amount which will be added to Account Value as of the time of the applicable first year premium payments, to determine the proceeds payable to the Owner upon surrender during in Policy Years 1 or 2. Such amount shall be equal to the lesser of (a) the Premium Loads on all premiums paid in the first Policy Year, less 2% of such premiums paid in the first Policy Year, or (b) one third of the Premium Loads paid on all premiums paid in the first Policy Year, plus 2% of such premiums, less the Premium Tax Charge. The Distribution Charge Refund is zero at all times after the first Policy Year. DURATION The number of full years the insurance has been in force; for the Face Amount on the Date of Issue, measured from the Date of Issue; for any increase in Face Amount, measured from the effective date of such increase. FACE AMOUNT The Face Amount of the Policy on the Date of Issue plus any increases in Face Amount and minus any decreases in Face Amount. 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 at least equal to three times the Monthly Deduction due the date when the Grace Period began, plus any Premium Loads. HOME OFFICE National Life's Home Office at National Life Drive, Montpelier, Vermont 05604. INSURED The person upon whose life the Policy is issued. ISSUE AGE The age of the Insured at his or her birthday nearest the Date of Issue. The Issue Age is stated in the Policy. LOAN ACCOUNT Account Value which is held in National Life's general account as Collateral for Policy loans. MINIMUM FACE AMOUNT The Minimum Face Amount is $5000. MINIMUM INITIAL PREMIUM The minimum premium required to issue a Policy. The Minimum Initial Premium per set of Policies purchased at the same time and associated with a corporation or its affiliates, a trust, or a partnership, is $50,000. 48 55 MINIMUM MONTHLY PREMIUM An amount stated in the Policy, the payment of which each month will keep the Policy from entering a Grace Period during the Policy Protection Period. MONTHLY DEDUCTION The amount deducted in advance from the Account Value on each Monthly Policy Date. It includes the Policy Administration Charge, the Cost of Insurance Charge, and, if applicable, the Underwriting Charge and the charge for the Term Rider. 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 Date, the Monthly Policy Date will be deemed to be the next Valuation Date. NET ACCOUNT VALUE The Account Value of a Policy less any outstanding Policy loans and accrued interest thereon. NET AMOUNT AT RISK The amount by which (a) the Death Benefit, plus any outstanding Policy loans and accrued interest, and plus any unpaid Monthly Deductions, and divided by 1.0032734 (to take into account earnings of 4% per annum solely for the purpose of computing Net Amount at Risk), exceeds (b) the Account Value. NET CASH SURRENDER VALUE The Cash Surrender Value of a policy less any outstanding Policy Loans and accrued interest thereon. NET PREMIUM The remainder of a premium after the deduction of the Premium Loads. OWNER The person(s) or entity(ies) entitled to exercise the rights granted in the Policy. POLICY ADMINISTRATION CHARGE A charge currently in the amount of $5.50 per month included in the Monthly Deduction, which is intended to reimburse National Life for ordinary administrative expenses. National Life reserves the right to increase this charge up to an amount equal to $8.00 per month. POLICY ANNIVERSARY The same day and month as the Date of Issue in each later year. POLICY PROTECTION PERIOD The first five years after the Date of Issue of a Policy during which the Policy will not lapse regardless of whether net Account value is sufficient to cover the Monthly Deductions, provided that premium payments at least equal to the Cumulative Minimum Monthly Premium have been paid. POLICY YEAR A year that starts on the Date of Issue or on a Policy Anniversary. PREMIUM LOADS A charge deducted from each premium payment, which consists of the Distribution Charge and the applicable Premium Tax Charge PREMIUM TAX CHARGE A charge deducted from each premium payment to cover the cost of all applicable state and local premium taxes. 49 56 RATE CLASS The classification of the Insured for cost of insurance purposes. The Rate Classes are: for each of guaranteed issue, simplified issue, and full medical underwriting, there are male non-smoker, female non-smoker, unisex non-smoker, male smoker, female smoker, unisex nonsmoker, unisex unismoker, male unismoker, and female unismoker. For full medical underwriting cases, preferred and substandard rate classes may also apply. SUPPLEMENTAL TERM INSURANCE AMOUNT Additional insurance coverage provided by the Term Rider, equal to, under Option A, the Term Insurance Amount stated in the Policy less any excess of (a) the Policy's Death Benefit Standard over (b) the Policy's Face Amount on the date of the Insured's death, less the amount of any Monthly Deductions then due, and less any outstanding Policy loans and accrued interest thereon, but not less than zero. Under Option B, the Supplemental Term Insurance Amount is equal to the Term Insurance Amount stated in the Policy less any excess of (a) the Policy's Death Benefit Standard over (b) the Policy's Face Amount on the date of the Insured's death, plus the Account Value of the Policy on the date of the Insured's Death, less the amount of any Monthly Deductions then due, and less any outstanding Policy loans and accrued interest thereon, but not less than zero. TARGET PREMIUM An amount equal to 1.25 times the annual whole life premium which would apply to a Policy calculated by using the applicable 1980 Commissioners Standard Ordinary Mortality Table and an interest rate of 3.5%. TERM INSURANCE AMOUNT An amount stated in the Policy on which the Supplemental Term Insurance Amount is based. TERM RIDER An optional benefit that may be included in a Policy at the owner's option, which provides additional insurance coverage in the form of the Supplemental Term Insurance Amount. THIRD PARTY ADMINISTRATOR The administrator of the Policy appointed by National Life, McCamish Systems, LLC, located at 6425 Powers Ferry Road, Third Floor, Atlanta, Georgia 30339. VALUATION DATE 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 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 Dates. Each Valuation Period includes a Valuation Date and any non-Valuation Date or consecutive non-Valuation Dates 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 Policy's Net Account Value. 50 57 APPENDIX A ILLUSTRATION OF DEATH BENEFITS, ACCOUNT VALUES AND NET CASH SURRENDER VALUES The following tables illustrate how the Death Benefits, Account Values and Net Cash Surrender Values of a Policy may change with the investment experience of the Separate Account. The tables show how the Death Benefits, Account Values and Net Cash Surrender Values of a Policy issued to an Insured of a 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-10 illustrate a Policy issued to a male Insured, Age 40 in the full medical underwriting nonsmoker preferred Rate Class with a Face Amount of $250,000 and Planned Periodic Premiums of $3,000 paid at the beginning of each Policy Year. The Death Benefits, Account Values and Net Cash Surrender Values would be lower if the Insured was in a smoker or substandard class, a guaranteed issue class or a simplified issue 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 charge for cost of insurance is based on the maximum level permitted under the Policy (based on the applicable 1980 CSO Table); the columns under the heading "Current" assume that throughout the life of the Policy, the monthly charge for cost of insurance is based on the current cost of insurance rate, and the Mortality and Expense Risk Charge and the Policy Administration Charge are at the current rates. The amounts shown in all tables reflect (1) the Mortality and Expense Risk Charge, (2) the Separate Account Administration Charge, and (3) an averaging of certain other asset charges described below that may be assessed under the Policy. The other asset charges reflected in the Current and Guaranteed illustrations equals an average of 0.84%. This total is based on an assumption that an Owner allocates the Policy values equally among the Subaccounts of the Separate Account. These asset charges take into account expense reimbursement arrangements expected to be in place for 2001 for some of the Portfolios. In the absence of the reimbursement arrangements for some of the Portfolios, the other asset charges would have totalled an average of 1.00%. If the reimbursement agreements were discontinued, the Account Values and Net Cash Surrender Values of a Policy which allocates Policy Values equally among the Subaccounts would be lower than those shown in the following tables. For information on Fund and Portfolio expenses, see the prospectuses for the Funds accompanying this prospectus. The tables also reflect the fact that no charges for Federal or state income taxes are currently made against the Separate Account. 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 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. Upon request, National Life will provide a comparable illustration based upon the proposed Insured's Age and Rate Class, the Death Benefit Option, the Death Benefit compliance test, Face Amount and Planned Periodic Premiums requested and the application of the Term Rider, if requested. A-1 58 NATIONAL LIFE INSURANCE COMPANY SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE $250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL DEATH BENEFIT OPTION A ANNUAL PREMIUM $3,000 PREFERRED CASH VALUE ACCUMULATION TEST NONSMOKER ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 0% (NET ANNUAL RATE OF RETURN OF -1.52% FOR GUARANTEED CHARGES IN ALL YEARS. FOR CURRENT CHARGES, -1.15% FOR THE FIRST SEVEN YEARS, -1.05% FOR THE NEXT THREE YEARS, -0.95% FOR THE NEXT 10 YEARS, AND -0.90% FOR YEARS AFTER THE TWENTIETH YEAR)
Guaranteed Current Premium ------------------------ ----------------- End of Accumulated Cash Cash Policy at 5% Int. Account Surrender Death Account Surrender Death Year Per Year Value Value Benefit Value Value Benefit ---- -------- ----- ----- ------- ----- ----- ------- 1 3,150 1,834 1,982 250,000 2,343 2,492 250,000 2 6,458 3,517 3,663 250,000 4,552 4,699 250,000 3 9,930 5,134 5,134 250,000 6,686 6,686 250,000 4 13,577 6,681 6,681 250,000 8,765 8,765 250,000 5 17,406 8,158 8,158 250,000 10,794 10,794 250,000 6 21,426 9,601 9,601 250,000 12,819 12,819 250,000 7 25,647 10,964 10,964 250,000 14,792 14,792 250,000 8 30,080 12,539 12,539 250,000 17,029 17,029 250,000 9 34,734 14,023 14,023 250,000 19,209 19,209 250,000 10 39,620 15,410 15,410 250,000 21,329 21,329 250,000 11 44,751 16,695 16,695 250,000 23,407 23,407 250,000 12 50,139 17,867 17,867 250,000 25,413 25,413 250,000 13 55,796 18,909 18,909 250,000 27,332 27,332 250,000 14 61,736 19,811 19,811 250,000 29,164 29,164 250,000 15 67,972 20,555 20,555 250,000 30,913 30,913 250,000 16 74,521 21,127 21,127 250,000 32,568 32,568 250,000 17 81,397 21,510 21,510 250,000 34,134 34,134 250,000 18 88,617 21,695 21,695 250,000 35,608 35,608 250,000 19 96,198 21,667 21,667 250,000 36,977 36,977 250,000 20 104,158 21,400 21,400 250,000 38,232 38,232 250,000 25 150,340 15,275 15,275 250,000 42,492 42,492 250,000 30 209,282 0 0 0 42,121 42,121 250,000
The Death Benefit may, and the Account Values and Cash Surrender Values will, differ if premiums are paid in different amounts or frequencies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
Guaranteed Current Premium -------------------------- ----------------- End of Accumulated Cash Cash Policy at 5% Int. Account Surrender Death Account Surrender Death Year Per Year Value Value Benefit Value Value Benefit ---- -------- ----- ----- ------- ----- ----- ------- 1 3,150 1,964 2,120 250,000 2,489 2,646 250,000 2 6,458 3,885 4,048 250,000 4,985 5,150 250,000 3 9,930 5,850 5,850 250,000 7,550 7,550 250,000 4 13,577 7,855 7,855 250,000 10,206 10,206 250,000 5 17,406 9,903 9,903 250,000 12,963 12,963 250,000 6 21,426 12,032 12,032 250,000 15,875 15,875 250,000 7 25,647 14,197 14,197 250,000 18,897 18,897 250,000 8 30,080 16,711 16,711 250,000 22,374 22,374 250,000 9 34,734 19,271 19,271 250,000 25,990 25,990 250,000 10 39,620 21,873 21,873 250,000 29,749 29,749 250,000 11 44,751 24,516 24,516 250,000 33,685 33,685 250,000 12 50,139 27,189 27,189 250,000 37,770 37,770 250,000 13 55,796 29,878 29,878 250,000 42,000 42,000 250,000 14 61,736 32,574 32,574 250,000 46,380 46,380 250,000 15 67,972 35,261 35,261 250,000 50,926 50,926 250,000 16 74,521 37,926 37,926 250,000 55,636 55,636 250,000 17 81,397 40,556 40,556 250,000 60,527 60,527 250,000 18 88,617 43,140 43,140 250,000 65,607 65,607 250,000 19 96,198 45,668 45,668 250,000 70,879 70,879 250,000 20 104,158 48,115 48,115 250,000 76,348 76,348 250,000 25 150,340 58,170 58,170 250,000 107,223 107,223 250,000 30 209,282 60,113 60,113 250,000 145,001 145,001 250,000
The Death Benefit may, and the Account Values and Net Cash Surrender Values will, differ if premiums are paid in different amounts or frequencies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
Guaranteed Current Premium ------------------------ --------------- End of Accumulated Cash Cash Policy at 5% Int. Account Surrender Death Account Surrender Death Year Per Year Value Value Benefit Value Value Benefit ---- -------- ----- ----- ------- ----- ----- ------- 1 3,150 2,093 2,259 250,000 2,635 2,801 250,000 2 6,458 4,268 4,451 250,000 5,435 5,619 250,000 3 9,930 6,627 6,627 250,000 8,483 8,483 250,000 4 13,577 9,182 9,182 250,000 11,826 11,826 250,000 5 17,406 11,955 11,955 250,000 15,502 15,502 250,000 6 21,426 15,009 15,009 250,000 19,595 19,595 250,000 7 25,647 18,323 18,323 250,000 24,100 24,100 250,000 8 30,080 22,253 22,253 250,000 29,425 29,425 250,000 9 34,734 26,531 26,531 250,000 35,299 35,299 250,000 10 39,620 31,189 31,189 250,000 41,779 41,779 250,000 11 44,751 36,266 36,266 250,000 48,976 48,976 250,000 12 50,139 41,795 41,795 250,000 56,923 56,923 250,000 13 55,796 47,817 47,817 250,000 65,693 65,693 250,000 14 61,736 54,379 54,379 250,000 75,383 75,383 250,000 15 67,972 61,529 61,529 250,000 86,104 86,104 250,000 16 74,521 69,331 69,331 250,000 97,971 97,971 250,000 17 81,397 77,853 77,853 250,000 111,126 111,126 250,000 18 88,617 87,182 87,182 250,000 125,719 125,719 254,985 19 96,198 97,416 97,416 250,000 141,847 141,847 280,132 20 104,158 108,659 108,659 250,000 159,619 159,619 307,065 25 150,340 183,872 183,872 312,249 280,079 280,079 475,626 30 209,282 296,024 296,024 449,847 474,652 474,652 721,297
The Death Benefit may, and the Account Values and Net Cash Surrender Values will, differ if premiums are paid in different amounts or frequencies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
Guaranteed Current Premium ------------------------ ------------------ End of Accumulated Cash Cash Policy at 5% Int. Account Surrender Death Account Surrender Death Year Per Year Value Value Benefit Value Value Benefit ---- -------- ----- ----- ------- ----- ----- ------- 1 3,150 1,835 1,982 250,000 2,344 2,492 250,000 2 6,458 3,518 3,663 250,000 4,553 4,699 250,000 3 9,930 5,136 5,136 250,000 6,688 6,688 250,000 4 13,577 6,683 6,683 250,000 8,768 8,768 250,000 5 17,406 8,160 8,160 250,000 10,797 10,797 250,000 6 21,426 9,605 9,605 250,000 12,824 12,824 250,000 7 25,647 10,969 10,969 250,000 14,798 14,798 250,000 8 30,080 12,545 12,545 250,000 17,036 17,036 250,000 9 34,734 14,030 14,030 250,000 19,218 19,218 250,000 10 39,620 15,418 15,418 250,000 21,341 21,341 250,000 11 44,751 16,706 16,706 250,000 23,421 23,421 250,000 12 50,139 17,879 17,879 250,000 25,429 25,429 250,000 13 55,796 18,923 18,923 250,000 27,351 27,351 250,000 14 61,736 19,827 19,827 250,000 29,185 29,185 250,000 15 67,972 20,573 20,573 250,000 30,937 30,937 250,000 16 74,521 21,146 21,146 250,000 32,595 32,595 250,000 17 81,397 21,532 21,532 250,000 34,165 34,165 250,000 18 88,617 21,719 21,719 250,000 35,642 35,642 250,000 19 96,198 21,693 21,693 250,000 37,015 37,015 250,000 20 104,158 21,429 21,429 250,000 38,273 38,273 250,000 25 150,340 15,344 15,344 250,000 42,616 42,616 250,000 30 209,282 0 0 0 42,335 42,335 250,000
The Death Benefit may, and the Account Values and Net Cash Surrender Values will, differ if premiums are paid in different amounts or frequencies. IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH BENEFIT, ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT, ACCOUNT VALUE AND NET CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR 12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. A-5 62 NATIONAL LIFE INSURANCE COMPANY SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE $250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL DEATH BENEFIT OPTION A ANNUAL PREMIUM $3,000 PREFERRED GUIDELINE PREMIUM TEST NONSMOKER ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 6% (NET ANNUAL RATE OF RETURN OF 4.39% FOR GUARANTEED CHARGES IN ALL YEARS. FOR CURRENT CHARGES, 4.78% FOR THE FIRST SEVEN YEARS, 4.89% FOR THE NEXT THREE YEARS, 4.99% FOR THE NEXT 10 YEARS, AND 5.04% FOR YEARS AFTER THE TWENTIETH YEAR)
Guaranteed Current Premium ------------------------- ----------------- End of Accumulated Cash Cash Policy at 5% Int. Account Surrender Death Account Surrender Death Year Per Year Value Value Benefit Value Value Benefit ---- -------- ----- ----- ------- ----- ----- ------- 1 3,150 1,964 2,120 250,000 2,489 2,646 250,000 2 6,458 3,885 4,048 250,000 4,985 5,150 250,000 3 9,930 5,850 5,850 250,000 7,550 7,550 250,000 4 13,577 7,855 7,855 250,000 10,206 10,206 250,000 5 17,406 9,903 9,903 250,000 12,963 12,963 250,000 6 21,426 12,032 12,032 250,000 15,875 15,875 250,000 7 25,647 14,197 14,197 250,000 18,897 18,897 250,000 8 30,080 16,711 16,711 250,000 22,374 22,374 250,000 9 34,734 19,271 19,271 250,000 25,990 25,990 250,000 10 39,620 21,873 21,873 250,000 29,749 29,749 250,000 11 44,751 24,516 24,516 250,000 33,685 33,685 250,000 12 50,139 27,189 27,189 250,000 37,770 37,770 250,000 13 55,796 29,878 29,878 250,000 42,000 42,000 250,000 14 61,736 32,574 32,574 250,000 46,380 46,380 250,000 15 67,972 35,261 35,261 250,000 50,926 50,926 250,000 16 74,521 37,926 37,926 250,000 55,636 55,636 250,000 17 81,397 40,556 40,556 250,000 60,527 60,527 250,000 18 88,617 43,140 43,140 250,000 65,607 65,607 250,000 19 96,198 45,668 45,668 250,000 70,879 70,879 250,000 20 104,158 48,115 48,115 250,000 76,348 76,348 250,000 25 150,340 58,170 58,170 250,000 107,223 107,223 250,000 30 209,282 60,113 60,113 250,000 145,001 145,001 250,000
The Death Benefit may, and the Account Values and Net Cash Surrender Values will, differ if premiums are paid in different amounts or frequencies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
Guaranteed Current Premium ------------------------ ----------------- End of Accumulated Cash Cash Policy at 5% Int. Account Surrender Death Account Surrender Death Year Per Year Value Value Benefit Value Value Benefit ---- -------- ----- ----- ------- ----- ----- ------- 1 3,150 2,093 2,259 250,000 2,635 2,801 250,000 2 6,458 4,268 4,451 250,000 5,435 5,619 250,000 3 9,930 6,627 6,627 250,000 8,483 8,483 250,000 4 13,577 9,182 9,182 250,000 11,826 11,826 250,000 5 17,406 11,955 11,955 250,000 15,502 15,502 250,000 6 21,426 15,009 15,009 250,000 19,595 19,595 250,000 7 25,647 18,323 18,323 250,000 24,100 24,100 250,000 8 30,080 22,253 22,253 250,000 29,425 29,425 250,000 9 34,734 26,531 26,531 250,000 35,299 35,299 250,000 10 39,620 31,189 31,189 250,000 41,779 41,779 250,000 11 44,751 36,266 36,266 250,000 48,976 48,976 250,000 12 50,139 41,795 41,795 250,000 56,923 56,923 250,000 13 55,796 47,817 47,817 250,000 65,693 65,693 250,000 14 61,736 54,379 54,379 250,000 75,383 75,383 250,000 15 67,972 61,529 61,529 250,000 86,104 86,104 250,000 16 74,521 69,331 69,331 250,000 97,971 97,971 250,000 17 81,397 77,853 77,853 250,000 111,126 111,126 250,000 18 88,617 87,182 87,182 250,000 125,721 125,721 250,000 19 96,198 97,416 97,416 250,000 141,925 141,925 250,000 20 104,158 108,659 108,659 250,000 159,931 159,931 250,000 25 150,340 185,504 185,504 250,000 285,387 285,387 348,172 30 209,282 313,968 313,968 364,202 494,561 494,561 573,691
The Death Benefit may, and the Account Values and Net Cash Surrender Values will, differ if premiums are paid in different amounts or frequencies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
Guaranteed Current Premium ------------------------ ---------------- End of Accumulated Cash Cash Policy at 5% Int. Account Surrender Death Account Surrender Death Year Per Year Value Value Benefit Value Value Benefit ---- -------- ----- ----- ------- ----- ----- ------- 1 3,150 1,830 1,977 251,830 2,343 2,491 252,343 2 6,458 3,503 3,649 253,503 4,550 4,696 254,550 3 9,930 5,107 5,107 255,107 6,680 6,680 256,680 4 13,577 6,634 6,634 256,634 8,753 8,753 258,753 5 17,406 8,086 8,086 258,086 10,772 10,772 260,772 6 21,426 9,498 9,498 259,498 12,785 12,785 262,785 7 25,647 10,822 10,822 260,822 14,743 14,743 264,743 8 30,080 12,350 12,350 262,350 16,959 16,959 266,959 9 34,734 13,777 13,777 263,777 19,114 19,114 269,114 10 39,620 15,096 15,096 265,096 21,202 21,202 271,202 11 44,751 16,304 16,304 266,304 23,240 23,240 273,240 12 50,139 17,383 17,383 267,383 25,195 25,195 275,195 13 55,796 18,319 18,319 268,319 27,053 27,053 277,053 14 61,736 19,100 19,100 269,100 28,809 28,809 278,809 15 67,972 19,704 19,704 269,704 30,468 30,468 280,468 16 74,521 20,118 20,118 270,118 32,016 32,016 282,016 17 81,397 20,323 20,323 270,323 33,459 33,459 283,459 18 88,617 20,310 20,310 270,310 34,790 34,790 284,790 19 96,198 20,066 20,066 270,066 35,996 35,996 285,996 20 104,158 19,562 19,562 269,562 37,062 37,062 287,062 25 150,340 12,064 12,064 262,064 39,983 39,983 289,983 30 209,282 0 0 0 37,298 37,298 287,298
The Death Benefit may, and the Account Values and Net Cash Surrender Values will, differ if premiums are paid in different amounts or frequencies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
Guaranteed Current Premium ------------------------- ---------------- End of Accumulated Cash Cash Policy at 5% Int. Account Surrender Death Account Surrender Death Year Per Year Value Value Benefit Value Value Benefit ---- -------- ----- ----- ------- ----- ----- ------- 1 3,150 1,958 2,115 251,958 2,488 2,645 252,488 2 6,458 3,869 4,032 253,869 4,982 5,146 254,982 3 9,930 5,817 5,817 255,817 7,541 7,541 257,541 4 13,577 7,797 7,797 257,797 10,189 10,189 260,189 5 17,406 9,810 9,810 259,810 12,933 12,933 262,933 6 21,426 11,894 11,894 261,894 15,826 15,826 265,826 7 25,647 14,000 14,000 264,000 18,823 18,823 268,823 8 30,080 16,438 16,438 266,438 22,267 22,267 272,267 9 34,734 18,903 18,903 268,903 25,840 25,840 275,840 10 39,620 21,387 21,387 271,387 29,543 29,543 279,543 11 44,751 23,885 23,885 273,885 33,406 33,406 283,406 12 50,139 26,381 26,381 276,381 37,397 37,397 287,397 13 55,796 28,855 28,855 278,855 41,506 41,506 291,506 14 61,736 31,291 31,291 281,291 45,733 45,733 295,733 15 67,972 33,666 33,666 283,666 50,088 50,088 300,088 16 74,521 35,956 35,956 285,956 54,563 54,563 304,563 17 81,397 38,140 38,140 288,140 59,168 59,168 309,168 18 88,617 40,197 40,197 290,197 63,901 63,901 313,901 19 96,198 42,106 42,106 292,106 68,755 68,755 318,755 20 104,158 43,827 43,827 293,827 73,718 73,718 323,718 25 150,340 48,037 48,037 298,037 100,135 100,135 350,135 30 209,282 38,521 38,521 288,521 127,634 127,634 377,634
The Death Benefit may, and the Account Values and Net Cash Surrender Values will, differ if premiums are paid in different amounts or frequencies. IT IS EMPHASIZED THAT THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN. THE DEATH BENEFIT, ACCOUNT VALUE AND NET CASH SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6% OR 12% OVER A PERIOD OF YEARS, BUT ALSO FLUCTUATED ABOVE OR BELOW THAT AVERAGE FOR INDIVIDUAL POLICY YEARS. THE DEATH BENEFIT, ACCOUNT VALUE AND NET CASH SURRENDER VALUE WOULD ALSO BE DIFFERENT FROM THOSE SHOWN, DEPENDING ON THE INVESTMENT ALLOCATIONS MADE TO THE SUBACCOUNTS OF THE SEPARATE ACCOUNT AND THE DIFFERENT RATES OF RETURN OF THE SUBACCOUNTS IF THE ACTUAL RATES OF INVESTMENT RETURN APPLICABLE TO THE POLICY AVERAGED 0%, 6%, OR 12%, BUT VARIED ABOVE OR BELOW THAT AVERAGE FOR PARTICULAR SUBACCOUNTS. NO REPRESENTATIONS CAN BE MADE THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. A-9 66 NATIONAL LIFE INSURANCE COMPANY SENTINEL BENEFIT PROVIDER FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE $250,000 FACE AMOUNT MALE INSURED ISSUE AGE 40 FULL MEDICAL DEATH BENEFIT OPTION B ANNUAL PREMIUM $3,000 PREFERRED GUIDELINE PREMIUM TEST NONSMOKER ASSUMING HYPOTHETICAL GROSS ANNUAL RATE OF RETURN 12% (NET ANNUAL RATE OF RETURN OF 10.30% FOR GUARANTEED CHARGES IN ALL YEARS. FOR CURRENT CHARGES, 10.72% FOR THE FIRST SEVEN YEARS, 10.83% FOR THE NEXT THREE YEARS, 10.94% FOR THE NEXT 10 YEARS, AND 10.99% FOR YEARS AFTER THE TWENTIETH YEAR)
Guaranteed Current Premium ------------------------ ---------------- End of Accumulated Cash Cash Policy at 5% Int. Account Surrender Death Account Surrender Death Year Per Year Value Value Benefit Value Value Benefit ---- -------- ----- ----- ------- ----- ----- ------- 1 3,150 2,088 2,253 252,088 2,634 2,800 252,634 2 6,458 4,250 4,433 254,250 5,431 5,615 255,431 3 9,930 6,588 6,588 256,588 8,473 8,473 258,473 4 13,577 9,112 9,112 259,112 11,806 11,806 261,806 5 17,406 11,840 11,840 261,840 15,464 15,464 265,464 6 21,426 14,831 14,831 264,831 19,533 19,533 269,533 7 25,647 18,059 18,059 268,059 24,003 24,003 274,003 8 30,080 21,873 21,873 271,873 29,278 29,278 279,278 9 34,734 25,999 25,999 275,999 35,084 35,084 285,084 10 39,620 30,458 30,458 280,458 41,473 41,473 291,473 11 44,751 35,278 35,278 285,278 48,545 48,545 298,545 12 50,139 40,479 40,479 290,479 56,325 56,325 306,325 13 55,796 46,080 46,080 296,080 64,871 64,871 314,871 14 61,736 52,108 52,108 302,108 74,262 74,262 324,262 15 67,972 58,583 58,583 308,583 84,595 84,595 334,595 16 74,521 65,531 65,531 315,531 95,957 95,957 345,957 17 81,397 72,981 72,981 322,981 108,466 108,466 358,466 18 88,617 80,971 80,971 330,971 122,237 122,237 372,237 19 96,198 89,537 89,537 339,537 137,396 137,396 387,396 20 104,158 98,706 98,706 348,706 154,076 154,076 404,076 25 150,340 154,776 154,776 404,776 266,922 266,922 516,922 30 209,282 229,596 229,596 479,596 449,808 449,808 699,808
The Death Benefit may, and the Account Values and Net Cash Surrender Values will, differ if premiums are paid in different amounts or frequencies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eport of Independent Accountants To the Board of Directors and Stockholder of National Life Insurance Company: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations and comprehensive income, changes in stockholder's equity, and cash flows present fairly, in all material respects, the financial position of National Life Insurance Company and its subsidiaries (National Life) at December 31, 2000 and 1999, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of National Life'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 auditing standards generally accepted in the United States of America 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. Boston, Massachusetts February 28, 2001 F-2 69
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, - ---------------------------------------------------------------------------------------------------- (In Thousands) 2000 1999 - ---------------------------------------------------------------------------------------------------- ASSETS: Cash and cash equivalents $ 258,807 $ 296,468 Available-for-sale debt and equity securities 5,232,837 5,110,272 Trading equity securities 13,845 11,793 Mortgage loans 1,229,954 1,162,956 Policy loans 765,005 761,235 Real estate investments 75,413 86,003 Other invested assets 153,995 154,126 - ---------------------------------------------------------------------------------------------------- Total cash and invested assets 7,729,856 7,582,853 Deferred policy acquisition costs 539,690 538,127 Accrued investment income 119,966 118,273 Premiums and fees receivable 23,639 22,033 Deferred income taxes 70,428 101,183 Amounts recoverable from reinsurers 331,698 302,607 Present value of future profits of insurance acquired 99,063 113,851 Property and equipment, net 54,623 45,609 Other assets 157,888 130,081 Separate account assets 491,050 400,867 - ---------------------------------------------------------------------------------------------------- Total assets $ 9,617,901 $ 9,355,484 ==================================================================================================== LIABILITIES: Policy benefit liabilities $ 4,118,666 $ 4,039,966 Policyholders' accounts 3,511,239 3,503,328 Policyholders' deposits 41,136 46,189 Policy claims payable 84,137 39,262 Policyholders' dividends 53,147 53,552 Amounts payable to reinsurers 27,661 19,213 Collateral held on loaned securities 25,931 115,524 Other liabilities and accrued expenses 306,674 274,172 Debt 74,096 76,092 Separate account liabilities 491,050 400,867 - ---------------------------------------------------------------------------------------------------- Total liabilities 8,733,737 8,568,165 - ---------------------------------------------------------------------------------------------------- MINORITY INTERESTS 12,401 12,331 EQUITY: Common stock (authorized 2.5 million shares at $1 par value, 2.5 million shares issued and outstanding) 2,500 2,500 Additional paid in capital 5,000 5,000 Retained earnings 885,889 825,188 Accumulated other comprehensive loss (21,626) (57,700) - ---------------------------------------------------------------------------------------------------- Total equity 871,763 774,988 - ---------------------------------------------------------------------------------------------------- Total liabilities, minority interests and equity $ 9,617,901 $ 9,355,484 ====================================================================================================
The accompanying notes are an integral part of these financial statements. F-3 70 NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, - ---------------------------------------------------------------------------------------------------- (In Thousands) 2000 1999 - ---------------------------------------------------------------------------------------------------- REVENUES: Insurance premiums $ 380,452 $ 383,395 Policy and contract charges 66,806 54,624 Net investment income 528,764 565,818 Net investment (losses) gains (2,007) 3,140 Mutual fund commission and fee income 63,992 56,232 Other income 17,974 19,847 - ---------------------------------------------------------------------------------------------------- Total revenue 1,055,981 1,083,056 - ---------------------------------------------------------------------------------------------------- BENEFITS AND EXPENSES: Increase in policy liabilities 86,068 112,923 Policy benefits 353,312 330,334 Policyholders' dividends 111,000 106,858 Interest credited to policyholders' accounts 157,388 207,736 Operating expenses 170,272 164,899 Policy acquisition expenses, net 85,635 76,862 - ---------------------------------------------------------------------------------------------------- Total benefits and expenses 963,675 999,612 - ---------------------------------------------------------------------------------------------------- Income before income taxes and minority interests 92,306 83,444 Income tax expense 23,906 17,380 - ---------------------------------------------------------------------------------------------------- Income before minority interests 68,400 66,064 Minority interests 6,699 9,436 - ---------------------------------------------------------------------------------------------------- NET INCOME $ 61,701 $ 56,628 ====================================================================================================
The accompanying notes are an integral part of these financial statements. F-4 71 NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, - ---------------------------------------------------------------------------------------------------- (In Thousands) 2000 1999 - ---------------------------------------------------------------------------------------------------- Net income $ 61,701 $ 56,628 OTHER COMPREHENSIVE INCOME (LOSS) : Unrealized gains (losses) on available-for-sale securities, net 36,074 (163,943) - ---------------------------------------------------------------------------------------------------- Total comprehensive income (loss) $ 96,775 $ (107,315) ====================================================================================================
The accompanying notes are an integral part of these financial statements. F-5 72 NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, - ---------------------------------------------------------------------------------------------------- (In Thousands) 2000 1999 - ---------------------------------------------------------------------------------------------------- COMMON STOCK: Balance at January 1 $ 2,500 $ - 2.5 million shares at $1 par issued via equity transfer from retained earnings pursuant to mutual holding company reorganization - 2,500 ---------------------------------------------------------------------------------------------------- Balance at December 31 $ 2,500 $ 2,500 ==================================================================================================== ADDITIONAL PAID IN CAPITAL: Balance at January 1 $ 5,000 $ - Capital contributed via equity transfer from retained earnings pursuant to mutual holding company reorganization - 5,000 - ---------------------------------------------------------------------------------------------------- Balance at December 31 $ 5,000 $ 5,000 ==================================================================================================== RETAINED EARNINGS: Balance at January 1 $ 825,188 $ 776,060 Transfer to common stock pursuant to mutual holding company reorganization - (2,500) Transfer to additional paid in capital pursuant to mutual holding company reorganization - (5,000) Net income 61,701 56,628 Dividend to stockholder (1,000) - - ---------------------------------------------------------------------------------------------------- Balance at December 31 $ 885,889 $ 825,188 ==================================================================================================== ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME: Balance at January 1 $ (57,700) $ 106,243 Unrealized gains (losses) on available-for-sale securities, net 36,074 (163,943) - ---------------------------------------------------------------------------------------------------- Balance at December 31 $ (21,626) $ (57,700) ==================================================================================================== TOTAL EQUITY: Balance at December 31 $ 871,763 $ 774,988 ====================================================================================================
The accompanying notes are an integral part of these financial statements. F-6 73 NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------------- (In Thousands) 2000 1999 - ------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 61,701 $ 56,628 Adjustments to reconcile net income to net cash provided by operations: Change in: Accrued investment income (1,693) 976 Policy liabilities 97,802 82,699 Deferred policy acquisition costs (42,200) (36,857) Policyholders' dividends (405) (1,205) Deferred income taxes 10,031 9,883 Net realized investment losses (gains) 2,007 (3,140) Depreciation 7,539 7,339 Other 5,046 4,767 - ------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 139,828 121,090 - ------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales, maturities and repayments of investments 1,198,810 1,576,457 Cost of available-for-sale investments acquired (1,323,987) (1,778,511) Acquisition of remaining interest in LSWNH, Inc. - (61,632) Other 5,740 14,788 - ------------------------------------------------------------------------------------------------------- Net cash used by investing activities (119,437) (248,898) - ------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Policyholders' deposits, including interest credited 525,495 579,795 Policyholders' withdrawals, including policy charges (517,584) (424,599) Net decrease in securities lending liabilities (89,593) (77,967) Dividend to stockholder (1,000) - Other 24,630 (902) - ------------------------------------------------------------------------------------------------------- Net cash (used by) provided by financing activities (58,052) 76,327 - ------------------------------------------------------------------------------------------------------- NET DECREASE IN CASH AND CASH EQUIVALENTS (37,661) (51,481) CASH AND CASH EQUIVALENTS: Beginning of year 296,468 347,949 - ------------------------------------------------------------------------------------------------------- End of year $ 258,807 $ 296,468 =======================================================================================================
The accompanying notes are an integral part of these financial statements. F-7 74 NATIONAL LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - NATURE OF OPERATIONS National Life Insurance Company (National Life) and its subsidiaries and affiliates (the Company) offer a broad range of financial products and services, including life insurance, annuities, disability income insurance, mutual funds, and investment advisory and administration services. National Life was chartered in 1848, and is also known by its registered trade name "National Life of Vermont". National Life employs about 994 people, primarily concentrated in Montpelier, Vermont and Dallas, Texas. On January 1, 1999, pursuant to a mutual holding company reorganization, National Life converted from a mutual to a stock life insurance company. NLV Financial Corp. owns all outstanding shares of National Life and is a wholly-owned subsidiary of National Life Holding Company. National life Holding Company and its subsidiaries and affiliates are known as the National Life Group. See Note 13 for more information. Insurance operations within the Company develop and distribute individual life insurance and annuity products. The Company markets this diverse product portfolio to small business owners, professionals, and other middle to upper income individuals. The Company provides financial solutions in the form of estate, business succession and retirement planning, deferred compensation and other key executive fringe benefit plans, and asset management. Insurance and annuity products are primarily distributed through 36 general agencies in major metropolitan areas, a system of managing general agents, and independent brokers throughout the United States of America. The Company has in excess of 300,000 policyholders and is licensed to do business in all 50 states and the District of Columbia through its member companies. About 25% of the Company's total collected premiums and deposits are from residents of New York and California. Subsidiaries and affiliates of the Company also distribute and provide investment advisory and administrative services to the Sentinel Group Funds, Inc. The Sentinel Funds' $2.9 billion of net assets represent fifteen mutual funds managed on behalf of about 122,000 individual, corporate, and institutional shareholders worldwide. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The accompanying consolidated financial statements of the Company have been prepared in conformity with accounting principles generally accepted in the United States (GAAP). The consolidated financial statements include the accounts of the Company and its subsidiaries and affiliates. All significant intercompany transactions and balances have been eliminated in consolidation. Certain reclassifications have been made to conform prior periods 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. F-8 75 Available-for-sale and trading debt and equity securities are reported at estimated fair value. Debt and equity securities that experience declines in value that are other than temporary are written down with a corresponding charge to net investment 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 net investment 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 estimated fair value. Investments in joint ventures and limited partnerships are generally carried at cost. Net realized investment gains and losses are recognized using the specific identification method and are reported as net investment gains and losses. Changes in the estimated fair values of available-for-sale debt and equity securities are reflected in comprehensive income after adjustments for related deferred policy acquisition costs, present value of future profits of insurance acquired, income taxes and minority interests. Changes in the fair value of trading equity securities are reflected in net investment gains and losses. POLICY ACQUISITION EXPENSES Commissions and other costs of acquiring 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 other comprehensive income, net of related income taxes. Deferred policy acquisition costs for non-participating term life insurance and disability income insurance are 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. GOODWILL Goodwill is amortized over 20 years using the straight-line method and is periodically evaluated for recoverability. F-9 76 PROPERTY AND EQUIPMENT Property and equipment is reported at depreciated cost. Real property is primarily depreciated over 39.5 years using the straight-line method. Furniture and equipment is depreciated using accelerated depreciation methods over 7 years and 5 years, respectively. SEPARATE ACCOUNTS Separate accounts are segregated funds relating to certain variable annuity and variable life policies, and the Company'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 policyholders' interests in separate account assets, include the actual investment performance of the respective accounts and are not guaranteed. Separate account results relating to these policyholders' interests are excluded from revenues and expenses. Separate account startup investments by National Life's general account are included in other invested assets. 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. Policyholders' account balances for universal life insurance and investment-type annuities represent amounts that inure to the benefit of the policyholders (before surrender charges). POLICYHOLDERS' DIVIDENDS Policyholders' 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 the Company's overall operating results. The dividend scale is approved annually by the Company's Board of Directors. See Note 12 for additional information on contract dividends within the Closed Block. RECOGNITION OF INSURANCE INCOME AND RELATED EXPENSES Premiums from traditional life and certain annuities are recognized as revenue when due from the policyholder. 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 policyholders' accounts. Revenues for these policies consist of mortality charges, policy administration fees and surrender charges deducted from policyholders' accounts. Policy benefits charged to expense include benefit claims in excess of related policyholders' account balances. Premiums from disability income policies are recognized as revenue over the period to which the premiums relate. F-10 77 FEDERAL INCOME TAXES National Life Holding Company will file a consolidated tax return for the tax year ended December 31, 2000. The income tax return will include all members within the National Life Group except Life Insurance Company of the Southwest (LSW) and Insurance Investors Life Insurance Company (IIL). LSW and IIL will file a separate tax return due to tax regulatory requirements. 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. MINORITY INTERESTS Minority interests represent minority partners' interests in entities within the Company. Minority interests attributable to common stockholders are carried on the equity method. Those attributable to preferred stockholders are carried on the cost method, with dividends paid reflected as minority interests within the consolidated financial statements. F-11 78 NOTE 3 - INVESTMENTS DEBT AND EQUITY SECURITIES The amortized cost and estimated fair values of available-for-sale debt and equity securities at December 31 were as follows (in thousands):
Gross Gross Amortized Unrealized Unrealized Estimated 2000 Cost Gains Losses Fair Value - ----------------------------------------------------------------------------------------------- Available-for-sale (AFS) debt and equity securities: U.S. government obligations $ 121,648 $ 2,591 $ 4,419 $ 119,820 Government agencies, authorities and subdivisions 96,274 5,539 833 100,980 Public utilities 530,592 19,890 12,329 538,153 Corporate 2,522,314 52,538 103,370 2,471,482 Private placements 694,646 19,124 17,356 696,414 Mortgage-backed securities 1,124,091 19,227 4,910 1,138,408 - ----------------------------------------------------------------------------------------------- Total AFS debt securities 5,089,565 118,909 143,217 5,065,257 Preferred stocks 140,242 1,190 5,593 135,839 Common stocks 39,497 426 8,182 31,741 - ----------------------------------------------------------------------------------------------- Total AFS debt and equity securities $ 5,269,304 $ 120,525 $ 156,992 $ 5,232,837 ===============================================================================================
1999 - ----------------------------------------------------------------------------------------------- AFS debt and equity securities: U.S. government obligations $ 281,194 $ 3,232 $ 19,020 $ 265,406 Government agencies, authorities and subdivisions 118,459 4,010 3,100 119,369 Public utilities 380,253 10,687 17,275 373,665 Corporate 2,462,499 23,937 94,932 2,391,504 Private placements 735,597 9,818 30,172 715,243 Mortgage-backed securities 1,112,382 2,432 37,065 1,077,749 - ----------------------------------------------------------------------------------------------- Total AFS debt securities 5,090,384 54,116 201,564 4,942,936 Preferred stocks 134,852 2,708 8,109 129,451 Common stocks 33,032 7,169 2,316 37,885 - ----------------------------------------------------------------------------------------------- Total AFS debt and equity securities $ 5,258,268 $ 63,993 $ 211,989 $ 5,110,272 ===============================================================================================
F-12 79 Unrealized gains and losses on available-for-sale debt and equity securities included as a component of accumulated other comprehensive income and changes therein for the years ended December 31 were as follows (in thousands):
2000 1999 - --------------------------------------------------------------------------------------- Net unrealized gains (losses) on available-for-sale securities $ 111,529 $ (399,066) Net unrealized gains (losses) on separate accounts 133 (2,652) Related minority interests - 8,672 Related deferred policy acquisition costs (40,635) 116,725 Related present value of future profits of insurance acquired (13,457) 16,353 Related deferred income taxes (21,496) 96,025 - --------------------------------------------------------------------------------------- Increase (decrease) in net unrealized gains (losses) 36,074 (163,943) Balance, beginning of year (57,700) 106,243 - --------------------------------------------------------------------------------------- Balance, end of year $ (21,626) $ (57,700) =======================================================================================
2000 1999 - --------------------------------------------------------------------------------------- Balance, end of year includes: Net unrealized (losses) gains on available-for-sale securities $ (36,467) $ (147,996) Net unrealized gains on separate accounts 3,296 3,163 Related minority interests - - Related deferred policy acquisition costs (1,449) 39,186 Related present value of future profits on insurance acquired 1,349 14,806 Related deferred income taxes 11,645 33,141 - --------------------------------------------------------------------------------------- Balance, end of year $ (21,626) $ (57,700) =======================================================================================
Net other comprehensive income (loss) for 2000 and 1999 of $36.1 million and $(163.9) million is presented net of reclassifications to net income for gross (losses) gains realized during the period of $(10.3) million and $13.9 million and net of tax and deferred acquisition cost offsets of $(6.9) million and $9.4 million, respectively. The amortized cost and estimated fair values of debt securities by contractual maturity at December 31, 2000 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 Cost Fair Value - ------------------------------------------------------------------- Due in one year or less $ 67,912 $ 65,007 Due after one year through five years 1,755,953 1,728,941 Due after five years through ten years 1,318,868 1,311,571 Due after ten years 822,740 821,329 Mortgage-backed securities 1,124,092 1,138,409 - ------------------------------------------------------------------- Total $ 5,089,565 $ 5,065,257 ===================================================================
Information relating to available-for-sale debt security sale transactions for the years ended December 31 is shown below (in thousands):
2000 1999 - ------------------------------------------------------------------- Proceeds from sales $ 702,030 $ 921,594 Gross realized gains $ 9,965 $ 40,496 Gross realized losses $ 16,258 $ 24,312
F-13 80 On January 1, 1999, the Company reclassified certain mutual fund investments from an available-for-sale to a trading classification. The cumulative gross unrealized gain reclassified into net investment gains was $0.6 million. For the years ended December 31, 2000 and 1999, these securities recorded $1.6 million and $0.9 million net investment income and $(1.8) million and $(0.5) million net investment losses, respectively. Cost of trading securities held at December 31, 2000 and 1999 was $15.7 million and $12.1 million, respectively. The Company periodically lends certain U.S. government or corporate bonds to approved counterparties to enhance the yield of its bond portfolio. The Company receives cash collateral for at least 102% 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 were $25.9 million and $115.5 million at December 31, 2000 and 1999, respectively. The Company 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, 2000 and 1999. MORTGAGE LOANS AND REAL ESTATE The distributions of mortgage loans and real estate at December 31 were as follows:
2000 1999 --------------------------- GEOGRAPHIC REGION New England 4.8% 5.4% Middle Atlantic 8.6 9.1 East North Central 11.6 10.1 West North Central 5.2 5.4 South Atlantic 24.4 24.7 East South Central 4.6 5.6 West South Central 10.2 10.1 Mountain 16.4 15.9 Pacific 14.2 13.7 - ------------------------------------------------------------------------- Total 100.0% 100.0% ========================================================================= PROPERTY TYPE - ------------- Residential 0.1% 0.1% Apartment 24.5 24.6 Retail 10.2 11.0 Office Building 36.1 34.9 Industrial 25.7 26.4 Hotel/Motel 2.3 1.8 Other Commercial 1.1 1.2 - ------------------------------------------------------------------------- Total 100.0% 100.0% ========================================================================= Total mortgage loans and real estate (in thousands) $ 1,305,367 $ 1,248,959 =========================================================================
F-14 81 Mortgage loans and related valuation allowances at December 31 were as follows (in thousands):
2000 1999 - --------------------------------------------------------------------- Unimpaired loans $ 1,207,452 $ 1,148,526 Impaired loans without valuation allowances 18,424 6,943 - --------------------------------------------------------------------- Subtotal 1,225,876 1,155,469 - --------------------------------------------------------------------- Impaired loans with valuation allowances 6,463 10,600 Related valuation allowances (2,385) (3,113) - --------------------------------------------------------------------- Subtotal 4,078 7,487 - --------------------------------------------------------------------- Total $ 1,229,954 $ 1,162,956 ===================================================================== Impaired loans: Average recorded investment $ 21,214 $ 19,771 Interest income recognized $ 1,880 $ 2,137 Interest received $ 1,885 $ 2,092
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):
2000 1999 ================================================================================ Additions for impaired loans charged to realized losses $ 118 $ 1,993 Changes to previously established valuation allowances (846) (14) - -------------------------------------------------------------------------------- (Decrease) increase in valuation allowances (728) 1,979 Balance, beginning of year 3,113 1,134 - -------------------------------------------------------------------------------- Balance, end of year $ 2,385 $ 3,113 ================================================================================
NET INVESTMENT INCOME The components of net investment income for the years ended December 31 were as follows (in thousands):
2000 1999 - ---------------------------------------------------------------------- Debt securities interest $ 404,429 $ 404,195 Equity securities dividends 3,555 2,385 Mortgage loan interest 98,064 94,258 Policy loan interest 47,555 46,393 Real estate income 17,277 11,698 Other investment income (10,938) 29,943 - ---------------------------------------------------------------------- Gross investment income 559,942 588,872 Less: investment expenses 31,178 23,054 - ---------------------------------------------------------------------- Net investment income $ 528,764 $ 565,818 ======================================================================
F-15 82 DERIVATIVES The Company 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, the Company's loss is the decrease in the fair value of futures and is limited to the premium paid for the options. The Company purchases options only from highly rated counterparties. However, in the event a counterparty failed to perform, the Company'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. Amortization of the option premium is 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, offset by changes in the intrinsic value of options held and changes in the fair value of futures. The call options are included in other invested assets and are carried at amortized cost plus intrinsic value, if any, of the call options as of the valuation date. The notional amounts and net book value of options and futures at December 31 were as follows (in thousands):
2000 1999 - ---------------------------------------------------------------------------------------------- Notional amounts: Options $ 82,049 $ 166,858 Futures $ 29,040 $ 5,439 ============================================================================================== Book values: Options: Net amortized cost $ 26,278 $ 17,800 Intrinsic value 1,870 18,894 - ---------------------------------------------------------------------------------------------- Book value 28,148 36,694 Futures at fair value (12) 890 - ---------------------------------------------------------------------------------------------- Net book value (included in other invested assets) $ 28,136 $ 37,584 ==============================================================================================
FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying values and estimated fair values of financial instruments at December 31 were as follows (in thousands):
2000 1999 - ----------------------------------------------------------------------------------------------- Carrying Estimated Carrying Estimated Value Fair Value Value Fair Value - ----------------------------------------------------------------------------------------------- Cash and cash equivalents $ 258,807 $ 258,807 $ 296,468 $ 296,468 Available-for-sale debt and equity securities 5,232,837 5,232,837 5,110,272 5,110,272 Trading equity securities 13,845 13,845 11,793 11,793 Mortgage loans 1,229,954 1,264,940 1,162,956 1,177,342 Policy loans 765,005 705,278 761,235 724,953 Derivatives 28,136 19,080 37,584 35,528 Investment products 2,790,629 2,795,106 2,770,295 2,740,443 Debt 74,096 66,285 76,092 62,615
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. F-16 83 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. 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 based on discounted cash flows using current interest rates of similar securities. NOTE 4 - INSURANCE IN-FORCE AND REINSURANCE The Company reinsures certain risks assumed in the normal course of business. For individual life products, the Company 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 agreements. Disability income products are significantly reinsured under coinsurance and modified coinsurance agreements. Reserve transfers and interest payments under modified coinsurance agreements are included in increase in policy liabilities. The Company remains liable in the event any reinsurer is unable to meet its assumed obligations. The Company 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. Transactions between the open and Closed Block (see Notes 12 and 13) have been excluded from the following schedule. The effects of reinsurance for the years ended December 31 were as follows (in thousands):
2000 1999 - ---------------------------------------------------------------------- Insurance premiums: Direct $ 437,321 $ 439,562 Reinsurance assumed 9,143 4,731 Reinsurance ceded (66,012) (60,898) - ---------------------------------------------------------------------- $ 380,452 $ 383,395 ====================================================================== Other income: Direct $ 5,783 $ 6,960 Reinsurance ceded 12,191 12,887 - ---------------------------------------------------------------------- $ 17,974 $ 19,847 ====================================================================== Increase in policy liabilities: Direct $ 78,303 $ 129,448 Reinsurance ceded 7,765 (16,525) - ---------------------------------------------------------------------- $ 86,068 $ 112,923 ======================================================================
F-17 84
2000 1999 - ---------------------------------------------------------------------- Policy benefits: Direct $ 411,781 $ 393,216 Reinsurance assumed 6,831 1,630 Reinsurance ceded (65,300) (64,512) - ---------------------------------------------------------------------- $ 353,312 $ 330,334 ====================================================================== Policyholders' dividends: Direct $ 111,748 $ 110,793 Reinsurance ceded (748) (3,935) - ---------------------------------------------------------------------- $ 111,000 $ 106,858 ======================================================================
NOTE 5 - DEFERRED POLICY ACQUISITION COSTS The following reflects the changes in the deferred policy acquisition costs asset (in thousands):
2000 1999 - --------------------------------------------------------------------------------------- Balance, beginning of year $ 538,127 $ 416,733 Acquisition costs deferred 88,217 73,648 Amortization to expense during the year (46,019) (36,791) Adjustment to equity during the year (40,635) 116,725 Purchase GAAP effect on purchase of LSWNH (Note 11) - (32,188) - --------------------------------------------------------------------------------------- Balance, end of year $ 539,690 $ 538,127 =======================================================================================
NOTE 6 - FEDERAL INCOME TAXES The components of federal income taxes and a reconciliation of the expected and actual federal income taxes and income tax rates for the years ended December 31 were as follows ($ in thousands):
2000 1999 - ------------------------------------------------------------------------------------------------- Amount Rate Amount Rate - ------------------------------------------------------------------------------------------------- Current $ 13,875 $ 7,497 Deferred 10,031 9,883 - ---------------------------------------------------------- ------------ Income taxes $ 23,906 $ 17,380 ========================================================== ============ Expected income taxes $ 32,307 35.0% $ 29,206 35.0% Differential earnings amount 223 0.2 (2,058) (2.5) Affordable housing tax credit (7,459) (8.1) (6,509) (7.8) Net change in tax reserves 1,978 2.1 2,033 2.4 Other, net (3,143) (3.4) (5,292) (6.3) - ------------------------------------------------------------------------------------------------- Income taxes $ 23,906 $ 17,380 =========================================================== ============ Effective federal income tax rate 25.8% 20.8% ============================================= ============ ============
The Company received $0.1 million and $9.4 million in federal income tax refunds during 2000 and 1999, respectively. F-18 85 Components of net deferred income tax assets at December 31 were as follows (in thousands):
2000 1999 - -------------------------------------------------------------------------------------------- Deferred income tax assets: Net unrealized loss on available-for-sale securities $ 12,095 $ 33,141 Policy liabilities 176,337 179,008 Other liabilities and accrued expenses 79,672 77,266 Other 4,814 490 - -------------------------------------------------------------------------------------------- Total deferred income tax assets 272,918 289,905 - -------------------------------------------------------------------------------------------- Deferred income tax liabilities: Deferred policy acquisition costs 138,505 125,842 Present value of future profits of insurance acquired 34,200 37,908 Debt and equity securities 9,627 10,201 Other 20,158 14,771 - -------------------------------------------------------------------------------------------- Total deferred income tax liabilities 202,490 188,722 - -------------------------------------------------------------------------------------------- Net deferred income tax assets $ 70,428 $ 101,183 ============================================================================================
Management believes it is more likely than not that the Company will realize the benefit of deferred tax assets. The Company's federal income tax returns are routinely audited by the IRS. The IRS has examined the Company's tax returns through 1995 and is currently examining the years 1996 - 1998. 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 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 a general account group 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 agents and a non-contributory defined supplemental benefit plan for certain executives. These non-qualified defined benefit pension plans are not separately 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 is recognized as benefits are earned. F-19 86 The status of the defined benefit plans at December 31 was as follows (in thousands):
Pension Benefits Other Benefits ------------------------------------------- 2000 1999 2000 1999 - --------------------------------------------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION: Benefit obligation, beginning of year $ 167,144 $ 189,524 $ 25,233 $ 27,883 Service cost (benefits earned during the current period) 3,638 4,194 538 581 Interest cost on benefit obligation 12,608 12,260 1,935 1,876 Actuarial gains (9,410) (26,832) (1,998) (3,937) Plan amendment and change in benefit provisions - - (2,842) - Benefits paid (12,531) (12,002) (1,046) (1,170) - --------------------------------------------------------------------------------------------------- Benefit obligation, end of year $ 161,449 $ 167,144 $ 21,820 $ 25,233 =================================================================================================== CHANGE IN PLAN ASSETS: Plan assets, beginning of year $ 104,250 $ 100,045 Actual return on plan assets 8,355 9,952 Benefits paid (5,623) (5,747) - ------------------------------------------------------------------------------ Plan assets, end of year $ 106,982 $ 104,250 ==============================================================================
Pension Benefits Other Benefits ------------------------------------------- 2000 1999 2000 1999 - --------------------------------------------------------------------------------------------------- FUNDED STATUS: Benefit obligation $ 161,449 $ 167,144 $ 21,820 $ 25,233 Plan assets (106,982) (104,250) - - - --------------------------------------------------------------------------------------------------- Benefit obligation in excess of plan assets 54,467 62,894 21,820 25,233 Unrecognized actuarial gains 25,380 18,309 8,137 6,397 Unrecognized prior service cost - - 1,834 (1,080) ------------------------------------------- Accrued benefit cost at September 30 79,847 81,203 31,791 30,550 Payments subsequent to measurement date (1,983) (1,638) - - - --------------------------------------------------------------------------------------------------- Accrued benefit cost at December 31 $ 77,864 $ 79,565 $ 31,791 $ 30,550 ===================================================================================================
The components of net periodic benefit cost for the years ended December 31 were as follows (in thousands):
Pension Benefits Other Benefits ------------------------------------------ 2000 1999 2000 1999 - -------------------------------------------------------------------------------------------------- Service cost (benefits earned during the current $ 3,638 $ 4,194 $ 538 $ 581 period) Interest cost on benefit obligation 12,608 12,260 1,935 1,876 Expected return on plan assets (9,130) (8,745) - - Net amortization and deferrals (1,564) 281 (259) (66) Amortization of prior service cost - - 72 72 - -------------------------------------------------------------------------------------------------- Net periodic benefit cost (included in operating expenses) $ 5,552 $ 7,990 $ 2,286 $ 2,463 ==================================================================================================
The total projected benefit obligation for non-qualified defined benefit pension plans was $72.2 million and $70.9 million at December 31, 2000 and 1999, respectively. The total accumulated benefit obligation (APBO) for these plans was $69.1 million and $67.7 million at December 31, 2000 and 1999, respectively. The actuarial assumptions used in determining benefit obligations at December 31, were as follows:
Pension Benefits Other Benefits ------------------------------------------ 2000 1999 2000 1999 - -------------------------------------------------------------------------------------------------- Discount rate 8.00% 7.75% 8.00% 7.75% Rate of increase in future compensation levels 5.00% 6.00% Expected long term return on plan assets 9.00% 9.00%
F-20 87 The health care cost trend rate was 5% for all future periods. Increasing the assumed health care trend rates by one percentage point in each year would increase the APBO by about $1.7 million and the 2000 service and interest cost components of net periodic postretirement benefit cost by about $0.1 million. Decreasing the assumed health care trend rates by one percentage point in each year would reduce the APBO by about $1.4 million and the 2000 service and interest cost components of net periodic postretirement benefit cost by about $0.1 million. National Life uses the straight-line method of amortization for prior service cost and unrecognized gains and losses. National Life made changes to its postretirement medical plans concurrent with the year-end 2000 plan valuation. These include a modification in the attribution and eligibility requirements to qualify for plan benefits, and in the expected future benefit cost due to a change in coverage and insurance carrier. The plan modifications reduced the projected benefit obligation at December 31, 2000 by $2.8 million. This reduction will be amortized through prior service cost in future periods. 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. Employees below specified levels of compensation also receive a foundation contribution of 1.5% of compensation. Additional employee voluntary contributions may be made to the plans up to a set maximum. Vesting and withdrawal privilege schedules are attached to the Company's contributions. Effective January 1, 2001, the savings plan was closed to new contributions and the 401(k) plan was modified to include more investment options. National Life also provides a 401(k) plan for it's regular full-time agents whereby accumulated funds may be invested by the agent in a group annuity contract with National Life or in mutual funds, some of which are sponsored by an affiliate of National Life. Total annual contributions can not exceed certain limits that vary based on total agent compensation. No National Life contributions are made to the plan. Life Insurance Company of the Southwest (LSW), an indirectly held wholly-owned subsidiary of National Life, provides a 401(k) plan to its employees. Additional voluntary employee contributions could be made to the plan subject to certain limits. LSW's contributions to these plans generally vest within two years. Effective January 1, 2001, LSW's 401(k) plan was merged into National Life's. F-21 88 NOTE 8 - DEBT Debt consists of the following (in thousands):
2000 1999 - -------------------------------------------------------------------------------------------- 8.25% Surplus Notes: $ 69,696 $ 69,692 $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. 6.57% Term Note: 4,400 6,400 $4.4 million, maturing March 1, 2002 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 $ 74,096 $ 76,092 ============================================================================================
The aggregate annual scheduled maturities of debt for the next five years are as follows (in thousands): 2001 2,000 2002 2,400 2003 - 2004 - 2005 -
Interest paid on debt was $6.2 million and $6.3 million in 2000 and 1999, respectively. NOTE 9 - CONTINGENCIES Total outstanding mortgage loan funding commitments at December 31, 2000 were $55.0 million. During 1997, several class action lawsuits were filed against National Life in various states related to the sale of life insurance policies during the 1980's and 1990's. National Life specifically denied any wrongdoing. National Life agreed to a settlement of these class action lawsuits in June 1998. This agreement was subsequently approved by the court in October 1998. The settlement provides class members with various policy enhancement options and new product purchase discounts. Class members may instead pursue alternative dispute resolution according to predetermined guidelines. Qualifying members may also opt out of the class action and pursue litigation separately against National Life. Most of the alternative dispute resolution cases were settled by December 31, 1999. Management believes that while the ultimate cost of this litigation (including those opting out of the class action) is still uncertain, it is unlikely, after considering existing provisions, to have a material adverse effect on National Life's financial position. F-22 89 In late 1999, two lawsuits were filed against National Life and the State of Vermont in Vermont related to National Life's conversion to a mutual holding company structure. National Life and the State of Vermont specifically deny any wrongdoing and intend to defend these cases vigorously. In the opinion of National Life's management, based on advice from legal counsel, the ultimate resolution of these lawsuits will not have a material effect on National Life's financial position. However, liabilities related to these lawsuits could be established in the near term if estimates of the ultimate resolution of these proceedings are revised. NOTE 10 - NEW ACCOUNTING PRONOUNCEMENTS FOR DERIVATIVE INSTRUMENTS - FAS 133 In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133), which establishes accounting and reporting standards for derivative instruments. FAS 133 requires that an entity recognize all derivatives as either assets or liabilities at fair value in the statement of financial position, and establishes special accounting for the following three types of hedges: fair value hedges, cash flow hedges, and hedges of foreign currency exposures of net investments in foreign operations. The statement was originally effective for fiscal years beginning after June 15, 1999. In June, 1999 the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133 (FAS 137). FAS 137 requires the application of FAS 133 for fiscal years beginning after June 15, 2000. Additional guidance related to equity indexed annuity products was issued by the Derivatives Implementation Group (a special working group charged with addressing FAS 133 implementation issues) in December, 2000. The Company has been studying the recently issued guidance and is implementing policy reserve and deferred acquisition cost calculation systems based on this guidance. Due to the system support required, the Company cannot currently estimate the potentially material cumulative effect of FAS 133 on its reported results. NOTE 11 - ACQUISITION On July 2, 1999, National Life acquired the outstanding one-third interest in LSW National Holdings, Inc., (LSWNH) the parent of Dallas, Texas-based Life Insurance Company of the Southwest (LSW), a financial services company specializing in the sale of annuities. National Life had previously purchased a two-thirds interest in the company in February, 1996. The purchase price was $61.6 million in cash. Purchasing the remaining one-third interest eliminated the ongoing provision for minority interests for the last six months of 1999. The effect of the cash purchase on the consolidated financial statements was to reduce minority interests by $39.7 million and record net purchase GAAP adjustments of $21.9 million, which included intangible assets for the present value of future profits of insurance acquired of $59.4 million and goodwill of $3.0 million. Had the one-third purchase been made at January 1, 1999, pro-forma consolidated net income would have increased by about $3.1 million in 1999. These pro-forma consolidated results are not necessarily indicative of the actual results that might have occurred had National Life owned all of LSWNH since that date. (unaudited) F-23 90 NOTE 12 - CLOSED BLOCK AND IMPLEMENTATION OF STATEMENT OF POSITION 00-3 National Life established and began operating a closed block (the Closed Block) on January 1, 1999. The Closed Block was established pursuant to regulatory requirements as part of the reorganization into a mutual holding company corporate structure. The Closed Block was established for the benefit of policyholders of participating policies inforce at December 31, 1998, and includes traditional dividend paying life insurance policies, certain participating term insurance policies, dividend paying flex premium annuities, and other related liabilities. The Closed Block's primary purpose is to protect the policy dividend expectations related to these policies. The Closed Block is expected to remain in effect until all policies within the Closed Block are no longer inforce. Assets assigned to the Closed Block at January 1, 1999, together with projected future premiums and investment returns, are reasonably expected to be sufficient to pay out all future Closed Block policy benefits, expenses and taxes. Such benefits include dividends paid out under the current dividend scale, adjusted to reflect future changes in the underlying experience. The assets and liabilities allocated to the Closed Block are recorded in National Life's financial statements on the same basis as other similar assets and liabilities. National Life has adopted the American Institute of Certified Public Accountants Statement of Position 00-3 Accounting by Insurance Enterprises for Demutualizations and Formations of Mutual Insurance Holding Companies and for Certain Long-Duration Participating Contracts (SOP 00-3). Under the provisions of SOP 00-3, if actual cumulative Closed Block earnings are greater than expected cumulative earnings, only the expected earnings will be recognized in net income of the National Life. Actual cumulative earnings in excess of expected earnings represent undistributed earnings attributable to Closed Block policyholders. These excess earnings will be recorded as a policyholder dividend obligation because the excess will be paid as dividends to Closed Block policyholders unless offset by future results which are less than expected. If actual cumulative performance is less favorable than expected, only actual earnings will be recognized in income. No policyholder dividend obligation for distribution of accumulated excess earnings was required at December 31, 2000 or 1999. Summarized financial information for the Closed Block effects included in the consolidated financial statements as of December 31, 2000 and 1999 and for the years then ended is as follows (in thousands): F-24 91
2000 1999 - ---------------------------------------------------------------------------------------------------- LIABILITIES: Policy liabilities and accruals $ 3,692,064 $ 3,629,560 Other liabilities 27,924 69,186 - ---------------------------------------------------------------------------------------------------- Total liabilities 3,719,988 3,698,746 ==================================================================================================== ASSETS: Cash and cash equivalents $ 218,296 $ 122,982 Available-for-sale debt securities 1,797,634 1,771,494 Mortgage loans 416,639 380,986 Policy loans 642,378 640,490 Accrued investment income 54,052 53,387 Premiums and fees receivable 18,946 18,864 Deferred policy acquisition costs 268,708 312,588 Other assets 55,371 123,690 - ---------------------------------------------------------------------------------------------------- Total assets $ 3,472,024 $ 3,424,481 ==================================================================================================== Excess of reported closed block liabilities over closed block assets $ 247,964 $ 274,265 Closed block accumulated other comprehensive (gain) loss represented above (4,679) 6,979 - ---------------------------------------------------------------------------------------------------- Maximum future earnings to be recognized from closed block assets and liabilities $ 252,643 $ 267,286 ====================================================================================================
F-25 92
2000 1999 - ---------------------------------------------------------------------------------------------------- REVENUES: Premiums and other income $ 312,963 $ 325,445 Net investment income 217,096 216,432 Realized investment (loss) gain (4,309) 8,720 - ---------------------------------------------------------------------------------------------------- Total revenues 525,750 550,597 - ---------------------------------------------------------------------------------------------------- BENEFITS AND EXPENSES: Increase in policy liabilities 27,504 66,324 Policy benefits 308,769 283,598 Policyholders' dividends 114,095 107,941 Interest credited to policyholders' accounts 12,377 13,294 Operating expenses 17,213 17,407 Policy acquisition expenses, net 23,320 37,662 - ---------------------------------------------------------------------------------------------------- Total benefits and expenses 503,278 526,226 - ---------------------------------------------------------------------------------------------------- Pre-tax results of operations 22,472 24,371 Income taxes 7,829 8,629 - ---------------------------------------------------------------------------------------------------- Closed block results of operations 14,643 15,742 Other comprehensive income: Unrealized gain (loss) 11,658 (44,701) - ---------------------------------------------------------------------------------------------------- Total closed block comprehensive income (loss) $ 26,301 $ (28,959) ==================================================================================================== Excess of reported closed block liabilities over closed block assets: Beginning of year $ 274,265 $ - Original funding, net (includes other comprehensive gain of $37.7 million) - 245,306 Closed block comprehensive income (loss) 26,301 (28,959) - ---------------------------------------------------------------------------------------------------- End of year $ 247,964 $ 274,265 ====================================================================================================
Amortized cost of bonds held by the Closed Block at December 31, 2000 and 1999 were $1,777.2 million and $1,800.1 million, respectively. There were no mortgage valuation allowances on Closed Block mortgage loans at December 31, 2000 or 1999. Many expenses related to Closed Block operations are charged to operations outside the Closed Block; accordingly, the contribution from the Closed Block does not represent the actual profitability of the Closed Block operations. Operating costs and expenses outside the Closed Block are therefore disproportionate to the actual business outside the Closed Block. F-26 93 NOTE 13 - REORGANIZATION INTO A MUTUAL HOLDING COMPANY CORPORATE STRUCTURE On January 1, 1999, National Life converted from a mutual to a stock insurance company as part of a reorganization into a mutual holding company corporate structure. Prior to the conversion, policyowners held policy contractual and membership rights from National Life. The contractual rights, as defined in the various insurance and annuity policies, remained with National Life after the conversion. Membership interests held by policyowners of National Life at December 31, 1998, were converted to membership interests in National Life Holding Company (NLHC), a mutual insurance holding company created for this purpose. NLHC currently owns all the outstanding shares of NLV Financial (NLVF), a stock holding company created for this purpose, which in turn currently owns all the outstanding shares of National Life. NLHC currently has no assets, liabilities or operations other than that related to its ownership of NLVF's outstanding stock. Similarly, NLVF currently has no assets, liabilities or operations other than that related to its ownership of National Life's outstanding stock. Under the terms of the reorganization, NLHC must always hold a majority of the voting shares of NLVF. This reorganization was approved by policyowners of National Life and was completed with the approval of the Commissioner of the Vermont Department of Banking, Insurance, Securities, and Health Care Administration (the Commissioner). Under the provisions of the reorganization, National Life issued 2.5 million common stock $1 par shares to its parent, NLVF as a transfer from retained earnings. National Life declared and paid a $1 million dividend to its parent, NLVF, during 2000. Concurrently, NLVF declared and paid a dividend of $.3 million to NLHC. There were no dividends paid or declared in 1999 by National Life. There have been no distributions to members of NLHC. Dividends declared by National Life in excess of the lesser of ten percent of statutory surplus or statutory net gain from operations (see Note 14 for statutory information) require pre-approval by the Commissioner. NOTE 14 - 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's (which excludes NLVF and NLHC) statutory surplus to GAAP equity at December 31 and statutory net income to GAAP net income for the years ended December 31 were as follows (in thousands):
2000 1999 --------------------------------------------------------- Surplus/ Surplus/ Equity Net Income Equity Net Income - ----------------------------------------------------------------------------------------------- Statutory surplus/net income $ 411,278 $ 31,959 $ 408,086 $ 25,923 Asset valuation reserve 78,101 79,207 Interest maintenance reserve 49,873 (8,634) 58,507 5,681 Surplus notes (69,696) (69,692) Non-admitted assets 28,485 24,411 Investments 66,210 25,978 30,953 35,006 Deferred policy acquisition costs 466,326 17,368 445,704 19,310 Income taxes 61,834 1,285 58,458 (32,634) Policy liabilities and dividends (114,544) (9,251) (114,584) 1,065 Benefit plans (13,299) 1,873 (14,927) 363 Other comprehensive income, net (21,626) (57,700) Other changes, net (71,179) 1,123 (73,435) 1,914 - ----------------------------------------------------------------------------------------------- GAAP equity/net income $ 871,763 $ 61,701 $ 774,988 $ 56,628 ===============================================================================================
F-27 94 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 New York Insurance Department to financial statements prepared in accordance with generally accepted accounting principles in making such determinations. In 1998, the National Association of Insurance Commissioners (NAIC) adopted the Codification of Statutory Accounting Principles guidance (Codification), which will replace the current Accounting Practices and Procedures manual as the NAIC's primary guidance on statutory accounting. The NAIC has recommended an effective date of January 1, 2001. The Codification provides guidance for areas which promulgated statutory accounting principles had not previously addressed, and changes current promulgated guidance in other areas. The Vermont Department of Banking, Insurance, Securities, and Health Care Administration has adopted Codification effective January 1, 2001. National Life is currently implementing Codification and has not estimated the potentially material effect of Codification on its reported statutory basis results. F-28 95 NATIONAL VARIABLE LIFE INSURANCE ACCOUNT (BENEFIT PROVIDER SEGMENT) FINANCIAL STATEMENTS ***** DECEMBER 31, 2000 F-29 96 [PRICEWATERHOUSECOOPERS LETTERHEAD] REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors of National Life Insurance Company and Policyholders of National Variable Life Insurance Account -- Benefit Provider Segment In our opinion, the accompanying statement of net assets and the related statements of operations and of changes in net assets present fairly, in all material respects, the financial position of each of the sub-accounts constituting the National Variable Life Insurance Account -- Benefit Provider Segment (a segment within a Separate Account of National Life Insurance Company) (the Segment) at December 31, 2000, and the results of each of their operations and each of their changes in net assets for the year ended December 31, 2000 and the period from February 12, 1999 through December 31, 1999, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Segment's management, our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audits 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, which included confirmation of securities at December 31, 2000 by correspondence with the funds, provide a reasonable basis for the opinion expressed above. /s/ PriceWaterhouseCoopers LLP March 28, 2001 F-30 97 NATIONAL VARIABLE LIFE INSURANCE ACCOUNT -- BENEFIT PROVIDER SEGMENT (A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY) STATEMENT OF NET ASSETS DECEMBER 31, 2000
POLICYHOLDER ACCOUNT VALUES ------------ ASSETS: Investments in shares of mutual fund portfolios at market value: (Policyholder accumulation units and unit value) Market Street Fund Managed (150.14 units at $18.14 per unit) $ 2,724 Market Street Fund Bond (7,654.65 units at $11.52 per unit) 88,163 Sentinel Variable Products Trust Money Market (782,717.68 units at $1.12 per unit) 876,974 Sentinel Variable Products Trust Common Stock (7,872.38 units at $11.29 per unit) 88,910 Sentinel Variable Products Trust Small Company (40,003.14 units at $11.72 per unit) 468,926 Sentinel Variable Products Trust Mid Cap Growth (15,339.08 units at $15.19 per unit) 232,969 Strong Opportunity Fund II (2,624.73 units at $26.94 per unit) 70,698 Strong Variable Insurance Funds Mid Cap Growth (13,924.09 units at $23.73 per unit) 330,384 VIPF Overseas Portfolio (34,871.70 units at $2.00 per unit) 69,691 VIPF Investment Grade Bond Portfolio (286.23 units at $12.59 per unit) 3,603 Alger American Fund Growth (6,045.13 units at $60.26 per unit) 364,295 Alger American Fund Small Capitalization (2,697.11 units at $46.03 per unit) 124,143 American Century Variable Portfolios VP Value (13,918.64 units at $7.83 per unit) 109,004 American Century Variable Portfolios VP Income & Growth (50,511.57 units at $7.11 per unit) 359,182 JP Morgan Series Trust II International Opportunities (3,828.92 units at $11.75 per unit) 45,004 JP Morgan Series Trust II Small Company (1,879.42 units at $15.09 per unit) 28,354 Neuberger Berman Partners Portfolio (213.25 units at $19.65 per unit) 4,190 Deutsche Asset Management VIT Fund EAFE Equity Index (31,603.72 units at $11.82 per unit) 373,542 Deutsche Asset Management VIT Fund Equity 500 Index (31,878.83 units at $13.96 per unit) 445,185 Deutsche Asset Management VIT Fund Small Cap Index (7,119.73 units at $11.55 per unit) 82,248 ----------- TOTAL NET ASSETS $ 4,168,189 ===========
F-31 98 NATIONAL VARIABLE LIFE INSURANCE ACCOUNT -- BENEFIT PROVIDER SEGMENT (A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY) STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000
MARKET STREET ----------------------------- MONEY MARKET MANAGED BOND ------- ------- ------- INVESTMENT INCOME: Dividend income and capital gain distributions $17,203 $ - $ - EXPENSES: Mortality and expense risk and administration charges 974 - - ------- ------- ------- Net investment income (loss) 16,229 - - ------- ------- ------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain (loss) from shares sold - - - Net unrealized appreciation (depreciation) on investments - 31 1,402 ------- ------- ------- Net realized and unrealized gain (loss) on investments - 31 1,402 ------- ------- ------- Increase (decrease) in net assets resulting from operations $16,229 $ 31 $ 1,402 ======= ======= =======
SENTINEL VARIABLE PRODUCTS TRUST ALGER AMERICAN FUND -------------------------------------- -------------------- MONEY COMMON SMALL MID CAP MARKET STOCK COMPANY GROWTH GROWTH SMALL CAP ------ ------ ------- ------- ------- --------- INVESTMENT INCOME: Dividend income and capital gain distributions $9,593 $ 85 $ 436 $ - $ - $ - EXPENSES: Mortality and expense risk and administration charges 159 16 - 43 134 37 ------ ------ ------- ------- -------- --------- Net investment income (loss) 9,434 69 436 (43) (134) (37) ------ ------ ------- ------- -------- --------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized gain (loss) from shares sold - 1 115 95 (161) (128) Net unrealized appreciation (depreciation) on investments - 2,252 20,909 (7,969) (20,689) (4,138) ------ ------ ------- ------- -------- --------- Net realized and unrealized gain (loss) on investments - 2,253 21,024 (7,874) (20,850) (4,266) ------ ------ ------- ------- -------- --------- Increase (decrease) in net assets resulting from operations $9,434 $2,322 $21,460 $(7,917) $(20,984) $ (4,303) ====== ====== ======= ======= ======== =========
The accompanying notes are an integral part of these financial statements F-32 99 NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - BENEFIT PROVIDER SEGMENT (A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY) STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31,2000
STRONG VARIABLE AMERICAN CENTURY VARIABLE NEUBERGER STRONG INSURANCE FUNDS VIPF PORTFOLIOS BERMAN ------------- ---------------- ------------------------ ---------------------------- ----------- OPPORTUNITY MID CAP INVESTMENT VP INCOME & PARTNERS FUND II GROWTH OVERSEAS GRADE BOND VP VALUE GROWTH PORTFOLIOS ------------- --------------- ------------ ----------- ---------- ------------ ----------- INVESTMENT INCOME: Dividend income and capital gain distributions $ 159 $ 2,172 $ -- $ -- $ -- $ 972 $ -- EXPENSES: Mortality and expense risk and administrative charges 13 67 13 -- 36 477 1 ----------- ----------- ------- ------- ------ -------- -------- Net investment income (loss) 146 2,105 (13) -- (36) 495 (1) ----------- ----------- ------- ------- ------ -------- -------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS: Net realized (loss) gain from shares sold (28) (18) (27) -- 73 35 -- Net unrealized appreciation (depreciation) on investments 1,416 (8,334) (1,348) 9 5,997 (19,835) 149 ----------- ----------- ------- ------- ------ -------- -------- Net realized and unrealized gain (loss) on investments 1,388 (8,352) (1,375) 9 6,070 (19,800) 149 ----------- ----------- ------- ------- ------ -------- -------- INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 1,534 $ (6,247) $(1,388) $ 9 $6,034 $(19,305) $ 148 =========== =========== ======= ======= ====== ======== ========
The accompanying notes are an integral part of these financial statements. F-33 100 NATIONAL VARIABLE LIFE INSURANCE ACCOUNT -- BENEFIT PROVIDER SEGMENT (A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY) STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2000
JP MORGAN SERIES TRUST II DEUTSCHE ASSET MANAGEMENT VIT FUND --------------------------- --------------------------------------- INTERNATIONAL SMALL EQUITY 500 SMALL CAP EAFE OPPORTUNITIES COMPANY INDEX INDEX EQUITY INDEX TOTAL ------------- --------- ---------- --------- ------------ -------- INVESTMENT INCOME: Dividend income and capital gain distributions $ 959 $ 8 $ 256 $ 427 $ 6,225 $ 38,495 EXPENSES: Mortality and expense risk and administrative charges 15 5 139 - 186 2,315 ------- ------ ------- ------ ------- -------- Net investment income 944 3 117 427 6,039 36,180 ------- ------ ------- ------ ------- -------- REALIZED AND UNREALIZED (LOSS) GAIN ON INVESTMENTS: Net realized (loss) gain from shares sold (72) - (930) - 8 (1,037) Net unrealized (depreciation) appreciation on investments (1,442) 1,350 (4,806) 5,062 (2,469) (32,453) ------- ------ ------- ------ ------- -------- Net realized and unrealized (loss) gain on investments (1,514) 1,350 (5,736) 5,062 (2,461) (33,490) ------- ------ ------- ------ ------- -------- (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (570) $1,353 $(5,619) $5,489 $ 3,578 $ 2,690 ======= ====== ======= ====== ======= ========
The accompanying notes are an integral part of these financial statements. F-34 101 NATIONAL VARIABLE LIFE INSURANCE ACCOUNT -- BENEFIT PROVIDER SEGMENT (A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY) STATEMENT OF OPERATIONS FOR THE PERIOD FROM FEBRUARY 12, 1999 THROUGH DECEMBER 31, 1999
MARKET STREET AMERICAN FUND CENTURY ------------- ----------- MONEY INCOME & MARKET GROWTH TOTAL ------------- ----------- ------- INVESTMENT INCOME: Dividend income and capital gain distributions $2,988 $ -- $ 2,988 EXPENSES: Mortality and expense risk and administrative charges 174 -- 174 ------ ------ ------- Net investment income 2,814 -- 2,814 ------ ------ ------- REALIZED AND UNREALIZED GAIN ON INVESTMENTS: Net realized gain from shares sold -- -- -- Net unrealized appreciation on investments -- 8,302 8,302 ------ ------ ------- Net realized and unrealized gain on investments -- 8,302 8,302 ------ ------ ------- INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $2,814 $8,302 $11,116 ====== ====== =======
The accompanying notes are an integral part of these financial statements F-35 102 NATIONAL VARIABLE LIFE INSURANCE ACCOUNT -- BENEFIT PROVIDER SEGMENT (A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY) STATEMENT OF CHANGES IN NET ASSETS FOR THE YEAR ENDED DECEMBER 31, 2000
MARKET STREET SENTINEL VARIABLE PRODUCTS TRUST ALGER AMERICAN FUND ---------------------------- --------------------------------------- ------------------- MONEY MONEY COMMON SMALL MID CAP MARKET MANAGED BOND MARKET STOCK COMPANY GROWTH GROWTH SMALL CAP --------- ------- ------- -------- ------- -------- -------- -------- --------- INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 16,229 $ 31 $ 1,402 $ 9,434 $ 2,322 $ 21,460 $ (7,917) $(20,984) $ (4,303) --------- ------ ------- -------- ------- -------- -------- -------- -------- ACCUMULATION UNIT TRANSACTIONS: Participant deposits 3,510,827 -- -- 55,761 -- 1,133 1,133 114,999 58,632 Transfers between investment sub-accounts and general account, net (3,497,806) 2,693 86,745 822,482 86,632 446,437 242,297 272,558 71,115 Contract charges (29,651) -- -- (11,623) (53) (67) (55) (2,973) (1,451) Miscellaneous 401 -- 16 920 9 (37) (2,489) 695 150 --------- ------ ------- -------- ------- -------- -------- -------- -------- Total net accumulation unit transactions (16,229) 2,693 86,761 867,540 86,588 447,466 240,886 385,279 128,446 --------- ------ ------- -------- ------- -------- -------- -------- -------- Increase in net assets -- 2,724 88,163 876,974 88,910 468,926 232,969 364,295 124,143 Net assets, beginning of period -- -- -- -- -- -- -- -- -- --------- ------ ------- -------- ------- -------- -------- -------- -------- Net assets, end of period $ -- $2,724 $88,163 $876,974 $88,910 $468,926 $232,969 $364,295 $124,143 ========= ====== ======= ======== ======= ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements. F-36 103 NATIONAL VARIABLE LIFE INSURANCE ACCOUNT -- BENEFIT PROVIDER SEGMENT (A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY) STATEMENT OF CHANGES IN NET ASSETS FOR THE YEAR ENDED DECEMBER 31, 2000
STRONG VARIABLE AMERICAN CENTURY VARIABLE NEUBERGER STRONG INSURANCE FUNDS VIPF PORTFOLIOS BERMAN ----------- --------------- ----------------------- -------------------------- ----------- OPPORTUNITY MID CAP INVESTMENT VP INCOME & PARTNERS FUND II GROWTH OVERSEAS GRADE BOND VP VALUE GROWTH PORTFOLIO ----------- -------- -------- ---------- -------- ----------- ----------- INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 1,534 $ (6,247) $(1,388) $ 9 $ 6,034 $(19,305) $ 148 ------- -------- ------- ------ -------- -------- ------ ACCUMULATION UNIT TRANSACTIONS: Participant deposits -- 31,349 -- -- 57,499 173,053 -- Transfers between investment sub-accounts and general account, net 69,169 306,017 70,642 3,594 46,996 31,393 4,040 Contract charges (56) (729) (53) -- (1,525) (10,327) (16) Miscellaneous 51 (6) 490 -- -- (148) 18 ------- -------- ------- ------ -------- -------- ------ Total net accumulation transactions 69,164 336,631 71,079 3,594 102,970 193,971 4,042 ------- -------- ------- ------ -------- -------- ------ Increase in net assets 70,698 330,384 69,691 3,603 109,004 174,666 4,190 Net assets, beginning of period -- -- -- -- -- 184,516 -- ------- -------- ------- ------ -------- -------- ------ Net assets, end of period $70,698 $330,384 $69,691 $3,603 $109,004 $359,182 $4,190 ======= ======== ======= ====== ======== ======== ======
The accompanying notes are an integral part of these financial statements. F-37 104 NATIONAL VARIABLE LIFE INSURANCE ACCOUNT - BENEFIT PROVIDER SEGMENT (A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY) STATEMENT OF CHANGES IN NET ASSETS FOR THE YEAR ENDED DECEMBER 31, 2000
DEUTSCHE ASSET MANAGEMENT VIT FUND JP MORGAN SERIES TRUST II ------------------------------- ------------------------- EQUITY SMALL EAFE INTERNATIONAL SMALL 500 CAP EQUITY OPPORTUNITIES COMPANY INDEX INDEX INDEX TOTAL ------------- ------- -------- ------- -------- ---------- (DECREASE) INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (570) $ 1,353 $ (5,619) $ 5,489 $ 3,578 $ 2,690 ------------- ------- -------- ------- -------- ---------- ACCUMULATION UNIT TRANSACTIONS: Participant deposits 28,750 -- 11,457 -- -- 4,044,593 Transfers between investment sub-accounts and general account, net 17,650 27,101 444,179 76,711 369,023 (332) Contract charges (802) (62) (5,078) -- (186) (64,707) Miscellaneous (24) (38) 246 48 1,127 1,429 ------------- ------- -------- ------- -------- ---------- Total net accumulation unit transactions 45,574 27,001 450,804 76,759 369,964 3,980,983 ------------- ------- -------- ------- -------- ---------- Increase in net assets 45,004 28,354 445,185 82,248 373,542 3,983,673 Net assets, beginning of period -- -- -- -- -- 184,516 ------------- ------- -------- ------- -------- ---------- Net assets, end of period $ 45,004 $28,354 $445,185 $82,248 $373,542 $4,168,189 ============= ======= ======== ======= ======== ==========
The accompanying notes are an integral part of these financial statements: F-38 105 NATIONAL VARIABLE LIFE INSURANCE ACCOUNT -- BENEFIT PROVIDER SEGMENT (A SEGMENT WITHIN A SEPARATE ACCOUNT OF NATIONAL LIFE INSURANCE COMPANY) STATEMENT OF CHANGES IN NET ASSETS FOR THE PERIOD FROM FEBRUARY 12, 1999 THROUGH DECEMBER 31, 1999
MARKET STREET AMERICAN FUND CENTURY ------------- -------- MONEY INCOME & MARKET GROWTH TOTAL ------------- -------- --------- INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 2,814 $ 8,302 $ 11,116 --------- -------- -------- ACCUMULATION UNIT TRANSACTIONS: Participant deposits 177,053 -- 177,053 Transfers between investment sub-accounts and general account, net (176,214) 176,214 -- Contract charges (3,653) -- (3,653) --------- -------- -------- Total net accumulation unit transactions (2,814) 176,214 173,400 --------- -------- -------- Increase in net assets -- 184,516 184,516 Net assets, beginning of period -- -- -- --------- -------- -------- Net assets, end of period $ -- $184,516 $184,516 ========= ======== ========
The accompanying notes are an integral part of these financial statements. F-39 106 NATIONAL VARIABLE LIFE INSURANCE ACCOUNT (BENEFIT PROVIDER SEGMENT) (A Segment within a Separate Account of National Life Insurance Company) NOTES TO THE FINANCIAL STATEMENTS NOTE 1 -- NATURE OF OPERATIONS National Variable Life Insurance Account (the Variable Account) began operations on March 11, 1996 and is registered as a unit investment trust under the Investment Company Act of 1940, as amended. The operations of the Variable Account are part of the National Life Insurance Company (National Life). The Variable Account was established by National Life as a separate investment account to invest the net premiums received from the sale of certain variable life insurance products. Equity Services, Inc., an indirect wholly-owned subsidiary of National Life, is the principal underwriter for the variable life insurance policies issued by National Life. Sentinel Advisors Company, an indirectly-owned subsidiary of National Life, provides investment advisory services for certain Market Street Fund, Inc. mutual fund portfolios, for mutual funds within the Sentinel Variable Products Trust (SVPT), and for the SVPT Money Market Fund. National Life maintains three segments within the Variable Account. The Varitrak Segment within the Variable Account was established on March 11, 1996 and is used exclusively for National Life's flexible premium variable life insurance products known collectively as Varitrak. On May 1, 1998, National Life established the Estate Provider Segment within the Variable Account to be used exclusively for National Life's flexible premium variable life insurance products known collectively as Estate Provider. On February 12, 1999, National Life established the Benefit Provider Segment (the Segment) within the Variable Account to be used exclusively for National Life's flexible premium variable life insurance products known collectively as Benefit Provider. The Segment invests the accumulated policyholder account values in shares of mutual fund portfolios within Market Street Fund, Inc.(MSF), Alger American Fund, American Century Variable Portfolios (ACVP), JP Morgan Series Trust II, Strong Variable Insurance Funds, Strong Opportunity Fund II, Neuberger & Berman Advisers Management Trust, SVPT, Fidelity Variable Insurance Products Fund and Fidelity Variable Insurance Products Fund II (VIPF), and Deutsche Asset Management Funds. Net premiums received by the Segment are deposited in investment portfolios as designated by the policyholder, except for initial net premiums on new policies which are first invested in the SVPT Money Market Fund. Policyholders may also direct the allocations of their account value between the various investment portfolios within the Segment and a declared interest account (within the General Account of National Life) through participants transfers. There are twenty sub-accounts within the Segment. Each sub-account, which invests exclusively in the shares of the corresponding portfolio, comprises the accumulated policyholder account values of the underlying variable life insurance policies investing in the sub-account. NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. The following is a summary of significant accounting policies consistently followed in the preparation of the Segment's financial statements. F-40 107 INVESTMENTS The mutual fund portfolios consist of the Market Street Fund Money Market, Market Street Fund Managed, Market Street Fund Bond, Alger American Fund Growth, Alger American Fund Small Capitalization, American Century Variable Portfolios VP Value, American Century Variable Portfolios VP Income & Growth, JP Morgan Series Trust II International Opportunities, JP Morgan Series Trust II Small Company, Strong Opportunity Fund II, Strong Variable Insurance Funds Mid Cap Growth, Neuberger Berman Advisors Management Trust Partners Portfolio, SVPT Money Market Fund, SVPT Common Stock Fund, SVPT Small Company Fund, SVPT Mid Cap Growth Fund, VIPF Overseas, VIPF Investment Grade Bond, Deutsche Asset Management Fund Equity 500 Index, Deutsche Asset Management Fund Small Cap Index, Deutsche Asset Management Fund EAFE Equity Index, VIPF Overseas Portfolio, and VIPF Investment Grade Bond Portfolio. The assets of each portfolio are held separate from the assets of the other portfolios and each has different investment objectives and policies. Each portfolio operates separately and the gains or losses in one portfolio have no effect on the investment performance of the other portfolios. INVESTMENT VALUATION The investments in the Portfolios are valued at the closing net asset value per share as determined by the portfolio at the end of each period. The change in the difference between cost and market value is reflected as unrealized gain (loss) in the Statement of Operations. INVESTMENT TRANSACTIONS Investment transactions are accounted for on the trade date (date the order to buy or sell is executed) and dividend income (including capital gain distributions) are recorded on the ex-dividend date. The cost of investments sold is determined using the first-in, first-out basis (FIFO). FEDERAL INCOME TAXES The operations of the Segment are part of, and taxed with, the total operations of National Life. Under existing federal income tax law, investment income and capital gains attributable to the Segment are not taxed. F-41 108 NOTE 3 -- CHARGES AND EXPENSES National Life deducts a daily charge from the Segment based on an annual rate of 0.4% in years 1-7 of each sub-account's net asset value for its assumption of mortality and expense risks and for separate account administration. This rate declines to an ultimate rate of 0.15% in years 21 and beyond. The mortality risk assumed is that the insureds under the policies may die sooner than anticipated. The expense risk assumed is that expenses incurred in issuing and administering the policies may exceed expected levels. Cost of insurance charges are deducted monthly from each policyholder's accumu- lated account value for the insurance protection provided and are remitted to National Life. These charges vary based on the net amount at risk, attained age of the insured, and other factors. NOTE 4 -- INVESTMENTS The number of shares held and cost for the portfolio at December 31, 2000 is set forth below.
Portfolio Shares Cost - --------- ------ ----------- American Century Variable Portfolios VP Income & Growth 50,518 $ 370,714 VP Value 16,342 103,007 Alger American Fund Growth 7,707 384,985 Small Cap 5,285 128,281 Deutsche Asset Management VIT Fund Small Cap Index 7,410 77,186 EAFE Equity Index 33,532 376,010 Equity 500 Index 32,330 449,991 Market Street Fund Bond 8,081 86,761 Managed 162 2,693 JP Morgan Series Trust II Small Company 1,972 27,004 International Opportunities 3,965 46,446 Neuberger Berman Advisors Management Trust Partners Portfolio 259 4,040 Sentinel Variable Product Trust Common Stock 8,476 86,658 Mid Cap Growth 22,975 240,938 Small Company 43,702 448,017 Money Market 876,974 876,974 VIPF Overseas 3,486 71,038 Investment Grade Bond 286 3,594 Strong Opportunity Fund II 2,953 69,282 Strong Variable Insurance Funds Mid Cap Growth 13,964 338,719 ---------- Total $4,192,338 ==========
The cost also represents the aggregate cost for federal income tax purposes. F-42 109 NOTE 5 -- PURCHASES AND SALES OF PORTFOLIO SHARES Purchases and proceeds from sales of shares in the portfolios for the period ended December 31, 2000 aggregate the following:
Sales Portfolio Purchases Proceeds - --------- --------- ---------- American Century Variable Portfolios VP Income & Growth $ 205,429 $ 10,964 VP Value 104,496 1,562 Alger American Fund Growth 388,200 3,054 Small Cap 129,890 1,481 Deutsche Asset Management VIT Fund Small Cap Index 77,186 - EAFE Equity Index 376,362 360 Equity 500 Index 461,836 10,915 Market Street Fund Bond 86,761 - Managed 2,693 - Money Market 3,921,477 3,921,477 JP Morgan Series Trust II Small Company 27,071 67 International Opportunities 47,335 817 Neuberger Berman Advisors Management Trust Partners Portfolio 4,048 8 Sentinel Variable Product Trust Common Stock 86,726 69 Mid Cap Growth 242,267 1,424 Small Company 450,408 2,506 Money Market 3,050,783 2,173,809 VIPF Overseas 75,842 4,776 Investment Grade Bond 3,594 - Strong Opportunity Fund II 72,191 2,880 Strong Variable Insurance Funds Mid Cap Growth 339,533 796
NOTE 6 -- LOANS Policyholders may obtain loans on any business day as outlined in the variable life insurance policy. At the time a loan is granted, accumulated value equal to the amount of the loan is designated as collateral and transferred from the Segment to the General Account of National Life. Interest is credited by National Life at predetermined rates on collateral held in the General Account. This interest is periodically transferred to the Segment. F-43 110 NOTE 7 -- DISTRIBUTION OF NET INCOME The Segment does not expect to declare dividends to policyholders from accumulated net income. The accumulated net income will be distributed to policyholders as withdrawals (in the form of death benefits, surrenders or policy loans) in excess of the policyholders' net contributions to the Segment. NOTE 8 -- DIVERSIFICATION REQUIREMENTS Under the provisions of Section 817(h) of the Internal Revenue Code (IRC), a variable universal life insurance contract, other than a contract issued in connection with certain types of employee benefit plans, will not be treated as a variable universal life insurance contract for federal income tax purposes for any period for which the investments of the segregated asset account on which the contract is based are not adequately diversified. The IRC provides that the adequately diversified requirement may be met if the underlying investments satisfy either a statutory safe harbor test or diversification requirements set forth in regulations issued by the Secretary of the Treasury. National Life believes that the Segment satisfies the current requirements of the regulations, and it intends that the Segment will continue to meet such requirements. F-44 111 PART II 112 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 variable life insurance policies described in the prospectuses 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. 113 CONTENTS OF REGISTRATION STATEMENT This Registration Statement comprises the following papers and documents. The facing sheet. The prospectus consisting of 108 pages. Undertaking to file reports.(9) Rule 484 undertaking.(9) Representation relating to fees and charges.(9) The signatures. Written consents of the following persons: (a) Michele S. Gatto, Esq. (b) Kiri Parankirinathan, A.S.A., M.A.A.A. (c) Sutherland Asbill & Brennan LLP. (d) PricewaterhouseCoopers 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.(10) (2) Not Applicable. (3) (a) Form of Distribution Agreement between National Life Insurance Company and Equity Services, Inc.(4) (b)(1) Form of Equity Services, Inc. Branch Office Supervisor Contract(10) (b)(2) Form of Equity Services, Inc. Registered Representative Contract(10) (c) Schedule of Sales Commissions.(9) (4) Not Applicable. (5) (a) Specimen Sentinel Benefit Provider Policy Form (Sex Distinct)(8) (b) Supplemental Term Insurance Rider(8) (c) Endorsement for Unisex Policies(8) (6) (a) Amended and Restated Charter of National Life Insurance Company.(10) (b) Amended and Restated Bylaws of National Life Insurance Company.(10) (7) Not Applicable. (8) (a) Form of Participation Agreement by and among Market Street Fund, Inc., National Life Insurance Company and Equity Services, Inc.(3) (a)(2) Form of Amendment No. 2 to Participation Agreement among Market Street Fund, Inc., National Life Insurance Company and 1717 Capital Management Company (formerly PML Securities Company(5) (a)(3) Form of Amendment No. 3 to Participation Agreement among Market Street Fund, Inc., National Life Insurance Company and 1717 Capital Management Company (formerly PML Securities Company) (7) (a)(4) Form of Amendment No. 4 to Participation Agreement among Market Street Fund, Inc., National Life Insurance Company, 1717 Capital Management Company (formerly PML Securities Company) and LSW(9) 114 (b) Form of Participation Agreement by and among The Alger American Fund, National Life Insurance Company and Fred Alger and Company(3) (b)(2) Form of Amended Schedule A to the Participation Agreement by and among The Alger American Fund, National Life Insurance Company and Fred Alger and Company(6) (b)(3) Form of Amendment No. 2 to the Participation Agreement by and among The Alger American Fund, National Life Insurance Company and Fred Alger and Company(7) (b)(4) Form of Amendment No. 3 to the Participation Agreement by and among The Alger American Fund, National Life Insurance Company, Fred Alger and Company and LSW(9) (c) Form of Shareholder Services Agreement by and among National Life Insurance Company and American Century Investment Management, Inc.(5) (e) Form of Participation Agreement by and among National Life Insurance Company and J. P. Morgan Series Trust II(5) (f) Form of Participation Agreement by and among National Life Insurance Company, Neuberger Berman Advisers Managers Trust, Advisers Managers Trust, and Neuberger Berman Management Incorporated(5) (g) Form of Participation Agreement by and between BT Insurance Funds Trust, Bankers Trust Company and National Life Insurance Company. (h) (a) Fidelity Participation Agreement between Variable Insurance Products Fund, Fidelity Distributors Corporation and Vermont Life Insurance Company (now National Life Insurance Company) ("VIPF") (11) (b) Amendment No. 1 to VIPF (12) (c) Amendment No. 2 to VIPF (13) (i) (a) Fidelity Participation Agreement between Variable Insurance Products Fund II, Fidelity Distributors Corporation and Vermont Life Insurance Company (now National Life Insurance Company) ("VIPFII") (11) (b) Amendment No. 1 to VIPFII (14) (c) Amendment No. 2 to VIPFII (13) (j) Participation Agreement between National Life Insurance Company and The Dreyfus Socially Responsible Growth Fund, Inc.(15 ) (k) Participation Agreement between National Life Insurance Company, INVESCO Variable Investment Funds, Inc.; INVESCO Funds Group, Inc., and INVESCO Distributors, Inc. (16) (l) Participation Agreement amount National Life Insurance Company, The Universal Institutional Funds, Inc., Morgan Stanley Dean Witter Investment Management Inc. and Miller Anderson & Sherrerd, LLP (9) Master Administration Agreement between McCamish Systems, L.L.C. and National Life of Vermont dated as of April 18, 1998. (10)(a) Sentinel Benefit Provider Application Form.(8) (11) Memorandum describing issuance, transfer and redemption procedures.(9) 2. Opinion and Consent of Michele S. Gatto, Senior Vice President & General Counsel, as to the legality of the securities being offered. 3. Not Applicable. 4. Not Applicable. 5. Not Applicable. 115 6. Opinion and Consent of Kiri Parankirinathan, A.S.A., M.A.A.A., as to actuarial matters pertaining to the securities being registered. 7. (a) Consent of PricewaterhouseCoopers LLP. (b) Consent of Sutherland Asbill & Brennan LLP. 8. Powers of Attorney for Directors.(8) A. Robert E. Boardman B. Earle H. Harbison C. A. Gary Shilling - ----------------------------- (2)Incorporated herein by reference to the Form S-6 Registration Statement (File No. 33-91938) for National Variable Life Insurance Account (VariTrak) filed on May 5, 1995. (3)Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Form S-6 Registration Statement (File No. 33-91938) for National Variable Life Insurance Account (VariTrak) filed December 29, 1995. (4)Incorporated herein by reference to Post-Effective Amendment No. 1 to the Form S-6 Registration Statement (File No.33-91938) for National Variable Life Insurance Account (VariTrak) filed March 12, 1996 (5)Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Form S-6 Registration Statement (File No. 333-44723) for National Variable Life Insurance Account (Sentinel Estate Provider filed April 16, 1998) (6)Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Form N-4 Registration Statement (file No. 333-19583) for National Variable Annuity Account II (Sentinel Advantage) filed May 28, 1997. (7)Incorporated herein by referenced to Pre-Effective Amendment No. 1 to the Form N-4 Registration Statement (File No. 333-47363 ) for LSW Variable Annuity Account I (RetireMax) filed July 31, 1998. (8)Incorporated herein by reference to the S-6 Registration Statement (File No. 333-67003) filed on November 9, 1999. (9)Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Form S-6 Registration Statement (File No. 333-67003) for National Variable Life Insurance Account filed February 8, 1999. (10)Incorporated herein by reference to Pre-Effective Amendment No. 2 to the Form S-6 Registration Statement (File No. 333-67003) for National Variable Life Insurance Account filed February 11, 1999. (11)Incorporated herein by reference to Post-Effective Amendment No. 2 to the Form N-4 Registration Statement (File No. 333-19583) for National Variable Annuity Account II (Sentinel Advantage) filed February 25, 1999 (12)Incorporated herein by reference to Post-Effective Amendment No. 1 to the Form S-6 Registration Statement (File No. 33-91938 for National Variable Life Insurance Account (VariTrak) filed March 12, 1996 (13)Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Form S-6 Registration Statement (File No. 333-44723) for National Variable Life Insurance Account (Sentinel Estate Provider) filed April 16, 1998. (14)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 (VariTrak) filed April 30, 1997) (15)Incorporated herein by reference to Post-Effective Amendment No. 4 to the Form S-6 Registration Statement (File No. 333-44723) for National Variable Life Insurance Account (Sentinel Estate Provider) filed May 1, 2001. (16)Incorporated herein by reference to Post-Effective Amendment No. 4 to the Form S-6 Registration Statement (File No. 333-44723) for National Variable Life Insurance Account (Sentinel Estate Provider) filed May 1, 2001. 116 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant, National Variable Life Insurance Account, certifies that it meets all the requirements for effectiveness of this Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933, and has duly caused this Post-Effective Amendment No. 3 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 30th day of April, 2001. NATIONAL VARIABLE LIFE INSURANCE ACCOUNT (Registrant) By: NATIONAL LIFE INSURANCE COMPANY Attest: /s/ Christopher M. Neronha By: /s/ Patrick E. Welch ----------------------------- --------------------------- Christopher M. Neronha Patrick E. Welch Assistant Secretary Chairman of the Board and Chief Executive Officer 117 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, National Life Insurance Company certifies that it meets all the requirements for effectiveness of this Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933, and has duly caused this Post-Effective Amendment No. 3 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 30th day of April, 2001. NATIONAL LIFE INSURANCE COMPANY (SEAL) (Depositor) Attest: /s/ Christopher M. Neronha By: /s/ Patrick E. Welch ------------------------- --------------------------- Christopher M. Neronha 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. 2 to the 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 4/30/2001 - --------------------- and Chief Executive Officer, --------- Patrick E. Welch and Director /s/ Thomas H. MacLeay President & Chief Operating 4/30/2001 - ----------------------- Officer, and Director --------- Thomas H. MacLeay /s/ William A. Smith Executive Vice President & 4/30/2001 - ----------------------- Chief Financial Officer --------- William A. Smith Robert E. Boardman* Director 4/30/2001 - ------------------ --------- Robert E. Boardman
118 Earle H. Harbison, Jr.* Director 4/30/2001 - ---------------------- --------- Earle H. Harbison, Jr. A. Gary Shilling* Director 4/30/2001 - ----------------- --------- A. Gary Shilling
*By /s/ Patrick E. Welch Date: April 30, 2001 ----------------------------- Patrick E. Welch Pursuant to Power of Attorney 119 Exhibit Index 1 A 8 (l) Participation Agreement amount National Life Insurance Company, The Universal Institutional Funds, Inc., Morgan Stanley Dean Witter Investment Management Inc. and Miller Anderson & Sherrerd, LLP 1 A 9 Master Administration Agreement between McCamish Systems, L.L.C. and National Life of Vermont as of April 18, 1998 2. Opinion and Consent of Michele S. Gatto, as to the legality of the securities being offered. 6. Opinion and Consent of Kiri Parankirinathan, A.S.A., M.A.A.A., as to actuarial matters pertaining to the securities being registered. 7. (a) Consent of PricewaterhouseCoopers LLP (b) Consent of Sutherland Asbill & Brennan LLP EX-99.1A8L 2 w48261ex99-1a8l.txt PARTICIPATION AGREEMENT 1 EXHIBIT 1 A 8 (l) PARTICIPATION AGREEMENT AMONG THE UNIVERSAL INSTITUTIONAL FUNDS, INC., MORGAN STANLEY DEAN WITTER INVESTMENT MANAGEMENT INC., MILLER ANDERSON & SHERRERD, LLP AND NATIONAL LIFE INSURANCE COMPANY DATED AS OF NOVEMBER 30, 2000 2 TABLE OF CONTENTS
Page ---- ARTICLE I. Purchase and Redemption of Fund Shares 2 ARTICLE II. Representations and Warranties 4 ARTICLE III. Prospectuses, Reports to Shareholders and Proxy Statements; Voting 5 ARTICLE IV. Sales Material and Information 7 ARTICLE V. Fees and Expenses 8 ARTICLE VI. Diversification 9 ARTICLE VII. Potential Conflicts 9 ARTICLE VIII. Indemnification 11 ARTICLE IX. Applicable Law 16 ARTICLE X. Termination 16 ARTICLE XI. Notices 18 ARTICLE XII. Miscellaneous 18 SCHEDULE A Separate Accounts and Associated Contracts A-1 SCHEDULE B Portfolios of The Universal Institutional Funds, Inc. Available Under this Agreement B-1 SCHEDULE C Proxy Voting Procedures C-1
3 THIS AGREEMENT is made and entered into as of the 30th day of November, 2000 by and among NATIONAL LIFE INSURANCE COMPANY (the "Company"), a Vermont corporation, on its own behalf and on behalf of each separate account of the Company set forth on Schedule A hereto as may be amended from time to time (each such account referred to as an "Account"), THE UNIVERSAL INSTITUTIONAL FUNDS, INC. (the "Fund"), a Maryland corporation, and MORGAN STANLEY DEAN WITTER INVESTMENT MANAGEMENT INC. and MILLER ANDERSON & SHERRERD, LLP (collectively, the "Advisers," and individually, an "Adviser"), a Delaware corporation and a Pennsylvania limited liability partnership, respectively. WHEREAS, the Fund engages in business as an open-end management investment company and is available to act as (i) the investment vehicle for separate accounts established by insurance companies for individual and group life insurance policies and annuity contracts with variable accumulation and/or pay-out provisions (hereinafter referred to individually and/or collectively as "Variable Insurance Products") and (ii) the investment vehicle for certain qualified pension and retirement plans ("Qualified Plans"); and WHEREAS, insurance companies desiring to utilize the Fund as an investment vehicle under their Variable Insurance Products enter into participation agreements with the Fund and the Advisers (the "Participating Insurance Companies"); and WHEREAS, shares of the Fund are divided into several series of shares, each representing the interest in a particular managed portfolio of securities and other assets, any one or more of which may be made available under this Agreement; and WHEREAS, the Fund intends to offer shares of the series set forth on Schedule B hereto (each such series referred to as a "Portfolio"), as such Schedule may be amended from time to time by mutual written agreement of the parties hereto, to the Account(s) of the Company; and WHEREAS, the Fund has obtained an order from the Securities and Exchange Commission ("SEC"), dated September 19, 1996 (File No. 812-10118), granting Participating Insurance Companies and Variable Insurance Product separate accounts exemptions from the provisions of Sections 9(a), 13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended (the "1940 Act"), and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, to the extent necessary to permit shares of the Fund to be sold to and held by Variable Insurance Product separate accounts of both affiliated and unaffiliated life insurance companies and Qualified Plans (the "Shared Funding Exemptive Order"); and WHEREAS, the Fund is registered as an open-end management investment company under the 1940 Act and its shares are registered under the Securities Act of 1933, as amended (the "1933 Act"); and WHEREAS, each Adviser is duly registered as an investment adviser under the Investment Advisers Act of 1940, as amended, and any applicable state securities laws; and 2 4 WHEREAS, each Adviser manages certain Portfolios of the Fund; and WHEREAS, Morgan Stanley & Co. Incorporated (the "Underwriter") is registered as a broker/dealer under the Securities Exchange Act of 1934, as amended (the "1934 Act"), is a member in good standing of the National Association of Securities Dealers, Inc. (the "NASD") and serves as principal underwriter of the shares of the Fund; and WHEREAS, the Company has registered or will register under the 1933 Act the Variable Insurance Products identified on Schedule A hereto (the "Contracts"), as such Schedule may be amended from time to time by mutual written agreement of the parties hereto; and WHEREAS, each Account is a duly organized, validly existing segregated asset account, established by resolution or under authority of the Board of Directors of the Company, on the date shown for such Account on Schedule A hereto, to set aside and invest assets attributable to the Contracts; and WHEREAS, the Company has registered or will register each Account as a unit investment trust under the 1940 Act; and WHEREAS, to the extent permitted by applicable insurance laws and regulations, the Company intends to purchase shares of the Portfolios, on behalf of each Account or sub-Account thereof (together, as applicable, an "Account"), to fund the Contracts and the Underwriter is authorized to sell such shares to each such Account at net asset value. NOW, THEREFORE, in consideration of their mutual promises, the Company, the Fund and the Advisers agree as follows: ARTICLE I. PURCHASE AND REDEMPTION OF FUND SHARES 1.1. The Fund agrees to make available for purchase by the Company shares of the Portfolios and shall execute orders placed for each Account on a daily basis at the net asset value next computed after receipt by the Fund or its designee of such order. For purposes of this Section 1.1, the Company shall be the designee of the Fund for receipt of such orders from each Account and receipt by such designee shall constitute receipt by the Fund; provided that the Fund receives notice of such order by 10:00 a.m. Eastern time on the next following Business Day. "Business Day" shall mean any day on which the New York Stock Exchange, Inc. is open for trading and on which the Fund calculates its net asset value pursuant to SEC rules. 1.2. The Fund, so long as this Agreement is in effect, agrees to make shares of the Portfolios available for purchase at the applicable net asset value per share by the Company and its Accounts on those days on which the Fund calculates its net asset value pursuant to SEC rules and the Fund shall use reasonable efforts to calculate such net asset value on each day that the New York Stock Exchange, Inc. is open for trading. Notwithstanding the foregoing, the Board of Directors of the Fund (the "Board") may refuse to permit the Fund to sell shares of any 3 5 Portfolio to any person, or suspend or terminate the offering of 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 acting in good faith and in light of its fiduciary duties under federal and any applicable state laws, necessary in the best interests of the shareholders of such Portfolio. 1.3. The Fund agrees that shares of the Fund will be sold only to Participating Insurance Companies and their separate accounts and to certain Qualified Plans. No shares of a Portfolio will be sold to the general public. 1.4. The Fund agrees to redeem for cash, on the Company's request, any full or fractional shares of the Portfolios held by the Company, executing such requests on a daily basis at the net asset value next computed after receipt by the Fund or its designee of the request for redemption. For purposes of this Section 1.4, the Company shall be the designee of the Fund for receipt of requests for redemption from each Account and receipt by such designee shall constitute receipt by the Fund; provided that the Fund receives notice of such request for redemption by 10:00 a.m. Eastern time on the next following Business Day. 1.5. The Company agrees that purchases and redemptions of Portfolio shares offered by the then current prospectus of the Fund shall be made in accordance with the provisions of such prospectus. 1.6. The Company shall pay for Portfolio shares on the next Business Day after an order to purchase Fund shares is made in accordance with the provisions of Section 1.1 hereof. Payment shall be in federal funds transmitted by wire and the Company agrees to use its best efforts to transmit such funds by no later than 2:00 p.m. Eastern time on the day of transmission. For purposes of Sections 2.9 and 2.10, upon receipt by the Fund of the federal funds so wired, such funds shall cease to be the responsibility of the Company and shall become the responsibility of the Fund. 1.7. Issuance and transfer of the Fund's shares will be by book entry only. Stock certificates will not be issued to the Company or any Account. Shares ordered from the Fund will be recorded in an appropriate title for each Account or the appropriate sub-account of each Account. 1.8. The Fund shall furnish same-day notice (by wire or telephone, followed by written confirmation) to the Company of any income dividends or capital gain distributions payable on Portfolio shares. The 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 that Portfolio. The Company reserves the right to revoke this election and to receive all such income dividends and capital gain distributions in cash. The Fund shall notify the Company of the number of shares so issued as payment of such dividends and distributions. 1.9. The Fund shall make the net asset value per share for each Portfolio available to the Company on a daily basis as soon as reasonably practical after the net asset value per share is 4 6 calculated (normally by 6:30 p.m. Eastern time) and shall use its best efforts to make such net asset value per share available by 7:00 p.m. Eastern time. ARTICLE II. REPRESENTATIONS AND WARRANTIES 2.1. The Company represents and warrants that: (i) it is an insurance company duly organized and in good standing under applicable law; (ii) it has legally and validly established each Account prior to any issuance or sale thereof as a segregated asset account under applicable laws and regulations; and (iii) it has registered or, prior to any issuance or sale of the Contracts, will register each Account as a unit investment trust in accordance with the provisions of the 1940 Act to serve as a segregated investment account for the Contracts. The Company further represents and warrants that: (i) the Contracts are or will be registered under the 1933 Act; (ii) the Contracts will be issued and sold in compliance in all material respects with all applicable federal and state laws; and (iii) the sale of the Contracts shall comply in all material respects with state insurance suitability requirements. 2.2. The Fund represents and warrants that Fund shares sold pursuant to this Agreement shall be registered under the 1933 Act, duly authorized for issuance and sold in compliance with the laws of the State of Maryland and all applicable federal and state securities laws and that the Fund is and shall remain registered under the 1940 Act. The Fund shall amend the registration statement for its shares under the 1933 Act and the 1940 Act from time to time as required in order to effect the continuous offering of its shares. The Fund shall register and qualify the shares for sale in accordance with the laws of the various states only if and to the extent deemed advisable by the Fund. 2.3. The 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 use its reasonable efforts to maintain such qualification (under Subchapter M or any successor or similar provision) and that it will notify the Company immediately upon having a reasonable basis for believing that it has ceased to so qualify. 2.4. The Company represents that the Contracts are currently treated as life insurance policies or annuity contracts, as 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 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. 2.5. The Fund represents that to the extent that it decides to finance distribution expenses pursuant to Rule 12b-1 under the 1940 Act, the Fund undertakes to have the Board, a majority of whom are not interested persons of the Fund, formulate and approve any plan under Rule 12b-1 to finance distribution expenses. 2.6. The Fund makes no representation as to whether any aspect of its operations (including, but not limited to, fees and expenses and investment policies) complies with the 5 7 insurance laws or regulations of the various states, except that the Fund represents that the Portfolios' investment policies, fees and expenses are and shall at all times remain in compliance with the laws of the State of Maryland and that the Portfolios' operations are and shall at all times remain in material compliance with the laws of the State of Maryland to the extent required to perform this Agreement. 2.7. The Fund represents that it is lawfully organized and validly existing under the laws of the State of Maryland and that it does and will comply in all material respects with the 1940 Act. 2.8. Each Adviser represents and warrants that it is and shall remain duly registered in all material respects under all applicable federal and state securities laws and that it will perform its obligations for the Fund in compliance in all material respects with the laws of its state of domicile and any applicable state and federal securities laws. 2.9. The Fund represents and warrants that all of its directors, officers, employees, and other individuals/entities dealing 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 the minimum coverage as currently required by Rule 17g-1 of the 1940 Act or related provisions as may be promulgated from time to time. The aforesaid blanket fidelity bond shall include coverage for larceny and embezzlement and shall be issued by a reputable bonding company. 2.10. The Company represents and warrants that all of its directors, officers, employees, and other individuals/entities dealing with the money and/or securities of the Account(s) are and shall continue to be at all times covered by a blanket fidelity bond or similar coverage for the benefit of the Company and/or the Account(s) that is reasonable and customary in light of the Company's obligations under this Agreement. The aforesaid includes coverage for larceny and embezzlement and shall be issued by a reputable bonding company in an amount not less than $5 million. The Company agrees to make all reasonable efforts to see that this bond or another bond containing these provisions is always in effect, and agrees to notify the Fund and the Advisers in the event that such coverage no longer applies. ARTICLE III. PROSPECTUSES, REPORTS TO SHAREHOLDERS AND PROXY STATEMENTS; VOTING 3.1. The Fund or its designee shall provide the Company with as many printed copies of the Fund's current prospectus and statement of additional information as the Company may reasonably request. If requested by the Company, in lieu of providing printed copies the Fund shall provide camera-ready film or computer diskettes containing the Fund's prospectus and statement of additional information, and such other assistance as is reasonably necessary in order for the Company once each year (or more frequently if the prospectus and/or statement of additional information for the Fund is amended during the year) to have the prospectus for the 6 8 Contracts and the Fund's prospectus printed together in one document, and to have the statement of additional information for the Fund and the statement of additional information for the Contracts printed together in one document. Alternatively, the Company may print the Fund's prospectus and/or its statement of additional information in combination with other fund companies' prospectuses and statements of additional information. 3.2. Except as provided in this Section 3.2, all expenses of preparing, setting in type, printing and distributing Fund prospectuses and statements of additional information shall be the expense of the Company. For prospectuses and statements of additional information provided by the Company to its Contract owners who currently own shares of one or more Portfolios ("Existing Contract Owners"), in order to update disclosure as required by the 1933 Act and/or the 1940 Act, the cost of printing shall be borne by the Fund. If the Company chooses to receive camera-ready film or computer diskettes in lieu of receiving printed copies of the Fund's prospectus, the Fund shall bear the cost of typesetting to provide the Fund's prospectus to the Company in the format in which the Fund is accustomed to formatting prospectuses, and the Company shall bear the expense of adjusting or changing the format to conform with any of its prospectuses. In such event, the Fund will reimburse the Company in an amount equal to the product of "x" and "y", where "x" is the number of such prospectuses distributed to Existing Contract Owners and "y" is the Fund's per unit cost of typesetting and printing the Fund's prospectus. The same procedures shall be followed with respect to the Fund's statement of additional information. The Company agrees to provide the Fund or its designee with such information as may be reasonably requested by the Fund to assure that the Fund's expenses do not include the cost of printing, typesetting or distributing any prospectuses or statements of additional information other than those actually distributed to Existing Contract Owners. 3.3. The statement of additional information of the Fund shall be obtainable from the Fund, the Company or such other person as the Fund may designate. 3.4. The Fund, at its expense, shall provide the Company with copies of its proxy statements, reports to shareholders, and other communications (except for prospectuses and statements of additional information, which are covered in section 3.1) to shareholders in such quantity as the Company shall reasonably require for distributing to Contract owners. 3.5. If and to the extent required by law, the Company shall: (i) solicit voting instructions from Contract owners; (ii) vote the Portfolio shares in accordance with instructions received from Contract owners; and (iii) vote Portfolio shares for which no instructions have been received in the same proportion as Portfolio shares for which instructions have been received; so long as and to the extent that the SEC continues to interpret the 1940 Act to require pass-through voting privileges for variable contract owners. The Company reserves the right to vote Portfolio shares held in any segregated asset account in its own right, to the extent permitted by 7 9 law. If the Company is required to solicit voting instructions, the Fund and the Company shall follow the procedures, and shall have the corresponding responsibilities, for the handling of proxies and voting instruction solicitations, as set forth in Schedule C attached hereto and incorporated herein by reference. Participating Insurance Companies shall be responsible for ensuring that each of their separate accounts participating in the Fund (and for which the soliciting of voting instructions is required) calculates voting privileges in a manner consistent with the standards set forth on Schedule C, which standards will also be provided to the other Participating Insurance Companies. 3.6. The Fund will comply with all provisions of the 1940 Act requiring voting by shareholders, and in particular the Fund will either provide for annual meetings or comply with Section 16(c) of the 1940 Act (although the Fund is not one of the trusts described in Section 16(c) of that Act) as well as with Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will act in accordance with the SEC's interpretation of the requirements of Section 16(a) with respect to periodic elections of directors and with whatever rules the SEC may promulgate with respect thereto. 3.7. The Fund shall use reasonable efforts to provide Fund prospectuses, reports to shareholders, proxy materials and other Fund communications (or camera-ready equivalents) to the Company sufficiently in advance of the Company's mailing dates to enable the Company to complete, at reasonable cost, the printing, assembling and/or distribution of the communications in accordance with applicable laws and regulations. ARTICLE IV. SALES MATERIAL AND INFORMATION 4.1. The Company shall furnish, or shall cause to be furnished, to the Fund or its designee, each piece of sales literature or other promotional material in which the Fund or an Adviser is named, at least ten (10) Business Days prior to its use. No such material shall be used without the prior approval of the Fund or its designee. The Fund shall use its reasonable best efforts to review any such material as soon as practicable after receipt and no later than ten (10) Business Days after receipt of such material. 4.2. The Company shall not give any information or make any representations or statements on behalf of the Fund or concerning the Fund in connection with the sale of the Contracts other than the information or representations contained in the registration statement or prospectus for the Fund shares, as such registration statement and prospectus 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 or its designee, except with the permission of the Fund. 4.3. The Fund or its designee shall furnish, or shall cause to be furnished, to the Company or its designee, each piece of sales literature or other promotional material in which the Company and/or its Account(s) or Contract(s) are named at least ten (10) Business Days prior to 8 10 its use. No such material shall be used if the Company or its designee reasonably objects to such use within ten (10) Business Days after receipt of such material. 4.4. The Fund and the Advisers shall not give any information or make any representations on behalf of the Company or concerning the Company, each Account, or the Contracts, other than the information or representations contained in a registration statement or prospectus for the Contracts, as such registration statement and prospectus may be amended or supplemented from time to time, or in published reports for each Account which are in the public domain or approved by the Company for distribution to Contract owners, or in sales literature or other promotional material approved by the Company or its designee, except with the permission of the Company. 4.5. The Fund will provide to the Company at least one complete copy of all registration statements, prospectuses, statements of additional information, 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 and are relevant to the Company or the Contracts. 4.6. The Company will provide to the Fund 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 investment in the Fund or the Portfolios under the Contracts. 4.7. For purposes of this Article IV, the phrase "sales literature or other promotional material" includes, but is not limited to, any of the following that refer to the Fund or any affiliate of the Fund: 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 (i.e., any written communication distributed or made generally available to customers or the public, including brochures, circulars, research reports, market letters, form letters, seminar texts, 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, and registration statements, prospectuses, statements of additional information, shareholder reports, and proxy materials. ARTICLE V. FEES AND EXPENSES 5.1. The Fund shall pay no fee or other compensation to the Company under this Agreement, except that if the Fund or any Portfolio adopts and implements a plan pursuant to Rule 12b-1 to finance distribution expenses, then the Underwriter may make payments to the Company or to the underwriter for the Contracts if and in amounts agreed to by the Underwriter in writing. 9 11 5.2. All expenses incident to performance by the Fund under this Agreement shall be paid by the Fund. The Fund shall see to it that all its shares are registered and authorized for issuance in accordance with applicable federal law and, if and to the extent deemed advisable by the Fund, in accordance with applicable state laws prior to their sale. Except as otherwise set forth in Section 3.2 of this Agreement, the Fund shall bear the expenses for the cost of registration and qualification of the Fund's shares, preparation and filing of the Fund's prospectus and registration statement, proxy materials and reports, setting the prospectus in type, setting in type and printing the proxy materials and reports to shareholders, the preparation of all statements and notices required by any federal or state law, and all taxes on the issuance or transfer of the Fund's shares. 5.3. The Company shall bear the expenses of distributing the Fund's prospectus, statement of additional information, proxy materials and reports to owners of Contracts issued by the Company. ARTICLE VI. DIVERSIFICATION 6.1. The Fund will at all times invest money from the Contracts in such a manner as to ensure that the Contracts will be treated as variable contracts under the Code and the regulations issued thereunder. Without limiting the scope of the foregoing, the Fund will at all times comply with Section 817(h) of the Code and Treasury Regulation 1.817-5, relating to the diversification requirements for variable annuity, endowment, or life insurance contracts and any amendments or other modifications to such Section or Regulations. In the event of a breach of this Article VI by the Fund, it will take 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 Regulation 1.817-5. ARTICLE VII. POTENTIAL CONFLICTS 7.1. The Board will monitor the Fund for the existence of any material irreconcilable conflict between the interests of the contract owners of all separate accounts 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 interpretative 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 any Portfolio are being managed; (e) a difference in voting instructions given by Contract owners; or (f) a decision by a Participating Insurance Company 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. 7.2. 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 10 12 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. 7.3. If it is determined by a majority of the Board, or a majority of its disinterested members, that a material irreconcilable conflict exists, the Company and other Participating Insurance Companies shall, at their expense and to the extent reasonably practicable (as determined by a majority of the disinterested directors), take whatever steps are necessary to remedy or eliminate the irreconcilable material conflict, up to and including: (1) withdrawing the assets allocable to some or all of the separate accounts from the Fund or any Portfolio and reinvesting such assets in a different investment medium, including (but not limited to) another Portfolio of the Fund, or submitting the question 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 policy owners, or variable contract owners of one or more Participating Insurance Companies) that votes in favor of such segregation, or offering to the affected Contract owners the option of making such a change; and (2) establishing a new registered management investment company or managed separate account. 7.4. If a material irreconcilable conflict arises because of a decision by the Company to disregard contract owner voting instructions and that decision represents a minority position or would preclude a majority vote, the Company may be required, at the Fund's election, to withdraw the affected Account's investment in the Fund and terminate this Agreement with respect to such Account (at the Company's expense); 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. 7.5. If a material irreconcilable conflict arises because a particular state insurance regulator's decision applicable to the Company conflicts with the position of the majority of other state regulators, then the Company will withdraw the affected Account's investment in the Fund and terminate this Agreement with respect to such Account within six months after the Board informs 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 members of the Board. Until the end of the foregoing six month period, the Underwriter and Fund shall continue to accept and implement orders by the Company for the purchase (and redemption) of shares of the Fund. 7.6. For purposes of Sections 7.3 through 7.5 of this Agreement, a majority of the disinterested members of the Board shall determine whether any proposed action adequately remedies any irreconcilable material conflict, but in no event will the Fund be required to establish a new funding medium for the Contracts. The Company shall not be required by Section 7.3 to establish a new funding medium for the Contracts if an offer to do so has been declined by vote of a majority of Contract owners materially adversely affected by the irreconcilable material conflict. 11 13 7.7. 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 1940 Act or the rules promulgated thereunder with respect to mixed or shared funding (as defined in the Shared Funding Exemptive Order) on terms and conditions materially different from those contained in the Shared Funding Exemptive Order, then (a) the Fund and/or the Participating Insurance Companies, 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 3.4, 3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 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 VIII. INDEMNIFICATION 8.1. Indemnification by the Company 8.1(a).The Company agrees to indemnify and hold harmless the Fund and each member of the Board and each officer and employee of the Fund, and each Adviser and each director, officer and employee of each Adviser, and each person, if any, who controls the Fund or the Adviser within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" and individually, an "Indemnified Party," for purposes of this Section 8.1) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of the Company) or litigation (including reasonable 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 sale or acquisition of the Fund's shares or the Contracts and: (i) 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 Contracts or contained in the Contracts or sales literature for 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 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 the Company by or on behalf of the Fund for use in the registration statement or prospectus for the Contracts or in the Contracts or sales literature (or any amendment or supplement) or otherwise for use in connection with the sale of the Contracts or Fund shares; or 12 14 (ii) 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 the Fund not supplied by the Company, or persons under its control and other than statements or representations authorized by the Fund or an Adviser) or unlawful conduct of the Company or persons under its control, with respect to the sale or distribution of the Contracts or Fund shares; or (iii) arise out of or as a result of any untrue statement or alleged untrue statement of a material fact contained in a registration statement, prospectus, or sales literature of the Fund 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 and in conformity with information furnished to the Fund by or on behalf of the Company; or (iv) arise as a result of any failure by the Company to provide the services and furnish the materials under the terms of this Agreement; or (v) arise out of or result from any material breach of any representation and/or warranty made by the Company in this Agreement or arise out of or result from any other material breach of this Agreement by the Company. Each of paragraphs (i) through (v) above is limited by and in accordance with the provisions of Sections 8.1(b) and 8.1(c) below. 8.1(b).The 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. 8.1(c).The 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 the 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 the Company of any such claim shall not relieve the 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 the Indemnified Parties, the Company shall be entitled to participate, at its own expense, in the defense of such action. The Company also shall be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from the Company to such party of the 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 the Company 13 15 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. 8.1(d).The Indemnified Parties will promptly notify the Company of the commencement of any litigation or proceedings against them in connection with the issuance or sale of the Fund shares or the Contracts or the operation of the Fund. 8.2. Indemnification by the Advisers 8.2(a).Each Adviser agrees, with respect to each Portfolio that it manages, to indemnify and hold harmless the Company and each of its directors, officers and employees, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" and individually, an "Indemnified Party," for purposes of this Section 8.2) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of the Adviser) or litigation (including reasonable 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 sale or acquisition of shares of the Portfolio that it manages and: (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 the 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 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 the Fund by or on behalf of the Company for use in the registration statement or prospectus for the Fund or in sales literature (or any amendment or supplement) or otherwise for use in connection with the sale of the Contracts or Portfolio shares; or (ii) 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 Contracts not supplied by the Fund or persons under its control and other than statements or representations authorized by the Company) or unlawful conduct of the Fund, Adviser(s) or Underwriter or persons under their control, with respect to the sale or distribution of the Contracts or Portfolio shares; or (iii) arise out of or as a result of any untrue statement or alleged untrue statement of a material fact contained in a registration statement, prospectus, or sales 14 16 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 statement or statements therein not misleading, if such statement or omission was made in reliance upon information furnished to the Company by or on behalf of the Fund; or (iv) arise as a result of any failure by the Adviser to provide the services and furnish the materials under the terms of this Agreement; or (v) arise out of or result from any material breach of any representation and/or warranty made by the Adviser in this Agreement or arise out of or result from any other material breach of this Agreement by the Adviser. Each of paragraphs (i) through (v) above is limited by and in accordance with the provisions of Sections 8.2(b) and 8.2(c) below. 8.2(b).An Adviser 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 and duties under this Agreement. 8.2(c).An Adviser 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 the Adviser 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 the Adviser of any such claim shall not relieve the Adviser 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, the Adviser will be entitled to participate, at its own expense, in the defense thereof. The Adviser also shall be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from the Adviser to such party of the Adviser's election to assume the defense thereof, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and the Adviser 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. 8.2(d).The Company agrees promptly to notify the Adviser of the commencement of any litigation or proceedings against it or any of its officers or directors in connection with the issuance or sale of the Contracts or the operation of each Account. 15 17 8.3. Indemnification by the Fund 8.3(a).The Fund agrees to indemnify and hold harmless the Company, and each of its directors, officers and employees, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties," and individually, an "Indemnified Party," for purposes of this Section 8.3) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of the Fund) or litigation (including reasonable 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 result from the gross negligence, bad faith or willful misconduct of the Board or any member thereof, are related to the operations of the Fund and: (i) arise as a result of any failure by the Fund to provide the services and furnish the materials under the terms of this Agreement; or (ii) arise out of or result from any material breach of any representation and/or warranty made by the Fund in this Agreement or arise out of or result from any other material breach of this Agreement by the Fund. Each of paragraphs (i) and (ii) above is limited by and in accordance with the provisions of Sections 8.3(b) and 8.3(c) below. 8.3(b).The Fund 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 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 and duties under this Agreement. 8.3(c).The Fund 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 the Fund 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 the Fund of any such claim shall not relieve the Fund 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, the Fund will be entitled to participate, at its own expense, in the defense thereof. The Fund also shall be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from the Fund to such party of the Fund's election to assume the defense thereof, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and the Fund 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. 16 18 8.3(d).The Company agrees promptly to notify the Fund of the commencement of any litigation or proceedings against it or any of its respective officers or directors in connection with this Agreement, the issuance or sale of the Contracts, with respect to the operation of either Account, or the sale or acquisition of shares of the Fund. ARTICLE IX. APPLICABLE LAW 9.1. This Agreement shall be construed and the provisions hereof interpreted under and in accordance with the laws of the State of New York. 9.2. This Agreement shall be subject to the provisions of the 1933, 1934 and 1940 Acts, and the rules and regulations and rulings thereunder, including such exemptions from those statutes, rules and regulations as the SEC may grant (including, but not limited to, the Shared Funding Exemptive Order) and the terms hereof shall be interpreted and construed in accordance therewith. ARTICLE X. TERMINATION 10.1. This Agreement shall continue in full force and effect until the first to occur of: (a) termination by any party for any reason by sixty (60) days advance written notice delivered to the other parties; or (b) termination by the Company by written notice to the Fund and the Adviser with respect to any Portfolio based upon the Company's determination that shares of such Portfolio are not reasonably available to meet the requirements of the Contracts; or (c) termination by the Company by written notice to the Fund and the Adviser with respect to any Portfolio in the event any of the Portfolio's shares are not registered, issued or sold in accordance with applicable state and/or federal law or such law precludes the use of such shares as the underlying investment media of the Contracts issued or to be issued by the Company; or (d) termination by the Company by written notice to the Fund and the Adviser with respect to any Portfolio in the event that such Portfolio ceases to qualify as a Regulated Investment Company under Subchapter M of the Code or under any successor or similar provision, or if the Company reasonably believes that the Fund may fail to so qualify; or (e) termination by the Company by written notice to the Fund and the Adviser with respect to any Portfolio in the event that such Portfolio fails to meet the diversification requirements specified in Article VI hereof; or 17 19 (f) termination by the Fund or an Adviser by written notice to the Company if the Fund or the Adviser, as applicable, shall determine, in its sole judgment exercised in good faith, that the Company and/or its affiliated companies 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 (g) termination by the Company by written notice to the Fund and the Adviser, if the Company shall determine, in its sole judgment exercised in good faith, that either the Fund or the Adviser 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 (h) termination by any party to this Agreement upon another party's material breach of any provision of this Agreement. 10.2. Notwithstanding any termination of this Agreement, the Fund shall at the option of the Company continue to make available additional shares of the Portfolios, pursuant to the terms and conditions of this Agreement, for all Contracts in effect on the effective date of termination of this Agreement (the "Existing Contracts"), unless, with respect to a Portfolio, such further sale of Portfolio shares is proscribed by law, regulation or applicable regulatory authority, or unless the Board determines that liquidation of the Portfolio following termination of this Agreement is in the best interests of the Portfolio. Specifically, subject to the foregoing, the owners of the Existing Contracts shall be permitted to direct reallocation of investments in the Portfolios, redemption of investments in the Portfolios and/or investment in the Portfolios upon the making of additional purchase payments under the Existing Contracts. The parties agree that this Section 10.2 shall not apply to any terminations under Article VII and the effect of such Article VII terminations shall be governed by Article VII of this Agreement. 10.3. The Company shall not redeem Fund shares attributable to the Contracts (as distinct from Fund shares attributable to the Company's assets held in the Account) except (i) as necessary to implement Contract Owner initiated or approved transactions, or (ii) as required by state and/or federal laws or regulations or judicial or other legal precedent of general application (hereinafter referred to as a "Legally Required Redemption") or (iii) as permitted by an order of the SEC pursuant to Section 26(b) of the 1940 Act. Upon request, the Company will promptly furnish to the Fund the opinion of counsel for the Company (which counsel shall be reasonably satisfactory to the Fund) to the effect that any redemption pursuant to clause (ii) above is a Legally Required Redemption. Furthermore, except in cases where permitted under the terms of the Contracts, the Company shall not prevent Contract Owners from allocating payments to a Portfolio that was otherwise available under the Contracts without first giving the Fund ninety (90) days prior written notice of its intention to do so. 18 20 ARTICLE XI. NOTICES Any notice shall be sufficiently given when sent by registered or certified mail 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 the Fund: The Universal Institutional Funds, Inc. c/o Morgan Stanley Dean Witter Investment Management Inc. 1221 Avenue of the Americas New York, New York 10020 Attention: President If to the Advisers: Morgan Stanley Dean Witter Investment Management Inc. 1221 Avenue of the Americas New York, New York 10020 Attention: General Counsel and/or Miller Anderson & Sherrerd, LLP One Tower Bridge West Conshohocken, Pennsylvania 19428 Attention: General Counsel If to the Company: National Life Insurance Company National Life Drive Montpelier, Vermont 05604 Attention: General Counsel ARTICLE XII. MISCELLANEOUS 12.1. All persons dealing with the Fund must look solely to the property of the Fund for the enforcement of any claims against the Fund, as neither the Board, officers, agents or shareholders of the Fund assume any personal liability for obligations entered into on behalf of the Fund. 19 21 12.2. Subject to the requirements of legal process and regulatory authority, each party hereto shall treat as confidential the names and addresses of the owners of the Contracts and all information reasonably identified as confidential in writing by any other party hereto and, except as permitted by this Agreement, shall not disclose, disseminate or utilize such names and addresses and other confidential information until such time as it may come into the public domain without the express written consent of the affected party. 12.3. 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. 12.4. This Agreement may be executed simultaneously in two or more counterparts, each of which taken together shall constitute one and the same instrument. 12.5. 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. 12.6. Each party hereto shall cooperate with each other party and all appropriate governmental authorities (including without limitation the SEC, the National Association of Securities Dealers 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. Notwithstanding the generality of the foregoing, each party hereto further agrees to furnish State insurance authorities with any information or reports in connection with services provided under this Agreement which such authorities may request in order to ascertain whether the insurance operations of the Company are being conducted in a manner consistent with applicable law and regulations. 12.7. 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. 12.8. This Agreement or any of the rights and obligations hereunder may not be assigned by any party without the prior written consent of all parties hereto; provided, however, that an Adviser may assign this Agreement or any rights or obligations hereunder to any affiliate of or company under common control with the Adviser, if such assignee is duly licensed and registered to perform the obligations of the Adviser under this Agreement. 12.9. The Company shall furnish, or shall cause to be furnished, to the Fund or its designee copies of the following documents at the Fund's request: (a) the Company's annual statement (prepared under statutory accounting principles) and annual report (prepared under generally accepted accounting principles ("GAAP"), if any), as soon as practical and in any event within ninety (90) days after the end of each fiscal year; 20 22 (b) the Company's quarterly statements (prepared under statutory accounting principles and GAAP, if any), as soon as practical and in any event within forty five (45) days after the end of each quarterly period: (c) any financial statement, proxy statement, notice or report of the Company sent to stockholders and/or policyholders, as soon as practical after the delivery thereof to stockholders; (d) any registration statement (without exhibits) and financial reports of the Company filed with the SEC or any state insurance regulator, as soon as practical after the filing thereof; and (e) any other report submitted to the Company by independent accountants in connection with any annual, interim or special audit made by them of the books of the Company, as soon as practical after the receipt thereof. 12.10. Unless otherwise specifically provided in this Agreement, no provision of this Agreement may be amended or modified in any manner except by a written agreement executed by all parties. 21 23 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed in its name and on its behalf by its duly authorized representative and its seal to be hereunder affixed hereto as of the date specified above. NATIONAL LIFE INSURANCE COMPANY By: ------------------------------ NAME: TITLE: THE UNIVERSAL INSTITUTIONAL FUNDS, INC. By: ------------------------------ NAME: TITLE: MORGAN STANLEY DEAN WITTER INVESTMENT MANAGEMENT INC. By: ------------------------------ NAME: TITLE: MILLER ANDERSON & SHERRERD, LLP By: ------------------------------ NAME: TITLE: 22 24 SCHEDULE A SEPARATE ACCOUNTS AND ASSOCIATED CONTRACTS
NAME OF SEPARATE ACCOUNT AND FORM NUMBER AND NAME OF DATE ESTABLISHED BY BOARD OF DIRECTORS CONTRACT FUNDED BY SEPARATE ACCOUNT - -------------------------------------- ----------------------------------- National Variable Life Insurance Account Sentinel Benefit Provider (Established February 1, 1985) - Form # 9004 (0898)
A-1 25 SCHEDULE B PORTFOLIOS OF THE UNIVERSAL INSTITUTIONAL FUNDS, INC. AVAILABLE UNDER THIS AGREEMENT ------------------------------------------ Fixed Income Portfolio High Yield Portfolio Real Estate Portfolio Emerging Markets Equity Portfolio B-1 26 SCHEDULE C PROXY VOTING PROCEDURES The following is a list of procedures and corresponding responsibilities for the handling of proxies and voting instructions relating to the Fund. The defined terms herein shall have the meanings assigned in the Participation Agreement except that the term "Company" shall also include the department or third party assigned by the Company to perform the steps delineated below. - - The proxy proposals are given to the Company by the Fund as early as possible before the date set by the Fund for the shareholder meeting to enable the Company to consider and prepare for the solicitation of voting instructions from owners of the Contracts and to facilitate the establishment of tabulation procedures. At this time the Fund will inform the Company of the Record, Mailing and Meeting dates. This will be done verbally approximately two months before the shareholder meeting. - - Promptly after the Record Date, the Company will perform a "tape run", or other activity, which will generate the names, addresses and number of units which are attributed to each Contract owner/policyholder (the "Customer") as of the Record Date. Allowance should be made for account adjustments made after this date that could affect the status of the Customers' accounts as of the Record Date. Note: The number of proxy statements is determined by the activities described in this Step #2. The Company will use its best efforts to call in the number of Customers to the Fund, as soon as possible, but no later than two weeks after the Record Date. - - The Fund's Annual Report must be sent to each Customer by the Company either before or together with the Customers' receipt of voting instruction solicitation material. The Fund will provide the last Annual Report to the Company pursuant to the terms of Section 3.4 of the Participation Agreement. - - The text and format for the Voting Instruction Cards ("Cards" or "Card") is provided to the Company by the Fund. The Company, at its expense, shall produce and personalize the Voting Instruction Cards. The Fund or its affiliate must approve the Card before it is printed. Allow approximately 2-4 Business Days for printing information on the Cards. Information commonly found on the Cards includes: - name (legal name as found on account registration) - address - fund or account number C-1 27 - coding to state number of units - individual Card number for use in tracking and verification of votes (already on Cards as printed by the Fund). (This and related steps may occur later in the chronological process due to possible uncertainties relating to the proposals.) - - During this time, the Fund will develop, produce and pay for the Notice of Proxy and the Proxy Statement (one document). Printed and folded notices and statements will be sent to Company for insertion into envelopes (envelopes and return envelopes are provided and paid for by the Company). Contents of envelope sent to Customers by the Company will include: - Voting Instruction Card(s) - One proxy notice and statement (one document) - return envelope (postage pre-paid by Company) addressed to the Company or its tabulation agent - "urge buckslip" - optional, but recommended (this is a small, single sheet of paper that requests Customers to vote as quickly as possible and that their vote is important; one copy will be supplied by the Fund.) - cover letter - optional; supplied by Company and reviewed and approved in advance by the Fund - - The above contents should be received by the Company approximately 3-5 Business Days before mail date. Individual in charge at Company reviews and approves the contents of the mailing package to ensure correctness and completeness. Copy of this approval sent to the Fund. - - Package mailed by the Company. * The Fund must allow at least a 15-day solicitation time to the Company as the shareowner. (A 5-week period is recommended.) Solicitation time is calculated as calendar days from (but not including,) the meeting, counting backwards. - - Collection and tabulation of Cards begins. Tabulation usually takes place in another department or another vendor depending on process used. An often used procedure is to sort Cards on arrival by proposal into vote categories of all yes, no, or mixed replies, and to begin data entry. Note: Postmarks are not generally needed. A need for postmark information would be due to an insurance company's internal procedure and has not been required by the Fund in the past. C-2 28 - - Signatures on Card checked against legal name on account registration which was printed on the Card. Note: For Example, if the account registration is under "John A. Smith, Trustee," then that is the exact legal name to be printed on the Card and is the signature needed on the Card. - - If Cards are mutilated, or for any reason are illegible or are not signed properly, they are sent back to Customer with an explanatory letter and a new Card and return envelope. The mutilated or illegible Card is disregarded and considered to be not received for purposes of vote tabulation. Any Cards that have been "kicked out" (e.g. mutilated, illegible) of the procedure are "hand verified," i.e., examined as to why they did not complete the system. Any questions on those Cards are usually remedied individually. - - There are various control procedures used to ensure proper tabulation of votes and accuracy of that tabulation. The most prevalent is to sort the Cards as they first arrive into categories depending upon their vote; an estimate of how the vote is progressing may then be calculated. If the initial estimates and the actual vote do not coincide, then an internal audit of that vote should occur. This may entail a recount. - - The actual tabulation of votes is done in units which is then converted to shares. (It is very important that the Fund receives the tabulations stated in terms of a percentage and the number of shares.) The Fund must review and approve tabulation format. - - Final tabulation in shares is verbally given by the Company to the Fund on the morning of the meeting not later than 10:00 a.m. Eastern time. The Fund may request an earlier deadline if reasonable and if required to calculate the vote in time for the meeting. - - A Certification of Mailing and Authorization to Vote Shares will be required from the Company as well as an original copy of the final vote. The Fund will provide a standard form for each Certification. - - The Company will be required to box and archive the Cards received from the Customers. In the event that any vote is challenged or if otherwise necessary for legal, regulatory, or accounting purposes, the Fund will be permitted reasonable access to such Cards. - - All approvals and "signing-off" may be done orally, but must always be followed up in writing. C-3 EX-99.1A9 3 w48261ex99-1a9.txt MASTER ADMINISTRATION AGREEMENT 1 EXHIBIT 1 A 9 MASTER ADMINISTRATION AGREEMENT between McCamish Systems, L.L.C. and National Life of Vermont dated as of August 18, 1998 2 TABLE OF CONTENTS ----------------- SECTION 1 DEFINITIONS.......................................................1 1.01 Books and Records.......................................................1 1.02 Case....................................................................2 1.03 End User................................................................2 1.04 Effective Date..........................................................2 1.05 Initial Term............................................................2 1.06 Policy Administration Services..........................................2 1.07 Plan Administration Services............................................2 1.08 Policies................................................................2 1.09 Products................................................................2 1.10 Participants............................................................3 SECTION 2 TERM..............................................................3 SECTION 3 POLICY OR PLAN ADMINISTRATION.....................................3 3.01 Administrative Service..................................................3 3.02 Performance Criteria....................................................3 3.03 Authorized Personnel....................................................3 3.04 Records.................................................................4 SECTION 4 FEES AND EXPENSES.................................................4 4.01 Administration Fees.....................................................4 4.02 Expenses................................................................4 4.03 System Enhancements.....................................................5 4.04 Payment.................................................................5 SECTION 5 REPRESENTATIONS AND WARRANTIES OF McCAMISH........................5 SECTION 6 REPRESENTATIONS AND WARRANTIES OF NATIONAL LIFE...................7 SECTION 7 ADDITIONAL COVENANTS..............................................8 7.01 Independent Contractor..................................................8 7.02 Confidentiality and Disclosure..........................................8 7.03 Indemnification........................................................10 7.04 Arbitration............................................................10
i 3 7.05 Compliance ........................................................ 11 7.06 Actions ........................................................... 11 7.07 Records ........................................................... 13 7.08 Audit ............................................................. 13 7.09 Security of Operations ............................................ 13 7.10 Insurance Coverage ................................................ 13 SECTION 8 TERMINATION OF AGREEMENT ........................................ 14 8.01 By Mutual Agreement ............................................... 14 8.02 By Non-Renewal .................................................... 14 8.03 For Cause ......................................................... 14 SECTION 9 ASSIGNMENT ...................................................... 14 9.01 Assignment by National Life ....................................... 14 9.02 Assignment by McCamish ............................................ 15 SECTION 10 MISCELLANEOUS ................................................... 15 10.01 Governing Law ..................................................... 15 10.02 Notices ........................................................... 15 10.03 Entire Agreement .................................................. 16 10.04 Binding Effect .................................................... 16 10.05 Severability ...................................................... 16 10.06 No Third Party Beneficiaries ...................................... 16 10.07 Headings .......................................................... 16 10.08 Counterparts ...................................................... 16 10.09 Waiver ............................................................ 17 10.10 Construction ...................................................... 17 10.11 Taxes ............................................................. 17 10.12 Software Escrow Agreement ......................................... 17 10.13 Software License in Escrow ........................................ 18
ii 4 TABLE OF EXHIBITS A Policy Administration Services B Plan Administration Services C Performance Criteria D Fee Schedule E Products F Schedule of Authorized Personnel G Insurance Coverage H Software Escrow Agreement I Software System License Agreement iii 5 MASTER ADMINISTRATION AGREEMENT This MASTER ADMINISTRATION AGREEMENT (this "Agreement") is made and entered into as of the 18th day of August, 1998, by and between McCamish Systems, L.L.C., a Georgia limited liability company, having its principal address and place of business at 6425 Powers Ferry Road, Third Floor, Atlanta, Georgia, 30339 (hereinafter referred to as "McCamish"); and National Life of Vermont, a mutual life insurance company registered under the laws of the State of Vermont, having its principal place of business at One National Life Drive, Montpelier, VT 05604 (hereinafter referred to as "National Life"). WITNESSETH: WHEREAS, the parties hereto desire to enter into this Agreement to provide for the provision by McCamish, as an independent contractor, of insurance policy administration services and non-qualified plan administration services to National Life on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth, and other good and valuable considerations, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound, the parties hereto hereby agree as follows: SECTION 1 DEFINITIONS. As used in this Agreement, the following terms shall have the meaning set forth: 1.01 Books and Records. "Books and Records" means all books and records in the possession or control of McCamish that contain information related to the Policies (defined in Section 1.08 below) and Participants Policies (defined in Section 1.10 below), including without limitation, to the extent any of the following exist, (i) hard copy and microfiche records; (ii) all paper files; (iii) all electronic images; (iv) all computer data files; (v) all correspondence between McCamish and owners of Policies; (vi) administrative records; (vii) claim records; (viii) sales records; (ix) reinsurance records, (x) underwriting records and (xi) accounting records; provided, 1 6 however, that Books and Records shall not include any of McCamish's internal documentation of its own programs, systems and procedures or any of McCamish's books and records which are not directly related to the Policies. Books and records shall be maintained for a period time not less than five (5) years following the termination of this Agreement. 1.02 Case. "Case" means a group of Policies that have a common owner and payor, have a common corporate objective, and/or a group of Participants that are part of a common benefit plan. 1.03 End User. "End User" means a party for whom National Life has agreed to provide Plan Administration Services which are the subject of this Agreement. 1.04 Effective Date. "Effective Date" means the date stated in the first paragraph of this Agreement. 1.05 Initial Term. "Initial Term" means the five (5) year period commencing on the Effective Date of this Agreement and ending at 11:59 p.m. on the day prior to the fifth anniversary of the Effective Date. 1.06 Policy Administration Services. "Policy Administration Services" means the services set forth in Exhibit A attached hereto and designated as "Policy Administration Services". 1.07 Plan Administration Services. "Plan Administration Services" means the services set forth in Exhibit B attached hereto and designated as "Plan Administration Services". 1.08 Policies. "Policies" means, collectively, the insurance policies included within one of the Products and "Policy" means any one of the Policies. 1.09 Products. "Products" means the insurance products described in Exhibit E attached hereto and made a part hereof. A "Product" is limited to a single policy form of an 2 7 insurance company. Exhibit E may be amended during the Term by mutual written agreement of the parties hereto. 1.10 Participants. "Participants" means, collectively, the individuals included within a non-qualified benefit plan for which service is provided under the terms of this Agreement. SECTION 2 TERM. This Agreement shall commence on the Effective Date and shall continue in effect for the Initial Term; thereafter this Agreement shall continue in full force and effect from year to year until terminated as herein provided, each such additional year being an "Additional Term" of this Agreement. The Initial Term and any Additional Terms hereunder are herein collectively referred to as the "Term". SECTION 3 POLICY OR PLAN ADMINISTRATION. 3.01 Administrative Services. During the Term, McCamish shall perform Policy Administration Services and Plan Administration Services (collectively, sometimes referred to as the "Administration Services"). 3.02 Performance Criteria. The manner and method of performing Administration Services is set forth in Exhibit C. 3.03 Authorized Personnel. At any time McCamish may apply to a person indicated on the "Schedule of Authorized Personnel", attached hereto as Exhibit F, as a person authorized to give instructions under this section with respect to any matter arising in connection with this Agreement. McCamish shall not be liable for, and shall be indemnified and held harmless by National Life against any loss, cost, damage or expense arising from, any action taken or omitted by McCamish to the extent McCamish can demonstrate that the action or omission was taken or omitted in good faith in reliance upon such instruction. 3 8 National Life may at any time provide McCamish with written notice of any change of authority of persons authorized and enumerated in Exhibit F to provide McCamish with instructions or directions relating to services to be performed by McCamish under this agreement. 3.04 Records. During the Term, McCamish shall keep true and correct Books and Records relating to the performance of all Administration Services hereunder. McCamish shall deliver the Books and Records and copies thereof upon request by National Life. Anything herein to the contrary notwithstanding, McCamish shall be allowed to make and retain copies of the Books and Records, at its own expense, upon termination of this Agreement. It is acknowledged and agreed that any such Books and Records may be maintained on magnetic media, electronic media, microfiche, CD and other non-paper media. SECTION 4 FEES AND EXPENSES 4.01 Administration Fees. (a) During the Initial Term of this Agreement, National Life shall pay to McCamish, as compensation for all Administration Services rendered pursuant to this Agreement, the amounts set forth in Exhibit D. In no event, except as provided below, will the fees payable by National Life to McCamish hereunder be less than the fees determined by the application of the Minimum Charges set forth in Exhibit D. (b) for each Additional Term of this Agreement, National Life shall pay to McCamish, as compensation for all Administration Services rendered pursuant to this Agreement, such fees and charges as shall be agreed to by the parties and attached hereto as an amended Exhibit D prior to commencement of such Additional Term. 4.02 Expenses. National Life will promptly reimburse McCamish for all reasonable out-of-pocket expenses incurred by McCamish in the performance of this Agreement. Out-of-pocket expenses include, but are not limited to the following: 4 9 (a) Travel related costs for travel requested by National Life. (b) Postage and forms cost of special mailings requested by National Life. (c) Charges for telephone line(s) dedicated to service of National Life customers, agents and brokers. (d) Charges for dedicated voice/data lease line(s) providing wide area network access from National Life site(s) to McCamish site(s). 4.03 System Enhancements. Requested by National Life for enhancements to systems or procedures for support of new products or new functional capabilities will be performed and billed by McCamish to National Life on a time and expense basis at the then current rate in effect. Such National Life requests will be in writing. McCamish will provide, in writing, a design specification that will include a detailed description of the requested enhancement, an estimate of cost and an estimated implementation schedule. McCamish will undertake the project upon receipt of the signed acceptance of the design specification by National Life. 4.04 Payment. During the Term of this Agreement, National Life shall pay McCamish within thirty (30) days of the date of McCamish's invoice. Late payments shall be subject to McCamish's standard late payment charges as set forth on McCamish's invoice. SECTION 5 REPRESENTATIONS AND WARRANTIES OF MCCAMISH. McCamish hereby represents and warrants to National Life as follows: (a) It is a limited liability company duly organized and existing and in good standing under the laws of the State of Georgia. (b) It is empowered under applicable laws and by its articles of organization and operating agreement to enter into and perform the services contemplated in this Agreement. 5 10 (c) All requisite proceedings have been taken to authorize it to enter into and perform the services contemplated in, and execute and deliver, the Agreement. (d) It has duly executed and delivered this Agreement and such execution and delivery nor the performance by it of any of its obligations under this Agreement will (i) violate any provision of its certificate of incorporation or by-laws, (ii) result in a violation or breach of, or constitute a default or an event of default under, any indenture, mortgage, bond or other contract, license, agreement, permit, instrument or other commitment or obligation to which it is a party or (iii) violate any law, rule or regulation of any governmental body, writ, judgment, injunction or court decree (collectively, "Laws") applicable to it or its business. (e) It has all licenses, permits, registrations and other governmental approvals necessary or advisable for the performance of its obligations under this Agreement. (f) Its business operations have been conducted, are now, and will continue to be in compliance in all material respects with all Laws. (g) In its reasonable business judgment, it has the facilities, equipment and personnel necessary to carry out its duties and obligations under this Agreement. (h) Maintenance of Information 1. McCamish shall maintain and make available to National Life complete books and records of all transactions performed on behalf of National Life. The books and records shall be maintained in accordance with prudent standards of insurance recordkeeping and must be maintained for a period of not less than five (5) years from the date of their creation. 2. Insurance regulators authorized by statute shall have access to books and records maintained by McCamish for the purposes of examination, audit and inspection. Any trade secrets contained in such books and records, including the 6 11 identity and addresses of policyholders and certificate holders, shall be kept confidential, except that insurance regulators authorized by statute may use such information in any proceeding instituted against McCamish. 3. National Life shall own the records generated by McCamish pertaining to National Life; however, McCamish shall retain the right to continuing access to books and records to permit McCamish to fulfill all of its contractual obligations to insured parties, claimants and National Life. 4. In the event National Life and McCamish cancel this Agreement; notwithstanding the provisions of this Paragraph, McCamish may, by written agreement with National Life, transfer all records to a new administrator rather than retain them for five (5) years. In such cases, the new administrator shall acknowledge, in writing, that it is responsible for retaining the records so transferred by McCamish as required by Sub-paragraph 4.06(1) of this Agreement. SECTION 6 REPRESENTATIONS AND WARRANTIES OF National Life. National Life hereby represents and warrants to McCamish as follows: (a) It is a registered mutual life insurance company organized and existing and in good standing under the laws of the State of Vermont. (b) It is empowered under the applicable laws and regulations and by its governing documents to enter into and perform this Agreement. (c) All requisite proceedings have been taken to authorize it to enter into and perform this Agreement. (d) It has duly executed and delivered this Agreement and neither such execution and delivery nor the performance by it of any of its obligations under this Agreement will (i) violate any provision of its governing documents, (ii) result in a violation or breach 7 12 of, or constitute a default or an event of default under, any indenture, mortgage, bond or other contract, license, agreement, permit, instrument or other commitment or obligation to which it is a party or (iii) violate any Law applicable to it or its business. SECTION 7 ADDITIONAL COVENANTS. 7.01 Independent Contractor. It is understood and agreed that all Administration Services performed hereunder by McCamish shall be performed solely for National Life by McCamish in the capacity of an independent sub-contractor of National Life. Nothing contained herein shall be construed to create between McCamish and National Life a partnership, joint venture, association or other legal entity or relationship other than that of independent sub-contractor. 7.02 Confidentiality and Disclosure. (a) Each Party to this Agreement ("Disclosing Party") may disclose to the other party ("Recipient") certain proprietary and confidential information including, without limitation, policyholder information, procedures, National Life customer lists, prospect lists, contracted broker and agent lists, and material related to policy design, pricing, filings, marketing and sales administration and systems information ("Information"). (b) Recipient agrees to maintain, during the Term and thereafter, the Information of the Disclosing Party in confidence using at least the same degree of care as it uses in maintaining as secret its own trade secret, confidential and proprietary information, but always at least a reasonable degree of care. (c) All tapes, books, reference manuals, instructions, records, information, and data pertaining to the business of National Life, including information relating to the contracts and the names, addresses and other information regarding the policy owners, which are exchanged or received pursuant to the negotiation of and/or the carrying out of this Agreement shall remain confidential and shall not be voluntarily disclosed to any other person except as required to perform this Agreement. 8 13 McCamish further agrees not to use any such information for any purpose other than as directly related to its performance under this Agreement, and specifically agrees not to use such information directly or through affiliates to contact Contract Owners, insureds or beneficiaries, to replace any of the contracts or to solicit financial services or products. For this purpose, affiliate means any business organization in which McCamish has a majority ownership interest at the time such contacts is made. McCamish, however, may disclose any information if: (i) pursuant to Court order or the lawful requirement or demand of a government agency; (ii) otherwise required by law; or (iii) authorized in writing by National Life. McCamish will, upon request by National Life, return the tapes, books, reference materials, instructions, records and data mentioned above to National Life. (d) Recipient shall use reasonable efforts to limit access to information received from the Disclosing Party to only those personnel of Recipient who have need of such access for the performance of any obligation of Recipient under this Agreement. (e) Recipient shall use information only for purposes of fulfilling its obligations under the Agreement. (f) Except as expressly provided in the Agreement, Disclosing Party grants no license, right or interest to Recipient under any copyrights, patents, trademarks, trade secrets or other property rights of Disclosing Party by reason of the disclosure of the information. (g) Each party acknowledges that some information may, under applicable law, be deemed to be confidential information of third parties (such as natural persons whose lives are insured under a Policy) and agrees to preserve the confidentiality of all information, which under applicable Law must be treated as confidential. The terms and conditions of this Section 7.02 shall survive the termination of this Agreement. 9 14 7.03 Indemnification. Each party to this Agreement shall indemnify and hold harmless the other party and its officers, directors, partners, principals, independent contractors, employees, member firms, subcontractors and affiliates and their respective personnel from and against any and all liabilities, losses, damages, costs, expenses (including, without limitation, reasonable attorneys' fees and court costs), interest, penalties or other loss directly or indirectly arising out of, in connection with or with respect to any breach of this Agreement or any fraudulent, criminal, negligent and/or bad faith acts or omissions by such party or its officers, directors, partners, principals, independent contractors, employees, member firms, subcontractors and affiliates and their respective personnel under this Agreement. If a party is named in any lawsuit or other proceeding for which such party believes it may be entitled to indemnification hereunder (other than any action or proceeding described in Section 7.06), such party shall promptly give notice thereof to the other party, such notice to include a description in reasonable detail of such lawsuit or proceeding and the basis for such party's belief that it may be entitled to indemnification hereunder. The parties shall cooperate in all reasonable respects with each other in defending such lawsuit or proceeding. McCamish agrees not to settle any such lawsuit or proceeding without the written consent of National Life. The terms and conditions of this Section 7.03 shall survive the termination of this Agreement. 7.04 Arbitration. In the event of any dispute between National Life and McCamish with respect to the subject matter of this Agreement or the enforcement of rights hereunder, either party may, by written notice to the other, require such dispute or difference to be submitted to arbitration. This provision, however, shall not be applicable to any dispute that involves a claim by or against a Third Party. The arbitrator or arbitrators shall be selected by agreement of the parties or, if they cannot agree on an arbitrator or arbitrators within twenty (20) days after the notice of such party's desire to have the question settled by arbitration, then the arbitrator or arbitrators shall be selected by the American Arbitration Association (the "AAA") in Atlanta, Georgia. The determination reached, or award granted, in such arbitration shall be final and binding, to the extent not in violation of law or public policy, on all parties hereto. Enforcement of the arbitration award or determination may be sought in any court of competent jurisdiction. The 10 15 arbitrators shall not be bound by judicial formalities and may abstain from following the strict rules of evidence. The parties hereby mutually instruct the arbitrators to limit the time and scope of discovery to the greatest extent practicable and request the arbitrators to provide a decision as rapidly as practicable, in each case consistent with the interests of justice, it being the intention of the parties that any arbitration under this Section 7.04 be commenced, conducted and completed, and a decision rendered, as rapidly as practicable. Pending such decision, each party will continue to perform its obligations under this Agreement. Unless otherwise agreed by the parties, any such arbitration shall be conducted in accordance with the rules of the AAA. In the event of any litigation or arbitration as provided under this Agreement, or the enforcement of rights hereunder, each party shall bear its own costs and expenses relating to such litigation or arbitration, including reasonable attorney's fees and expenses, unless otherwise provided by the arbitration award or determination. In no event shall the arbitrators have the right or authority to award consequential, incidental, indirect, special or punitive damages relating to this Agreement. The terms and conditions of this Section 7.04 shall survive the termination of this Agreement. 7.05 Compliance. McCamish shall provide staff with the skills necessary to perform the Administrative Services, as determined by McCamish using its reasonable business judgment. McCamish shall obtain and maintain for itself, all licenses necessary for performance under this Agreement. McCamish shall maintain all records of its administrative services in accordance with relevant SEC and NASD requirements. 7.06 Actions. (a) Each party to this Agreement (the "Notifying Party") shall promptly notify the other party of any threatened or pending lawsuit or governmental or regulatory agency inquiry or complaint relating to Policies of which the Notifying Party has actual knowledge and shall promptly transmit to such other party a copy of any applicable 11 16 service of process or other instrument related to a court proceeding or any correspondence or other document transmitted to or from any governmental or regulatory agency relating to the Policies which shall be actually received by the Notifying Party. (b) McCamish shall make no response to any governmental or regulatory agency's inquiry or complaint relating to Policies without first obtaining National Life's approval and consent to the response to such inquiry or complaint; provided, however, that if National Life fails to give its approval or consent or delays its approval or consent and such failure or delay would subject McCamish to any fine, penalty, liability or sanction, then McCamish may make a response. (c) National Life reserves the right to control the defense of any litigation, threatened or pending, by or against it, or to respond on its own behalf to any governmental or regulatory agency's inquiry or complaint; provided, however, that if National Life shall exercise this right in such a manner as shall subject McCamish to any fine, penalty, liability or sanction for failure to follow procedure, or otherwise in a manner which, in the reasonable opinion of McCamish or its legal counsel may have a material adverse effect on McCamish, then McCamish shall have the right to defend itself with counsel of its choice at its own expense. (d) McCamish reserves the right to control the defense of any litigation, threatened or pending, by or against it, or, subject to subsection (b) above, to respond on its own behalf to any governmental or regulatory agency's inquiry or complaint; provided, however, that if McCamish shall exercise this right in such a manner as shall subject National Life to any fine, penalty, liability or sanction for failure to follow procedure, or otherwise in a manner which, in the reasonable opinion of National Life or its legal counsel may have a material adverse effect on National Life, then National Life shall have the right to defend itself with counsel of its choice at its own expense. 12 17 (e) The parties shall cooperate with each other in responding to or defending any such lawsuit, threat, demand, inquiry, complaint, administrative or regulatory investigation or proceeding. 7.07 Records. Each party to this Agreement shall maintain, following the termination of this Agreement for any reason, its Books and Records with respect to business produced under this Agreement for such period of time as may be required by law. It is acknowledged and agreed that any such books and records may be maintained on magnetic media, electronic media, microfiche or other non-paper media. 7.08 Audit. Upon forty-eight (48) hours advanced notice to McCamish, National Life will have the right under this Agreement to perform on-site inspection and analyses of the Books and Records in accordance with reasonable procedures and at reasonable frequencies. At the request of National Life, McCamish will make available to National Life representatives of the appropriate regulatory agencies all reasonable requested Books and Records and access to operating procedures. In addition to any rights granted National Life elsewhere in this Agreement, National Life shall have the right to conduct periodic audits, including termination audits, with reasonable frequency during normal business hours at McCamish's office. If National Life decides to conduct an audit at its own office, McCamish shall ship to National Life all requested records to National Life at National Life's expense. Audits may include examination of books and records, fiduciary accounts, business practices and procedures, compliance with applicable laws and regulations, and compliance with this Agreement. 7.09 Security of Operations. McCamish shall maintain such off-site backup of its systems, procedures, and Books and Records as National Life may reasonably request. McCamish shall maintain at all times during the Term a disaster recovery capability materially consistent with that currently maintained by McCamish. 7.10 Insurance Coverage. McCamish shall use its reasonable efforts to continue in effect the insurance coverages described in Exhibit G attached hereto provided that such coverage is available from a domestic insurance carrier at a reasonable cost to McCamish. 13 18 McCamish shall not voluntarily cause any termination, reduction, or alteration of these coverages without thirty (30) days prior written notice to National Life. SECTION 8 TERMINATION OF AGREEMENT. 8.01 By Mutual Agreement. This Agreement may be terminated or amended by mutual written agreement of the parties at any time. 8.02 By Non-Renewal. At least one hundred and eighty (180) days prior to the end of the Initial Term and any Additional Term hereof, either party may give the other notice if the party delivering such notice desires to change any term of the Agreement. If McCamish and National Life do not agree in writing with respect to the matters described in such notice before the end of the Term during which McCamish gives such notice, this Agreement shall terminate at the end of such Term. 8.03 For Cause. If either of the parties hereto shall materially breach this Agreement or be materially in default hereunder (the Defaulting party), the other party hereto may give written notice thereof to the Defaulting Party and if such default or breach shall not have been remedied within thirty (30) days after such written notice is given, then the party giving such written notice may terminate this Agreement by giving thirty (30) days written notice of such termination to the Defaulting Party. Termination of this Agreement by default or breach by a party shall not constitute a waiver of any rights of the other party in reference to services performed prior to such termination, rights to be reimbursed for out-of-pocket expenditures or any other rights such other party might have under this Agreement at law, in equity or otherwise. SECTION 9 ASSIGNMENT. 9.01 Assignment by National Life. National Life shall not, directly or indirectly, in whole or in part, assign any of its rights or obligations hereunder without the prior written consent of McCamish, which consent shall not be unreasonably withheld. 14 19 9.02 Assignment by McCamish. McCamish shall not directly or indirectly, in whole or in part, delegate its duties or assign its rights under this Agreement without the prior written consent of National Life, which consent shall not be unreasonably withheld. SECTION 10. MISCELLANEOUS 10.01 Governing Law. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Georgia, without giving effect to the principles of conflicts of laws thereof. 10.02 Notices. Any notice, consent, approval or other communication required or permitted hereunder shall be in writing and shall be delivered personally, or sent by facsimile transmission, overnight courier service or by registered or certified mail, postage prepaid, return receipt requested, and addressed as follows: (a) If to McCamish: McCamish Systems, L.L.C. 6425 Powers Ferry Road Third Floor Atlanta, GA 30339 Attention: Sam D. Thomas, Senior Vice President Facsimile Number: (770) 690-1800 (b) If to National Life: National Life of Vermont One National Life Place Montpelier, VT 05604 Attention: Charles Kittredge, Senior Vice President Facsimile Number: (802) 229-9281 Any such notice shall be deemed given when so delivered (in the case of personal delivery or overnight courier service) or sent by facsimile transmission or, if mailed, upon receipt as evidenced by the return receipt. If the address of any party hereunto is changed, written 15 20 notice of such change shall be given to the other party, in accordance with this Section, and said new address shall be used for purposes of this Agreement. 10.03 Entire Agreement. This Agreement, the Exhibits which are attached hereto and made a part hereof, and the documents executed pursuant hereto, contain the entire understanding of the parties with respect to the subject matter hereof and thereof and no representation, warranty, covenant or agreement not embodied herein or therein, oral or otherwise, shall be of any force or effect whatsoever with respect to the subject matter hereof or thereof. Further, no change, amendment or modification of this Agreement shall be effective unless in writing and signed by both parties hereto. 10.04 Binding Effect. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and permitted assigns. 10.05 Severability. In the event any one or more of the provisions contained in this Agreement shall, for any reason, be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision of this Agreement. 10.06 No Third Party Beneficiaries. Nothing in this Agreement is intended or shall be construed to give any person, other than the parties hereto, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision contained herein. 10.07 Headings. The Section headings of this Agreement are for convenience only and shall not affect the construction or interpretation of this Agreement. 10.08 Counterparts. This Agreement may be executed in two (2) or more counterparts, each of which shall be deemed an original but all of which will constitute one and the same document. 16 21 10.09 Waiver. (a) A waiver of any default or breach hereunder granted by any party hereto shall not constitute a waiver by such party of any other default or breach or a waiver by such party of the same default or breach at a later time. Further, to be effective, any such waiver must be in writing and be signed by the party granting such waiver. (b) Subject to the last sentence of Section 10.09(a), the forbearance or neglect by National Life or McCamish to insist upon strict compliance with any of the provision of this Agreement, or to declare a forfeiture or termination, shall not be construed as a waiver of any right or privilege hereunder. No waiver of any right or privilege arising from any default or failure of performance hereunder shall affect the rights or privileges of either party in the event of a further default or failure of performance hereunder. 10.10 Construction. All parties hereto have participated, directly or indirectly, in the negotiations and preparation of this Agreement. In no event shall this Agreement be construed more or less stringently against any party hereto by reason of either party being construed as the principal drafting party hereto. 10.11 Taxes. All sales, use, excise or other similar taxes or duties which may be or become payable on account of goods or services provided hereunder shall be payable by National Life to McCamish Systems upon the receipt by National Life of McCamish Systems' invoice therefor. In lieu of paying such taxes, National Life may provide McCamish Systems with a tax exemption certificate acceptable in form and substance to the appropriate taxing authorities. 10.12 Software Escrow Agreement. As soon as is practicable after the execution of this Agreement, (i) the parties hereto shall execute and deliver an Escrow Agreement substantially in the form of Exhibit H attached hereto and made a part hereof (the "Escrow Agreement") for the purpose of protecting National Life in the event of a breach of this Agreement by McCamish or the 17 22 termination of this Agreement by National Life for Cause, pursuant to Section 8 hereof, prior to the end of the Term; and (ii) upon execution of the Escrow Agreement by all parties thereto, McCamish shall deposit with the Escrow Agent a copy of the Software to be held in accordance with the terms and conditions of the Escrow Agreement. 10.13 Software License in Escrow. As soon as is practicable after execution of the Escrow Agreement, the parties hereto shall execute and deliver to the Escrow Agent, to be held in accordance with the terms and conditions of the Escrow Agreement, a License Agreement substantially in the form of Exhibit I attached hereto and made a part hereof (the "License Agreement"), which shall provide that in the event the Software shall be released by the Escrow Agent to National Life, upon the occurrence of a Release Event (as defined in the Escrow Agreement), but only in such event, McCamish grants to National Life, effective upon receipt of the Software from the Escrow Agent, a license to use the Software (and such modifications, enhancements, improvements, updates, corrections or changes as National Life shall elect to make to the Software) (the "Software License") for a period of twenty-four months following the termination of this Agreement, solely on the terms and conditions of the License Agreement. At the expiration of the license term, the National Life shall have no further rights with respect to the Software. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their duly authorized partners and officers, all as of the date first above written. McCamish Systems, L.L.C. National Life of Vermont By:_________________________ By:__________________________ Sam D. Thomas Charles Kittredge Senior Vice President Senior Vice President 18 23 EXHIBIT A POLICY ADMINISTRATIVE SERVICES 1. McCamish will perform the following services related to the policy issue process: (a) McCamish will, upon receipt of Case Set up Worksheet for new cases, set up the case and case version information. (b) McCamish will, upon receipt of census data in a prescribed format, perform the following census edits: (i) Validate named, sex, date of birth, state of issue, and social security number; (ii) Validate eligibility requirements as applicable; (iii) Test for duplicate insureds. (c) McCamish will, upon receipt of policy applications, perform the following; (i) Validate application; (ii) Validate agent license status; (iii) Validate product approval status; (iv) Determine and report underwriting requirements for each applicant according to National Life provided rules; (v) Electronically feed to National Life Underwriter Workbench System; (vi) Electronically accept changes in the underwriting status as provided by National Life; (vii) Track the underwriting process. (d) McCamish will, upon completion of the underwriting process, produce the required policy pages, including state exception pages, in the following optional scenarios: (i) A set of policy pages for each policy; (ii) A set of policy pages for a single policy and a policy specification page for each policy. (e) McCamish will prepare Policy Delivery Receipts(s) in the following optional scenarios: (i) A Policy Delivery Receipt for each policy; (ii) A single Policy Delivery Receipt for the owner and a list detailing each policy. (f) McCamish will determine the date on which the free look period expires and the initial allocation takes place according to National Life provided rules. 1 24 EXHIBIT A POLICY ADMINISTRATIVE SERVICES 2. McCamish will perform the following services related to the renewal function: (a) McCamish will produce a Case Renewal Audit Checklist and associated reports approximately 90 days prior to renewal date. (b) McCamish will, for policies with automatic death benefit change provisions and upon receipt of updated census data, perform the following services: (i) Perform eligibility and underwriting edits; (ii) Provide National Life with target death benefit and underwriting criteria; (iii) Track underwriting process; (iv) Process death benefit changes and produce new policy specification pages as required. 3. McCamish will perform the following services related to the policy administration function: (a) McCamish will prepare and distribute an initial and modal billing kit for premiums and loan interest due based on National Life supplied rules. At any time prior to the due date and upon request by the owner, McCamish will prepare an additional billing kit. (b) McCamish will, upon expiration of the free look period, cause the initial allocation of policy funds from the free look default fund into the policy owner's selected funds. (c) McCamish is not responsible for receiving, directly handling any of National Life or the policy owner's funds. Upon notification by National Life of receipt of payment, McCamish will perform the following services: (i) Update Case/Policy suspense records; (ii) Reconcile cash received versus funds due; (iii) Apply premium and loan interest; (iv) Create accounting journal entries. (d) McCamish will provide the following services related to death claims: (i) Perform claim adjudication to insure that the claim should be paid; (ii) Transfer separate account funds into the general account; (iii) Establish pending death claim as necessary; (iv) Calculate net proceeds and interest on proceeds; (v) Identify net cash refunds of transactions occurring after the date of death; 2 25 EXHIBIT A POLICY ADMINISTRATIVE SERVICES (vi) Create Death Claim Worksheet and payment letter; (vii) Create check or wire request for disbursement of claim proceeds; (viii) Create accounting journal entries; (ix) Produce monthly pending claim status reports as necessary. (e) McCamish will perform the following services related to other policy terminations, including not taken, surrender, rescission and lapse: (i) Calculate net surrender value or net refund; (ii) Create Surrender Worksheet or Rescission Worksheet and cover letter; (iii) Create check or wire request for disbursement of proceeds; (iv) Create accounting journal entries. (f) McCamish will perform the following services as part of anniversary processing: (i) Create an invoice for loan interest due; (ii) Capitalize due and unpaid loan interest; (iii) Create accounting journal entries. (g) McCamish will perform the following services as part of monthaversary processing: (i) Compute and deduct fees and charges due; (ii) Compute and deduct cost of insurance for all coverages and benefits; (iii) Compute and credit interest to fixed funds; (iv) Perform grace period and lapse processing on policies failing equity test; (v) Create accounting journal entries. (h) McCamish will, upon request, perform the following policy services: (i) Process changes of owner, payor or beneficiary; (ii) Process name or address changes; (iii) Process change in coverage and coverage amount; (iv) Process change in death benefit option; (v) Process change in dividend option; (vi) Process change in sex, birth date, and policy rating criteria of insured. (i) McCamish will, upon request, perform the following financial event services: (i) Process premium remittances; (ii) Process loan repayment and loan interest payment remittances; (iii) Process loans; 3 26 EXHIBIT A POLICY ADMINISTRATIVE SERVICES (iv) Process partial withdrawals; (v) Process dividend distributions; (vi) Create check or wire request for disbursements, as appropriate; (vii) Create accounting journal entries. (j) McCamish will, upon request, perform the following policy asset related services: (i) Process rebalance of assets; (ii) Process transfer of assets; (iii) Process reallocation of assets; (iv) Process dollar cost averaging of assets; (v) Process change in investment allocations; (vi) Create accounting journal entries. 4. McCamish will perform the following services related to agent/broker commissions and service fees: (a) Process changes in commission structure; (b) Upon notification of receipt of premium payment, compute actual commissions and fees, or if premiums are no longer payable, compute paid up service fee; (c) Compute commission and fee reversals due to undo processing; (d) Compute commission and fee charge back due to terminated policies; (e) Prepare commission statement and recaps of commissions, fees, commission reversals and commission charge backs; (f) Create check or wire request for funds to be disbursed; (g) Create accounting journal entries. 5. McCamish will produce the following processing related reports: (a) Policy owner reports: (i) Confirmation of Policy Activity (variable products only); (ii) Periodic Statement of Policy Activity. (b) Daily processing reports: 4 27 EXHIBIT A POLICY ADMINISTRATIVE SERVICES (i) Transaction Registers; (ii) Error Report; (iii) Accounting Journal; (iv) Check Register; (v) Billing Register; (vi) Disbursement Suspense; (vii) Deposit Suspense. (c) McCamish will develop special reports or services as requested on a time and expense basis using its then current consulting rates. 6. McCamish will perform the following services related to fund pricing and trading: (a) For each fund McCamish is required to value, McCamish will, on fund valuation days and upon receipt of the Net Asset Value: (i) Compute mortality & expense charge; (ii) Compute Unit Value; (iii) Update the Price Table; (iv) Create accounting journal entries. (b) For each fund National Life is required to value, McCamish will, on fund valuation days and upon receipt of the Unit Value: (i) Update the Price Table. (c) McCamish will produce daily on National Life processing days: (i) An electronic feed of fund trading activity; (ii) Fund Summary Report; (iii) Fund Detail Report. (d) McCamish will prepare a monthly statement of mortality & expense charges due for each fund that McCamish is required to value. 7. McCamish will provide National Life with the following services related to the insurance carrier financial reporting function: (a) McCamish will provide National Life with the following accounting reports, on a monthly basis, in a printable format and on CD, unless noted as CD only: (i) Premium/Benefits by State; (ii) Detail Journal - Policy Order; (iii) Detail Journal - Account Order; (iv) Trial Balance - YTD All Cases; (v) Trial Balance - YTD by Case; 5 28 EXHIBIT A POLICY ADMINISTRATIVE SERVICES (vi) Disbursement Clearing Recap; (vii) Collection Suspense Recap; (viii) Cash Receipts Control Recap; (ix) Disbursements Outstanding Recap; (x) Policy Suspense Recap. (b) McCamish will provide, on a monthly basis, an electronic data feed of accounting entries in a form specified by National Life. (c) McCamish will provide the following Valuation and Policy Exhibit reports, as required, on a monthly basis, in a printable format and on CD, unless noted as CD only: (i) Policy Exhibit by State; (ii) Policy Loan Detail; (iii) Policy Loan Summary; (iv) Policy Loan By Case; (v) Coverage Reserves Detail; (vi) Coverage Reserves Summary; (vii) Reserves Released Detail; (viii) Reserves Released By Case; (ix) Dividend Liability Detail; (x) Dividend Liability Summary; (xi) Dividend Liability by Case; (xii) Coverage Reserves By Case; (xiii) Experience Credit Contingency Reserve; (xiv) Pending Death Claim Reserve; (xv) Death Claim History. (d) McCamish will maintain an agent balance sub-account by agent within case and provide the following reports on a monthly basis. All reports will be provided electronically in a printable format and on CD, unless noted as CD only: (i) Agent Balance By Case by Month; (ii) Agent Balance Summary by Month; (iii) Agent Balance Reconciliation. (e) McCamish will provide National Life with following reinsurance reports on a monthly basis. All reports will be provided electronically in a printable format and on CD, unless noted as CD only. (f) McCamish will provide National Life with a monthly electronic feed of financial management information data. 8. McCamish will provide the following remote access subject to security authorization: 6 29 EXHIBIT A POLICY ADMINISTRATIVE SERVICES (a) Wide Area Network access from designated National Life office(s) policy inquiry and report request capability; (b) Dial In access by National Life employees and by designated agents/brokers, providing policy inquiry and report request capability. 7 30 EXHIBIT B PLAN ADMINISTRATION SERVICES 1. McCamish will perform the following services related to establishing a new plan: (a) Establish plan records; (b) Upon receipt of participant census data in a specified format, McCamish will perform the following participant census data edits: (i) Valid name, sex, date of birth and Social Security Number, (ii) Duplicate names. 2. McCamish will perform the following functions relating to split dollar insurance contracts: (a) Maintain employer/employee split ownership records for cash value and death benefit based on plan rules; (b) Compute employee's economic benefit from a policy; (c) Provide historic and projection of split dollar values. 3. McCamish will perform the following functions relating to defined contribution plans: (a) Upon receipt of participant deferral data in a specified format, McCamish will update contributions to participant accounts, including employee deferrals and employer matching amounts; (b) Maintain detail records of investment elections and fund activity; (c) Provide periodic participant account statements; (d) Provide reports of historic and projected participant account activity and balances; (e) Provide plan level reports of projected funding liabilities and projected policy assets. 4. McCamish will perform the following functions relating to defined benefit plans: (a) Upon receipt of participant funding data in a specified format, McCamish will detail records of participant account contributions; (b) Maintain detail records of investment elections and fund activity; (c) Provide periodic participant account statements; 1 31 EXHIBIT B PLAN ADMINISTRATION SERVICES (d) Provide reports of historic and projected participant account activity and balances; (e) Provide plan level reports of projected funding liabilities and projected policy assets. 5. McCamish will provide the following reports on an Ad Hoc or pre-scheduled basis: (a) Participant Reports: (i) Deferral Statement of Account; (ii) Summary of Executive Benefits. (b) Plan Analysis Reports (Individual or Composite): (i) Summary of Insurance; (ii) Summary of Plan Costs; (iii) Summary of Financial Accounting; (iv) Plan Cash Flow; (v) Analysis of Cost Savings with Insurance. (c) Plan Financial Reports (Individual or Composite): (i) Profit and Loss Effect; (ii) Balance Sheet Effect; (iii) Retirement Benefit Journal Entries; (iv) Insurance Journal Entries; (v) Tax Journal Entries; (vi) Accounts for Journal Entries. 2 32 EXHIBIT C PERFORMANCE CRITERIA 1. McCamish shall discharge its duties hereunder in a manner that is consistent with insurance industry practices. 2. Performance with respect to Policy Administration Services shall include the following: (a) McCamish will electronically, or by hard copy or both as periodically agreed upon by National Life and McCamish, provide National Life with copies of all policy owner and agent/broker reports, letters and other correspondence on an agreed upon basis; (b) Calculation of policy values, dividends, policy distributions, and commissions will be made in accordance with procedures agreed to by National Life and McCamish and will not be changed without prior approval by National Life; (c) Specimens of each policy owner and agent/broker report referenced in Exhibit A - Policy Administrative Services will be provided to National Life and changes to existing report formats or development of new reports will be provided to National Life for approval prior to use; (d) Calculation of death proceeds will be done in accordance with procedures agreed to by National Life, and will be sent to National Life within three working days following receipt by McCamish of all required documentation. 3. Performance with respect to financial reporting shall include the following: (a) McCamish will deliver financial reports within five working days following the accounting close, as agreed to by National Life and McCamish; (b) McCamish will maintain financial records in accordance with procedures agreed to by National Life and McCamish and will not change procedures without prior approval by National Life. 4. Performance with respect to Plan Administration Services shall include the following: (a) McCamish will electronically, or by hard copy or both as periodically agreed upon by National Life and McCamish, provide National Life with copies of all plan and participant reports, letters and other correspondence on an agreed upon basis; (b) Calculation of policy and benefit values will be made in accordance with procedures agreed to by National Life and McCamish and will not be changed without prior approval by National Life; 1 33 EXHIBIT C PERFORMANCE CRITERIA (c) Specimens of each plan and participant report referenced in Exhibit B - Plan Administrative Services will be provided to National Life and changes to existing report formats or development of new reports will be provided to National Life for approval prior to use. 5. National Life and McCamish may mutually agree, from time to time, to modifications of the administrative services and/or performance criteria or to additional administrative services and/or performance criteria. 2 34 EXHIBIT D CORPORATE OWNED LIFE INSURANCE POLICY AND PLAN ADMINISTRATION PRICING SCHEDULE The monthly charge under the Agreement is the greater of the MINIMUM MONTHLY CHARGE (a) and the POLICY ADMINISTRATION UNIT CHARGE (b); plus the PLAN ADMINISTRATION UNIT CHARGE (c): (a) MINIMUM MONTHLY CHARGE. This is the minimum amount due each month for fees associated with (b) and (c) below.
AGREEMENT MONTH MINIMUM MONTHLY CHARGE --------------- ---------------------- Months 1 - 3 $15,000.00 Months 4 - 6 $20,000.00 Months 7 - 9 $25,000.00 Months 10 - 12 $30,000.00 Months 13 - 24 $35,000.00 Months 25 - 36 $40,000.00 Months 37 - 48 $45,000.00 Months 49 - 60 $50,000.00
(b) POLICY ADMINISTRATION UNIT CHARGE. This charge is due monthly, at the end of the calendar month, for each Policy processed during the month or any part of the month.
NUMBER OF POLICIES FEE PER POLICY ------------------ -------------- First 25,000 Policies $2.50 Next 25,000 Policies 2.30 Thereafter 1.88
(c) PLAN ADMINISTRATION UNIT CHARGE. This charge is due monthly, at the end of the calendar month, for each Participant active during the month or any part of the month.
NUMBER OF PARTICIPANTS FEE PER PARTICIPANT WITH POLICY WITHOUT POLICY ---------------------- ----------- -------------- First 25,000 Participants $3.00 $5.00 Next 25,000 Participants 2.50 4.50 Thereafter 1.83 4.00
1 35 EXHIBIT D CORPORATE OWNED LIFE INSURANCE POLICY AND PLAN ADMINISTRATION PRICING SCHEDULE (d) Consulting Rates:
Actuary I 15 $165 Actuary II 17 $190 Actuary III 19 $250 Sr. Actuary 20 $325 Business Analyst I 10 $125 Business Analyst II 13 $150 Business Analyst III 15 $165 Business Analyst IV 17 $190 Sr. Business Analyst 20 $250 Project Manager I 14 $150 Project Manager II 16 $175 Project Manager III 18 $210 Sr. Project Manager/Account Manager 21 $275 TPA Specialist I 6 $75 TPA Specialist II 8 $100 TPA Specialist III 10 $125 Sr. TPA Specialist 12 $150 Software Engineer I 11 $125 Software Engineer II 13 $150 Software Engineer III 15 $165 Software Engineer IV 17 $190 Sr. Software Engineer 19 $250
2 36 EXHIBIT E PRODUCTS PLAN CODE PLAN NAME - -------------------------------------------------- ____ Registered Variable Universal Life. ____ Non-registered Variable Universal Life. ____ Traditional Life 1 37 EXHIBIT F SCHEDULE OF AUTHORIZED PERSONNEL The following individuals are authorized to give instructions or direction to McCamish with respect to matters arising in connection with the servicing to be performed under this Agreement: C. Bryant Brink Robert MacLeod 1 38 EXHIBIT G INSURANCE COVERAGE McCamish will maintain the following coverages during the term of this Agreement: (a) Worker's Compensation at statutory limits; (b) Employers Liability, with $1,000,000 limit of liability; (c) Commercial General Liability including Products-Completed Operations coverage with Broad Form Contractual cover with the following limits of liability: (i) with a combined single limit of $1,000,000 for Bodily Injury and Property Damage; (ii) $1,000,000 limit of liability for Aggregate Products-Completed Operations and Property Damages; and (iii) $1,000,000 General Aggregate; (d) Automobile Liability, with a combined single limit of liability of $1,000,000/accident; (e) Crime Insurance policy with limits of $5,000,000; (f) Errors and Omissions policy with limits of $5,000,000; (g) Umbrella/Excess Liability insurance with a $4,000,000 limit of liability. 1 39 ADDENDUM NO. 1 ADDENDUM to MASTER ADMINISTRATION AGREEMENT is made and entered into as of the 18th day of August, 1998, by and between McCamish Systems, L.L.C., a Georgia limited liability company, having its principal address and place of business at 6425 Powers Ferry Road, Third Floor, Atlanta, Georgia, 30339, (hereinafter referred to as "McCamish"); and National Life of Vermont, a mutual life insurance company registered under the laws of the State of Vermont, having its principal place of business at One National Life Drive, Montpelier, VT 05604 (hereinafter referred to as "National Life"). 1. BUY OUT PROVISION. In the event National Life terminates the MASTER ADMINISTRATION AGREEMENT during the Initial Term other than for cause, National Life agrees to pay McCamish compensation set forth in Exhibit J attached hereto and designated as "Buy Out Compensation" in lieu of the Minimum Monthly Charge as set forth in Exhibit D to the MASTER ADMINISTRATION AGREEMENT. 2. ADMINISTRATION SYSTEM SOFTWARE LICENSE. In the event National Life terminates the MASTER ADMINISTRATION AGREEMENT during the Initial Term, National Life has the option to purchase the McCamish Corporate Owned Life Insurance Third Party Administration Software for a license fee as set forth in Exhibit K attached hereto and designated as "Administration System Software License Fee". Said license fee(s) will be used to offset payments due McCamish as described in the BUY OUT PROVISION. In the event National Life terminates the MASTER ADMINISTRATION AGREEMENT during the Initial Term and purchases the McCamish Corporate Owned Life Insurance Third Party Administration Software, the amount of the One Time License Fee paid to McCamish will be applied towards the payments due McCamish as described in the BUY OUT PROVISION. For the purposes of this calculation, the amount of the One Time License Fee will be set at $750,000. 1 40 McCamish Systems, L.L.C. National Life of Vermont By: /s/ Sam D. Thomas By: /s/ Charles Kittredge --------------------- ------------------------- Sam D. Thomas Charles Kittredge Senior Vice President Senior Vice President 2 41 EXHIBIT J BUY OUT COMPENSATION
TERMINATION YEAR COMPENSATION ---------------- ------------ Year 2 $1,200,000 Year 3 $1,060,000 Year 4 $700,000 Year 5 $300,000
For example, in the event National Life exercises the Buy Out Provision in Year 2, National Life would pay McCamish as compensation under the Buy Out Provision, $1,200,000. Both parties understand that National Life will have no further liability upon payment of the Buy Out Provision Compensation in Year 2. In the event National Life exercises the Buy Out Provision in Year 2 and purchases the McCamish Corporate Owned Life Insurance Third Party Administration Software as a One Time License Fee With Support as described in Exhibit K, National Life would pay McCamish as compensation under the Buy Out Provision $450,000, ($1,200,000 less the $750,000 One Time License Fee With Support). 3 42 EXHIBIT K ADMINISTRATION SYSTEM SOFTWARE LICENSE FEE 1. One Time License Fee No Support $1,000,000 McCamish does not provide maintenance, updates nor perform special requests. 2. One Time License Fee With Support $750,000 Annual Maintenance Fee $112,500 McCamish provides maintenance and updates. Support Contract is for 5 years. Special requests, while contract is in effect, are performed at standard time and materials. In the event of a Buy-Out during the Initial Term the charge for the License Fees would be subtracted from the Buy-Out amount to determine the amount of compensation due under the Buy Out Provision. For example, in the event National Life exercises the Buy Out Provision in Year 2 and purchases the McCamish Corporate Owned Life Insurance Third Party Administration Software as a One Time License Fee With Support as described in Exhibit K, National Life would pay McCamish as compensation under the Buy Out Provision $450,000, ($1,200,000 less the $750,000 One Time License Fee With Support). 4 43 ADDENDUM NO. 2 ADDENDUM to MASTER ADMINISTRATION AGREEMENT is made and entered into as of the 10th day of September, 1998, by and between McCamish Systems, L.L.C., a Georgia limited liability company, having its principal address and place of business at 6425 Powers Ferry Road, Third Floor, Atlanta, Georgia, 30339 (hereinafter referred to as "McCamish"); and National Life of Vermont, a mutual life insurance company registered under the laws of the State of Vermont, having its principal place of business at One National Life Drive, Montpelier, VT 05604 (hereinafter referred to as "National Life"). YEAR 2000 COMPLIANCE McCamish hereby represents and warrants that the VPAS-Corporate Life software is Year 2000 Compliant. For these purposes, Year 2000 Compliant is defined to mean that this software: (a) uses date data century recognition, and as appropriate, same century and multi-century formulas and date values in each instance for all calculations for which a date is used; (b) will not abnormally end or provide invalid or incorrect results as a result of date data, specifically including date data which represents or references different centuries or more than one century; and otherwise conforms with the current industry standards in order that it will fully perform without any errors or other problems due to the year being greater than 1999; (c) will correctly manage and manipulate data involving dates, including, but not limited to: single-century formulas and multi-century formulas, century recognition and calculations that accommodate same century and multi-century formulas, comparing and sequencing, and leap year calculations; and will operate without any time or Year 2000 related defects or abnormalities; and 1 44 (d) to the extent that the software will accept data from other systems and sources that are not Year 2000 Compliant, the software will properly recognize, calculate, sort, store output, and otherwise process such data in a manner that eliminates any century ambiguity so that the software remains Year 2000 Compliant. IN WITNESS WHEREOF, the parties hereto have caused this AMENDMENT to be executed and delivered by their duly authorized partners and officers, all as of the date first above written. McCamish Systems, L.L.C. National Life of Vermont By: /s/ Sam D. Thomas By: /s/ Charles Kittredge --------------------- -------------------------- Sam D. Thomas Charles Kittredge Senior Vice President Senior Vice President 2 EX-99.2 4 w48261ex99-2.txt OPINION AND CONSENT OF MICHELE S. GATTO 1 EXHIBIT 2 April 30, 2001 National Life Insurance Company National Life Drive Montpelier, Vermont 05604 Dear Sirs: This opinion is furnished in connection with the filing of a Post-Effective Amendment No. 3 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 Sentinel Benefit Provider variable universal life insurance policies intended primarily for the Corporate Market ("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 and Senior Vice President 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 Post Effective Amendment No. 3 to the Registration Statement and to the reference to my name under the heading "Legal Matters" in the prospectus. Very truly yours, Michele S. Gatto Senior Vice President and General Counsel. EX-99.6 5 w48261ex99-6.txt OPINION AND CONSENT OF KIRI PARANKIRINATHAN 1 EXHIBIT 6 April 30, 2001 National Life Insurance Company National Life Drive Montpelier, VT 05604 Ladies and Gentlemen: In my capacity as a consultant to National Life Insurance Company, I have provided actuarial advice concerning: (a) the preparation of Post Effective Amendment No. 3 to the registration statement for the 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 the Sentinel Benefit Provider Variable Universal Life Insurance Policies intended primarily for the Corporate Market (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, Net Cash Surrender Values, Account Values, and accumulated premiums in Appendix A of the prospectus (the "Prospectus") 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 disproportionately more favorable to the prospective purchasers of Policies, who are male non-smokers age 40 who undergo medical underwriting, 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 prospectus entitled "Detailed Description of Policy Provisions," "Charges and Deductions," and "Policy Rights and Privileges," 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 Post Effective Amendment No. 3 to the Registration Statement and the use of my name under the heading "Experts" in the prospectus contained in the Registration Statement. Sincerely, Kiri Parankirinathan, A.S.A., M.A.A.A EX-99.7A 6 w48261ex99-7a.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 Exhibit 7(a) CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Post-Effective Amendment No. 3 to the Registration Statement of the National Variable Life Insurance Account, a Separate Account of National Life Insurance Company, on Form S-6 relating to the Sentinel Benefit Provider policy, of our report dated February 28, 2001 relating to the financial statements of the National Life Insurance Company and our report dated March 28, 2001 relating to the financial statements of the National Variable Life Insurance Account - Benefit Provider Segment, all of which appear in such Prospectus. We also consent to the reference to us under the heading "Experts" in such Prospectus. PricewaterhouseCoopers LLP Boston, Massachusetts May 1, 2001 EX-99.7B 7 w48261ex99-7b.txt CONSENT OF SUTHERLAND, ASBILL & BRENNAN LLP 1 STEPHEN E. ROTH DIRECT LINE: (202) 383-0158 Internet: sroth@sablaw.com May 1, 2001 Board of Directors National Life Insurance Company One National Life Drive Montpelier, Vermont 05604 Re: National Variable Life Insurance Account Ladies and Gentlemen: We hereby consent to the reference to our name under the caption "Legal Matters" in the Prospectus filed as part of Post-Effective Amendment No. 3 to the Registration Statement on Form S-6 by National Variable Life Insurance Account for certain variable life insurance policies (File No. 333-67003). 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-----