Lincoln Financial Group said it would take federal bailout money and sell stock and debt to raise $2 billion to shore up its insurance unit and repay older debt.

The insurer also said on Monday that it would sell its UK subsidiary to Sun Life Financial Inc of Canada for 195 million pounds ($319 million).

U.S. life insurers have been weakened by the global financial crisis, hurt by investment losses as well as higher costs on investment-linked retirement products that guarantee returns.

In May the government declared six big insurers, including Lincoln, eligible for bailout funds under the Troubled Asset Relief Program. Lincoln said it would take $950 million by selling preferred stock to the Treasury. Hartford Financial Services Group Inc is taking up to $3.4 billion, while the other four have declined to accept TARP funds.

Lincoln said it also plans to sell $600 million of common stock and up to $500 million of senior debt.

It may boost the stock offering to $690 million if there is sufficient demand. The sale could dilute the investment of current shareholders by 13 percent.

Lincoln's stock fell 6 percent to $16.70 in premarket trading.

The company said half of the new funds would go to fund Lincoln National Life Insurance Co. The remainder will go for general corporate purposes, including the repayment of short-term debt and investment in the company's core businesses.

Lincoln estimated proceeds of $280 million to $300 million, net of tax, from the sale of its UK unit. The deal is expected to close on or around September 30, it said.

Lincoln has been working for months to head off a cash drain, slashing its dividend 95 percent in February and more recently reaching a reinsurance deal with Goldman Sachs that improves its capital position by about $240 million.

The insurer has also paid down debt, reducing financial leverage.

Lincoln shares are down 11 percent this year, while the Dow Jones U.S. life insurance index <.DJUSIL> has fallen 9 percent.

(Reporting by Juan Lagorio, editing by Lisa Von Ahn and John Wallace)

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