<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 17, 1997
REGISTRATION NO.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
ALABAMA
(State or other jurisdiction of (I.R.S. Employer (Primary Standard Industrial
incorporation or organization) Identification Number) Classification Code)
</TABLE>
2801 HIGHWAY 280 SOUTH
BIRMINGHAM, ALABAMA 35223
(205) 879-9230
(Address, including zip code, and telephone number, including
area code, of principal executive office)
------------------------
CAROLYN KING
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
P. O. BOX 2606
BIRMINGHAM, ALABAMA 35202
(205) 879-9230
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
------------------------
COPIES TO:
STEPHEN E. ROTH, ESQ. STEVE M. CALLAWAY, ESQ.
Sutherland, Asbill & Brennan LLP 1275 American Foundation Life Ins. Co.
Pennsylvania Avenue, N.W. P. O. Box 2606
Washington, D.C. 20004-2404 Birmingham, Alabama 35202
------------------------
If any of the securities that have been registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933 check the following box. /X/
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH OF SECURITIES TO BE AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
REGISTERED BE REGISTERED PER UNIT OFFERING PRICE REGISTRATION FEE
<S> <C> <C> <C> <C>
Modified Guaranteed Annuity Contracts and
Participating Interests Therein.......... * * $100,000,000 $34,483
</TABLE>
* The maximum aggregate offering price is estimated solely for the purpose of
determining the registration fee. The amount to be registered and the proposed
maximum offering price per unit are not applicable since these securities are
not issued in predetermined amounts or units.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
SHALL DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
Cross Reference Sheet Pursuant to
Regulation S-K, Item 501(b)
FORM S-1 ITEM NUMBER AND CAPTION HEADING IN PROSPECTUS
<TABLE>
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus... Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus............................ Capsule Summary of the Contract; Table of
Contents
3. Summary Information, Risk Factors and Ratio
of Earnings to Fixed Charges............. Outside Front Cover Page; Capsule Summary
of the Contract; Glossary of Special
Terms
4. Use of Proceeds............................ Investments by Protective
5. Determination of Offering Price............ Not Applicable
6. Dilution................................... Not Applicable
7. Selling Security Holders................... Not Applicable
8. Plan of Distribution....................... Distribution of Contracts
9. Description of Securities to be
Registered............................... Capsule Summary of the Contract;
Description of Contracts, Appendix B;
Appendix C
10. Interests of Named Experts and Counsel..... Not Applicable
11. Information with Respect to the
Registrant............................... American Foundation Life Insurance Company;
Executive Officers and Directors;
Executive Compensation; Financial
Statements; Legal Proceedings
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................. Undertakings
</TABLE>
<PAGE>
PROSPECTUS
MODIFIED GUARANTEED ANNUITY CONTRACTS
ISSUED BY
American Foundation Life Insurance Company
("American Foundation")
2801 Highway 280 South
Birmingham, Alabama 35223
(800) 456-6330
------------------------
This Prospectus describes interests in a non-participating individual
modified guaranteed annuity contract. It is designed and offered to provide
annuity payments in connection with retirement programs that may or may not
qualify for special income tax treatment under the Internal Revenue Code. The
individual modified guaranteed annuity contract is hereafter referred to as the
"Contract".
The Annuity Premium payments accepted by American Foundation under the
Contract will be allocated to and accounted for in a non-unitized separate
account. The assets of this separate account equal to the reserves and other
contract liabilities are not chargeable with the liabilities arising out of any
other business the Company conducts.
An Annuity Premium of at least $10,000 is required to purchase a Contract.
Additional Annuity Premium payments may be accepted. Regardless of the number of
Annuity Premium payments made, only one Contract will be issued. American
Foundation reserves the right not to accept any Annuity Premium payment and to
limit the total amount of your Annuity Premiums.
Each Annuity Premium payment (less premium taxes, if applicable) will be
allocated at your direction to one or more Sub-Accounts which correspond to the
Guaranteed Periods chosen by you, and will accumulate at the Guaranteed Interest
Rate or Rates applicable to such Guaranteed Periods. American Foundation
currently offers several Guaranteed Periods. PARTIAL AND FULL SURRENDERS MADE
PRIOR TO THE END OF A GUARANTEED PERIOD MAY BE SUBJECT TO A SURRENDER CHARGE,
AND WILL BE SUBJECT TO A MARKET VALUE ADJUSTMENT, WHICH COULD EITHER INCREASE OR
DECREASE YOUR ACCOUNT VALUE. American Foundation guarantees that Annuity Premium
held to the end of a Guaranteed Period will accumulate at its Guaranteed
Interest Rate, and will not be subject to a Surrender Charge or a Market Value
Adjustment.
PLEASE READ THIS PROSPECTUS CAREFULLY. INVESTORS SHOULD KEEP A COPY FOR
FUTURE REFERENCE.
AN INVESTMENT IN THE CONTRACT IS NOT A DEPOSIT OR OBLIGATION OF, OR GUARANTEED
OR ENDORSED BY, ANY BANK, NOR IS THE CONTRACT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. AN INVESTMENT IN
THE CONTRACT INVOLVES CERTAIN RISKS, INCLUDING THE LOSS OF ANNUITY DEPOSITS
(PRINCIPAL).
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS
<PAGE>
CAPSULE SUMMARY OF THE CONTRACT
This Prospectus describes an individual modified guaranteed annuity contract
( the "Contract") issued by American Foundation Life Insurance Company
("American Foundation").
The Contract may be issued pursuant to nonqualified retirement plans or
plans qualifying for special tax treatment including Individual Retirement
Annuities or Accounts, certain Tax Sheltered Annuities and H.R. 10 plans.
You must submit a properly completed application along with an Annuity
Premium payment to receive a Contract. Your initial Annuity Premium must be at
least $10,000 unless approved by the Company. Additional Annuity Premium
payments may be accepted. Regardless of the number of Annuity Premium payments
made, only one Contract will be issued. We reserve the right not to accept any
Annuity Premium payment and to limit the total amount of your Annuity Premium.
Each Annuity Premium payment will be allocated to one or more Sub-Accounts
which correspond to the Guaranteed Periods that you specify. A Guaranteed Period
is the period of years for which a rate of interest is guaranteed. You select
Initial Guaranteed Period(s) from among those offered by us at the time the
Annuity Premium is paid. During an Initial Guaranteed Period, Annuity Premium
allocated to a Sub-Account will earn interest at the Initial Guaranteed Interest
Rate established by the Company.
At the end of the Initial Guaranteed Period a Subsequent Guaranteed Period
will begin. Unless you instruct us otherwise in Writing, the Sub-Account value
at the end of the Guaranteed Period will become the Sub-Account Premium for a
Subsequent Guaranteed Period with the same duration as the previous Guaranteed
Period, if it does not extend beyond the Annuity Commencement Date. Otherwise,
the Subsequent Guaranteed Period will be the longest Guaranteed Period then
offered which does not extend beyond the Annuity Commencement Date. The
Sub-Account will earn interest at the Subsequent Guaranteed Interest Rate. The
Subsequent Guaranteed Interest Rate will be determined at the beginning of the
Subsequent Guaranteed Period and may not be equal to the Initial Guaranteed
Interest Rate then offered for an Initial Guaranteed Period of the same
duration. Initial and Subsequent Guaranteed Interest Rates will not be less than
an annual effective interest rate of 3%.
AMERICAN FOUNDATION LIFE INSURANCE COMPANY WILL MAKE THE FINAL DETERMINATION
AS TO GUARANTEED RATES TO BE DECLARED. WE CANNOT PREDICT NOR DO WE GUARANTEE
FUTURE INTEREST RATES TO BE DECLARED. (See "Establishment of Guaranteed Interest
Rates").
We make no charges to your Annuity Premium when it is received by us (except
deduction for premium taxes, where applicable). Full and partial surrenders from
each Sub-Account are permitted subject to certain restrictions. A full or
partial surrender made prior to the end of a Guaranteed Period will be subject
to a Market Value Adjustment and may be subject to a Surrender Charge, which
could result in the receipt of less than your Annuity Premium(s). A Surrender
Charge will apply during each Guaranteed Period. For Guaranteed Periods with
durations longer than seven years, a Surrender Charge will only apply during the
first seven years. The Surrender Charge is equal to a specified Surrender Charge
Percentage (maximum 7%) applied to the amount of each full or partial surrender
requested adjusted by the Market Value Adjustment, less any amount available as
an Interest Withdrawal. (See "Interest Withdrawals" and "Surrender Charges").
After the first Premium Year of any Sub-Account, you may request a
withdrawal of all, or a portion of the interest credited to that Sub-Account
during the prior Premium Year. Your request must be in Writing and you may only
make one such request per Premium Year. No Surrender Charge or Market Value
Adjustment will be imposed on these interest withdrawals. Any such withdrawal
may, however, be subject to tax, including a 10% penalty tax under the Internal
Revenue Code. (See "Federal Tax Matters".)
2
<PAGE>
A Market Value Adjustment is applied when you make a full or partial
surrender from a Sub-Account prior to the end of the Sub-Account's Guaranteed
Period. The Market Value Adjustment reflects the relationship between (i) the
Guaranteed Interest Rate initially established for the Sub-Account from which
the surrender is being made; and, (ii) the Guaranteed Interest Rate in effect at
the time of the surrender for a Guaranteed Period equivalent to the original
duration of the Guaranteed Period from which the surrender is being made reduced
by the number of completed years elapsed since the Guaranteed Period was
established. It is possible that the interest rate for a Guaranteed Period
equivalent to the time remaining in the Sub-Account from which the surrender is
being made may be higher at the time of surrender than the Guaranteed Interest
Rate credited at the time a Sub-Account was established. In this case, the
amount you would receive upon a surrender may be less than the amount allocated
to the Sub-Account plus the interest credited thereon. If the interest rate for
a Guaranteed Period equivalent to the time remaining in the Sub-Account from
which the surrender is being made is lower than the Guaranteed Interest Rate
credited when the Sub-Account was established, you could receive an amount
larger than the amount allocated to the Sub-Account plus the interest credited.
(See "Market Value Adjustment").
Partial or full surrenders are generally taxable, and may also may be
subject to a 10% penalty tax under the Internal Revenue Code (See "Federal Tax
Matters".) We may defer payment of any full or partial surrender for a period
not exceeding 6 months from the Surrender Date, or the period permitted by
applicable state insurance law, if less.
On the Annuity Commencement Date, American Foundation will apply the Account
Value, less applicable premium taxes, to the Annuity option you have selected.
To elect an Annuity option, you must notify us of the Annuity option you are
electing 30 days prior to the Annuity Commencement Date. (See "Annuity
Benefits").
This Contract provides for a Death Benefit. If an Owner dies while this
Contract is in force and before the Annuity Commencement Date, a Death Benefit
may be payable to the Beneficiary. If no Beneficiary designation is in effect or
if no Beneficiary is living at the time of an Owner's death, the Estate of the
deceased Owner will be the Beneficiary.
Only one Death Benefit is payable under this Contract. (See "Death
Benefit").
For Contracts subject to premium tax, the premium tax may be deducted from
the Annuity Premium when received or upon full or partial surrender, or from the
Death Benefit or the amount applied to an Annuity option. Currently, New York
does not impose premium tax.
We will furnish you with a report annually showing your Account Value,
Sub-Account Values, and all other information required by law. The report will
not include our financial statements.
You may cancel your Contract within thirty days after receipt by returning
or mailing it to us or the person who sold you the Contract. We will refund the
Account Value adjusted by the Market Value Adjustment (except for Individual
Retirement Annuities returned within seven days of issuance) and cancel the
Contract, as though it had never been issued.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
GLOSSARY OF SPECIAL TERMS......................................................................... 6
DESCRIPTION OF CONTRACTS.......................................................................... 8
A. General................................................................................ 8
B. Application Information, Annuity Premium............................................... 8
C. Initial and Subsequent Guaranteed Periods.............................................. 8
D. Determination of Guaranteed Interest Rates............................................. 10
E. Surrenders............................................................................. 10
1. Market Value Adjustment..................................................... 10
2. Surrender Charge............................................................ 11
3. Interest Withdrawals........................................................ 12
F. Premium Taxes.......................................................................... 12
G. Death Benefit.......................................................................... 12
H. Annuity Benefits....................................................................... 13
1. Electing the Annuity Commencement Date and Form of Annuity.................. 13
2. Change of Annuity Commencement Date, Annuity Option, or Annuitant........... 13
3. Annuity Options............................................................. 14
4. Annuity Payment............................................................. 14
5. Death of Annuitant or Owner After Annuity Commencement Date................. 14
INVESTMENTS BY AMERICAN FOUNDATION................................................................ 15
OTHER PROVISIONS.................................................................................. 16
A. Contract Transactions.................................................................. 16
B. Amendment of Contracts................................................................. 16
C. Assignment of Contracts................................................................ 16
DISTRIBUTION OF CONTRACTS......................................................................... 16
FEDERAL TAX MATTERS............................................................................... 16
A. Introduction........................................................................... 16
B. The Company's Tax Status............................................................... 17
C. Taxation of Annuities in General....................................................... 17
1. Tax Deferral During Accumulation Period..................................... 17
2. Taxation of Partial and Full Withdrawals.................................... 17
3. Taxation of Annuity Payments................................................ 18
4. Taxation of Death Benefit Proceeds.......................................... 18
5. Penalty Tax on Premature Distributions...................................... 18
6. Aggregation of Contracts.................................................... 19
7. Loss of Interest Deduction Where Contracts Are Held by or for the Benefit of
Certain Non-natural Persons............................................... 19
D. Qualified Retirement Plans............................................................. 19
1. In General.................................................................. 19
a. Individual Retirement Annuities.......................................... 20
b. Corporate and Self-Employed ("H.R. 10" and "Keogh") Pension and Profit-
Sharing Plans............................................................ 20
c. Tax-Sheltered Annuities.................................................. 21
2. Direct Rollover Rules....................................................... 21
E. Federal Income Tax Withholding......................................................... 21
</TABLE>
4
<PAGE>
<TABLE>
<S> <C> <C> <C>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY........................................................ 22
A. Business............................................................................... 22
B. Selected Financial Data................................................................ 22
C. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 23
1. Results of Operations....................................................... 23
a. Known Trends and Uncertainties........................................... 23
b. Recently Issued Accounting Standards..................................... 25
2. Recently Issued Accounting Standards........................................ 25
3. Liquidity and Capital Resources............................................. 25
4. Impact of Inflation......................................................... 25
D. Investments............................................................................ 25
E. Indemnity Reinsurance.................................................................. 26
F. Policy Liabilities and Accruals........................................................ 26
G. Competition............................................................................ 26
H. Regulation............................................................................. 26
I. Recent Developments.................................................................... 28
J. Employees.............................................................................. 29
K. Properties............................................................................. 29
DIRECTORS AND EXECUTIVE OFFICERS.................................................................. 29
EXECUTIVE COMPENSATION............................................................................ 31
SUMMARY COMPENSATION TABLE........................................................................ 31
OPTION/SAR GRANTS IN LAST FISCAL YEAR............................................................. 32
AGGREGATED FY-END OPTION/SAR VALUES............................................................... 32
PERFORMANCE SHARE PLAN............................................................................ 32
PENSION PLAN...................................................................................... 33
ADDITIONAL AGREEMENTS............................................................................. 34
A. Compensation Committee Interlocks and Insider Participation............................ 34
B. Management Ownership of PLC Stock...................................................... 35
CERTAIN TRANSACTIONS.............................................................................. 36
LEGAL PROCEEDINGS................................................................................. 36
EXPERTS........................................................................................... 36
LEGAL MATTERS..................................................................................... 36
REGISTRATION STATEMENT............................................................................ 36
APPENDIX A........................................................................................ A-1
</TABLE>
5
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THAT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH
THE OFFER CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED ON AS HAVING BEEN AUTHORIZED. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF, OR SOLICITATION OF AN OFFER TO
ACQUIRE, ANY CONTRACTS OFFERED BY THIS PROSPECTUS IN ANY JURISDICTION TO ANYONE
TO WHOM IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION IN SUCH
JURISDICTION.
GLOSSARY OF SPECIAL TERMS
"We", "us", "our", "American Foundation", and "Company" refer to American
Foundation Life Insurance Company. "You", "your", and "Owner" refer to a person
who has been issued a Contract. Individuals as well as non-natural persons, such
as corporations and trusts, may be Owners. The individual modified guaranteed
annuity contract is hereinafter referred to as the "Contract."
DEFINITIONS
ACCOUNT VALUE: The sum of all Sub-Account Values.
ADMINISTRATIVE OFFICE: 2801 Highway 280 South, Birmingham, Alabama 35223.
Correspondence sent by U.S. Mail should be addressed to American Foundation at
P.O. Box 10648, Birmingham, Alabama 35202-0648.
ANNUITANT: Annuity payments may depend upon the continuation of the life of
a person. That person is called an Annuitant. If an Annuitant is not an Owner
and dies prior to the Annuity Commencement Date, the Owner first named on the
application will become the Annuitant, unless the Owner designates otherwise.
ANNUITY: A series of periodic payments.
ANNUITY COMMENCEMENT DATE: The date on which Annuity payments are
determined. The initial payment must be made within one month of the Annuity
Commencement Date.
ANNUITY PREMIUM: Payments (less premium taxes, if applicable) made and
allocated to the Guaranteed Period(s) you select under the Contract. Each
Annuity Premium and each allocation to a Guaranteed Period must be at least
$10,000. We reserve the right not to accept any Annuity Premium payment and to
limit the total amount of your Annuity Premiums. Only one Contract will be
issued regardless of the number of Annuity Premiums you make.
BENEFICIARY: The person or persons entitled to receive the Death Benefit
under this Contract, if any, upon the death of an Owner.
PRIMARY--The Primary Beneficiary is the surviving Owner, if any. If there
is no surviving Owner, the Primary Beneficiary is the person or persons
designated on the application or, if changed by the Owner, the person or
persons so named in our records.
CONTINGENT--The person or persons named to receive the Death Benefit if
the Primary Beneficiary is not living at the time of an Owner's death. If
no Beneficiary designation is in effect or if no Beneficiary is living at
the time of an Owner's death, the Estate of the deceased Owner will be
the Beneficiary.
IRREVOCABLE--An irrevocable Beneficiary is one whose consent is needed to
change the Beneficiary designation, and to exercise certain other rights.
COMPANY: American Foundation Life Insurance Company.
6
<PAGE>
DEATH BENEFIT: The amount payable to a Beneficiary upon the death of an
Owner prior to the Annuity Commencement Date. Only one Death Benefit is payable
under this Contract even though the Contract may, in some circumstances,
continue beyond an Owner's death.
EFFECTIVE DATE: The date on which we begin crediting interest on your
initial Annuity Premium. The Effective Date is shown on the Schedule page of
your Contract. Contract Years are measured from the Effective Date.
GUARANTEED INTEREST RATE: The effective rate of interest, calculated after
daily compounding has been taken into account, which is established by the
Company for a Guaranteed Period. Guaranteed Interest Rates are designated either
"Initial" or "Subsequent".
GUARANTEED PERIOD: The period for which a Guaranteed Interest Rate will be
credited to a Sub-Account. Guaranteed Periods are designated as either "Initial"
or "Subsequent".
MARKET VALUE ADJUSTMENT: The adjustment made to a Sub-Account Value when a
full or partial surrender is made prior to the end of a Guaranteed Period.
NET ACCOUNT VALUE: The sum of all Net Sub-Account Values.
NET SUB-ACCOUNT VALUE: The Sub-Account Value after application of the
Market Value Adjustment and deductions for any Surrender Charges and applicable
premium taxes.
NET SURRENDER AMOUNT: The Surrender Amount after application of the Market
Value Adjustment and less any deductions for any Surrender Charges and
applicable premium taxes.
QUALIFIED CONTRACTS: Contracts issued in connection with retirement plans
that receive favorable tax treatment under sections 401, 403, or 408 of the
Internal Revenue Code of 1986, as amended.
QUALIFIED PLAN: Retirement plans which receive favorable tax treatment
under sections 401, 403, or 408 of the Internal Revenue Code of 1986, as
amended.
SUB-ACCOUNT: Annuity Premium is allocated to one or more Sub-Accounts. A
Sub-Account is characterized by its Guaranteed Period and its corresponding
Guaranteed Interest Rate.
SUB-ACCOUNT PREMIUM: Annuity Premium allocated to a Sub-Account, or any
amount transferred to a Sub-Account at the end of a Guaranteed Period. Premium
Years are measured from the date the Sub-Account Premium is credited.
SUB-ACCOUNT VALUE: The Sub-Account Premium, increased by all interest
credited and decreased by previous full or partial surrenders (including
applicable Surrender Charges, Market Value Adjustments and premium taxes) and
previous interest withdrawals. The Sub-Account Value of each Sub-Account under
this Contract must be at least $10,000 at all times.
SURRENDER AMOUNT: The portion of the Sub-Account Value removed to satisfy a
written request for a full or partial surrender.
SURRENDER CHARGE: A charge imposed when a partial or full surrender is made
prior to the end of a Guaranteed Period.
SURRENDER DATE: The date on which we receive at our Administrative Office a
request in Writing for a full or partial surrender, or such later date that you
may request.
WRITING: A written form satisfactory to the Company received at the
Administrative Office. Correspondence sent by U.S. Mail should be addressed to
American Foundation, P. O. Box 10648, Birmingham, Alabama 35202-0648.
7
<PAGE>
DESCRIPTION OF CONTRACTS
A. GENERAL
The Contract is a flexible-premium, deferred, individual modified guaranteed
annuity contract. The Contract may be issued pursuant to nonqualified retirement
plans or plans qualifying for special tax treatment including Individual
Retirement Annuities or Accounts, certain Tax Sheltered Annuities and H.R. 10
plans. We reserve the right to accept or decline a request to issue a Contract.
B. APPLICATION INFORMATION, ANNUITY PREMIUM
To apply for a Contract, an Annuity Premium must accompany a properly
completed application. The minimum Annuity Premium is $10,000. American
Foundation reserves the right not to accept any Annuity Premium payment and to
limit the total amount of your Annuity Premium. Currently, the maximum aggregate
amount of Annuity Premium that will be accepted without prior Administrative
Office approval is $1,000,000.
Each Annuity Premium (less premium taxes, if applicable) will be allocated
at your direction to one or more Sub-Accounts corresponding to the Guaranteed
Periods you choose. Each Annuity Premium will accumulate at specified Guaranteed
Interest Rate(s). Your Account Value is the sum of all of your Sub-Account
Values. Each Sub-Account Value is equal to the amount you allocated to the
Sub-Account (either as an Annuity Premium or as part of a transfer of a
Sub-Account Value at the end of the previous Guaranteed Period), plus the
interest credited thereto at the Guaranteed Interest Rate, as adjusted for any
prior full or partial surrenders (including Market Value Adjustments, Surrender
Charges, premium taxes thereon and previous interest withdrawals).
You will start earning interest on the day your Contract is issued, which is
also called the Effective Date. Additional Annuity Premium payments may be made
to the Contract, subject to our acceptance. Regardless of the number of Annuity
Premium payments made, only one Contract will be issued.
C. INITIAL AND SUBSEQUENT GUARANTEED PERIODS
You select the Guaranteed Periods for each Annuity Premium from those
durations offered by us at the time the Annuity Premium is made, provided no
Guaranteed Period may extend beyond the Annuity Commencement Date. All
Guaranteed Periods may not be available in all states at all times. We will
establish a Sub-Account for each Guaranteed Period you select. The minimum
allocation to a Sub-Account is $10,000. The Sub-Account Premium will earn
interest at the Initial Guaranteed Interest Rate which will be an effective
annual interest rate after taking into account daily compounding of interest.
Set forth below is an illustration of how interest will be credited to your
Account Value during each Guaranteed Period. For the purpose of this example we
have made the assumptions as indicated.
NOTE: THE FOLLOWING EXAMPLE ASSUMES NO SURRENDERS OR WITHDRAWALS OF ANY
AMOUNT AND NO PREMIUM TAX DUE ON ISSUANCE. A MARKET VALUE ADJUSTMENT AND
SURRENDER CHARGE MAY APPLY TO ANY SUCH PARTIAL OR FULL SURRENDER MADE PRIOR TO
THE END OF A GUARANTEED PERIOD (SEE "SURRENDERS"). THE HYPOTHETICAL INTEREST
RATES ARE ILLUSTRATIVE ONLY AND ARE NOT INTENDED TO PREDICT FUTURE INTEREST
RATES TO BE DECLARED UNDER THE CONTRACT. ACTUAL INTEREST RATES DECLARED FOR ANY
GIVEN GUARANTEED PERIOD MAY BE MORE OR LESS THAN THOSE SHOWN.
8
<PAGE>
EXAMPLE OF COMPOUNDING AT THE GUARANTEED INTEREST RATE
Premium:
Guaranteed Period:
Guaranteed Interest Rate:
<TABLE>
<CAPTION>
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Beginning of Year 1 Account Value:
X (1 + Guaranteed Interest Rate):
= End of Year 1 Account Value:
Beginning of Year 2 Account Value:
X (1 + Guaranteed Interest Rate):
= End of Year 2 Account Value:
Beginning of Year 3 Account Value:
X (1 + Guaranteed Interest Rate):
= End of Year 3 Account Value:
Beginning of Year 4 Account Value:
X (1 + Guaranteed Interest Rate):
= End of Year 4 Account Value:
Beginning of Year 5 Account Value:
X (1 + Guaranteed Interest Rate):
= End of Year 5 Account Value:
Total Interest Credited in Guaranteed Period:
Account Value at End of Guaranteed Period:
</TABLE>
At the end of any Guaranteed Period a Subsequent Guaranteed Period will
begin. Unless you instruct us otherwise in Writing, the Sub-Account Value at the
end of a Guaranteed Period will become the Sub-Account Premium for a Subsequent
Guaranteed Period with the same duration as the previous Guaranteed Period, if
it does not extend beyond the Annuity Commencement Date. Otherwise, the
Subsequent Guaranteed Period will be the longest Guaranteed Period then offered
which does not extend beyond that date. The Company will always offer a 1-year
Subsequent Guaranteed Period in addition to other Guaranteed Periods then
available.
The Sub-Account Premium will earn interest at the Subsequent Guaranteed
Interest Rate. The Subsequent Guaranteed Interest Rate will be determined at the
beginning of the Subsequent Guaranteed Period and may not be equal to the
Initial Guaranteed Interest Rate then offered for an Initial Guaranteed Period
of the same duration.
Initial and Subsequent Guaranteed Interest Rates will not be less than an
annual effective interest rate of 3%. You may not transfer a Sub-Account Value
to any other Sub-Account before the end of the existing Sub-Account's Guaranteed
Period. At least 45 days, but no more than 75 days prior to the end of each
Guaranteed Period, we will send a written notice advising you of the maturity
date and maturity value of the Sub-Account. At your request during this period,
we will provide you with the then effective Guaranteed Interest Rate for each
specified Subsequent Guaranteed Period. THE ACTUAL GUARANTEED INTEREST RATE WILL
BE DETERMINED AT THE BEGINNING OF THE SUBSEQUENT GUARANTEED PERIOD(S) YOU
SELECT.
In no event may Guaranteed Periods extend beyond the Annuity Commencement
Date then in effect. The Annuity Commencement Date may not be later than the
Annuitant's 90th birthday (or a date to which we agree in writing). Any request
for extension of the Annuity Commencement Date beyond the
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Annuitant's 90th birthday must be approved in writing by the Administrative
Office. Annuity Commencement Dates which occur at advanced ages, E.G., past age
85, may in some circumstances have adverse income tax consequences. (See
"Federal Tax Matters".)
D. DETERMINATION OF GUARANTEED INTEREST RATES
From time to time, American Foundation Life Insurance Company, in its sole
discretion, determines the Guaranteed Interest Rate for each Initial and
Subsequent Guaranteed Period. The determination will be reflective of interest
rates available on the types of instruments in which the Company intends to
invest the proceeds attributable to the Contracts. (See "Investments By American
Foundation"). In addition, we may also consider various other factors in
determining Guaranteed Interest Rates, including regulatory and tax
requirements; sales commissions and administrative expenses incurred by the
Company; general economic trends; and, competitive factors.
Sub-Account Premium of $100,000 or more is currently credited with an
interest rate in excess of that credited to Sub-Account Premium of less than
$100,000. In addition, if your account value exceeds $100,000 all subsequent
Annuity Premiums and renewals will be credited with the increased interest rate.
American Foundation reserves the right to change or discontinue offering the
increased interest rate at its discretion. A Guaranteed Interest Rate credited
to a Sub-Account will never be changed prior to the end of the Guaranteed
Period. AMERICAN FOUNDATION LIFE INSURANCE COMPANY WILL MAKE THE FINAL
DETERMINATION AS TO GUARANTEED INTEREST RATES TO BE DECLARED. WE CANNOT PREDICT
NOR DO WE GUARANTEE FUTURE INTEREST RATES TO BE DECLARED.
E. SURRENDERS
Full surrenders may be made at any time. Partial surrenders may only be made
if each Sub-Account Value after the partial surrender is at least $10,000. You
must specify the Sub-Accounts from which the partial surrender is to be made,
but if a surrender is requested from a Sub-Account which has the same Guaranteed
Period as any other Sub-Account, the partial surrender must come from the
Sub-Account with the shortest time remaining.
In the case of certain Qualified Plans, Federal tax law imposes restrictions
on the form and manner in which benefits may be paid. For example, spousal
consent may be needed in certain instances before a distribution may be made.
1. MARKET VALUE ADJUSTMENT
The amount payable on a full or partial surrender made prior to the end of
any Guaranteed Period may be adjusted up or down by the application of the
Market Value Adjustment formula.
The Market Value Adjustment is equal to the Market Value Adjustment
Percentage indicated below, applied to the amount of each full or partial
surrender requested less any amount available under the "INTEREST WITHDRAWAL"
provision of this Contract at the time of the surrender. The Market Value
Adjustment does not apply to surrenders made from a Sub-Account at the end of
its Guaranteed Period. Such surrenders should be requested during the final 30
days of the Guaranteed Period.
MARKET VALUE ADJUSTMENT PERCENTAGE = (C - I + 0.25%) X (N/12), WHERE:
C = the Guaranteed Interest Rate currently in effect for a Guaranteed Period
with a duration equivalent to the time remaining in the Guaranteed Period
from which the surrender is being made. Linear interpolation will be used to
determine C when the time remaining is not an integral number of whole
years. When the time remaining is less than one year, C will be the current
one year rate;
I = the Guaranteed Interest Rate initially established for the Guaranteed
Period from which the surrender is being made;
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N = The number of months remaining in the Guaranteed Period from which the
surrender is being made.
C will be based upon the same factors used in determining I, including
whether the original Guaranteed Period was an Initial Guaranteed Period or a
Subsequent Guaranteed Period, and whether or not I included excess rate.
In the event a current Guaranteed Interest Rate is no longer calculated by
the Company, a suitable replacement index, subject to all necessary regulatory
approvals, will be used.
The Market Value Adjustment formula includes a set percentage factor (0.25%)
designed to compensate American Foundation for certain expenses and losses that
might be incurred as a direct or indirect result or consequence of surrenders.
Please refer to Appendix A of this Prospectus, which contains an example of
the Market Value Adjustment Percentage as it is applied to a surrender request.
2. SURRENDER CHARGES
A Surrender Charge, if applicable, will be applied to a full or partial
surrender from a Sub-Account requested prior to the end of a Guaranteed Period.
The Surrender Charge Percentage for each year of an Initial or Subsequent
Guaranteed Period is indicated in the appropriate table below. The Surrender
Charge is determined by applying the Surrender Charge Percentage to the amount
of each full or partial surrender requested adjusted by any applicable Market
Value Adjustment, less any amount available under the "INTEREST WITHDRAWAL"
provision of this Contract at the time of the surrender. The Surrender Charge
does not apply to Surrenders made from a Sub-Account at the end of its
Guaranteed Period.
SURRENDER CHARGE FOR INITIAL GUARANTEED PERIODS
<TABLE>
<CAPTION>
PREMIUM YEAR DURING WHICH SURRENDER IS TAKEN
GUARANTEED ----------------------------------------------------------
PERIOD 1 2 3 4 5 6 7 8 9 10
- ------------ ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1......... 1%
2......... 2% 1%
3......... 3% 2% 1%
4......... 4% 3% 2% 1%
5......... 5% 4% 3% 2% 1%
6......... 6% 5% 4% 3% 2% 1%
7-10........ 7% 6% 5% 4% 3% 2% 1% 0% 0% 0%
</TABLE>
SURRENDER CHARGE FOR SUBSEQUENT GUARANTEED PERIODS
<TABLE>
<CAPTION>
PREMIUM YEAR DURING WHICH SURRENDER IS TAKEN
GUARANTEED ----------------------------------------------------------
PERIOD 1 2 3 4 5 6 7 8 9 10
- ------------ ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1......... 1%
2......... 2% 1%
3......... 3% 2% 1%
4......... 4% 3% 2% 1%
5......... 5% 4% 3% 2% 1%
6......... 5% 5% 4% 3% 2% 1%
7-10........ 5% 5% 5% 4% 3% 2% 1% 0% 0% 0%
</TABLE>
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There is no Surrender Charge after the first seven years of Guaranteed
Periods with a duration greater than seven years. In addition, for purposes of
determining amounts subject to the Surrender Charge, we will consider
surrendered amounts first to be interest withdrawals, to the extent interest
credited to your Sub-Accounts during the prior Contract Year has not yet been
withdrawn. No Surrender Charge (or Market Value Adjustment) is imposed on these
interest withdrawal amounts. (See "Interest Withdrawals".)
The Surrender Charge and Market Value Adjustment will not apply to full or
partial surrenders from a Sub-Account at the end of its Guaranteed Period.
The Net Surrender Amount will be calculated by the Company on the Surrender Date
using the following formula:
(A - M - S - P), WHERE:
A= the Surrender Amount
M= the amount of the Market Value Adjustment;
S= the amount of the Surrender Charge;
P= the amount of unpaid premium taxes, if any.
The Company may defer payment of any partial or full surrender for the period
permitted by law. In no event will the deferral exceed 6 months from the
Surrender Date.
Full or partial surrender may be subject to Federal and state income tax,
including a 10 percent penalty tax (see "Federal Tax Matters"), and, in some
cases, premium tax (See "Premium Taxes"). Under certain Qualified Plans, the
consent of your spouse may be required. Under Tax-Sheltered Annuities,
withdrawals attributable to contributions made pursuant to a salary reduction
agreement may be made only in limited circumstances. (See "Federal Tax
Matters".)
3. INTEREST WITHDRAWALS
After the first Premium Year of any Sub-Account, you may request a
withdrawal of all, or a portion of the interest credited to that Sub-Account
during the prior Premium Year. Your request must be in Writing and you may only
make one such request per Premium Year. No Surrender Charge or Market Value
Adjustment will be imposed on these interest withdrawals. Any such withdrawal
may, however, be subject to tax, including the 10% penalty tax under the
Internal Revenue Code. Withdrawals are permitted from Contracts issued as Tax
Sheltered Annuities only under limited circumstances. (See "Federal Tax
Matters".)
F. PREMIUM TAXES
Premium taxes will be deducted, if applicable. For Contracts subject to
premium tax, the premium tax may be deducted from the Annuity Premium when
received or upon full or partial surrender, or from the Death Benefit or the
amount applied to an Annuity option. Where applicable, these tax rates range up
to 3.50%. Currently, New York does not impose premium tax.
G. DEATH BENEFIT
If the Annuitant is not an Owner and dies prior to the Annuity Commencement
Date, the Owner first named on the Application will become the new Annuitant
unless the Owner designates otherwise. If any Owner is not an individual, the
death of the Annuitant will be treated as the death of an Owner.
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If any Owner dies while this Contract is in force prior to the Annuity
Commencement Date, a Death Benefit will be payable to the Beneficiary.
The Death Benefit will be determined as of the date due proof of death is
received by the Company. If a claim for the Death Benefit is received at our
Administrative Office within 1 year of the date of death, the Death Benefit will
equal the greater of: (1) the Account Value, less applicable premium taxes; or
(2) the Net Account Value. If a claim is received later than 1 year after the
date of death, the Death Benefit will equal the Net Account Value. Only one
Death Benefit is payable under this Contract.
The Death Benefit may be taken in one sum immediately. In this event, the
Contract will terminate. If the Death Benefit is not taken in one sum
immediately, then the entire interest in the Contract must be distributed under
one of the following options.
(1) the entire interest must be distributed over the life of the
Beneficiary, or over a period not extending beyond the life expectancy of
the Beneficiary, with distributions beginning within one year of the
Owner's death, or
(2) the entire interest must be distributed within 5 years of the Owner's
death.
If the Beneficiary is the deceased Owner's spouse, then the surviving spouse may
elect, in lieu of receiving the Death Benefit, to continue the Contract and
become the new Owner. The surviving spouse may select a new Beneficiary. Upon
this spouse's death, the Death Benefit will become payable to the new
Beneficiary and must then be distributed to the new Beneficiary in one sum
immediately or according to either paragraph (1) or (2) above.
If there is more than one Beneficiary, the foregoing provisions will apply
to each Beneficiary individually.
You may change the Beneficiary at any time, but any such change must be in
Writing. We must also receive any Irrevocable Beneficiary's written consent to
make a change. The request will be effective on the date the request is signed,
but we will not be liable for any payment we make before we receive and
acknowledge the request at our Administrative Office.
H. ANNUITY BENEFITS
1. ELECTING THE ANNUITY COMMENCEMENT DATE AND FORM OF ANNUITY
Upon purchasing a Contract, you may select an Annuity Commencement Date. The
Annuity Commencement Date you select cannot be earlier than the end of any
Guaranteed Period nor later than the Annuitant's 90th Birthday. Any request for
extension of the maximum Annuity Commencement Date must be approved by our
Administrative Office. If no Annuity Commencement Date is selected, the Annuity
Commencement Date will be the end of the Contract Year immediately prior to the
Annuitant's 90th birthday. You may elect to have all, or a portion or your
Account Value applied to an Annuity option on the Annuity Commencement Date.
Annuity Commencement Dates which occur at advanced ages, E.G., past age 85, may
in some circumstances have adverse income tax consequences. (See "Federal Tax
Matters".) Distributions from Qualified Contracts may be required before the
Annuity Commencement Date. In the absence of such election, the Account Value
will be applied on the Annuity Commencement Date under Option 1 Payments for a
5-Year Certain Period.
2. CHANGE OF ANNUITY COMMENCEMENT DATE, ANNUITY OPTION OR ANNUITANT
You may change the Annuity Commencement Date, the Annuity option, or both.
Any such change must be made in Writing and we must receive it at least 30 days
prior to the scheduled Annuity Commencement Date. The Annuity Commencement Date
you select cannot be earlier than the end of any existing Guaranteed Period nor
later than the Annuitant's 90th Birthday. You may also change the Annuitant
prior to the Annuity Commencement Date provided the change is made in Writing.
If any
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Owner is not an individual, the Annuitant may not be changed. The new
Annuitant's 90th birthday may not be before the end of any existing Guaranteed
Period. Once the request is received and acknowledged at our Administrative
Office, any change will relate back to and take effect on the date the request
was signed. If an Annuitant is not an Owner and dies prior to the Annuity
Commencement Date, the Owner first named on the application will become the
Annuitant, unless otherwise designated.
3. ANNUITY OPTIONS
Annuity payments will be paid to the Annuitant, unless directed otherwise by
the Owner. Currently, any one of the following Annuity options may be elected.
Other Annuity options may be offered in the future. For Contracts issued to fund
certain Qualified Plans, other Annuity options will be available and certain
restrictions may apply.
OPTION 1--Payment For a Certain Period. Guaranteed payments will be made
for any certain period from 5 to 30 years.
OPTION 2--Payments for Life. Payments are based upon the life of the
Annuitant and stop upon the Annuitant's death.
OPTION 3--Life Income with Payments for a Certain Period. Payments are
based on the life of the Annuitant. Payments will continue for the
lifetime of that person with payments guaranteed for the selected
certain period of 10 years. Payments stop upon the death of the
Annuitant or at the end of the certain period, whichever is later.
The dollar amount of guaranteed minimum monthly payments under each
available Annuity option for each $1,000 applied will be calculated in
accordance with the 1983 Individual Annuitant Mortality Table A projected 14
years with interest at 3% per annum. To determine future minimum monthly rates,
one year will be deducted from the attained age of the Annuitant for every three
completed years beyond the year 1997. Upon annuitization, if we have available
rates more favorable than those guaranteed, the higher rates will apply.
4. ANNUITY PAYMENT
We will send a written notice advising you of the Annuity Commencement Date
at least 45 days, but no more than 75, days before that date. If the Annuitant
is alive on the Annuity Commencement Date then the Account Value, less
applicable premium taxes, will be applied to the Annuity option you have
selected. In the absence of a selection, however, this amount will be applied
under OPTION 1--Payments for a 5 year Certain Period.
The first payment under any Annuity option will be made one month following
the Annuity Commencement Date. Subsequent payments will be made in accordance
with the manner of payment selected.
The Annuity option elected must result in a payment of an amount at least
equal to the minimum payment amount according to the Company's rules then in
effect. If at any time payments are less than the minimum payment amount, we
have the right to change the frequency to an interval resulting in a payment at
least equal to the minimum. If any amount due is less than the minimum per year,
we may make other arrangements that are equitable to the Annuitant.
This Contract may not be surrendered after the commencement of Annuity
payments.
5. DEATH OF ANNUITANT OR OWNER AFTER ANNUITY COMMENCEMENT DATE
If any Annuitant or Owner dies on or after the Annuity Commencement Date and
before all the benefits under the Annuity option selected have been paid, any
remaining payments will be distributed at least as rapidly as under the Annuity
option being used on the date of death.
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INVESTMENTS BY AMERICAN FOUNDATION
American Foundation's investment philosophy is to maintain a portfolio that
is matched to its liabilities with respect to yield, risk, and cash flow
characteristics. The types of assets in which American Foundation may invest are
governed by state laws which prescribe permissible investment assets. Within the
parameters of these laws, American Foundation invests its assets giving
consideration to such factors as liquidity needs, investment quality, investment
return, matching of assets and liabilities, and the composition of the
investment portfolio by asset type and credit exposure. Because liquidity is
important, the Company continually balances maturity against yield and quality
considerations in selecting new investments.
In establishing Guaranteed Interest Rates, the Company intends to take into
account the yields available on the instruments in which it intends to invest
the proceeds from the Contracts. (See "Determination of Guaranteed Interest
Rates" on page .) American Foundation's investment strategy with respect to
the proceeds attributable to the Contracts will be to invest in investment-grade
debt instruments having durations tending to match the applicable Guaranteed
Periods. It is also anticipated that some portion of the portfolio will be
invested in commercial mortgages. American Foundation may also invest in lower
than investment-grade issues, depending upon relative spreads in the capital
markets.
Investment-grade debt instruments in which American Foundation intends to
invest the proceeds from the Contracts include:
Securities issued by the United States Government or its agencies or
instrumentalities, which issues may or may not be guaranteed by the United
States Government.
Mortgaged-backed and corporate debt securities which have an investment
grade, at the time of purchase, within the four highest-grades assigned by
Moody's Investors Service, Inc. (Aaa, Aa, A, Baa), Standard & Poor's
Corporation ("S&P") (AAA, AA, A, or BBB) or any other nationally recognized
rating service. American Foundation considers bonds rated Baa or higher by
Moody's or BBB or higher by S&P to be investment grade. At December 31,
1996, % of bonds in which American Foundation invests were considered
investment grade; % of these bonds were rated Baa or BBB.
Debt obligations which have a Moody's or Standard & Poor's rating below
investment-grade may comprise a portion of the portfolio. Risks associated with
investments in less than investment-grade debt obligations may be significantly
higher than risks associated with investments in debt securities rated
investment-grade. Risk of loss upon default by the borrower is significantly
greater with respect to such debt obligations than with other debt securities
because these obligations may be unsecured or subordinated to other creditors.
Additionally, there is often a thinly traded market for such securities and
current market quotations are frequently not available for some of these
securities. Issuers of less than investment-grade debt obligations usually have
higher levels of indebtedness and are more sensitive to adverse economic
conditions, such as recession or increasing interest rates, than
investment-grade issuers. American Foundation carefully selects, and closely
monitors, such investments.
Fixed maturity securities rated BBB may have speculative characteristics and
changes in economic conditions or other circumstances are more likely to lead to
a weakened capacity of the issuer to make principal and interest payments than
is the case with higher rated fixed maturity securities. American Foundation
carefully selects, and closely moitors, such investments.
Annuity Premium payments accepted by the Company under the Contracts will be
allocated to and accounted for in a non-unitized separate account. The assets of
this separate account equal to the reserves and other contract liabilities are
not chargeable with the liabilities arising out of any other business the
Company conducts. The separate account is a pool of assets that provides an
additional measure of assurance that Contract Owners will receive full payment.
It is not an investment vehicle in whose performance Contract Owners will have
any interest. The federal government or its instrumentalities does not guarantee
the Contracts. American Foundation backs the guarantees associated with the
Contracts. All policyholder liabilities of American Foundation are guaranteed by
Protective Life Insurance Company.
While the foregoing generally describes our investment strategy with respect
to the proceeds attributable to the Contracts, we are not obligated to invest
the proceeds attributable to the Contracts according to any particular strategy,
except as may be required by the insurance laws of Alabama and other states in
which we operate.
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OTHER PROVISIONS
CONTRACT TRANSACTIONS
Currently, each request for a change or transaction under your Contract
(such as making an additional Annuity Premium, requesting a surrender or
interest withdrawal, selecting certain Guaranteed Periods, changing the Annuity
Commencement Date, Annuity option, or Annuitant, or making a Death Benefit
claim) must be made in Writing on a form acceptable to the Company. The request
must provide all information that is necessary for us to make the change or
effect the transaction. For additional information on how to make a change or
effect a transaction, contact us at our Administrative Office.
AMENDMENT OF CONTRACTS
We reserve the right to amend the Contract to meet the requirements of
applicable Federal or state laws, regulations or rulings. We will notify you of
any such amendments.
ASSIGNMENT OF CONTRACTS
Your rights, as evidenced by a Contract, may be assigned as permitted by
applicable law. An assignment will not be binding upon us until we receive
notice from you in Writing. We assume no responsibility for the validity or
effect of any assignment. An assignment will have tax consequences. (See
"Federal Tax Matters".) Generally, Qualified Contracts cannot be assigned.
DISTRIBUTION OF CONTRACTS
Investment Distributors, Inc. ("IDI") serves as principal underwriter for
the Contracts. IDI has agreed to use its best efforts to sell the Contracts. IDI
is a wholly-owned subsidiary of Protective Life Corporation ("PLC") and is
registered with the Securities and Exchange Commission ("SEC") under the
Securities Exchange Act of 1934 as a broker-dealer and is a member of the
National Association of Securities Dealers, Inc. ("NASD").
IDI has entered into Distribution Agreements with certain broker-dealers
registered under the Securities Exchange Act of 1934. Under the Distribution
Agreements such broker-dealers may offer Contracts to persons who have
established an account with the broker-dealer. In addition, IDI may offer
Contracts to members of certain other eligible groups or certain individuals.
The maximum commission rate American Foundation will pay for either the sale of
a Contract or for a renewal into a Subsequent Guaranteed Period is 7%.
FEDERAL TAX MATTERS
INTRODUCTION
The following discussion of the federal income tax treatment of the
Contracts is not exhaustive, does not purport to cover all situations, and is
not intended as tax advice. The federal income tax treatment of the Contracts is
unclear in certain circumstances, and a qualified tax adviser should always be
consulted with regard to the application of law to individual circumstances.
This discussion is based on the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury regulations, and interpretations existing on the date of this
Prospectus. These authorities, however, are subject to change by Congress, the
Treasury Department, and judicial decisions.
This discussion does not address state or local tax consequences associated
with the purchase of the Contracts. In addition, THE COMPANY MAKES NO GUARANTEE
REGARDING ANY TAX TREATMENT--FEDERAL, STATE OR LOCAL--OF ANY CONTRACT OR OF ANY
TRANSACTION INVOLVING A CONTRACT.
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THE COMPANY'S TAX STATUS
The Company is taxed as a life insurance company under Subchapter L of the
Code. The assets underlying the Contracts will be owned by the Company, and the
income derived from such assets will be includable in the Company's income for
federal income tax purposes.
TAXATION OF ANNUITIES IN GENERAL
TAX DEFERRAL DURING ACCUMULATION PERIOD
Under existing provisions of the Code (and except as described below), the
Contracts should be treated as annuities and any increase in an Owner's Account
Value is generally not taxable until received, either in the form of Annuity
payments as contemplated by the Contracts, or in some other form of
distribution.
As a general rule, Contracts held by "non-natural persons" such as a
corporation, trust or other similar entity, as opposed to a natural person, are
not treated as annuities for federal tax purposes. The income on such Contracts
(as defined in the tax law) is taxed as ordinary income that is received or
accrued by the Owner during the taxable year. There are several exceptions to
this general rule for Contracts held by non-natural persons. First, Contracts
will generally be treated as held by a natural person if the nominal owner is a
trust or other entity which holds the Contract as an agent for a natural person.
However, this special exception will not apply in the case of any employer who
is the nominal owner of a Contract under a non-qualified deferred compensation
arrangement for its employees.
In addition, exceptions to the general rule for non-natural Contract owners
will apply with respect to (1) Contracts acquired by an estate of a decedent by
reason of the death of the decedent, (2) Contracts issued in connection with
certain Qualified Plans, (3) Contracts purchased by employers upon the
termination of certain Qualified Plans, (4) certain Contracts used in connection
with structured settlement agreements, and (5) Contracts purchased with a single
premium when the annuity starting date is no later than a year from purchase of
the Contract and substantially equal periodic payments are made, not less
frequently than annually, during the annuity period.
If the Contract's Annuity Commencement Date occurs (or is scheduled to
occur) at a time when the Annuitant has reached an advanced age, e.g., past age
85, it is possible that the Contract would not be treated as an annuity for
federal income tax purposes. In that event, the income and gains under the
Contract could be currently includible in the Owner's income.
The remainder of this discussion assumes that the Contract will constitute
an annuity for federal tax purposes.
TAXATION OF PARTIAL AND FULL WITHDRAWALS
In the case of a partial withdrawal, amounts received generally are
includable in income to the extent the Owner's Account Value before the
withdrawal exceeds his or her "investment in the contract." In the case of a
full withdrawal, amounts received are includable in income to the extent they
exceed the "investment in the contract." For these purposes the investment in
the contract at any time equals the premiums paid under the Contract (to the
extent such premium payments were neither deductible when made nor excludable
from income as, for example, in the case of certain employer contributions to
Qualified Plans) less any amounts previously received from the Contract which
were not included in income.
Other than in the case of Contracts issued in connection with certain
Qualified Plans (which generally cannot be assigned or pledged), any assignment
or pledge (or agreement to assign or pledge) any portion of the Account Value is
treated as a withdrawal of such amount or portion. The investment in the
contract is increased by the amount includable as income with respect to such
assignment or pledge, though it is not
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affected by any other aspect of the assignment or pledge (including its
release). If an Owner transfers a Contract without adequate consideration to a
person other than the Owner's spouse (or to a former spouse incident to
divorce), the Owner will be taxed on the difference between the Account Value
and the investment in the contract at the time of transfer. In such case, the
transferee's investment in the contract will be increased to reflect the
increase in the transferor's income.
There is some uncertainty regarding the treatment of the Market Value
Adjustment for purposes of determining the amount includable in income as a
result of any partial withdrawal or transfer without adequate consideration.
Congress has given the Internal Revenue Service ("IRS") regulatory authority to
address this uncertainty. However, as of the date of this Prospectus, the IRS
has not issued any regulations addressing these determinations.
TAXATION OF ANNUITY PAYMENTS
Normally, the portion of each Annuity payment taxable as ordinary income is
equal to the excess of the payment over the exclusion amount. The exclusion
amount is the amount determined by multiplying (1) the payment by (2) the ratio
of the investment in the contract, adjusted for any period certain or refund
feature, to the total expected value of Annuity payments for the term of the
Contract (determined under Treasury Department regulations).
Once the total amount of the investment in the contract is excluded using
this ratio, Annuity payments will be fully taxable. If Annuity payments cease
because of the death of the Annuitant and before the total amount of the
investment in the contract is recovered, the unrecovered amount generally will
be allowed as a deduction to the Annuitant in his last taxable year.
There may be special income tax issues present in situations where the Owner
and the Annuitant are not the same person and are not married to one another. A
tax advisor should be consulted in those situations.
TAXATION OF DEATH BENEFIT PROCEEDS
Prior to the Annuity Commencement Date, amounts may be distributed from a
Contract because of the death of an Owner or, in certain circumstances, the
death of the Annuitant. Such Death Benefit proceeds are includible in income as
follows: (1) if distributed in a lump sum, they are taxed in the same manner as
a full withdrawal, as described above, or (2) if distributed under an Annuity
Option, they are taxed in the same manner as Annuity payments, as described
above. After the Annuity Commencement Date, where a guaranteed period exists
under an Annuity Option and the Annuitant dies before the end of that period,
payments made to the Beneficiary for the remainder of that period are includible
in income as follows: (1) if received in a lump sum, they are includible in
income to the extent that they exceed the unrecovered investment in the Contract
at that time, or (2) if distributed in accordance with the existing Annuity
Option selected, they are fully excludable from income until the remaining
investment in the Contract is deemed to be recovered, and all Annuity payments
thereafter are fully includible in income.
Proceeds payable on death may be subject to federal income tax withholding
requirements. (See "Federal Income Tax Withholding".) In addition, in the case
of such proceeds from certain Qualified Plans, mandatory withholding
requirements may apply, unless a "direct rollover" of such proceeds is made.
(See "Direct Rollover Rules".)
PENALTY TAX ON PREMATURE DISTRIBUTIONS
Where a Contract has not been issued in connection with a Qualified Plan,
there generally is a 10% penalty tax on the taxable amount of any payment from
the Contract unless the payment is: (a) received on or after the Owner reaches
age 59 1/2; (b) attributable to the Owner becoming disabled (as defined in the
tax law); (c) made on or after the death of the Owner, or, if an Owner is not an
individual, on or after the
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death of the Primary Annuitant (as defined in the tax law); (d) made as a series
of substantially equal periodic payments (not less frequently than annually) for
the life (or life expectancy) of the Annuitant or the joint lives (or joint life
expectancies) of the Annuitant and a designated Beneficiary (as defined in the
tax law); or (e) made under a Contract purchased with a single premium when the
Annuity Commencement Date is no later than a year from purchase of the Contract
and substantially equal periodic payments are made, not less frequently than
annually, during the Annuity period. (Similar rules, described below, generally
apply in the case of Contracts issued in connection with certain Qualified
Plans.)
AGGREGATION OF CONTRACTS
In certain circumstances, the IRS may determine the amount of an Annuity
payment or a withdrawal from a Contract that is includable in income by
combining some or all of the Annuity contracts owned by an individual which are
not issued in connection with a Qualified Plan. For example, if a person
purchases a Contract offered by this Prospectus and also purchases at
approximately the same time an immediate annuity, the IRS may treat the two
contracts as one contract. In addition, if a person purchases two or more
deferred annuity contracts from the same insurance company (or its affiliates)
during any calendar year, all such contracts will be treated as one contract for
purposes of determining whether any payment not received as an annuity
(including withdrawals prior to the Annuity Commencement Date) is includable in
income. The effects of such aggregation are not clear; however, it could affect
the amount of a withdrawal or an Annuity payment that is taxable and the amount
which might be subject to the 10% penalty tax described above.
LOSS OF INTEREST DEDUCTION WHERE CONTRACTS ARE HELD BY OR FOR THE BENEFIT OF
CERTAIN NON-NATURAL PERSONS
In the case of Contracts issued after June 8, 1997 to a non-natural taxpayer
(such as a corporation or a trust), or held for the benefit of such an entity,
recent changes in the tax law may result in otherwise deductible interest no
longer being deductible by the entity, regardless of whether the income on such
Contracts is treated as ordinary income that is received or accrued by the Owner
during the taxable year. Entities that are considering purchasing the Contract,
or entities that will be beneficiaries under a Contract, should consult a tax
advisor.
QUALIFIED RETIREMENT PLANS
IN GENERAL
The Contracts are also designed for use in connection with certain types of
retirement plans which receive favorable treatment under the Code. Those who are
considering the purchase of a Contract for use in connection with a Qualified
Plan should consider, in evaluating the suitability of the Contract, that the
Contract requires an Annuity Premium of at least $10,000. Numerous special tax
rules apply to participants in Qualified Plans and to Contracts used in
connection with Qualified Plans. Therefore, no attempt is made in this
prospectus to provide more than general information about the use of the
Contracts with the various types of Qualified Plans.
The tax rules applicable to Qualified Plans vary according to the type of
plan and the terms and conditions of the plan itself. For example, both the
amount of the contribution that may be made, and the tax deduction or exclusion
that the Owner may claim for such contribution, are limited under Qualified
Plans and vary with the type of plan. Also, for full withdrawals, partial
withdrawals, and Annuity payments under Qualified Contracts, there may be no
"investment in the contract" and the total amount received may be taxable.
Similarly, loans from Qualified Contracts, where allowed, are subject to a
variety of limitations, including restrictions as to the amount that may be
borrowed, the duration of the loan, and the manner in which the loan must be
repaid. (Owners should always consult their tax advisors and retirement plan
fiduciaries prior to exercising their loan privileges.)
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In addition, special rules apply to the time at which distributions must
commence and the form in which the distributions must be paid. For example, the
length of any guarantee period may be limited in some circumstances to satisfy
certain minimum distribution requirements under the Code. Furthermore, failure
to comply with minimum distribution requirements applicable to Qualified Plans
will result in the imposition of an excise tax. This excise tax generally equals
50% of the amount by which a minimum required distribution exceeds the actual
distribution from the Qualified Plan. In the case of Individual Retirement
Accounts or Annuities ("IRAs"), distributions of minimum amounts (as specified
in the tax law) must generally commence by April 1 of the calendar year
following the calendar year in which the Owner attains age 70 1/2. In the case
of certain other Qualified Plans, distributions of such minimum amounts
generally must commence by the later of this date or April 1 of the calendar
year following the calendar year in which the employee retires.
There is also a 10% penalty tax on the taxable amount of any payment from
certain Qualified Contracts. (The amount of the penalty tax is 25% of the
taxable amount of any payment received from a "SIMPLE retirement account" during
the 2 year period beginning on the date the individual first participated in any
qualified salary reduction agreement (as defined in the tax law) maintained by
the individual's employer.) There are exceptions to this penalty tax which vary
depending on the type of Qualified Plan. In the case of an IRA, exceptions
provide that the penalty tax does not apply to a payment (a) received on or
after the Owner reaches age 59 1/2, (b) received on or after the Owner's death
or because of the Owner's disability (as defined in the tax law), or (c) made as
a series of substantially equal periodic payments (not less frequently than
annually) for the life (or life expectancy) of the Owner or for the joint lives
(or joint life expectancies) of the Owner and the Owner's designated Beneficiary
(as defined in the tax law). These exceptions, as well as certain others not
described herein, generally apply to taxable distributions from other Qualified
Plans (although, in the case of plans qualified under sections 401 and 403,
exception "c" above for substantially equal periodic payments applies only if
the Owner has separated from service). In addition, the penalty tax does not
apply to certain distributions from IRAs taken after December 31, 1997 which are
used for qualified first time home purchases or for higher education expenses.
Special conditions must be met for these two exceptions to the penalty tax.
Those wishing to take a distribution from an IRA for these purposes should
consult their tax advisor.
When issued in connection with a Qualified Plan, a Contract will be amended
as generally necessary to conform to the requirements of the plan. However,
Owners, Annuitants, and Beneficiaries are cautioned that the rights of any
person to any benefits under Qualified Plans may be subject to the terms and
conditions of the plans themselves, regardless of the terms and conditions of
the Contract. In addition, the Company shall not be bound by terms and
conditions of Qualified Plans to the extent such terms and conditions contradict
the Contract, unless the Company consents.
Following are brief descriptions of various types of Qualified Plans in
connection with which American Foundation will generally issue a Contract.
INDIVIDUAL RETIREMENT ANNUITIES. Section 408 of the Code permits eligible
individuals to contribute to an individual retirement program known as an "IRA."
IRAs are subject to limits on the amounts that may be contributed, the persons
who may be eligible and on the time when distributions may commence. Also,
subject to the direct rollover and mandatory withholding requirements discussed
below, distributions from certain Qualified Plans may be "rolled over" on a
tax-deferred basis into an IRA. The Contract may not, however, be used in
connection with an "Education IRA" under Section 530 of the Code, or as a
"SIMPLE IRA" under Section 408(p) of the Code.
CORPORATE AND SELF-EMPLOYED ("H.R.10" AND "KEOGH") PENSION AND
PROFIT-SHARING PLANS. Sections 401(a) and 403(a) of the Code permit corporate
employers to establish various types of tax-favored retirement plans for
employees. The Self-Employed Individuals' Tax Retirement Act of 1962, as
amended, commonly referred to as "H.R. 10" or "Keogh," permits self-employed
individuals also to establish such tax-favored retirement plans for themselves
and their employees. Such retirement plans may permit the
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purchase of the Contract in order to provide benefits under the plans. Employers
intending to use the Contract in connection with such plans should seek
competent advice.
TAX-SHELTERED ANNUITIES. Section 403(b) of the Code permits public school
employees and employees of certain types of charitable, educational and
scientific organizations specified in Section 501(c)(3) of the Code to have
their employers purchase annuity contracts for them and, subject to certain
limitations, to exclude the amount of purchase payments from gross income for
tax purposes. These annuity contracts are commonly referred to as "tax-sheltered
annuities." Purchasers of the Contracts for such purposes should seek competent
advice as to eligibility, limitations on permissible amounts of purchase
payments and other tax consequences associated with the Contracts. Section
403(b) Policies contain restrictions on withdrawals of (i) contributions made
pursuant to a salary reduction agreement in years beginning after December 31,
1988, (ii) earnings on those contributions, and (iii) earnings after December
31, 1988 on amounts attributable to salary reduction contributions held as of
December 31, 1988. These amounts can be paid only if the employee has reached
age 59 1/2 separated from service, died, become disabled, or in the case of
hardship. Amounts permitted to be distributed in the event of hardship shall be
limited to actual contributions; earnings thereon shall not be distributed on
account of hardship. (These limitations on withdrawals do not apply to the
extent the Company is directed to transfer some or all of the Amount Value to
the issuer of another tax-sheltered annuity or into a Section 403(b)(7)
custodial account.)
DIRECT ROLLOVER RULES
In the case of Contracts used in connection with a pension, profit-sharing,
or annuity plan qualified under Sections 401(a) or 403(a) of the Code, or in the
case of a Section 403(b) Tax- Sheltered Annuity, any "eligible rollover
distribution" from the Contract will be subject to direct rollover and mandatory
withholding requirements. An eligible rollover distribution generally is any
taxable distribution from a qualified pension plan under Section 401(a) of the
Code, qualified annuity plan under Section 403(a) of the Code, or Section 403(b)
tax sheltered annuity or custodial account, excluding certain amounts (such as
minimum distributions required under Section 401(a)(9) of the Code and
distributions which are part of a "series of substantially equal periodic
payments" made for life or a specified period of 10 years or more).
Under these requirements, withholding at a rate of 20 percent will be
imposed on any eligible rollover distribution. In addition, the participant in
these qualified retirement plans cannot elect out of withholding with respect to
an eligible rollover distribution. However, this 20 percent withholding will not
apply if, instead of receiving the eligible rollover distribution, the Owner
elects to have amounts directly transferred to certain Qualified Plans (such as
to an Individual Retirement Annuity). Prior to receiving an eligible rollover
distribution, you will receive a notice (from the plan administrator or the
Company) explaining generally the direct rollover and mandatory withholding
requirements and how to avoid the 20% withholding by electing a direct transfer.
FEDERAL INCOME TAX WITHHOLDING
The Company will withhold and remit to the U.S. government a part of the
taxable portion of each distribution made under a Contract unless the
distributee notifies the Company at or before the time of the distribution that
he or she elects not to have any amounts withheld. In certain circumstances,
American Foundation may be required to withhold tax. The withholding rates
applicable to the taxable portion of periodic Annuity payments (other than
eligible rollover distributions) are the same as the withholding rates generally
applicable to payments of wages. The withholding rate applicable to the taxable
portion of non-periodic payments (including withdrawals prior to the Annuity
Commencement Date) is 10%. Regardless of whether you elect not to have federal
income tax withheld, you are still liable for payment of federal income tax on
the taxable portion of the payment. As described above, the withholding rate
applicable to eligible rollover distributions is 20%.
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AMERICAN FOUNDATION LIFE INSURANCE COMPANY
A. BUSINESS
The Contracts are issued by American Foundation Life Insurance Company, a
wholly owned subsidiary of Protective Life Insurance Company, which is the chief
operating subsidiary of Protective Life Corporation, a Delaware based insurance
holding company whose stock is traded on the New York Stock Exchange. American
Foundation is authorized to transact insurance business in 29 states and offers
a variety of individual life, annuity, and group dental insurance products. The
company's assets for the fiscal year ending 1996 were in excess of 100 million
dollars. All policyholder liabilities of American Foundation are guaranteed by
Protective Life Insurance Company.
During 1996 the Company's operations consisted of three business segments:
servicing blocks of insurance policies acquired from other insurers; the sale of
dental maintenance plans and consumer benefit products; and its corporate
segment, consisting of net investment income and expenses. The Company is not
dependent upon any single customer and no single customer accounted for more
than 10% of revenues in 1997.
B. SELECTED FINANCIAL DATA
The following selected financial data for the Company should be read in
conjunction with the financial statements and notes thereto included in this
Prospectus.
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
FOR THE FISCAL YEARS ENDED DECEMBER 31
--------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Premiums and policy fees...........
-- -- -- -- --
New investment income..............
-- -- -- -- --
Realized investment gains
(losses).........................
-- -- -- -- --
Other income.......................
-- -- -- -- --
Total revenues.....................
-- -- -- -- --
Benefits and expenses..............
-- -- -- -- --
Income tax expense.................
-- -- -- -- --
Minority interest..................
-- -- -- -- --
Net Income.........................
-- -- -- -- --
BALANCE SHEET DATA:
Total assets.......................
-- -- -- -- --
Long-term debt.....................
-- -- -- -- --
Total debt(3)......................
-- -- -- -- --
Redeemable preferred stock.........
-- -- -- -- --
Stockholder's equity...............
-- -- -- -- --
Stockholder's equity excluding net
unrealized gains and losses on
investments......................
</TABLE>
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<PAGE>
C. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
[ ] realized net earnings of $million for the year ending December
31, 1997, as compared to net earnings of $ million for the same period in 1996,
or an [increase] of $ million. The [increase] in net earnings in 1997 is
attributable to [ ]. Investment income [increased] from
$ million in 1996 to $ million in 1997. This [increase] is
attributable to [ ]. Total invested assets were $ million in
1996 and $ million in 1997. Total benefits and expenses in 1996 and
1997, respectively, were $ million and $ million. This
[increase] is primarily attributable to [ ]. Net earnings in 1996 were
$million as compared to $ million in 1997. This [increase] in earnings
is due primarily to [ ].
1996 COMPARED TO 1995
The Company realized net earnings of $ million for the year ending
December 31, 1996, as compared to net earnings of $ million for the
same period in 1995, or an [increase] of $ million. The [increase] in
net earnings in 1996 is attributable to [ ]. Investment income
[increased] from $ million in 1995 to $ million in 1996. This
[increase] is attributable to [ ]. Total invested assets were
$ million in 1995 and $ million in 1996. Total benefits and
expenses in 1995 and 1996, respectively, were $ million and
$ million. This [increase] is primarily attributable to [ ].
Net earnings in 1995 were $ million as compared to $ million
in 1996. This [increase] is due primarily to [ ].
KNOWN TRENDS AND UNCERTAINTIES
The operating results of companies in the insurance industry have
historically been subject to significant fluctuations due to competition,
economic conditions, interest rates, investment performance, maintenance of
insurance ratings, and other factors. Certain known trends and uncertainties
which may affect future results of the Company are discussed more fully below.
COMPETITION. Life and health insurance is a mature industry. In recent
years, the industry has experienced virtually no growth in life insurance sales,
though the aging population has increased the demand for retirement savings
products. Life and health insurance is a highly competitive industry and the
Company encounters significant competition from other insurance companies, many
of which have greater financial resources than the Company, as well as
competition from other providers of financial services.
Management believes that the Company's ability to compete is dependent upon,
among other things, its ability to attract and retain distribution channels to
market its insurance and investment products, its ability to develop competitive
and profitable products, its ability to maintain low unit costs, and its
maintenance of strong claims-paying and financial strength ratings from rating
agencies.
The Company competes against other insurance companies and financial
institutions in the origination of commercial mortgage loans.
RATINGS. Ratings are an important factor in the competitive position of
life insurance companies. Ratings organizations periodically review the
financial performance and condition of insurers, including the Company. A
downgrade in the ratings of the Company could adversely affect its ability to
sell its products and its ability to compete for attractive acquisition
opportunities.
Rating organizations assign ratings based upon several factors. While most
of the considered factors related to the rated company, some of the factors
relate to general economic conditions and circumstances outside the rated
company's control.
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<PAGE>
POLICY CLAIMS FLUCTUATIONS. The Company's results may fluctuate from year
to year on account of fluctuations in policy claims received by the Company.
LIQUIDITY AND INVESTMENT PORTFOLIO. Many of the products offered by the
Company allow policyholders and contractholders to withdraw their funds under
defined circumstances. The Company designs products and configures investment
portfolios so as to provide and maintain sufficient liquidity to support
anticipated withdrawal demands and contract benefits and maturities.
Asset/liability management programs and procedures are used to monitor the
relative duration of the Company's assets and liabilities. While the Company
owns a significant amount of liquid assets, many of its assets are relatively
illiquid. Significant unanticipated withdrawal or surrender activity could,
under some circumstances, compel the Company to dispose of illiquid assets on
unfavorable terms, which could have a material adverse effect on the Company.
INTEREST RATE FLUCTUATIONS. Significant changes in interest rates expose
life insurance companies to the risk of not earning anticipated spreads between
the interest rate earned on investments and the interest rate credited to its
life insurance and investment products. Both rising and declining interest rates
can negatively affect the Company's spread income. For example, certain of the
Company's insurance and investment products guarantee a minimum credited
interest rate. While the Company develops and maintains asset/liability
management programs and procedures designed to preserve spread income in rising
or falling interest rate environments, no assurance can be given that
significant changes in interest rates will not materially affect such spreads.
Lower interest rates may result in lower sales of the Company's life insurance
and investment products.
INVESTMENT RISKS. The Company's invested assets are subject to inherent
risks of defaults and changes in market values. The value of the Company's
commercial mortgage portfolio depends in part on the financial condition of the
tenants occupying the properties on which the Company has made loans. Factors
that may affect the overall default rate on, and market value of, the Company's
invested assets include the level of interest rates, performance of the
financial markets, and general economic conditions, as well as particular
circumstances affecting the businesses of individual borrowers and tenants.
REGULATION AND TAXATION. The Company is subject to government regulation in
each of the states in which it conducts business. Such regulation is vested in
state agencies having broad administrative power dealing with all aspects of the
insurance business including premium rates, benefits, marketing practices,
advertising, policy forms, underwriting standards, and capital adequacy, and is
concerned primarily with the protection of policyholders rather than
stockholders. The Company cannot predict the form of any future regulatory
initiatives.
Under the Internal Revenue Code of 1986, as amended (the Code), income tax
payable by policyholders on investment earnings is deferred during the
accumulation period of certain life insurance and annuity products. This
favorable tax treatment may give certain of the Company's products a competitive
advantage over other non-insurance products. To the extent that the Code is
revised to reduce the tax-deferred status of life insurance and annuity
products, or to increase the tax-deferred status of competing products, all life
insurance companies, including the Company, would be adversely affected.
The Company cannot predict what future initiatives the President or Congress
may propose which may affect the life and health insurance industry and the
Company.
LITIGATION. A number of civil verdicts have been returned against life and
health insurers in the jurisdictions in which the Company does business
involving the insurers' sales practices, alleged agent misconduct, failure to
properly supervise agents, and other matters. Increasingly these lawsuits have
resulted in the award of substantial judgments against the insurer that are
disproportionate to the actual damages, including material amounts of punitive
damages. In some states, juries have substantial discretion in awarding punitive
damages which creates the potential for unpredictable material adverse judgments
in any given punitive damages suit. The Company, like other life and health
insurers, in the ordinary
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<PAGE>
course of business, may be involved in such litigation. The outcome of any such
litigation cannot be predicted with certainty. In addition, in some lawsuits
involving insurers' sales practices, insurers have made material settlement
payments to end litigation.
REINSURANCE. As is customary in the insurance industry, the Company cedes
insurance to other insurance companies. However, the ceding insurance company
remains liable with respect to ceded insurance should any reinsurer fail to meet
the obligations assumed by it. Any regulatory or other adverse development
affecting the ceding insurer could also have an adverse effect on the Company.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1996 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities." This statement is
effective for transactions entered into after January 1, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Funds necessary to meet the capital requirements of all states in which the
Company does business, and to support the Company's operations, have been
provided principally by capital contributions from Protective Life Insurance
Company, and from investment income.
IMPACT OF INFLATION
Inflation increases the need for life insurance. Many policyholders who once
had adequate insurance programs increase their life insurance coverage to
provide the same relative financial benefits and protection.
The higher interest rates that have traditionally accompanied inflation may
also affect the Company's investment operation. Policy loans increase as policy
loan interest rates become relatively more attractive. As interest rates
increase, disintermediation of annuity deposits and individual life policy cash
values may increase, the market value of the Company's fixed-rate, long-term
investments may decrease, and the Company may be unable to implement fully the
interest rate reset and call provisions of its mortgage loans. The difference
between the interest rate earned on investments and the interest rate credited
to interest-sensitive products may also be adversely affected by rising interest
rates.
D. INVESTMENTS
The types of assets in which the Company may invest are influenced by state
laws which prescribe qualified investment assets. Within the parameters of these
laws, the Company invests its assets giving consideration to such factors as
liquidity needs, investment quality, investment return, matching of assets and
liabilities, and the composition of the investment portfolio by asset type and
credit exposure. Because liquidity is important, the Company continually
balances maturity against yield and quality considerations in selecting new
investments.
At December 31, 1997, invested assets totaling $ million consisted of
$ million of short-term securities and $ million of bonds and other
long-term investments.
At December 31, 1997, of the total invested assets, % were invested in
bonds rated BBB by Standard & Poor's Corporation, and % were invested in
bonds rated below that rating. Bonds rated BBB by Standard & Poor's Corporation
may have speculative characteristics, and changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity of the
issuers to make principal and interest payments than is the case with higher
grade bonds. Bonds rated below BBB by Standard & Poor's Corporation are
speculative and are subject to significantly greater risks related to the
creditworthiness of issuers and the liquidity of the market for such securities.
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<PAGE>
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations _ Liquidity and Capital Resources" included herein for certain
information relating to investments and liquidity.
E. INDEMNITY REINSURANCE
As is customary in the insurance industry, the Company cedes insurance to
other insurance companies. The ceding insurance company remains liable with
respect to ceded insurance should any reinsurer fail to meet the obligations
assumed by it. The Company sets a limit on the amount of insurance retained on
the life of any one person. In the individual lines it will not retain more than
[ ], including accidental death benefits, on any one life. For group
insurance, the maximum amount retained on any one life is generally
[ ]. At December 31, 1997, the Company had insurance in force of
$[ ] which approximately $[ ] was ceded to reinsurers.
F. POLICY LIABILITIES AND ACCRUALS
The applicable insurance laws under which the Company operates require that
each insurance company report policy liabilities to meet future obligations on
the outstanding policies. These liabilities are the amounts which, with the
additional premiums to be received and interest thereon compounded annually at
certain assumed rates, are calculated in accordance with applicable law to be
sufficient to meet the various policy and contract obligations as they mature.
These laws specify that the liabilities shall not be less than liabilities
calculated using certain named mortality tables and interest rates.
The policy liabilities and accruals carried in the Company's financial
reports (presented on the basis of generally accepted accounting principles)
differ from those specified by the laws of the various states and carried in the
Company's statutory financial statements (presented on the basis of statutory
accounting principles mandated by state insurance regulation). For policy
liabilities, other than those for universal life policies and annuity contracts,
these differences arise from the use of mortality and morbidity tables and
interest rate assumptions which are deemed under generally accepted accounting
principles to be more appropriate for financial reporting purposes than those
required for statutory accounting purposes; from the introduction of lapse
assumptions into the reserve calculation; and from the use of the net level
premium method on all business. Policy liabilities for universal life policies
and annuity contracts are carried in the Company's financial reports at the
account value of the policy or contract.
G. COMPETITION
Life and health insurance is a mature industry. In recent years, the
industry has experienced virtually no growth in life insurance sales, though the
aging population has increased the demand for retirement savings products. Life
and health insurance is a highly competitive industry and the Company encounters
significant competition from other insurance companies, many of which have
greater financial resources than the Company, as well as competition from other
providers of financial services.
Management believes that the Company's ability to compete is dependent upon,
among other things, its ability to attract and retain distribution channels to
market its insurance and investment products, its ability to develop competitive
and profitable products, its ability to maintain low unit costs, and its
maintenance of strong claims-paying and financial strength ratings from rating
agencies.
H. REGULATION
The Company is subject to government regulation in each of the states in
which it conducts business. Such regulation is vested in state agencies having
broad administrative power dealing with all aspects of the insurance business,
including premium rates, marketing practices, advertising, policy forms and
capital adequacy, and is concerned primarily with the protection of
policyholders rather than stockholders. The Company cannot predict the form of
any future proposals or regulation.
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<PAGE>
A life insurance company's statutory capital is computed according to rules
prescribed by the NAIC as modified by the insurance company's state of domicile.
Statutory accounting rules are different from generally accepted accounting
principles and are intended to reflect a more conservative view, for example, by
requiring immediate expensing of policy acquisition costs and more conservative
computations of policy liabilities. The NAIC's risk-based capital requirements
require insurance companies to calculate and report information under a
risk-based capital formula. These requirements are intended to allow insurance
regulators to identify inadequately capitalized insurance companies based upon
the types and mixtures of risks inherent in the insurer's operations. The
formula includes components for asset risk, liability risk, interest rate
exposure, and other factors. Based upon the [December 31, 1996] statutory
financial reports, the Company is adequately capitalized under the formula.
The Company is required to file detailed annual reports with the supervisory
agencies in each of the jurisdictions in which it does business and its business
and accounts are subject to examination by such agencies at any time. Under the
rules of the NAIC, insurance companies are examined periodically (generally
every three to five years) by one or more of the supervisory agencies on behalf
of the states in which they do business. To date, no such insurance department
examinations have produced any significant adverse findings regarding the
Company.
Under insurance guaranty fund laws in most states, insurance companies doing
business in such a state can be assessed up to prescribed limits for
policyholder losses incurred by insolvent or failed insurance companies.
Although the Company cannot predict the amount of any future assessments; most
insurance guaranty fund laws currently provide that an assessment may be excused
or deferred if it would threaten an insurer's financial strength. The Company
was assessed immaterial amounts in [1996,] which will be partially offset by
credits against future state premium taxes.
In addition, many states, including the state in which the Company is
domiciled, have enacted legislation or adopted regulations regarding insurance
holding company systems. These laws require registration of and periodic
reporting by insurance companies domiciled within the jurisdiction which control
or are controlled by other corporations or persons so as to constitute an
insurance holding company system. These laws also affect the acquisition of
control of insurance companies as well as transactions between insurance
companies and companies controlling them. Most states, including New York, where
the Company is domiciled, require administrative approval of the acquisition of
control of an insurance company domiciled in the state or the acquisition of
control of an insurance holding company whose insurance subsidiary is
incorporated in the state.
The Company is subject to various state statutory and regulatory
restrictions on its ability to pay dividends to Protective Life Insurance
Company. In general, dividends up to specified levels are considered ordinary
and may be paid without prior approval. Dividends in larger amounts are subject
to approval by the insurance commissioner of the state of domicile. The maximum
amount that would qualify as ordinary dividends to Protective Life Insurance
Company by the Company in 1997 is estimated to be [ ] million. No assurance can
be given that more stringent restrictions will not be adopted from time to time
by states in which the Company is domiciled, which restrictions could have the
effect, under certain circumstances, of significantly reducing dividends or
other amounts payable by the Company without affirmative prior approval by state
regulatory authorities.
The Company acts as a fiduciary and is subject to regulation by the
Department of Labor ("DOL") when providing a variety of products and services to
employee benefit plans governed by the Employee Retirement Income Security Act
of 1974 ("ERISA"). Severe penalties are imposed by ERISA on fiduciaries that
violate ERISA's prohibited transaction provisions by breaching their duties to
ERISA covered plans. In a case decided by the United States Supreme Court in
December 1993 (John Hancock Mutual Life Insurance Company v. Harris Trust and
Savings Bank), the Court concluded that an insurance company general account
contract that had been issued to a pension plan should be divided into its
guaranteed and nonguaranteed components and that certain ERISA fiduciary
obligations applied with
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respect to the assets underlying the nonguaranteed components. [Although the
Company has not issued contracts identical to the one involved in Harris Trust,
some of its policies relating to ERISA-covered plans may be deemed to have
nonguaranteed components subject to the principles announced by the Court.]
The full extent to which Harris Trust makes the fiduciary standards and
prohibited transaction provisions of ERISA applicable to all or part of
insurance company general account assets, however, cannot be determined at this
time. The Supreme Court's opinion did not resolve whether the assets at issue in
the case may be subject to ERISA for some purposes and not others. The life
insurance industry requested that the DOL issue exemptions from the prohibited
transaction provisions of ERISA in view of Harris Trust. In July of 1995, the
DOL published, in final form, a prohibited transaction class exemption (PTE
95-60) which exempts from the prohibited transaction rules, prospectively and
retroactively to January 1, 1975, certain transactions engaged in by insurance
company general accounts in which employee benefit plans have an interest. The
exemption does not cover all such transactions, and the insurance industry is
seeking further relief. Pursuant to the Small Business Job Protection Act signed
into law on August 20, 1996, the DOL is required to publish final regulations
clarifying the Harris Trust decision. Until these and other matters are
clarified, the Company is unable to determine whether the decision will result
in any liability and, if so, its nature and scope.
Existing federal laws and regulations affect the taxation of the Company's
products. Income tax payable by policyholders on investment earnings is deferred
during the accumulation period of certain life insurance and annuity products.
Congress has from time to time considered proposals that, if enacted, would have
had an adverse impact on the federal income tax treatment of such products, or
would increase the tax deterred status of competing products. If these proposals
were to be adopted, they could adversely affect the ability of all life
insurance companies, including the Company, to sell such products and could
result in the surrender of existing contracts and policies. Although it cannot
be predicted whether future legislation will contain provisions that alter the
treatment of these products, such provisions are not part of any tax legislation
currently under active consideration in Congress.
The Federal Government has from time to time advocated changes to the
current health care delivery system which will address both affordability and
availability issues. In addition to the federal initiatives, a number of states
are considering legislative programs that are intended to affect the
accessibility and affordability of health care. Some states have enacted health
care reform legislation. However, in light of the small relative proportion of
the Company's earnings attributable to group health insurance, management does
not expect that either the federal or state proposals will have a material
adverse effect on the Company's earnings.
The Federal Government has advocated the repeal the Glass-Steagall Act and
certain other legislative changes, which would allow banks to diversify into
securities and other businesses, including possibly insurance. The ultimate
scope and effective date of any proposals are unknown at this time and are
likely to be modified as they are considered for enactment. It is anticipated
that these proposals may increase competition and, therefore, may adversely
affect the Company.
Additional issues related to regulation of the Company are discussed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" included herein.
I. RECENT DEVELOPMENTS
[ TO BE COMPLETED ]
28
<PAGE>
J. EMPLOYEES
The Company has no employees. All services are performed by PLC and
Protective employees under a servicing agreement among the Company, PLC and
Protective. These employees are covered by Protective Life's contributory major
medical, dental, group life, and long-term disability insurance plans. The cost
of these benefits in 1997 amounted to approximately $[ ] million for the
Company. In addition, substantially all of the employees are covered by a
pension plan. The Company also matches employee contributions to its 401(k)
Plan. See Note L to Consolidated Financial Statements.
K. PROPERTIES
[TO BE COMPLETED]
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of American Foundation are as follows:
<TABLE>
<S> <C> <C>
Wayne E. Stuenkel 44 President, Chief Actuary and a Director
Drayton Nabers,
Jr. 57 Director
R. Stephen Briggs 48 Executive Vice President and a Director
John D. Johns 45 Director
Senior Vice President, General Counsel, Secretary and a
Deborah J. Long 44 Director
Jim E. Masssengale 54 Executive Vice President, Acquisitions and a Director
Danny L. Bentley 39 Senior Vice President, Group and a Director
Richard J. Bielen 36 Senior Vice President, Investments and a Director
Steven A. Schultz 43 Senior Vice President, Financial Institutions and a Director
Executive Vice President, Investments and Treasurer, and a
A.S. Williams, III 61 Director
Carolyn King 47 Senior Vice President, Investment Products and a Director
Jerry W. DeFoor 45 Vice President and Controller
</TABLE>
All executive officers and directors are elected annually. Executive
officers serve at the pleasure of the Board of Directors and directors are
elected by PLC at the annual meeting of shareholders of Protective. None of the
individuals listed above is related to any director of PLC or Protective or to
any executive officer.
Mr. Stuenkel has been President and Chief Actuary of American Foundation
since June 1996. He was Senior Vice President and Chief Actuary of American
Foundation from May 1990 to June [1996] and PLC since March 1987. Mr. Stuenkel
is a Fellow in the Society of Actuaries.
Mr. Nabers has been a Director of American Foundation since June 1996. Mr.
Nabers has been Chairman of the Board and Chief Executive Officer of PLC and a
Director since August 1996. From May 1994 to August 1996, Mr. Nabers was
Chairman of the Board, President and Chief Executive Officer and a Director of
PLC. From May 1992 to May 1994, he was President and Chief Executive Officer and
a Director of PLC. Mr. Nabers was President and Chief Executive Officer and a
Director of PLC from
29
<PAGE>
August 1982 until May 1992. He is also a director of Energen Corporation,
National Bank of Commerce of Birmingham, and Alabama National Bancorporation.
Mr. Briggs has been Executive Vice President of PLC and American Foundation
since October 1993. From January 1993 to October 1993, he was Senior Vice
President, Life Insurance and Investment Products of American Foundation and
PLC. Mr. Briggs had been Senior Vice President, Ordinary Marketing of PLC since
August 1988 and of American Foundation since May 1986.
Mr. Johns has been President and Chief Operating Officer of PLC since August
1996 and a Director of American Foundation since June 1996. He was Executive
Vice President and Chief Financial Officer of PLC from October 1993 to August
1996. He was Executive Vice President and Chief Financial Officer of American
Foundation from October 1993 to June 1996. From August 1988 to October 1993, he
served as Vice President and General Counsel of Sonat Inc. He is a director of
National Bank of Commerce of Birmingham and Alabama National Bancorporation.
Ms. Long has been Senior Vice President, Secretary and General Counsel of
PLC since November 1996 and of American Foundation since September 1996. Ms.
Long was Senior Vice President and General Counsel of PLC from February 1994 to
November 1996 and of American Foundation from February 1994 to September 1996.
From August 1993 to January 1994, Ms. Long served as General Counsel of PLC and
from February 1984 to January 1994, she practiced law with the law firm of
Maynard, Cooper & Gale, P.C.
Mr. Massengale has been Executive Vice President, Acquisitions of American
Foundation and PLC since August 1996. From May 1992 to August 1996, he served as
Senior Vice President of American Foundation and PLC. From May 1989 to May 1992,
Mr. Massengale was Senior Vice President, Operations and Systems of American
Foundation and PLC.
Mr. Bentley has been Senior Vice President, Group of American Foundation and
PLC since August 1996. From May 1989 to August 1996, he was Vice President,
Group Marketing of American Foundation.
Mr. Bielen has been Senior Vice President, Investments of PLC and American
Foundation since August 1996. From August 1991 to August 1996, he was Vice
President, Investments of American Foundation.
Mr. Schultz has been Senior Vice President, Financial Institutions of
American Foundation and PLC since March 1993. Mr. Schultz served as Vice
President, Financial Institutions of American Foundation from February 1989 to
March 1993 and of PLC from February 1993 to March 1993.
Mr. Williams has been Executive Vice President, Investments and Treasurer of
American Foundation and PLC since August 1996. From July 1981 to August 1996, he
was Senior Vice President, Investments and Treasurer of PLC and from October
1993 to August 1996, he was Senior Vice President, Investments of American
Foundation.
Ms. King has been Senior Vice President, Investment Products Division of PLC
and American Foundation since April 1995. From August 1994 to March 1995, she
served as Senior Vice President and Chief Investment Officer of Provident Life
and Accident Insurance Company and of its parent company, Provident Life and
Accident Insurance Company of America. She served as President of Provident
National Assurance Company from November 1987 to March 1995. From November 1986
to August 1994, she served as Vice President of Provident Life and Accident
Insurance Company of America.
Mr. DeFoor has been Vice President and Controller, and Chief Accounting
Officer of PLC since April 1989. Mr. DeFoor has been Vice President and
Controller of American Foundation since May 1989. Mr. DeFoor is a certified
public accountant.
30
<PAGE>
EXECUTIVE COMPENSATION
Executive officers of the Company also serve as executive officers and/or
directors of one or more affiliate companies of PLC. Compensation allocations
are made as to each individual's time devoted to duties as an executive officer
of the Company and its affiliates. The following table shows the total
compensation paid to the chief executive officer of the Company by the Company
or any of its affiliates including PLC. No other officer of the Company received
total annual salary and bonus attributable to the Company during the last fiscal
year. Directors of the Company who are also employees receive no compensation in
addition to their compensation as employees of the Company.
PLC has established a Deferred Compensation Plan for Officers of PLC (the
"Officers' Plan") whereby eligible officers may voluntarily elect to defer to a
specified date receipt of all or any portion of their Annual Incentive Plan and
Performance Share Plan bonuses. The bonuses so deferred are credited to the
officers in cash or PLC stock equivalents or a combination thereof. The cash
portion earns interest at approximately PLC's short-term borrowing rate. The
stock equivalent portion is credited with dividends in the form of additional
stock equivalents. Deferred bonuses will be distributed in stock or cash as
specified by the officers in accordance with the Officers' Plan unless
distribution is accelerated under certain provisions, including upon a change in
control of PLC.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
----------------------
AWARDS PAYOUTS
ANNUAL COMPENSATION ---------- ----------
---------------------------------- SECURITIES LONG-TERM
OTHER UNDERLYING INCENTIVE
NAME AND PRINCIPAL ANNUAL OPTIONS/ PLAN ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION SARS(#) PAYOUTS COMPENSATION
(a) (b) (1)(c) (1)(2)(d) (e) (g) (2)(3)(h) (4)(i)
- ------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
WAYNE E. STUENKEL........ 1997 $ $ $ $ $
President and Chief 1996
Actuary 1995
</TABLE>
- ------------------------
(1) Includes amounts that the named executives may have voluntarily elected to
contribute to PLC's 401(k) and Stock Ownership Plan.
(2) Includes amounts that the named executives may have voluntarily deferred
under PLC's Deferred Compensation Plan for Officers.
(3) For further information, see the "Long-Term Incentive Plan--Awards In Last
Fiscal Year" table.
(4) Matching contributions to PLC's 401(k) and Stock Ownership Plan.
The above table sets forth certain information for the three years ended
December 31, 1997 relating to the Chief Executive Officer and the four most
highly compensated executive officers of PLC.
The following table sets forth information regarding the stock appreciation
rights granted to named executives during 1997.
31
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
---------------------------------------------- ALTERNATIVE
PERCENT OF VALUE AT ASSUMED TO (F) AND
NUMBER OF TOTAL (G): GRANT
SECURITIES OPTIONS/SARS ANNUAL RATES OF STOCK DATE VALUE
UNDERLYING GRANTED TO EXERCISE PRICE APPRECIATION FOR ----------
OPTION/ EMPLOYEES OF BASE OPTION TERM GRANT DATE
SARS(1) IN FISCAL PRICE EXPIRATION ---------------------- PRESENT
NAME GRANTED(#) YEAR ($/SH) DATE 5%($) 10%($) VALUE $
(a) (b) (c) (d) (e) (f) (g) (h)(2)
- ------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Wayne E. Stuenkel........ $
</TABLE>
- ------------------------
(1) The stock appreciation rights are exercisable after five years (earlier upon
the death, disability or retirement of the executive or, in certain
circumstances, upon a change in control of PLC). Unexercised rights expire
upon termination of employment, and rights exercised within the one-year
period prior to termination are recoverable by PLC if the executive becomes
employed by a competitor of PLC.
(2) The stock appreciation rights were valued using the Roll-Geske variation of
the Black-Scholes option pricing model. Expected volatility was assumed to
approximately equal that of the S&P Life Insurance Index or %. Other
assumptions include a risk-free rate of %, a dividend yield of %, and an
expected time of exercise of .
The following table sets forth the value of the stock appreciation rights
held by the named executives based upon the value of the Common Stock as of
December 31, 1997.
AGGREGATED FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FY-END(#) FY-END($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
(a) (d) (e)
- ------------------------- --------------- ---------------
<S> <C> <C>
Wayne E. Stuenkel........
</TABLE>
PERFORMANCE SHARE PLAN
LONG-TERM INCENTIVE PLAN--AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
PERFORMANCE OR ESTIMATED FUTURE PAYOUTS UNDER NON-STOCK
NUMBER OF OTHER PERIOD
SHARES, UNITS UNTIL PRICE-BASED PLANS (IN SHARES)
OR OTHER MATURATION OR -------------------------------------------------
NAME RIGHTS(#)(1) PAYOUT THRESHOLD TARGET MAXIMUM
(a) (b) (c) (d) (e) (f)
- ------------------------- --------------- --------------- --------------- ------ ---------------
<S> <C> <C> <C> <C> <C>
Wayne E. Stuenkel........
</TABLE>
In 1997, the Compensation and Management Succession Committee of PLC's Board
of Directors awarded performance shares, as indicated, to the above named
executives, which are not payable, if at all, until the results of the
comparison group of companies for the four-year period ending December 31,
are known.
[With respect to 1997 awards awarded to the named executive officers, 125%
of the award is earned if PLC's average return on average equity for the
four-year period ranks at the top 25% of the comparison group. If PLC ranks at
the top 10% of the comparison group, 170% of the award is earned. If PLC ranks
at the median of the comparison group, 50% of the award is earned and if PLC's
results are below the median of the comparison group, no portion of the award is
earned.] The Performance Share Plan provides for interpolation between
thresholds to determine the exact percentage to be paid.
32
<PAGE>
PENSION PLAN
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------------------------------------------------
RENUMERATION 15 20 25 30 35
- ------------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$ 125,000 $ 27,802 $ 37,070 $ 46,337 $ 55,604 $ 64,872
150,000 33,802 45,070 56,337 67,604 78,872
175,000* 39,802 53,070 66,337 79,604 92,872
200,000* 45,802 61,070 76,337 91,604 106,872
225,000* 51,802 69,070 86,337 103,604 120,872
250,000* 57,802 77,070 96,337 115,604 134,872*
275,000* 63,802 85,070 106,337 127,604* 148,872*
300,000* 69,802 93,070 116,337 139,604* 162,872*
400,000* 93,802 125,070* 156,337* 187,604* 218,872*
500,000* 117,802 157,070* 196,337* 235,604* 274,872*
600,000* 141,802* 189,070* 236,337* 283,604* 330,872*
700,000* 165,802* 221,070* 276,337* 331,604* 386,872*
800,000* 189,802* 253,070* 316,337* 379,604* 442,872*
900,000* 213,802* 285,070* 356,337* 427,604* 498,872*
1,000,000* 237,802* 317,070* 396,337* 475,604* 554,872*
1,100,000* 261,802* 349,070* 436,337* 523,604* 610,872*
1,200,000* 285,802* 381,070* 476,337* 571,604* 666,872*
1,300,000* 309,802* 413,070* 516,337* 619,604* 722,872*
</TABLE>
- ------------------------
* Current pension law limits the maximum annual benefit payable at normal
retirement age under a defined benefit plan to $ for 1998 and is
subject to increase in later years. In addition, in 1997, such a plan may not
take into account annual compensation in excess of $160,000, which amount is
similarly subject to increase in later years. PLC's Excess Benefit Plan
("Excess Benefit Plan"), adopted effective September 1, 1984, and amended and
restated as of January 1, 1989, provides for payment, outside of the PLC
Pension Plan ("Pension Plan"), of the difference between (1) the fully accrued
benefits which would be due under the Pension Plan absent both of the
aforesaid limitations and (2) the amount actually payable under the Pension
Plan as so limited.
The above table illustrates estimated gross annual benefits which would be
payable for life in a straight life annuity commencing at normal retirement age
under the Pension Plan and the Excess Benefit Plan for employees with average
compensation (remuneration under the table above) and years of service. Benefits
in the above table are not reduced by social security or other offset amounts.
Compensation covered by the Pension Plan (for purposes of pension benefits)
excludes commissions and performance share awards and generally corresponds to
that shown under the heading "Annual Compensation" in the Summary Compensation
Table. Compensation is calculated based on the average of the highest level of
compensation paid during a period of 36 consecutive whole months. Only three
Annual Incentive Plan bonuses (whether paid or deferred under a Deferred
Compensation Plan maintained by PLC) may be included in obtaining the average
compensation.
The named executives and their estimated length of service as of December
31, 1997 are provided in the following table.
<TABLE>
<CAPTION>
NAME YEARS OF SERVICE
- ------------------------------------------------------------------------------ -------------------
<S> <C>
Wayne E. Stuenkel.............................................................
</TABLE>
33
<PAGE>
ADDITIONAL AGREEMENTS
PLC has entered into Severance Compensation Agreements with all executive
officers and several other officers. These agreements provide for certain
payments upon termination of employment or reduction in duties or compensation
following certain events constituting a "change in control". The agreements may
be terminated or modified by the Board of Directors at any time prior to a
change in control. The benefits granted upon termination of employment are (i)
continuation (for up to twenty-four months) in PLC's hospital, medical,
accident, disability, and life insurance plans as provided to the executive
immediately prior to the date of his termination of employment and (ii) a plan
distribution. The distribution shall consist of (1) the payment in full of all
pending performance share awards as if fully earned, using the higher of the
market price or price of PLC's Common Stock in the transaction effecting the
change in control, and (2) delivery of an annuity to equal increased benefits
under the Pension Plan and the Excess Benefit Plan resulting from an additional
three years of credited service (subject to the Pension Plan's maximum on
crediting service).
The maximum benefits are limited to two times the sum of the executive's
most recent annualized base salary plus the last earned bonus under PLC's Annual
Incentive Plan (not to exceed certain tax law limitations). The Severance
Compensation Agreements also provide that if the Performance Share Plan has
terminated before the time of payment of benefits, the amount of benefits under
the Severance Compensation Agreements would be reduced by any payment to the
executive due to the termination of the Performance Share Plan.
The Board of Directors of PLC has authorized PLC to enter into Employment
Continuation Agreements with each of the named executives which provide for
certain benefits in the event such executive's employment is actually or
constructively (by means of a reduction in duties or compensation) terminated
following certain events constituting a "change in control". Such benefits
include (i) a payment equal to three times the sum of the annual base salary in
effect at the time of the change in control and the average annual incentive
plan bonus for the three years preceding the change in control; (ii)
continuation (for twenty-four months) in PLC's hospital, medical, accident,
disability, and life insurance plans as provided to the executive immediately
prior to the date of his termination of employment; (iii) delivery of an annuity
to equal increased benefits under the Pension Plan and the Excess Benefit Plan
resulting from an additional three years of credited service (subject to the
Pension Plan's maximum on crediting service); and (iv) an additional payment, if
necessary, to reimburse the executive for any additional tax (other than normal
Federal, state and local income taxes) incurred as a result of any benefits
received in connection with the change in control.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The members of the Compensation and Management Succession Committee
("Committee") are Messrs. McMahon (Chairman), Woods, Dahlberg, Kuehn, and
Sklenar. No member of the Committee was an officer or employee of PLC or any of
its subsidiaries at any time during 1996. Also, no member of the Committee was
formerly an officer of PLC or any of its subsidiaries.
Mr. Dahlberg is the Chairman of the Board, President and Chief Executive
Officer of The Southern Company. PLC is a 25% member of a limited liability
company which acquired an office building adjacent to PLC's home office from an
affiliate of The Southern Company which continues to lease portions of the
building. During 1997, the limited liability company received $ in lease
payments from affiliates of The Southern Company.
34
<PAGE>
MANAGEMENT OWNERSHIP OF PLC STOCK
No director or named executive officer of Protective owns any stock of
Protective or of any affiliated corporation except for the shares of PLC common
stock which are shown as owned as of , 1998:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
BENEFICIAL
OWNERSHIP(1)
----------------------
SHARED PERCENT OF
NAME AND BENEFICIAL OWNER SOLE POWER POWER(2) CLASS(1)
- --------------------------------------------------------- ---------- ---------- -----------
<S> <C> <C> <C>
[TO BE COMPLETED] %
*
*
*
*
*
*
*
*
*
*
*
*
*
All directors and executive officers as a group (
persons)............................................... %
</TABLE>
- ------------------------
* less than one percent
(1) The number of shares reflected are shares which under applicable regulations
of the Securities and Exchange Commission are deemed to be beneficially
owned. Shares deemed to be beneficially owned, under such regulations,
include shares as to which, directly or indirectly, through any contract,
relationship, understanding or otherwise, either voting power or investment
power is held or shared. The total number of shares beneficially owned is
subdivided, where applicable, into two categories: shares as to which
voting/investment power is held solely and shares as to which
voting/investment power is shared. Unless otherwise indicated in the
following notes, if a beneficial owner has sole power, he has sole voting
and investment power, and if a beneficial owner has shared power, he has
shared voting and investment power. The percentage calculation is based on
the aggregate number of shares beneficially owned.
(2) This column may include shares held in the name of a spouse, minor children,
or certain other relatives sharing the same home as the director or officer,
or held by the director or officer, or the spouse of the director or
officer, as a trustee or as a custodian for children, as to all of which
beneficial ownership is disclaimed by the respective directors and officers
except as otherwise noted below.
CERTAIN TRANSACTIONS
PLC is a 25% member of a limited liability company which acquired an office
building adjacent to PLC's home office from an affiliate of The Southern Company
which continues to lease portions of the building. During 1997, the limited
liability company received $ in lease payments from affiliates of The
Southern Company. Mr. Dahlberg is the Chairman of the Board, President and Chief
Executive Officer of The Southern Company.
35
<PAGE>
LEGAL PROCEEDINGS
[TO BE COMPLETED]
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1997 and
1996 and the consolidated statements of income, stockholder's equity, and cash
flows for each of the three years in the period ended December 31, 1997 and the
related financial statement schedules, in this Prospectus, have been included
herein in reliance on the report of [ ], independent certified public
accountants, given on the authority of that firm as experts in auditing and
accounting.
LEGAL MATTERS
Sutherland, Asbill & Brennan LLP of Washington, D.C. has provided advice on
certain matters relating to federal securities laws.
REGISTRATION STATEMENT
A Registration Statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933 as amended with respect to the
Contracts. This Prospectus does not contain all information set forth in the
Registration Statement, its amendments and exhibits, to all of which reference
is made for further information concerning the Company and the Contracts.
Statements contained in this Prospectus as to the content of the Contracts and
other legal instruments are summaries. For a complete statement of the terms
thereof, reference is made to the instruments as filed in the Registration
Statement.
36
<PAGE>
APPENDIX A
MARKET VALUE ADJUSTMENT
The Market Value Adjustment is equal to the Market Value Adjustment
Percentage indicated below, applied to the amount of each full or partial
surrender requested. We will consider surrendered amounts to be interest
withdrawals first to the extent interest credited during the prior Contract Year
has not yet been withdrawn from the Contract at the time of the full or partial
surrender. (See "Market Value Adjustment").
MARKET VALUE ADJUSTMENT PERCENTAGE = (C - I + 0.25%) X (N/12), WHERE:
C = the Guaranteed Interest Rate currently in effect for a Guaranteed Period
with a duration equivalent to the time remaining in the Guaranteed Period
from which the surrender is being made. Linear interpolation will be used to
determine C when the time remaining is not an integral number of whole
years. When the time remaining is less than one year, C will be the current
one year rate;
I = the Guaranteed Interest Rate initially established for the Guaranteed
Period from which the surrender is being made;
N = The number of months remaining in the Guaranteed Period from which the
surrender is being made.
A Surrender Charge will apply during the first seven years of each Initial
and each Subsequent Guaranteed Period. The Surrender Charge is equal to a
specified Surrender Charge Percentage applied to the amount of each full or
partial surrender requested less any amount available under the Interest
Withdrawals. (See "Surrender Charges").
MARKET VALUE ADJUSTMENT AND SURRENDER CHARGE EXAMPLES
FULL SURRENDER AFTER COMPLETION OF YEAR 3
<TABLE>
<CAPTION>
GUARANTEED PERIOD (YEARS): 3 5 7 TOTAL
- ----------------------------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Initial--
Annuity Deposit:
Guaranteed Interest Rate:
Year 1--
Beginning of Year Account Value:
X (1 + Guaranteed Interest Rate):
= End of Year Account Value:
- Beginning of Year Account Value:
= Interest Earned during Year:
Year 2--
Beginning of Year Account Value:
X (1 + Guaranteed Interest Rate):
= End of Year Account Value:
- Beginning of Year Account Value:
= Interest Earned during Year:
</TABLE>
A-1
<PAGE>
MARKET VALUE ADJUSTMENT AND SURRENDER CHARGE EXAMPLES
FULL SURRENDER AFTER COMPLETION OF YEAR 3 (CONTINUED)
<TABLE>
<CAPTION>
GUARANTEED PERIOD (YEARS): 3 5 7 TOTAL
- ----------------------------------------------------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year 3--
Beginning of Year Account Value:
X (1 + Guaranteed Interest Rate):
= End of Year Account Value:
- Beginning of Year Account Value:
= Interest Earned during Year:
After Completion of Year 3--
Account Value:
- Prior Year's Interest:
= Amount Subject to Surrender Charge and Market
Value Adjustment:
Surrender Charge Percentage:
X Subjected Amount:
= Surrender Charge:
Number of Months Remaining in the Guaranteed Period:
EXAMPLE #1--INCREASING INTEREST RATE ENVIRONMENT
Current Guaranteed Interest Rate:
- Initial Guaranteed Interest Rate:
+ 0.25%:
X Number Months Remaining / 12:
= Market Value Adjustment Percentage:
X Subjected Amount:
= Market Value Adjustment:
Account Value:
- Surrender Charge:
- Market Value Adjustment:
= Net Account Value:
EXAMPLE #2--DECREASING INTEREST RATE ENVIRONMENT
Current Interest Rate:
- Initial Guaranteed Interest Rate:
+ 0.25%:
X Number Months Remaining / 12:
= Market Value Adjustment Percentage:
X Subjected Amount:
= Market Value Adjustment:
Account Value:
- Surrender Charge:
- Market Value Adjustment:
= Net Account Value:
</TABLE>
A-2
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.*
The expenses of the issuance and distribution of the Contracts, other than
any underwriting discounts and commissions, are as follows:
<TABLE>
<CAPTION>
Securities and Exchange Commission Registration Fees........ $[34,483.00]
<S> <C>
Printing and Engraving...................................... [ ]
Accounting fees and expenses................................ [ ]
Legal fees and expenses..................................... [65,000.00]
Miscellaneous............................................... [ ]
---------------
TOTAL EXPENSES.............................................. $[99,483.00]
---------------
---------------
</TABLE>
- ------------------------
* Estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Article XI of the By-laws of the Company provides, in substance, that any of
the Company's directors and officers, who is a party or is threatened to be made
a party to any action, suit or proceeding, other than an action by or in the
right of the Company, by reason of the fact that he is or was an officer or
director, shall be indemnified by the Company against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such claim, action, suit
or proceeding if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the Company and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. If the claim, action or suit is or was by or in the right
of the Company to procure a judgment in its favor, such person shall be
indemnified by the Company against expenses (including attorneys' fees) actually
and reasonably incurred by him in connection with the defense or settlement of
such action or suit if he acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Company except
that no indemnification shall be made in respect of any claim, issue or matter
as to which such person shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the Company unless and only to the
extent that the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which such court shall deem proper. To the extent
that a director or officer has been successful on the merits or otherwise in
defense of any such action, suit or proceeding, or in defense of any claim,
issue or matter therein, he shall be indemnified by the Company against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith, not withstanding that he has not been successful on any
other claim issue or matter in any such action, suit or proceeding. Unless
ordered by a court, indemnification shall be made by the Company only as
authorized in the specific case upon a determination that indemnification of the
officer or director is proper in the circumstances because he has met the
applicable standard of conduct. Such determination shall be made (a) by the
Board of Directors by a majority vote of a quorum consisting of directors who
were not parties to, or who have been successful on the merits or otherwise with
respect to, such claim action, suit or proceeding, or (b) if such a quorum is
not obtainable, or, even if obtainable a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion or (c) by the
shareholders.
In addition, the executive officers and directors are insured by PLC's
Directors' and Officers' Liability Insurance Policy including Company
Reimbursement and are indemnified by a written contract with PLC which
supplements such coverage.
II-1
<PAGE>
Insofar as indemnification for liability arising under the Securities Act of
1933 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 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.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Not applicable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT METHOD OF
NUMBER DESCRIPTION FILING
- ------------ ------------------------------------------------------------------------------ ---------------
<C> <S> <C>
*1(a) -Underwriting Agreement
*1(b) -Form of Distribution Agreement
**3(a) -Articles of Incorporation
**3(b) -By-laws
4(a) -Individual Modified Guaranteed Annuity Contract
4(b) -Application for Individual Modified Guaranteed Annuity Contract
*5 -Opinion re legality
*23(a) -Consent of [independent accountants]
*23(b) -Consent of Sutherland, Asbill & Brennan LLP
24 -Powers of Attorney
*27 -Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed in Form N-4 Registration Statement
Registration No. 333-41577
FINANCIAL STATEMENTS SCHEDULES
[To be filed by amendment]
Schedules other than those referred to above are not required or are
inapplicable and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
(A) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which,
II-2
<PAGE>
individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement, including (but not limited to) any
addition or deletion of a managing underwriter;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-3
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, the Registrant has duly caused
this registration statement on Form S-1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Birmingham, State of
Alabama, on this 12th day of December, 1997.
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
By: /s/ WAYNE E. STUENKEL
------------------------------------------
Wayne E. Stuenkel, PRESIDENT
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
As required by the Securities Act of 1933, this registration statement on
Form S-1 has been signed by the following persons in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ WAYNE E. STUENKEL Principal and Director
- ------------------------------ (Principal Executive December 12, 1997
Wayne E. Stuenkel Officer)
Vice President (Principal
/s/ JERRY W. DEFOOR Financial Officer and
- ------------------------------ Principal Accounting December 12, 1997
Jerry W. DeFoor Officer
/s/ R. STEPHEN BRIGGS
- ------------------------------ Director December 12, 1997
Stephen Briggs
/s/ JIM E. MASSENGALE
- ------------------------------ Director December 12, 1997
Jim E.Massengale
/s/ WAYNE E. STUENKEL
- ------------------------------ Director December 12, 1997
Wayne E.Stuenkel
/s/ A.S. WILLIAMS, III
- ------------------------------ Director December 12, 1997
A.S. Williams, III
/s/ STEVEN A. SCHULTZ
- ------------------------------ Director December 12, 1997
Steven A.Schultz
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ DEBORAH A. LONG
- ------------------------------ Director December 12, 1997
Deborah A.Long
/s/ CAROLYN KING
- ------------------------------ Director December 12, 1997
Carolyn King
/s/ RICHARD J. BIELEN
- ------------------------------ Director December 12, 1997
Richard J.Bielen
/s/ DANNY L. BENTLEY
- ------------------------------ Director December 12, 1997
Danny L.Bentley
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
PAGE TO SEQUENTIAL
NUMBERING SYSTEM
NUMBER DESCRIPTION WHERE EXHIBIT LOCATED
- -------------- ----------------------------------------------------------------------------------- -----------------------
<C> <S> <C>
1(a) Underwriting Agreement *
1(b) Form of Distribution Agreement *
3(a) Articles of Incorporation **
3(b) By-laws **
4(a) Individual Modified Guaranteed Annuity Contract
4(b) Application for Individual Modified Guaranteed Annuity Contract
5 Opinion re legality *
23(a) Consent of [independent accountants] *
23(b) Consent of Sutherland, Asbill & Brennan LLP *
24 Powers of Attorney
27 Financial Data Schedule *
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed in Form N-4 Registration Statement, Registration
No. .
<PAGE>
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
2801 HWY. 280 SOUTH
BIRMINGHAM, ALABAMA 35223
800-456-6330
(A STOCK INSURANCE COMPANY)
The Company will provide the benefits described in this contract. They will not
be less than the minimum benefits required by the laws of the state in which
this contract is delivered.
MARKET VALUE ADJUSTMENT
This contract contains a Market Value Adjustment formula. The formula may
result in an upward or downward adjustment of the Account Value when withdrawals
are made prior to the end of any Guaranteed Period. Generally, the Market Value
Adjustment will not be applied to:
- - The Death Benefit, when proper claim is made within 1 year of death (see
page 7);
- - Surrenders from a Sub-Account at the end of its Guaranteed Period (see page
9);
- - Interest Withdrawals (see page 9);
- - Annuitization on the Annuity Commencement Date (see page 9).
The Market Value Adjustment is described on the Schedule of this contract.
SEPARATE ACCOUNT
Your Annuity Premium(s) will be allocated to and accounted for in a non-unitized
separate account. The assets of this separate account cannot be charged with
liabilities arising out of other business of the Company. Contract values are
determined in accordance with the terms of this contract without regard to the
actual performance of the assets in the separate account.
YOU HAVE THE RIGHT TO RETURN THIS CONTRACT.
YOU MAY CANCEL THIS CONTRACT WITHIN THIRTY DAYS AFTER YOU RECEIVE IT BY
RETURNING IT TO OUR ADMINISTRATIVE OFFICE OR TO OUR AGENT, WITH A WRITTEN
REQUEST FOR CANCELLATION. WE WILL PROMPTLY RETURN THE ACCOUNT VALUE ADJUSTED BY
THE MARKET VALUE ADJUSTMENT.
/s/ Wayne E. Stuenkel /s/ Deborah J. Long
Wayne E. Stuenkel Deborah J. Long
President Secretary
NON-PARTICIPATING FLEXIBLE PREMIUM DEFERRED ANNUITY CONTRACT
THIS IS A LEGAL CONTRACT - READ IT CAREFULLY
<PAGE>
SCHEDULE
JOHN DOE NONE
- ----------------------------------- -----------------------------------
Owner Joint Owner
JOHN DOE MARCH 1, 2039
- ----------------------------------- -----------------------------------
Annuitant Annuity Commencement Date
NYR-9999900 MARCH 1, 1997
- ----------------------------------- -----------------------------------
Contract Number Effective Date
- -------------------------------------------------------------------------------
Guaranteed Guaranteed Annuity
Sub-Account # Period Interest Rate Premium
------------- ---------- ------------- ------------
NYR9999900-AA 3 YEARS 4.75% $ 10,000.00
NYR9999900-AB 5 YEARS 5.25% $ 10,000.00
NYR9999900-AC 7 YEARS 5.75% $ 10 000.00
NYR9999900-AD 10 YEARS 6.25% $ 10,000.00
------------
TOTAL ANNUITY PREMIUM $ 40,000.00
- -------------------------------------------------------------------------------
MARKET VALUE ADJUSTMENT
The Market Value Adjustment is equal to the Market Value Adjustment percentage
indicated below, applied to the amount of each full or partial surrender
requested less any amount available under the "INTEREST WITHDRAWAL" provision of
this Contract at the time of the surrender. The Market Value Adjustment does
not apply to surrenders made from a Sub-Account at the end of its Guaranteed
Period; such surrenders should be requested during the final 30 days of the
Guaranteed Period.
MARKET VALUE ADJUSTMENT PERCENTAGE = (C - I + 0.25%) X (N/12), WHERE:
C = the Guaranteed Interest Rate currently in effect for a Guaranteed
Period with a duration equivalent to the time remaining in the Guaranteed
Period from which the surrender is being made. Linear interpolation will
be used to determine C when the time remaining is not an integral number of
whole years. When the time remaining is less than one year, C will be the
current one year rate;
I = the Guaranteed Interest Rate initially established for the Guaranteed
Period from which the surrender is being made;
N = the number of months remaining in the Guaranteed Period from which the
surrender is being made.
Factors used in determining I, such as whether I was established as an Initial
or a Subsequent Guaranteed Interest Rate, will be considered when determining
C.
In the event a current Guaranteed Interest Rate is no longer established by the
Company, a suitable replacement index, subject to all necessary regulatory
approvals, will be used.
A detailed description of the Market Value Adjustment has been filed with the
Superintendent of the New York Insurance Department.
2
<PAGE>
SURRENDER CHARGE
The Surrender Charge percentage for each year of an Initial or Subsequent
Guaranteed Period is indicated in the appropriate table below. The Surrender
Charge is determined by applying the Surrender Charge percentage to the amount
of each full or partial surrender requested adjusted by any applicable Market
Value Adjustment, less any amount available under the "INTEREST WITHDRAWAL"
provision of this Contract at the time of the surrender. The Surrender Charge
does not apply to surrenders made from a Sub-Account at the end of its
Guaranteed Period.
SURRENDER CHARGE FOR INITIAL GUARANTEED PERIODS
GUARANTEED
PERIOD PREMIUM YEAR DURING WHICH SURRENDER IS TAKEN
1 2 3 4 5 6 7 8 9 10
1 1%
2 2% 1%
3 3% 2% 1%
4 4% 3% 2% 1%
5 5% 4% 3% 2% 1%
6 6% 5% 4% 3% 2% 1%
7-10 7% 6% 5% 4% 3% 2% 1% 0% 0% 0%
SURRENDER CHARGE FOR SUBSEQUENT GUARANTEED PERIODS
GUARANTEED
PERIOD PREMIUM YEAR DURING WHICH SURRENDER IS TAKEN
1 2 3 4 5 6 7 8 9 10
1 1%
2 2% 1%
3 3% 2% 1%
4 4% 3% 2% 1%
5 5% 4% 3% 2% 1%
6 5% 5% 4% 3% 2% 1%
7-10 5% 5% 5% 4% 3% 2% 1% 0% 0% 0%
INDEX
Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
General Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Control Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Death Benefit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Interest Credited and Guaranteed Periods . . . . . . . . . . . . . . . . . . 8
Premium Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Surrenders - Termination . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Annuity Options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Annuity Tables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
3
<PAGE>
DEFINITIONS
ACCOUNT VALUE - The sum of all Sub-Account Values.
ADMINISTRATIVE OFFICE - 2801 Highway 280 South, Birmingham, Alabama 35223.
ANNUITANT - Annuity payments may depend upon the continuation of the life of a
person. That person is called an Annuitant. Annuity payments will be paid to
the Annuitant, unless directed otherwise by the Owner.
ANNUITY - A series of periodic payments.
ANNUITY COMMENCEMENT DATE - The date on which Annuity payments are determined.
The initial payment must be made within one month of the Annuity Commencement
Date.
ANNUITY PREMIUM - Payments (less premium taxes, if applicable) made and
allocated to the Guaranteed Period(s) you select under this contract. Each
Annuity Premium and each allocation to a Guaranteed Period must be at least
$10,000. Only one contract will be issued regardless of the number of Annuity
Premiums made. We reserve the right not to accept any Annuity Premium payment.
BENEFICIARY - The person or persons entitled to receive the Death Benefit under
this contract upon the death of an Owner.
PRIMARY - The Primary Beneficiary is the surviving Owner, if any. If there
is no surviving Owner, the Primary Beneficiary is the person or persons
designated on the application or, if changed by the Owner, the person or
persons so named in our records.
CONTINGENT - The person named to receive the Death Benefit if the Primary
Beneficiary is not living at the time of an Owner's death. If no
Beneficiary designation is in effect or if no Beneficiary is living at the
time of an Owner's death, the estate of the deceased Owner will be the
Beneficiary.
IRREVOCABLE - An irrevocable Beneficiary is one whose consent is needed to
change the Beneficiary designation, and to exercise certain other rights.
COMPANY - American Foundation Life Insurance Company. The Company is also
referred to as "we", "us", or "our".
DEATH BENEFIT - The amount payable to a Beneficiary upon the death of an Owner
prior to the Annuity Commencement Date. Only one Death Benefit is payable under
this contract even though the contract may, in some circumstances, continue
beyond an Owner's death.
EFFECTIVE DATE - The date on which this contract takes effect. Contract Years
are measured from the Effective Date.
GUARANTEED INTEREST RATE - The effective rate of interest, calculated after
daily compounding has been taken into account, which is established by the
Company for a Guaranteed Period. Guaranteed Interest Rates are designated as
either "Initial" or "Subsequent".
4
<PAGE>
GUARANTEED PERIOD - The period for which a Guaranteed Interest Rate will be
credited to a Sub-Account. Guaranteed Periods are designated as either
"Initial" or "Subsequent".
MARKET VALUE ADJUSTMENT - An adjustment made to a Sub-Account Value when a
partial or full surrender is made prior to the end of any Guaranteed Period.
NET ACCOUNT VALUE - The sum of all Net Sub-Account Values.
NET SUB-ACCOUNT VALUE - The Sub-Account Value after application of the Market
Value Adjustment and less deductions for any Surrender Charges and applicable
premium taxes.
NET SURRENDER AMOUNT - The Surrender Amount after application of the Market
Value Adjustment and less deductions for any Surrender Charges and applicable
premium taxes.
OWNER - The Owner(s) of the contract, also referred to as "you" or "your."
Individuals, as well as non-natural persons such as corporations or trusts, may
be Owners.
SUB-ACCOUNT - Annuity Premium is allocated to one or more Sub-Accounts. A
Sub-Account is characterized by its Guaranteed Period and its corresponding
Guaranteed Interest Rate.
SUB-ACCOUNT PREMIUM - Annuity Premium allocated and credited to a Sub-Account
("Initial"), or any amount transferred and credited to a Sub-Account at the end
of a Guaranteed Period ("Subsequent"). Premium Years are measured from the date
the Sub-Account Premium is credited.
SUB-ACCOUNT VALUE - The Sub-Account Premium, increased by all interest credited
and decreased by previous full or partial surrenders (including applicable
Surrender Charges, Market Value Adjustments and premium taxes) and previous
interest withdrawals. The Sub-Account Value of each Sub-Account under this
contract must be at least $10,000 at all times.
SURRENDER AMOUNT - The portion of the Sub-Account Value removed to satisfy a
written request for a full or partial surrender.
SURRENDER CHARGE - A charge imposed when a partial or full surrender is made
prior to the end of a Guaranteed Period.
SURRENDER DATE - The date on which a full or partial surrender is processed.
WRITING - A written form satisfactory to the Company received at the
Administrative Office.
GENERAL PROVISIONS
ENTIRE CONTRACT
The entire agreement between the Company and the Owner consists of this
contract, the attached copy of the application and any riders, endorsements or
amendments we provide. All statements in the application are considered
representations and not warranties.
5
<PAGE>
APPLICATION OF LAW
The provisions of this contract are to be interpreted in accordance with the
laws of the state in which it was delivered.
NON-PARTICIPATING
This contract does not share in our surplus or profits and does not pay
dividends.
MODIFICATION OF CONTRACT
No change or waiver of the terms of this contract is valid unless made by us in
writing, and signed by our President, Vice President, or Secretary. We reserve
the right to change the provisions of this contract to conform to any applicable
laws, regulations or rulings issued by a governmental agency. We will send
notice of changes affecting your contract.
ERROR IN AGE OR SEX
Payments under this contract may depend upon a person's age and sex. If the date
of birth or sex provided us is not correct, the benefits under this contract
will be adjusted to the amount which would have been payable at the correct age
and sex. If we made any underpayments because of the error, the amount of any
underpayment shall be immediately paid in one sum. Any overpayments made shall
be deducted from the current or succeeding payments due under the contract.
Overpayments and underpayments shall bear interest at an annual effective rate
of 3%.
Proof of the Annuitant's age and sex will be required before the first payment
will be made under an Annuity option involving lifetime payments.
ASSIGNMENT
Upon notice to us, the Owner may assign his or her rights under this contract.
The assignment must be in Writing and we assume no responsibility for the
validity of any assignment. A claim against a contract under assignment is
subject to proof of claimant's interest and the extent of the assignment.
SETTLEMENT
The Owner may elect to apply settlement proceeds, including any full or partial
surrender proceeds or the Death Benefit, to any payout option offered by us for
such payments at the time the election is made. The settlement option selected
must comply with the requirements of the Internal Revenue Code. Any payment we
make under this contract is payable at our Administrative Office.
FACILITY OF PAYMENT
If a person receiving payments under this contract is incapable of giving us a
valid receipt we may make such payment to whomever has assumed his or her care
and principal support. Any such payment shall fully discharge us to the extent
of that payment. We may require proof that the Annuitant is living to continue
Annuity payments.
PROTECTION OF PROCEEDS
To the extent permitted by law, no benefits payable under this contract will be
subject to the claims of creditors of any payee.
6
<PAGE>
ANNUAL REPORTS
At the end of each contract Year we will send you a report showing the current
Account Value, Sub-Account Values and all other information required by law.
CONTROL PROVISIONS
ANNUITY COMMENCEMENT DATE CHANGE
You may change the Annuity Commencement Date by notice to us in Writing. We
must receive your request at least 30 days before the proposed Annuity
Commencement Date. The Annuity Commencement Date you select cannot be earlier
than the end of any existing Guaranteed Period nor later than the Annuitant's
90th Birthday.
ANNUITANT CHANGE
The Owner may change the Annuitant prior to the Annuity Commencement Date. The
request must be in Writing. Once it is received and acknowledged at our
Administrative Office. The change will relate back to and take effect on the
date the request was signed. The new Annuitant's 90th birthday may not be
before the end of any existing Guaranteed Period. If any Owner is not an
individual, the Annuitant may not be changed.
BENEFICIARY CHANGE
You may change the Beneficiary at any time. We must receive your request in
Writing. If any Beneficiary has been designated irrevocably we will also need
the Irrevocable Beneficiary's written consent to make the change. The change
will relate back to and take effect on the date the request was signed but we
will not be liable for any payment we make before such request has been received
and acknowledged at our Administrative Office.
CONTROL
You may assign the contract, surrender the contract, amend or modify the
contract with our written consent, and exercise, receive and enjoy every other
right and benefit contained in the contract. The use of the rights may be
subject to the consent of any assignee or Irrevocable Beneficiary. Except with
respect to termination, Joint Owners may provide that each Owner alone may
exercise all rights, options and privileges.
DEATH OF THE ANNUITANT OR OWNER
If the Annuitant is not an Owner and dies prior to the Annuity Commencement
Date, the Owner first named on the application will become the new Annuitant
unless the Owner designates otherwise. If any Owner is not an individual, the
death of the Annuitant will be treated as the death of an Owner.
If any Owner dies while this contract is in force prior to the Annuity
Commencement Date, a Death Benefit will be payable to the Beneficiary.
DEATH BENEFIT
The Death Benefit will be determined as of the date due proof of death is
received by the Company. If a claim for the Death Benefit is received at our
Administrative Office within 1 year of the date of death the Death Benefit will
equal the greater of: (1) the Account Value, less applicable premium taxes; or
(2) the Net Account Value. If a claim is received past 1 year after the date of
death the Death Benefit will equal the Net Account Value.
7
<PAGE>
Only one Death Benefit is payable under this contract.
The Death Benefit may be taken in one sum immediately and the contract will
terminate. If the Death Benefit is not taken immediately as a lump sum, then the
entire interest in the contract must be distributed under one of the following
options:
(1) the entire interest must be distributed over the life of the
Beneficiary, or over a period not extending beyond the life expectancy
of the Beneficiary, with distribution beginning within one year of the
Owner's death; or,
(2) the entire interest must be distributed within 5 years of the Owner's
death.
If the Beneficiary is the deceased Owner's spouse, the surviving spouse may
elect, in lieu of receiving the Death Benefit, to continue the contract and
become the new Owner. The surviving spouse may select a new Beneficiary. Upon
this spouse's death, the Death Benefit will become payable and must then be
distributed to the new Beneficiary in one sum immediately or according to either
paragraph (1) or (2), above.
If there is more than one Beneficiary, the foregoing provisions will apply to
each Beneficiary individually.
The contract shall be interpreted to comply with the requirements of Section
72(s) of the Internal Revenue Code.
INTEREST CREDITED AND GUARANTEED PERIODS
Initial Sub-Account Premium will earn interest at the Initial Guaranteed
Interest Rate. You may select from any Guaranteed Period we are offering under
this contract at the time the Annuity Premium is made, provided no Guaranteed
Period extends beyond the Annuity Commencement Date.
You may not transfer a Sub-Account Value to any other Sub-Account before the end
of the existing Sub-Account's Guaranteed Period. At least 45 days, but no more
than 75 days prior to the end of each Guaranteed Period, we will send a written
notice advising you of the maturity date and maturity value of the Sub-Account.
At the end of any Guaranteed Period a Subsequent Guaranteed Period will begin.
Unless you instruct us otherwise in Writing, the Sub-Account Value at maturity
will become the Sub-Account Premium for a Subsequent Guaranteed Period with the
same duration as the previous Guaranteed Period, if it does not extend beyond
the Annuity Commencement Date. Otherwise, the Subsequent Guaranteed Period will
be the longest Guaranteed Period then offered which does not extend beyond that
date. The Company will always offer a 1-year Subsequent Guaranteed Period in
addition to other Guaranteed Periods then available.
Subsequent Sub-Account Premium will earn interest at the Subsequent Guaranteed
Interest Rate. The Subsequent Guaranteed Interest Rate will be determined at the
beginning of the Subsequent Guaranteed Period and may not be equal to the
Initial Guaranteed Interest Rate then offered for an Initial Guaranteed Period
of the same duration.
Initial and Subsequent Guaranteed Interest Rates will not be less than an annual
effective interest rate of 3%.
8
<PAGE>
PREMIUM TAXES
Premium taxes will be deducted if applicable. Premium taxes may be deducted
from the Annuity Premium when received, from a full or partial surrender, from
the Death Benefit, or from the amount applied to an Annuity, in accordance with
applicable law.
SURRENDERS - TERMINATION
Full surrenders may be made at any time. Partial surrenders may only be made if
each Sub-Account Value after the partial surrender is at least $10,000. You
must specify the Sub-Accounts from which the partial surrender is to be made,
but if a surrender is requested from a Sub-Account which has the same Guaranteed
Period as any other Sub-Account, the partial surrender must come from the
Sub-Account with the shortest time remaining.
The Surrender Charge and Market Value Adjustment will not apply to full or
partial surrenders made from a Sub-Account at the end of its Guaranteed Period.
The Net Surrender Amount will be calculated by the Company on the Surrender Date
using the following formula:
(A - M - S - P), WHERE:
A = the Surrender Amount
M = the amount of the Market Value Adjustment;
S = the amount of the Surrender Charge;
P = the amount of unpaid premium taxes, if any.
The Company may defer payment of any partial or full surrender for the period
permitted by law. In no event will the deferral exceed 6 months from the
Surrender Date.
INTEREST WITHDRAWALS
After the first Premium Year of any Sub-Account, you may request a withdrawal of
all, or a portion of the interest credited to that Sub-Account during the prior
Premium Year. Your request must be in Writing and you may only make one such
request per Premium Year. No Surrender Charge or Market Value Adjustment will
be imposed on these interest withdrawals.
ANNUITY OPTIONS
ANNUITY BENEFIT
We will send a written notice advising you of the Annuity Commencement Date at
least 45 days, but no more than 75 days, before that date. If the Annuitant is
alive on the Annuity Commencement Date the Account Value, less applicable
premium taxes, will be applied to the Annuity option you have selected. In the
absence of a selection, however, this amount will be applied under OPTION 1 -
Payments for a 5 Year Certain Period.
If an Annuitant or Owner dies on or after the Annuity Commencement Date any
remaining payments will be distributed at least as rapidly as under the method
of distribution being used on the date of death.
An Annuity may not be surrendered after the commencement of Annuity payments.
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OPTION 1 - PAYMENT FOR A CERTAIN PERIOD. Guaranteed payments will be made for
any Certain Period from 5 to 30 years.
OPTION 2 - PAYMENTS FOR LIFE. Payments are based upon the life of the Annuitant
and stop upon the Annuitant's death.
OPTION 3 - LIFE INCOME WITH PAYMENTS FOR A CERTAIN PERIOD. Payments are based
on the life of the Annuitant. Payments will continue for the lifetime of that
person with payments guaranteed for the selected Certain Period of 10 years.
Payments stop upon the death of the Annuitant or at the end of the Certain
Period, whichever is later.
MINIMUM AMOUNTS - If monthly payments are less than $100 we may make payments
quarterly, semi-annually, or annually.
ANNUITY TABLES
OPTION 1 TABLE OPTIONS 2 AND 3 TABLE
Payments for a Payments for Life, and Life Income with
Certain Period Payments for a Certain Period
LIFE WITH 10 YEARS
LIFE ONLY PERIOD CERTAIN
MONTHLY AGE OF ---------------- ------------------
YEARS PAYMENT ANNUITANT MALE FEMALE MALE FEMALE
- ----- ------- --------- ---------------- ------------------
5 17.91 60 4.77 4.25 4.68 4.21
10 9.61 65 5.46 4.78 5.28 4.70
15 6.87 70 6.44 5.53 6.03 5.36
20 5.51 75 7.79 6.63 6.90 6.21
25 4.71 80 9.70 8.26 7.81 7.22
30 4.18 85 & 12.38 10.70 8.60 8.20
over
These tables illustrate the minimum monthly payment rates for each $1,000
applied. The basis for these calculations is the 1983 Individual Annuitant
Mortality Table A projected 14 years with interest at 3% per annum. Minimum
monthly payment rates for ages and Certain Periods not shown will be calculated
on the same basis and may be obtained from us. To determine future minimum
monthly rates according to these tables, one year will be deducted from the
attained age of the Annuitant for every three completed years beyond the year
1997. Upon annuitization, if we have available rates more favorable than those
guaranteed, the higher rates will apply.
FLEXIBLE PREMIUM DEFERRED MODIFIED GUARANTEED ANNUITY CONTRACT
NON-PARTICIPATING
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AMERICAN FOUNDATION LIFE INSURANCE COMPANY
2801 HWY. 280 SOUTH
BIRMINGHAM, ALABAMA 35223
QUALIFIED RETIREMENT PLAN ENDORSEMENT
The Contract to which this Qualified Plan Endorsement is attached is amended as
of its Effective Date as follows:
The Contract was issued to a custodian or trustee of a qualified retirement plan
under Section 401(a) of the Internal Revenue Code (the "Code") maintained on
behalf of Annuitants for whom the annuity under the Contract is purchased. Such
custodian or trustee is the Owner and Beneficiary. Except as otherwise provided
under the Code and applicable regulations, the Annuitant cannot be changed. The
Owner shall not distribute the Contract to the Annuitant until a distributable
event under the plan for which the Contract is purchased occurs. If a Contract
is distributed by the Owner to the Annuitant, (1) the Annuitant becomes the
Owner, (2) the provisions below apply to such Owner, and (3) a Beneficiary may
be designated by such Owner (or, in the absence of such a designation, the
Owner's estate shall be the Beneficiary), subject to the provisions below.
1. After such distribution, the Contract is nontransferable and may not be
sold, assigned, discounted or pledged as collateral for a loan or as
security for the performance of an obligation or for any other purpose to
any person other than to American Foundation Life Insurance Company, nor
may the Annuitant be changed. Annuity payments under the Contract cannot
be surrendered, commuted, assigned, encumbered or anticipated in any way,
except to the extent required by a qualified domestic relations order as
defined in Code Section 414(p).
2. No amount may be paid from the Contract in a lump sum unless such payment
is allowed under both the retirement plan for which the annuity under the
Contract is purchased and the Code and related regulations. An Annuitant
who is married must have the consent of his or her spouse in order to: (a)
withdraw all or part of the Contract Value, and (b) choose an Annuity
Option other than a Qualified Joint and Survivor Annuity (within the
meaning of Code Section 417). If no Annuity Option is chosen, a Qualified
Joint and Survivor Annuity will be automatic for a married Annuitant. The
form of the spouse's consent must satisfy Code Section 417 (and applicable
regulations).
3. The Annuitant's entire interest in this Contract shall be distributed as
required under Code Section 401(a)(9) and applicable regulations. Unless
otherwise provided under applicable law, the Annuitant's entire interest
shall be distributed, or commence to be distributed, no later than the
"Required Beginning Date," over:
(a) the life of the Annuitant, or the lives of the Annuitant and his or
her designated beneficiary (within the meaning of Code Section
401(a)(9)), or
(b) a period not extending beyond the life expectancy of the Annuitant, or
the joint and last survivor expectancy of the Annuitant and his or her
designated beneficiary.
If the Annuitant's interest is to be distributed over a period greater than
one year, then the amount to be distributed by December 31 of each year
(including the year in which the Required Beginning Date occurs) shall be
made in accordance with the requirements of Code Section 401(a)(9), and the
regulations thereunder, including the incidental death benefit requirements
of Code Section 401(a)(9)(G), including the minimum distribution incidental
benefit requirement of Section 1.401(a)(9)-2 of the Proposed Income Tax
Regulations.
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4. An unmarried Annuitant will be deemed to have elected a life annuity unless
he or she makes a different election in the manner required under Code
Section 417.
5. Except as otherwise provided by law, the term "Required Beginning Date" as
used in this Endorsement means April 1 of the calendar year following the
later of the calendar year in which (1) the Annuitant attains age 70 1/2, or
(2) the Annuitant retires. However, the Required Beginning Date means
April 1 of the calendar year following the calendar year in which the
Annuitant attains age 70 1/2 for an Annuitant who (1) is a 5-percent owner
(as defined in Code Section 416) of the organization sponsoring the plan
which purchased this Contract with respect to the plan year ending in the
calendar year in which the Annuitant attains age 70 1/2; and (2) is not in a
governmental plan or church plan (as defined in Code Section 401(a)(9)(C)).
6. Payments must be made in periodic intervals of no longer than one year. In
addition, payments must be either nonincreasing or they may increase only
as provided in Q&A F-3 of Section 1.401(a)(9)-1 of the Proposed Income Tax
Regulations.
If guaranteed payments are to be made under the Contract, the period over
which the guaranteed payments are to be made must not exceed the shorter of
(1) the Annuitant's life expectancy, or if a Joint Annuitant is named, the
joint and last survivor expectancy of the Annuitant and the Joint
Annuitant, and (2) the applicable maximum period under Section
1.401(a)(9)-2 of the Proposed Income Tax Regulations.
7. Notwithstanding any other provisions of the Contract or this Endorsement,
(a) Unless otherwise permitted under applicable law, if the Annuitant dies
before the Required Beginning Date and an irrevocable annuity
distribution has not begun, the entire interest will be distributed in
accordance with one of the following three provisions:
(1) The entire interest will be paid by December 31 of the calendar
year containing the fifth anniversary of the Annuitant's death.
(2) If the interest is payable to an individual who is the
Annuitant's designated beneficiary, except as provided in
paragraph (3) below, the entire interest will be distributed
beginning within one year of the Annuitant's death and will be
made (in accordance with the regulations under Code section
401(a)(9)) over the life of the designated beneficiary, or over a
period not extending beyond the life expectancy of the designated
beneficiary. An irrevocable election of this method of
distribution must be made by the designated beneficiary within
one year of the Annuitant's death.
(3) If the designated beneficiary in paragraph (2) above is the
Annuitant's surviving spouse, the spouse may irrevocably elect to
receive equal or substantially equal payments over the life of
the surviving spouse, or over a period not extending beyond the
life expectancy of the surviving spouse, commencing at any date
on or before the later of: (i) December 31 of the calendar year
immediately following the calendar year in which the Annuitant
died; and (ii) December 31 of the calendar year in which the
Annuitant would have attained age 70 1/2. Such election by the
surviving spouse must be made no later than the earlier of
December 31 of the calendar year containing the fifth anniversary
of the Annuitant's death or the date distributions are required
to begin pursuant to the preceding sentence.
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<PAGE>
If the surviving spouse dies before distributions begin, the
limitations of this Section 7(a) (without regard to this
paragraph (3)) shall be applied as if the surviving spouse were
the Annuitant.
(b) Unless otherwise permitted under applicable law, if the Annuitant dies
on or after the Required Beginning Date (or if distributions have
begun before the Required Beginning Date as irrevocable annuity
payments), the remaining portion of such interest, if any, will
continue to be distributed at least as rapidly as under the method of
distribution being used at the time of the Annuitant's death.
(c) Distributions under this Section 7 are considered to have begun if the
distributions are made on account of the Owner reaching his or her
Required Beginning Date or, if prior to the Required Beginning Date,
distributions irrevocably commence to an Owner over a period permitted
and in an annuity form acceptable under Section 1.401(a)(9) of the
Proposed Income Tax Regulations.
8. Life expectancy is computed by use of the expected return multiples in
Tables V and VI of Section 1.72-9 of the Income Tax Regulations. Life
expectancies shall be recalculated unless such recalculation is not
permitted, or the Annuitant (or for purposes of distributions beginning
after the Annuitant's death, the Annuitant's surviving spouse) elects at
the time distributions are to begin that life expectancies are not to be
recalculated annually. Such an election shall be irrevocable as to the
Annuitant (or the Annuitant's surviving spouse), and shall apply to all
subsequent years. The life expectancy of a non-spouse beneficiary may not
be recalculated, and shall be calculated using the attained age of such
beneficiary during the calendar year in which distributions are required to
begin pursuant to this Endorsement. Payments for any subsequent calendar
year shall be calculated based on such life expectancy reduced by one for
each calendar year which has elapsed since the calendar year life
expectancy was first calculated.
9. Upon the death prior to the Annuity Commencement Date of the Annuitant,
leaving a spouse surviving, the death benefit will be paid as a Qualified
Preretirement Survivor Annuity (within the meaning of Code Section 417)
unless the spouse has consented to the designation of someone else as
beneficiary or elects a different Annuity Option and such designation is
permitted under applicable law. In either case, the form of the consent or
election must satisfy Code Section 417.
10. Elections and consents made pursuant to this Endorsement may be made and
revoked only in the form, time and manner prescribed in Code Section 417
(and applicable regulations).
11. We will not pay the Account Value in one lump sum in lieu of annuity
benefits if the Contract Value is greater than $3,500, as determined on the
first day of the month preceding the Annuity Commencement Date, in
accordance with the requirements of Code Section 411(a)(11) and 417 (and
applicable regulations).
12. Notwithstanding any provision of the Contract to the contrary that would
otherwise limit a distributee's election under this paragraph, a
distributee may elect, at the time and in the manner prescribed by the
Company, to have any portion of an eligible rollover distribution paid
directly to an eligible retirement plan specified by the distributee in a
direct rollover.
A distributee includes an Annuitant. In addition, the Annuitant's
surviving spouse and the Annuitant's spouse or former spouse who is the
alternate payee under a qualified domestic relations order, as defined in
Code Section 414(p), are distributees with regard to the interest of the
spouse or former spouse.
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An eligible rollover distribution is any distribution of all or any portion
of the balance to the credit of the distributee, except than an eligible
rollover distribution does not include (1) any distribution that is one of
a series of substantially equal periodic payments (not less frequently than
annually) made for the life (or life expectancy) of the distributee or the
joint lives (or joint and last survivor expectancies) of the distributee
and the distributee's designated beneficiary, or for a specified period of
ten years or more; (2) any distribution to the extent such distribution is
required under Code Section 401(a)(9); and (3) the portion of any
distribution that is not includable in gross income (determined without
regard to the exclusion for net unrealized appreciation with respect to
employer securities).
An eligible retirement plan is an individual retirement account described
in Code Section 408(a), an individual retirement annuity described in Code
Section 408(b), an annuity plan described in Code Section 403(a), or a
qualified trust described in Code Section 401(a), that accepts the
distributee's eligible rollover distribution. However, in the case of an
eligible rollover distribution to the surviving spouse, an eligible
retirement plan is an individual retirement account or individual
retirement annuity.
A direct rollover is a payment by the Company to the eligible retirement
plan specified by the distributee.
13. All references in the Contract to Code Section 72(s) are deleted.
14. Annuity payments will be based on unisex rates.
15. The terms of the Contract and Endorsement are subject to the provisions of
any plan under which the Contract and Endorsement are issued.
16. All annuity options under the Contract must meet the requirements of Code
Section 401(a)(9) and applicable regulations, including the requirement
that payments to persons other than the Annuitant are incidental. The
provisions of this Endorsement reflecting the requirements of Code Section
401(a)(9) override any annuity option which is inconsistent with such
requirements.
17. The Company reserves the right, and the Owner agrees the Company shall have
such right, to make any amendments to this Endorsement from time to time as
may be necessary to comply with the Code, as amended, and any regulations
relating to the Contract under Code Section 401(a). We will notify you
immediately of any such changes.
Signed for the Company as of the Effective Date.
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
/s/ Deborah J. Long
Deborah J. Long
Secretary
4
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AMERICAN FOUNDATION LIFE INSURANCE COMPANY
2801 HWY. 280 SOUTH
BIRMINGHAM, ALABAMA 35223
INDIVIDUAL RETIREMENT ANNUITY ENDORSEMENT
The Contract to which this Individual Retirement Annuity Endorsement is attached
is issued to fund a program under the Individual Retirement Annuity provisions
of the Internal Revenue Code of 1986, as amended (the "Code"). Accordingly, the
applicable provisions of the Contract are restricted or amended by this
Endorsement as required by Code Section 408.
The Contract is amended as of the Effective Date as follows:
1. The Annuitant must be an individual who is the sole Owner, and all payments
made from the Contract while the Annuitant is alive must be made to the
Annuitant. Except as otherwise permitted under the Code and applicable
regulations, neither the Owner nor the Annuitant can be changed. The
Contract is established for the exclusive benefit of the Owner and his or
her beneficiaries. The Owner's interest under the Contract is
nontransferable, and may not be sold, assigned, discounted or pledged as
collateral for a loan or as security for the performance of any obligation
or for any other purpose, to any person other than the Company.
2. Regardless of any other provision of the Contract or this Endorsement,
(a) Unless otherwise permitted under applicable law, the entire interest
of the Owner will be distributed, or commence to be distributed, no
later than the first day of April following the calendar year in which
the Owner attains age 70 1/2 (the "Required Beginning Date"), in equal
or substantially equal amounts over:
(1) the life of the Owner, or the lives of such Owner and his or her
designated beneficiary (within the meaning of Code Section
401(a)(9)), or
(b) a period not extending beyond the life expectancy of the Owner,
or the joint and last survivor expectancy of the Owner and his or
her designated beneficiary.
Payments must be made in periodic intervals of no longer than one
year. In addition, payments must be either nonincreasing or they may
increase only as provided in Q&A F-3 of Section 1.401(a)(9)-1 of the
Proposed Income Tax Regulations.
(b) If the Owner's interest is to be distributed over a period greater
than one year, the amount to be distributed by December 31 of each
year (including the year in which the Required Beginning Date occurs)
shall be made in accordance with the requirements of Code Section
401(a)(9) and the regulations thereunder, including the incidental
death benefit requirements of Code Section 401(a)(9)(G) and the
regulations thereunder, including the minimum distribution incidental
benefit requirement of Section 1.401(a)(9)-2 of the Proposed Income
Tax Regulations.
1
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3. Notwithstanding any other provision of the Contract or this Endorsement,
(a) Unless otherwise permitted under applicable law, if the Owner dies
before the Required Beginning Date and an irrevocable annuity
distribution has not begun, the entire interest will be distributed in
accordance with one of the following four provisions:
(1) The entire interest will be paid by December 31 of the calendar
year containing the fifth anniversary of the Owner's death.
(2) If the interest is payable to an individual who is the Owner's
designated beneficiary, except as provided in paragraphs (3) and
(4) below, the entire interest will be distributed beginning
within one year of the Owner's death and will be made (in
accordance with the regulations under Code Section 401(a)(9))
over the life of the designated beneficiary or over a period not
extending beyond the life expectancy of the designated
beneficiary. The irrevocable election of this method of
distribution must be made by the designated beneficiary within
one year of the Owner's death.
(3) If the designated beneficiary in paragraph (2) above is the
Owner's surviving spouse, the spouse may irrevocably elect to
receive equal or substantially equal payments over the life of
the surviving spouse or over a period not extending beyond the
life expectancy of the surviving spouse, commencing at any date
prior to the later of: (i) December 31 of the calendar year
immediately following the calendar year in which the Owner died;
and (ii) December 31 of the calendar year in which the Owner
would have attained age 70 1/2. Such election by the surviving
spouse must be made no later than the earlier of December 31 of
the calendar year containing the fifth anniversary of the Owner's
death or the date distributions are required to begin pursuant to
the preceding sentence.
(4) If the designated beneficiary is the Owner's surviving spouse,
the spouse may irrevocably elect to treat the Contract as his or
her own individual retirement annuity. This election will be
deemed to have been made if such surviving spouse pays an Annuity
Premium, makes a rollover to or from the Contract, or fails to
elect paragraphs (2) or (3) of this Section 3(a).
If the designated beneficiary in paragraph (2) above is the Owner's
surviving spouse and the surviving spouse dies before distributions
begin, the limitations of this Section 3(a) (without regard to
paragraphs (3) and (4)) shall be applied as if the surviving spouse
were the Owner.
(b) Unless otherwise permitted under applicable law, if the Owner dies on
or after the Required Beginning Date (or if distributions have begun
before the Required Beginning Date as irrevocable annuity payments),
the remaining portion of such interest, if any, will continue to be
distributed at least as rapidly as under the method of distribution
being used at the time of the Owner's death.
(c) Distributions under this Section 3 are considered to have begun if
distributions are made on account of the Owner reaching his or
her Required Beginning Date or if prior to the
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Required Beginning Date distributions irrevocably commence to an Owner over
a period permitted and in an annuity form acceptable under Section
1.401(a)(9) of the Proposed Income Tax Regulations.
4. Life expectancy is computed by use of the expected return multiples in
Tables V and VI of Section 1.72-9 of the Income Tax Regulations. Life
expectancies shall be recalculated unless such recalculation is not
permitted, or the Owner (or for purposes of distributions beginning after
the Owner's death, the Owner's surviving spouse) elects at the time
distributions are to begin that life expectancies are not to be
recalculated annually. Such an election shall be irrevocable as to the
Owner (or the Owner's surviving spouse), and shall apply to all subsequent
years. The life expectancy of a non-spouse beneficiary may not be
recalculated, and shall be calculated using the attained age of such
beneficiary during the calendar year in which distributions are required to
begin pursuant to this Endorsement. Payments for any subsequent calendar
year shall be calculated based on such life expectancy reduced by one for
each calendar year which has elapsed since the calendar year life
expectancy was first calculated.
5. Annuity Premiums are payable in cash and may not include any amounts other
than a rollover contribution (as permitted by Code Sections 402(c),
403(a)(4), 403(b)(8), or 408(d)(3)), a nontaxable transfer from an
Individual Retirement Account under Code Section 408(a) or another
Individual Retirement Annuity under Code Section 408(b), a contribution
made in accordance with the terms of a Simplified Employee Pension as
described in Code Section 408(k), and a contribution in cash not to exceed
$2,000 in any taxable year. Any refund of Annuity Premiums (other than
those attributable to excess contributions) will be applied, before the
close of the calendar year following the year of the refund, toward the
payment of future Annuity Premiums or the purchase of additional benefits.
No contribution will be accepted under a SIMPLE plan established by any
employer pursuant to Code Section 408(p). No transfer or rollover of funds
attributable to contributions made by a particular employer under its
SIMPLE plan will be accepted from a SIMPLE IRA, that is, an Individual
Retirement Account under Code Section 408(a) or an Individual Retirement
Annuity under Code Section 408(b) used in conjunction with a SIMPLE plan,
prior to the expiration of the 2-year period beginning on the date the
Owner first participated in that employer's SIMPLE plan.
6. Except as provided by law, the entire interest of the Owner in the Contract
is nonforfeitable.
7. If the Contract is issued in connection with a Simplified Employee Pension,
annuity payments will be based on unisex rates.
8. The Company will furnish annual calendar year reports concerning the status
of this Contract.
9. All references in the Contract to Code Section 72(s) are deleted.
10. All annuity options under the Contract must meet the requirements of Code
Sections 401(a)(9) and 408(b)(3). The provisions of this Endorsement
reflecting the requirements of these Code sections override any annuity
option which is inconsistent with such requirements.
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If guaranteed payments are to be made under the Contract, the period over
which the guaranteed payments are to be made must not exceed the shorter of
(1) the Annuitant's life expectancy, or if a Joint Annuitant is named, the
joint and last survivor expectancy of the Annuitant and the Joint
Annuitant, and (2) the applicable maximum period under Section
1.401(a)(9)-2 of the Proposed Income Tax Regulations.
The market value adjustment and surrender charge will not be applied to the
extent of a distribution required under Code Sections 401(a)(9) and
408(b)(3) for this Contract.
11. The Company reserves the right, and the Owner agrees the Company shall have
such right, to make any amendments to this Endorsement from time to time as
may be necessary to comply with the Code, as amended, and any regulations
relating to the Contract as an Individual Retirement Annuity under Code
Section 408(b). We will notify you immediately of any such changes.
Signed for the Company as of the Effective Date.
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
/s/ Deborah J. Long
Deborah J. Long
Secretary
4
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AMERICAN FOUNDATION LIFE INSURANCE COMPANY
2801 HWY. 280 SOUTH
BIRMINGHAM, ALABAMA 35223
TAX-SHELTERED ANNUITY ENDORSEMENT
The Contract to which this Tax-Sheltered Annuity Endorsement is attached is
amended as of its Effective Date as follows:
1. The Annuitant must be an individual who is the sole Owner and, except as
otherwise permitted by this Endorsement, all payments made from the
Contract while the Annuitant is alive must be made to the Annuitant.
The Owner's interest in the Contract is nontransferable within the meaning
of Internal Revenue Code (the "Code") Section 401(g) and applicable
regulations. In particular, the Contract may not be sold, assigned,
discounted or pledged as collateral for a loan or as security for the
performance of any obligation or for any other purpose, to any person other
than the Company. Except as provided by law, the Owner's interest in the
Contract is nonforfeitable. Except as otherwise permitted under the Code
and applicable regulations, the Annuitant cannot be changed.
2. The Owner must be an employee of an organization described in Code Section
403(b)(1)(A). If the Contract is used as a funding mechanism for a
rollover under Code Sections 403(b) or 408(d)(3), or a nontaxable transfer,
the Owner must be one individual and that same individual must be the
Annuitant.
3. Regardless of any other provision of the Contract or this Endorsement,
(a) Unless otherwise permitted under applicable law, the entire interest
of the Owner will be distributed, or commence to be distributed, no
later than the "Required Beginning Date," in equal or substantially
equal amounts over:
(1) the life of the Owner, or the lives of the Owner and his or her
designated beneficiary (within the meaning of Code Section
401(a)(9)), or
(2) a period not extending beyond the life expectancy of the Owner,
or the joint and last survivor expectancy of the Owner and his or
her designated Beneficiary.
Except as otherwise provided by law, the term "Required Beginning
Date" as used in this Endorsement means April 1 of the calendar year
following the later of (1) the calendar year in which the Owner
attains age 70 1/2; and (2) the calendar year in which the Owner
retires. However, the Required Beginning Date means April 1 of the
calendar year following the calendar year in which the Owner attains
age 70 1/2 for an Owner who (1) is a 5-percent owner (as defined in
Code Section 416) of the
<PAGE>
organization described in Section 2 of this Endorsement with respect
to the plan year ending in the calendar year in which the Owner
attains age 70 1/2; and (2) is not in a governmental plan or church
plan (as defined in Code Section 401(a)(9)(C)).
Payments must be made in periodic intervals of no longer than one
year. In addition, payments must be either nonincreasing or they may
increase only as provided in Q&A F-3 of Section 1.401(a)(9)-1 of the
Proposed Income Tax Regulations.
(b) If the Owner's interest is to be distributed over a period greater
than one year, the amount to be distributed by December 31 of each
year (including the year in which the Required Beginning Date occurs)
shall be made in accordance with the requirements of Code Section
401(a)(9) and the regulations thereunder, including the incidental
death benefit requirements of Code Section 401(a)(9)(G) and the
regulations thereunder, including the minimum distribution incidental
benefit requirement of Section 1.401(a)(9)-2 of the Proposed Income
Tax Regulations.
4. Notwithstanding any other provision of the Contract or this Endorsement,
(a) Unless otherwise permitted under applicable law, if the Owner dies
before the Required Beginning Date and an irrevocable annuity
distribution has not begun, the entire interest will be distributed in
accordance with one of the following three provisions:
(1) The entire interest will be paid by December 31 of the calendar
year containing the fifth anniversary of the Owner's death.
(2) If the interest is payable to an individual who is the Owner's
designated beneficiary, except as provided in paragraph (3)
below, the entire interest will be distributed beginning within
one year of the Owner's death and will be made (in accordance
with the regulations under Code section 401(a)(9)) over the life
of the designated beneficiary, or over a period not extending
beyond the life expectancy of the designated beneficiary. An
irrevocable election of this method of distribution must be made
by the designated beneficiary within one year of the Owner's
death.
(3) If the designated beneficiary in paragraph (2) above is the
Owner's surviving spouse, the spouse may irrevocably elect to
receive equal or substantially equal payments over the life of
the surviving spouse, or over a period not extending beyond the
life expectancy of the surviving spouse, commencing at any date
on or before the later of: (i) December 31 of the calendar year
immediately following the calendar year in which the Owner died;
and (ii) December 31 of the calendar year in which the Owner
would have attained age 70 1/2. Such election by the surviving
spouse must be made no later than the earlier of December 31 of
the calendar year containing the fifth anniversary of the Owner's
death or the date distributions are required to begin pursuant to
the preceding sentence.
<PAGE>
If the surviving spouse dies before distributions begin, the
limitations of this Section 4(a) (without regard to this
paragraph (3)) shall be applied as if the surviving spouse were
the Owner.
(b) Unless otherwise permitted under applicable law, if the Owner dies on
or after the Required Beginning Date (or if distributions have begun
before the Required Beginning Date as irrevocable annuity payments),
the remaining portion of such interest, if any, will continue to be
distributed at least as rapidly as under the method of distribution
being used at the time of the Owner's death.
(c) Distributions under this Section 4 are considered to have begun if
distributions are made on account of the Owner reaching his or her
Required Beginning Date or if prior to the Required Beginning Date
distributions irrevocably commence to an Owner over a period permitted
and in an annuity form acceptable under Section 1.401(a)(9) of the
Proposed Income Tax Regulations.
5. Life expectancy is computed by use of the expected return multiples in
Tables V and VI of Section 1.72-9 of the Income Tax Regulations. Life
expectancies shall be recalculated unless such recalculation is not
permitted, or the Owner (or for purposes of distributions beginning after
the Owner's death, the Owner's surviving spouse) elects at the time
distributions are to begin that life expectancies are not to be
recalculated annually. Such an election shall be irrevocable as to the
Owner (or the Owner's surviving spouse), and shall apply to all subsequent
years. The life expectancy of a non-spouse beneficiary may not be
recalculated, and shall be calculated using the attained age of such
beneficiary during the calendar year in which distributions are required to
begin pursuant to this Endorsement. Payments for any subsequent calendar
year shall be calculated based on such life expectancy reduced by one for
each calendar year which has elapsed since the calendar year life
expectancy was first calculated.
6. Annuity Premiums are payable in cash and may not include amounts other than
a rollover contribution (as permitted by Code Sections 403(b)(8) and
408(d)(3)) and a nontaxable transfer from another contract qualifying under
Code Section 403(b) or from a custodial account qualifying under Code
Section 403(b)(7). In all events, payments made pursuant to a salary
reduction agreement shall be limited to the extent provided in Code Section
402(g). Payments shall not exceed the amount allowed by Code Section 415.
To the extent payments are in excess of the amounts permitted under Code
Sections 402(g), 415, or 403(b)(2), the Company may distribute amounts
equal to such excess as permitted by applicable law.
7. Notwithstanding any other provision of the Contract, withdrawals and other
distributions attributable to contributions made pursuant to a salary
reduction agreement after December 31, 1988, and the earnings on such
contributions and on amounts held as of December 31, 1988, shall not be
paid unless the Owner has reached age 59 1/2, separated from service, died,
became disabled (within the meaning of Code Section 72(m)(7)), or incurred
a hardship; provided that amounts permitted to be distributed in the event
of hardship shall be limited to actual salary deferral contributions
(excluding earnings thereon); and provided further that amounts may be
distributed pursuant to a Qualified Domestic Relations Order to the extent
permitted by Code Section 414(p).
<PAGE>
8. Notwithstanding any other provision of the Contract, an Annuity Premium
made by a permitted rollover or a nontaxable transfer from a custodial
account qualifying under Code Section 403(b)(7), and the earnings of such
amounts, shall not, except to the extent otherwise provided by Federal tax
law, be paid or made available unless the Owner has reached age 59 1/2,
separated from service, died, became disabled (within the meaning of Code
Section 72(m)(7)), or in the case of such amounts attributable to
contributions made under the custodial account pursuant to a salary
reduction agreement, incurred a hardship; provided that amounts permitted
to be distributed in the event of hardship shall be limited to amounts
attributable to actual salary deferral contributions made under the
custodial account (excluding earnings thereon); and provided further that
amounts may be distributed pursuant to a Qualified Domestic Relations Order
to the extent permitted by Code Section 414(p).
9. A distributee may elect, at the time and in the manner prescribed by us, to
have any portion of an eligible rollover distribution paid directly to an
eligible retirement plan specified by the distributee in a direct rollover.
(a) A distributee includes an Owner. In addition, the Owner's surviving
spouse and the Owner's spouse or former spouse who is the alternative
payee under a Qualified Domestic Relations Order, as defined in
section 414(p), are distributees with regard to the interest of the
spouse or former spouse.
(b) An eligible rollover distribution is any distribution of all or any
portion of the balance to the credit of the distributee, except that
an eligible rollover distribution does not include (1) any
distribution that is one of a series of substantially equal periodic
payments (not less frequently than annually) made for the life (or
life expectancy) of the distributee or the joint lives (or joint and
survivor expectancies) of the distributee and the distributee's
designated beneficiary, or for a specified period of ten years or
more; (2) any distribution to the extent such distribution is required
under Code Section 401(a)(9); and (3) the portion of any distribution
that is not includible in gross income (determined without regard to
the exclusion for net unrealized appreciation with respect to employer
securities).
(c) An eligible retirement plan is an annuity described in Code Section
403(b), an Individual Retirement Account described in Code Section
408(a), or an Individual Retirement Annuity described in Code Section
408(b), that accepts the distributee's eligible rollover distribution.
However, in the case of an eligible rollover distribution to the
surviving spouse, an eligible retirement plan is an Individual
Retirement Account or an Individual Retirement Annuity.
(d) A direct rollover is a payment by us to the eligible retirement plan
specified by the distributee.
10. Annuity payments will be based on unisex rates.
<PAGE>
11. All references in the Contract to Code Section 72(s) are deleted.
12. All annuity options under the Contract must meet the requirements of Code
Section 403(b)(10) and applicable regulations, including the requirement
that payments to persons other than the Owner are incidental. The
provisions of this Endorsement reflecting the requirements of Code Sections
401(a)(9) and 403(b)(10) override any annuity option which is inconsistent
with such requirements.
If guaranteed payments are to be made under the Contract, the period over
which the guaranteed payments are to be made must not exceed the shorter of
(1) the Annuitant's life expectancy, or if a Joint Annuitant is named, the
joint and last survivor expectancy of the Annuitant and the Joint
Annuitant, and (2) the applicable maximum period under Section
1.401(a)(9)-2 of the Proposed Income Tax Regulations.
The market value adjustment and surrender charge will not be applied to the
extent of a distribution required under Code Section 401(a)(9) and
403(b)(10) for this Contract.
13. The Company reserves the right, and the Owner agrees the Company shall have
such right, to make any amendments to this Endorsement from time to time as
may be necessary to comply with the Code, as amended, and any regulations
relating to the Contract as a Tax Sheltered Annuity under Code Section
403(b). We will notify you immediately of any such changes.
14. The terms of the Contract and Endorsement are subject to the provisions of
any plan under which the Contract and Endorsement are issued.
Signed for the Company as of the Effective Date.
AMERICAN FOUNDATION LIFE INSURANCE COMPANY
/s/ Deborah J. Long
Deborah J. Long
Secretary
<PAGE>
<TABLE>
<CAPTION>
<S><C>
ANNUITY APPLICATION AMERICAN FOUNDATION LIFE INSURANCE COMPANY
P.O. BOX 10648 BIRMINGHAM, ALABAMA 35202-0648
- ------------------------------------------------------------------------------------------------------------------------
OWNER NAME, STREET, CITY, STATE, ZIP CODE
/ / Male Birthdate (MO./DAY/YR.) / /
/ / Female Tax ID/Social Security No. -- --
- ------------------------------------------------------------------------------------------------------------------------
JOINT OWNER (IF ANY) NAME, STREET, CITY, STATE, ZIP CODE
/ / Male Birthdate (MO./DAY/YR.) / /
/ / Female Tax ID/Social Security No. -- --
- ------------------------------------------------------------------------------------------------------------------------
ANNUITANT (IF OTHER THAN OWNER) NAME, STREET, CITY, STATE, ZIP CODE
/ / Male Birthdate (MO./DAY/YR.) / /
/ / Female Tax ID/Social Security No. -- --
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
PRIMARY BENEFICIARY NAME, RELATIONSHIP & PERCENTAGE PLAN TYPE - Check Only One (SEE INSTRUCTIONS ON BACK.)
/ /Non-Qualified / /1035 Exchange
Tax ID/Social Security No. -- -- / /CD Transfer / /IRA Rollover
- -------------------------------------------------------- / /IRA Transfer / /IRA Direct Rollover
CONTINGENT BENEFICIARY NAME, RELATIONSHIP & PERCENTAGE / / / /TSA Direct Rollover
----------------
Tax ID/Social Security No. -- -- REPLACEMENT: Will this annuity change or replace any
existing life insurance or annuity? / / Yes / / No
If yes, indicate company name and policy # in Special
Remarks section on back.
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL ANNUITY PREMIUM $
Guaranteed Period: -----------------
3 Yr. $ 5 Yr. $ 7 Yr. $ 10 Yr. $ Yr. $
-------------- -------------- -------------- -------- ----- --------------
(OTHER)
/ / I authorize American Foundation to automatically transfer each Guaranteed Period(s) at renewal to the ____
Guaranteed Period. If the Guaranteed Period is not available due to my age, I elect to renew to the longest
Guaranteed Period available. I may change my election at any time prior to the expiration of any current
Guaranteed Period.
RATE LOCK: AVAILABLE FOR 1035 EXCHANGES, DIRECT TRANSFERS AND DIRECT ROLLOVERS. SEE INFORMATION ON BACK.
/ / Yes, please lock-in my rate for 60 days. The estimated amount of my exchange/transfer is $______________.
/ / No, please give me the rate in effect when my money is received at American Foundation.
OTHER AMERICAN FOUNDATION ANNUITIES:
Have you purchased other American Foundation Annuities this calendar year? / / Yes / / No
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
AUTHORIZATION AND ACKNOWLEDGEMENT: I declare to the best of my knowledge that all of the answers herein are complete and
true. I agree this Application shall be part of my Contract and that if this Application is declined, the Company
will have no liability except to return the Annuity Premium. I HAVE RECEIVED A COPY OF THE CURRENT PROSPECTUS.
/ / YES / / NO
Signed At: Date:
-------------------------------------------------------------------------- -----------------------
(CITY, STATE) (MO./DAY/YR.)
Signature of Signature of
Owner Joint Owner
-------------------------------------------------------- -------------------------------------------
Signature of
Annuitant: (IF OTHER THAN OWNER) Witness:
----------------------------------- -----------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
AF-2004NY 7/97
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S><C>
- ------------------------------------------------------------------------------------------------------------------------
SPECIAL REMARKS:
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
AGENT REPORT
TO THE BEST OF MY KNOWLEDGE AND BELIEF, THE ANNUITY BEING APPLIED FOR / / DOES / / DOES NOT REPLACE OR CHANGE ANY OTHER
ANNUITY OR INSURANCE.
Agent's Print
Signature: Agent Name:
---------------------------------------------------- --------------------------------------------
American Foundation
Broker/Dealer Name (IF APPLICABLE) Agent Number:
---------------------------- ------------------------------------------
Branch: Phone No.:
------------------------------------------------------- ---------------------------------------------
Client Account No. (IF APPLICABLE)
----------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
IMPORTANT INFORMATION REGARDING RATE LOCK
If "yes" is selected, and the money is received within 60 DAYS FROM THE DATE THE APPLICATION IS RECEIVED, you will
receive the rate in effect on that date, regardless of whether the rate goes up or down. If the money is received after
the 60 day period, you will receive the rate in effect on the date the money is received by American Foundation.
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
EXPLANATION OF PLAN TYPES
NON-QUALIFIED - Money which did not originate in an IRA, TSA, Pension, Profit Sharing, or 401K Plan.
1035 EXCHANGE - The tax free exchange of a non-qualified annuity or life insurance contract for one issued by another
insurance company.
CD TRANSFER - The direct transfer of non-qualified proceeds from a maturing certificate of deposit into an annuity.
IRA ROLLOVER - The deposit of qualified funds originating from the distribution of proceeds from an IRA, IRA Rollover,
TSA, Pension, Profit Sharing, or 401K Plan. The rollover must be made within 60 days after the distribution. If
taxes were withheld, out of pocket money may be added to make up the full distribution amount.
IRA TRANSFER - The direct transfer of IRA funds originating from the distribution of assets in an IRA. These
distributions/deposits are not reported to the IRS.
DIRECT IRA ROLLOVER - The direct rollover of qualified funds originating from the distributions of assets in a TSA,
Pension, Profit Sharing, or 401K plan into an IRA Rollover. These distributions/deposits are reported to the IRS.
This method avoids mandatory withholding taxes.
TSA DIRECT ROLLOVER - The direct rollover or transfer of assets distributed from a 403 (b) plan into another 403 (b)
program. These distributions/deposits are reported to the IRS. This method avoids mandatory withholding taxes.
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
SEND APPLICATION TO:
REGULAR MAIL: OVERNIGHT MAIL:
American Foundation Life Insurance Company American Foundation Life Insurance Company
Client Services 3-7 IPS Client Services 3-7 IPS
P.O. Box 10648 2801 Highway 280 South
Birmingham, AL 35202-0648 Birmingham, AL 35223
- ------------------------------------------------------------------------------------------------------------------------
AF-2004NY 4/97
</TABLE>
<PAGE>
DIRECTORS'
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each of the undersigned Directors of
American Foundation Life Insurance Company, an Alabama corporation, ("Company")
by his execution hereof or upon an identical counterpart hereof, does hereby
constitute and appoint John D. Johns, Steve M. Callaway or Jerry W. DeFoor, and
each or any of them, his true and lawful attorney-in-fact and agent, for him and
in his name, place and stead, to execute and sign the Registration Statement on
Form S-1 to be filed by the Company with respect to modified guaranteed annuity
products with the Securities and Exchange Commission, pursuant to the provisions
of the Securities Exchange Act of 1933 and the Investment Company Act of 1940
and, further, to execute and sign any and all pre-effective and post-effective
amendments to such Registration Statement, and to file same, with all exhibits
and schedules thereto and all other documents in connection therewith, with the
Securities and Exchange Commission and with such state securities authorities as
may be appropriate, granting unto said attorney-in-fact and agent, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes of the undersigned might or could do in person, hereby
ratifying and confirming all the acts of said attorney-in-fact and agent or any
of them which they may lawfully do in the premises or cause to be done by virtue
hereof.
IN WITNESS WHEREOF, each of the undersigned has hereunto set his hand and
seal this ____ day of ____________, 1997.
WITNESS TO ALL SIGNATURES:
/s/
- -----------------------------------
Deborah J. Long
/s/ /s/
- ----------------------------------- -----------------------------------
Drayton Nabers, Jr. Danny L. Bentley
/s/ /s/
- ----------------------------------- -----------------------------------
John D. Johns Richard J. Bielen
/s/ /s/
- ----------------------------------- -----------------------------------
R. Stephen Briggs Carolyn King
/s/ /s/
- ----------------------------------- -----------------------------------
Deborah J. Long Jim E. Massengale
/s/ /s/
- ----------------------------------- -----------------------------------
Steven A. Schultz A. S. Williams III
/s/
- -----------------------------------
Wayne E. Stuenkel
