<PAGE>
LEGACY PLUS
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY (THE "POLICY")
ISSUED BY
AMERICAN GENERAL LIFE INSURANCE COMPANY ("AGL")
HOME OFFICE:
<TABLE>
<CAPTION>
(Express Delivery) (US Mail)
<S> <C>
2727-A Allen Parkway Variable Universal Life
Houston, Texas 77019-2191 Administration
PHONE: 1-888-325-9315 P.O. Box 4880
or 1-713-831-3443 Houston, Texas 77210-4880
FAX: 1-713-620-3857
</TABLE>
Investment options. You may invest in the following variable investment
options and change your selections from time to time:
<TABLE>
<S> <C> <C>
BT INSURANCE FUNDS TRUST MORGAN STANLEY UNIVERSAL ROYCE CAPITAL FUND
.Equity 500 Index FUNDS, INC. .Royce Total Return
.EAFE Equity Index .Equity Growth
- -----------------------------------------------------------------------------
AIM VARIABLE INSURANCE AMERICAN GENERAL SERIES
FUNDS, INC. PORTFOLIO COMPANY
.AIM V.I. Value .Money Market
</TABLE>
SEPARATE PROSPECTUSES CONTAIN MORE INFORMATION ABOUT THE MUTUAL FUNDS ("FUNDS"
OR "MUTUAL FUNDS") IN WHICH WE INVEST THE ACCUMULATION VALUE THAT YOU ALLOCATE
TO ANY OF THE ABOVE-LISTED INVESTMENT OPTIONS. THE FORMAL NAME OF EACH SUCH
FUND IS SET FORTH IN THE CHART THAT APPEARS ABOVE. YOUR INVESTMENT RESULTS IN
ANY SUCH OPTION WILL DEPEND ON THOSE OF THE RELATED FUND. THEREFORE, YOU
SHOULD BE SURE YOU ALSO READ THE PROSPECTUS OF THE MUTUAL FUND FOR ANY SUCH
INVESTMENT OPTION YOU MAY BE INTERESTED IN. YOU CAN REQUEST FREE COPIES OF ANY
OR ALL OF THE MUTUAL FUND PROSPECTUSES FROM YOUR AGL REPRESENTATIVE OR FROM US
AT OUR HOME OFFICE LISTED ABOVE.
Other choices you have. During the insured person's lifetime, you can (1)
increase (but not decrease) the amount of insurance, (2) borrow or withdraw
amounts you have invested, (3) choose, within limits, when and how much you
invest, and (4) choose whether the amount you have invested under your Policy,
upon the insured person's death, will be added to the insurance proceeds we
otherwise will pay to the beneficiary.
Charges and expenses. We deduct charges and expenses from the amounts you
invest. These are described beginning on page 6.
Right to return. If for any reason you are not satisfied with your Policy,
you may return it to us and we will refund any premiums paid adjusted to
reflect investment experience. (In some states, we will return premiums paid
as required by state law.) To exercise your right to return your Policy, you
must mail it directly to the Home Office address shown on the first page of
this prospectus or return it to the AGL representative through whom you
purchased the Policy within 10 days after you receive it. In a few states,
this period may be longer. Because you have this right, we will invest your
initial premium payment in the money market investment option from the date
your investment performance begins until the first business day that is at
least 15 days later. Then we will automatically allocate your investment among
the above-listed investment options as you have chosen. Any additional premium
we receive during the 15-day period will also be invested in the money market
division and allocated to the investment options at the same time as your
initial premium.
<PAGE>
PLEASE READ THIS PROSPECTUS CAREFULLY AND KEEP IT FOR FUTURE REFERENCE. THIS
PROSPECTUS CONTAINS INFORMATION THAT YOU SHOULD KNOW BEFORE INVESTING IN A
POLICY. THE POLICIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION ("SEC") NOR HAS THE SEC PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
THE POLICIES ARE NOT INSURED BY THE FDIC OR ANY OTHER AGENCY. THEY ARE NOT
DEPOSITS OR OTHER OBLIGATIONS OF ANY BANK AND ARE NOT BANK GUARANTEED. THEY
ARE SUBJECT TO INVESTMENT RISKS AND POSSIBLE LOSS OF PRINCIPAL INVESTED.
THIS BOOKLET IS CALLED A "PROSPECTUS." ITS DATE IS SEPTEMBER 1, 1998.
2
<PAGE>
GUIDE TO THIS PROSPECTUS
This booklet (which is called a "prospectus") contains information that you
should know before you purchase a Legacy Plus policy ("Policy") or exercise
any of your rights or privileges under a Policy.
Basic Information. Here are the page numbers in this prospectus where you
may find answers to most of your questions:
<TABLE>
<CAPTION>
PAGE TO
SEE IN
THIS
BASIC QUESTIONS YOU MAY HAVE PROSPECTUS
---------------------------- ----------
<S> <C>
.How can I invest money in a Policy?................................ 4
.How will the value of my investment in a Policy change over time?.. 5
.What is the basic amount of insurance ("death benefit") that AGL
pays when the insured person dies?............................. 5
.What charges will AGL deduct from my investment in a Policy?....... 6
.What charges and expenses will the Mutual Funds deduct from amounts
I invest through my Policy?.................................... 7
.Must I invest any minimum amount in a Policy?...................... 8
.How can I change my Policy's investment options?................... 8
.How can I change my Policy's insurance coverage?................... 8
.What additional rider benefits might I select?..................... 9
.How can I access my investment in a Policy?........................ 9
.Can I choose the form in which AGL pays out proceeds from my
Policy?............................................................ 10
.To what extent can AGL vary the terms and conditions of the Policy
in particular cases?............................................... 11
.How will my Policy be treated for income tax purposes?............. 11
.How do I communicate with AGL?..................................... 11
</TABLE>
Illustrations of a hypothetical Policy. Starting on page 13, we have
included some illustrations of how the values of a hypothetical Policy would
change over time, based on certain assumptions we have made. Because your
circumstances may vary considerably from our assumptions, your AGL
representative will also provide you with a similar hypothetical illustration
that is more tailored to your own circumstances and wishes.
Additional information. You may find the answers to any other questions you
have under "Additional Information" beginning on page 16 or in the form of our
Policy. A table of contents for the "Additional Information" portion of this
prospectus also appears on page 16. You can obtain copies of our Policy form
from (and direct any other questions to) your AGL representative or our Home
Office (shown on the first page of this Prospectus).
Financial statements. We have included certain financial statements of AGL
and Separate Account VL-R in this prospectus. These begin on page 30.
Special words and phrases. If you want more information about any words or
phrases that you read in this prospectus, you may wish to refer to the Index
of Words and Phrases that appears at the back of this prospectus. That index
will tell you on what page you can read more about many of the words and
phrases that we use.
3
<PAGE>
BASIC QUESTIONS YOU MAY HAVE
HOW CAN I INVEST MONEY IN A POLICY?
Premium payments. We call the investments you make in a Policy "premiums" or
"premium payments." The amount we require as your initial premium varies
depending on the specifics of your Policy and the insured person. We can
refuse to accept a subsequent premium payment that is less than $50.
Otherwise, with a few exceptions mentioned below, you can make premium
payments at any time and in any amount.
Limits on premium payments. In certain circumstances, we may refuse to
accept an additional premium if the insured person does not provide us with
adequate evidence that he/she continues to meet our requirements for issuing
insurance or if the additional premium would cause the "net amount at risk" to
exceed the Maximum Net Amount at Risk, as set out in your Policy. The net
amount at risk is the difference between (a) the death benefit that would be
payable before reduction by policy loans if the insured person died on that
date and (b) the then total accumulation value under the Policy. The term
"accumulation value" is described on page 5. Additional premium payments may
result in an increase in the death benefit. If the increase in the death
benefit exceeds the increase in the accumulation value due to the alternative
basic death benefit calculation, then the net amount at risk will increase.
The resulting increase in the net amount at risk could cause the net amount at
risk to exceed the Maximum Net Amount at Risk. The "alternative basic death
benefit" calculation is described starting on page 5.
The sum of the premiums paid under your Policy may not exceed the guideline
premium limitation as defined by Section 7702 of the Internal Revenue Code of
1986, as amended. Any portion of any premium paid which is determined to be in
excess of the limit will be refunded.
Checks and money orders. Premiums must be by check or money order drawn on a
U.S. bank in U.S. dollars and made payable to "American General Life Insurance
Company," or "AGL." Premiums after the initial premium must be sent directly
to our Home Office.
Other ways to pay premiums. We also accept premium payments by bank draft,
wire, or by exchange from another insurance company. You may obtain further
information about how to make premium payments by any of these methods from
your AGL representative or from our Home Office shown on the first page of
this prospectus.
Dollar cost averaging. Dollar cost averaging is an investment strategy
designed to reduce the risks that result from market fluctuations. The
strategy spreads the allocation of your accumulation value over a period of
time. This allows you to reduce the risk of investing most of your funds at a
time when prices are high. The success of this strategy depends on market
trends and is not guaranteed.
Under dollar cost averaging, we automatically make transfers of your
accumulation value from the money market investment option to one or more of
the other investment options that you choose. You tell us whether you want
these transfers to be made monthly, quarterly, semi-annually or annually; and
we make the transfers as of the end of the valuation period that contains the
day of the month that you select other than the 29th, 30th or 31st day of the
month. The term "valuation period" is described on page 22. You must have at
least $100,000 of accumulation value to start dollar cost averaging and each
transfer under the program must be at least $5,000. You cannot participate in
dollar cost averaging while also using automatic rebalancing (discussed
below). Dollar cost averaging ceases upon your request, or if your
accumulation value in the money market option becomes exhausted.
Automatic rebalancing. This feature automatically rebalances the proportion
of your accumulation value in each investment option under your Policy to
correspond to your then current premium allocation designation. You tell us
whether you want us to do the rebalancing quarterly, semi-annually or
annually. The date automatic
4
<PAGE>
rebalancing occurs will be based on the date of issue of your Policy. For
example, if your Policy is dated January 17, and you have requested automatic
rebalancing on a quarterly basis, automatic rebalancing will start on April
17, and will occur quarterly thereafter. Automatic rebalancing will occur as
of the end of the valuation period that contains the date of the month your
Policy was issued. You must have a total accumulation value of at least
$100,000 to begin automatic rebalancing. You cannot participate in this
program while also participating in dollar cost averaging (discussed above).
Rebalancing terminates upon your request.
HOW WILL THE VALUE OF MY INVESTMENT IN A POLICY CHANGE OVER TIME?
Your accumulation value. From each premium payment you make, we deduct the
charges that we describe on page 6 under "Deductions from each premium
payment." We invest the rest in one or more of the investment options listed
on the first page of this prospectus. We call the amount that is at any time
invested under your Policy (including any loan collateral we are holding for
your Policy loans) your "accumulation value."
Your investment options. We invest the accumulation value that you have
allocated to any investment option in shares of a Mutual Fund that follows
investment practices, policies and objectives that are appropriate to that
option. Over time, your accumulation value in any investment option will
increase or decrease by the same amount as if you had invested in the related
Fund's shares directly (and reinvested all dividends and distributions from
the Fund in additional Fund shares); except that your accumulation value will
be reduced by certain charges that we deduct. We describe these charges
beginning on page 6 under "What charges will AGL deduct from my investment in
a Policy?"
Other important information about the Mutual Funds that you can choose is
included in the separate prospectuses for those Funds. This includes
information about the investment performance that each Fund's investment
manager has achieved. Additional free copies of these prospectuses are
available from your AGL representative or from our Home Office shown on the
first page of this prospectus.
Policies are "non-participating." The Policies are not "participating."
Therefore, you will not be entitled to any dividends from AGL.
WHAT IS THE BASIC AMOUNT OF INSURANCE ("DEATH BENEFIT") THAT AGL PAYS WHEN THE
INSURED PERSON DIES?
Your specified amount of insurance. In your application to buy a Legacy Plus
Policy, you will tell us how much life insurance coverage you want on the life
of the insured person. We call this the "specified amount" of insurance.
Your death benefit. The basic death benefit we will pay is reduced by any
outstanding Policy loans. You also choose whether the basic death benefit we
will pay is
.Option 1--The specified amount on the date of the insured person's death
- or -
.Option 2--The specified amount plus the Policy's accumulation value on
the date of death.
Under Option 2, your death benefit will tend to be higher than under Option
1. However, the monthly insurance charge we deduct will also be higher to
compensate us for our additional risk. Because of this, your accumulation
value will tend to be higher under Option 1 than under Option 2.
We will automatically pay an alternative basic death benefit if it is higher
than the basic Option 1 or Option 2 death benefit (whichever you have
selected). The alternative basic death benefit is computed by multiplying your
Policy's accumulation value on the insured person's date of death by the
following percentages:
5
<PAGE>
TABLE OF ALTERNATIVE BASIC DEATH BENEFITS AS A PERCENTAGE MULTIPLE OF POLICY
ACCUMULATION VALUE
BASED ON GUIDELINE PREMIUM
<TABLE>
<CAPTION>
INSURED'S INSURED'S
AGE ON % OF AGE ON % OF
POLICY ACCUMULATION POLICY ACCUMULATION
ANNIVERSARY* VALUE ANNIVERSARY* VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C>
0-40 250 60 130
41 243 61 128
42 236 62 126
43 229 63 124
44 222 64 122
45 215 65 120
46 209 66 119
47 203 67 118
48 197 68 117
49 191 69 116
50 185 70 115
51 178 71 113
52 171 72 111
53 164 73 109
54 157 74 107
55 150 75-90 105
56 146 91 104
57 142 92 103
58 138 93 102
59 134 94 101
95+ 100
</TABLE>
- --------
* Nearest birthday at the beginning of the Policy year in which the insured
person dies.
WHAT CHARGES WILL AGL DEDUCT FROM MY INVESTMENT IN A POLICY?
Deductions from each premium payment. There is currently no deduction from
each premium payment you make. However, We have the right at any time to
assess a charge not to exceed more than 1.5% on all future premium payments
for the costs associated with the issuance of the Policy and administrative
services we perform.
Daily charge. We make a daily deduction at an annual effective rate of .75%
of your accumulation value that is then being invested in any of the
investment options for the costs associated with the mortality and expense
risks we assume under the Policy. After a Policy has been in effect for 10
years, we will reduce the rate of the charge to a maximum of .50%, and after
20 years, we will further reduce the charge to a maximum of .25%. Because the
Policies were first offered in 1998, however, this decrease has not yet
occurred for any outstanding Policy. The daily deduction charges, including
the current charge of .75%, are the maximums we may charge; we may charge
less, but we can never charge more.
Monthly insurance charge. Every month we will deduct from your accumulation
value a charge based on the cost of insurance rates applicable to your Policy
on the date of the deduction and our "amount at risk" on that date. Our amount
at risk is the difference between (a) the death benefit that would be payable
before reduction by policy loans if the insured person died on that date and
(b) the then total accumulation value under the Policy. For otherwise
identical Policies, a greater amount at risk results in a higher monthly
insurance charge. The current monthly insurance charge has been designed
primarily to provide funds out of which we can make payments of death benefits
under the Policy as insured persons die.
For otherwise identical Policies, a higher cost of insurance rate also
results in a higher monthly insurance charge. Our cost of insurance rates are
guaranteed not to exceed those that will be specified in your Policy.
6
<PAGE>
In general, our cost of insurance rates increase with the insured person's
age. Therefore, the longer you own your Policy, the higher the cost of
insurance rate will be. Also our cost of insurance rates will generally be
lower (except in Montana) if the insured person is a female than if a male.
Similarly, our current cost of insurance rates are generally lower for non-
smokers than smokers. Insured persons who present particular health,
occupational or avocational risks may be charged higher cost of insurance
rates and other additional charges based on the specified amount of insurance
coverage under their Policy.
Our cost of insurance rates also are generally higher under a Policy that
has been in force for some period of time than they would be under an
otherwise identical Policy purchased more recently on the same insured person.
Transaction Fee. We will charge a $25 transaction fee for each partial
surrender you make to cover administrative services. This charge will be
deducted from the investment options in the same ratio as the requested
transfer.
Charge for taxes. We can make a charge in the future for taxes we incur or
reserves we set aside for taxes in connection with the Policies. This would
reduce the investment experience of your accumulation value.
For a further discussion regarding the charges we will deduct from your
investment in a Policy, see "More About Policy Charges" on page 21.
Allocation of charges. You may choose from which of your investment options
we deduct all monthly charges. If you do not have enough accumulation value in
any investment option to comply with your selection, we will deduct these
charges in proportion to the amount of accumulation value you then have in
each investment option.
WHAT CHARGES AND EXPENSES WILL THE MUTUAL FUNDS DEDUCT FROM AMOUNTS I INVEST
THROUGH MY POLICY?
Each Mutual Fund pays its investment management fees and other operating
expenses. Because they reduce the investment return of a Fund, these fees and
expenses also will reduce indirectly the return you will earn on any
accumulation value that you have invested in that Fund. These charges and
expenses currently are as follows:
THE MUTUAL FUNDS' ANNUAL EXPENSES (1) (as a percentage of average net assets)
<TABLE>
<CAPTION>
FUND OTHER FUND TOTAL FUND
MANAGEMENT OPERATING OPERATING
FEES AFTER EXPENSES EXPENSES
EXPENSE AFTER EXPENSE AFTER EXPENSE
NAME OF FUND REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT
------------ ------------- ------------- -------------
<S> <C> <C> <C>
The following funds of
BT INSURANCE FUNDS TRUST:
Equity 500 Index................... 0.00% 0.30% 0.30%
EAFE Equity Index.................. 0.02% 0.63% 0.65%
The following fund of
MORGAN STANLEY UNIVERSAL FUNDS,
INC.:
Equity Growth...................... 0.0% 0.85% 0.85%
The following fund of
AMERICAN GENERAL SERIES PORTFOLIO
COMPANY:
Money Market....................... 0.50% 0.07% 0.57%
The following fund of
ROYCE CAPITAL FUND:
Royce Total Return................. 0.00% 1.35% 1.35%
The following fund of
AIM VARIABLE INSURANCE FUNDS, INC.:
AIM V.I. Value..................... 0.62% 0.08% 0.70%
</TABLE>
- --------
(1) The annual expenses are estimated for the current fiscal year for the
Equity 500 Index and EAFE Equity Index Funds, because neither of these
Funds has financial statements covering a period of at least ten months.
7
<PAGE>
If certain voluntary expense reimbursements from the investment adviser were
terminated, management fees and other expenses for the fiscal year ended in
1997 would have been as set out in the following table. Information about
annual expenses excluding voluntary expense reimbursements is estimated for
the Equity 500 Index and EAFE Equity Index Funds since neither of these Funds
has financial statements covering a period of at least ten months.
<TABLE>
<CAPTION>
OTHER TOTAL
FUND FUND FUND
MANAGEMENT OPERATING OPERATING
NAME OF FUND FEES EXPENSES EXPENSES
------------ ---------- --------- ---------
<S> <C> <C> <C>
Equity 500 Index................................. 0.20% 2.58% 2.78%
EAFE Equity Index................................ 0.45% 2.30% 2.75%
Royce Total Return............................... 1.00% 1.99% 2.99%
Equity Growth.................................... 0.55% 1.50% 2.05%
</TABLE>
MUST I INVEST ANY MINIMUM AMOUNT IN A POLICY?
Planned periodic premiums. Page 3 of your Policy will specify a "Planned
Periodic Premium." This is the amount that you (within limits) choose to have
us bill you. Our current practice is to bill quarterly, semi-annually or
annually. However, payment of these or any other specific amounts of premiums
is not mandatory. After payment of your initial premium, you need only invest
enough to ensure your Policy's cash surrender value stays above zero. The less
you invest, the more likely it is that your Policy's cash surrender value
could fall to zero, as a result of the deductions we periodically make from
your accumulation value.
Policy lapse and reinstatement. If your Policy's cash surrender value does
fall to zero, we will notify you and give you a grace period to pay at least
the amount we estimate is necessary to keep your Policy in force for a
reasonable time. If we do not receive your payment by the end of the grace
period, your Policy will terminate without value and all coverage under your
Policy will cease. Although you can apply to have your Policy "reinstated,"
you must do this within 5 years (or, if earlier, before the Policy's maturity
date), and you must present evidence that the insured person still meets our
requirements for issuing coverage. Also, you would have to pay certain extra
amounts that we require. In the Policy form itself, you will find additional
information about the values and terms of a Policy after it is reinstated.
HOW CAN I CHANGE MY POLICY'S INVESTMENT OPTIONS?
Future premium payments. You may at any time change the investment options
in which future premiums you pay will be invested. Your allocation must,
however, be in whole percentages that total 100%.
Transfers of existing accumulation value. You may also transfer your
existing accumulation value from one investment option under the Policy to
another. You may make transfers at any time. Unless you are transferring the
entire amount you have in an investment option, each transfer must be at least
$5,000. See "Additional Rights That We Have" on page 25.
Transaction Fee. We will charge a $25 transaction fee for each transfer you
make in excess of 12 per Policy year.
Maximum number of investment options. We can at any time limit the number of
investment options you may use.
HOW CAN I CHANGE MY POLICY'S INSURANCE COVERAGE?
Increase in coverage. You may at any time request an increase in the
specified amount of coverage under your Policy. You must, however, provide us
with satisfactory evidence that the insured person continues to meet our
requirements for issuing insurance coverage. You may not request a decrease in
the specified amount of coverage under your Policy.
8
<PAGE>
We treat an increase in specified amount in many respects as if it were the
issuance of a new Policy. For example, the monthly insurance charge for the
increase will be based on the age and risk class of the insured person at the
time of the increase.
Change of death benefit option. You may at any time request us to change
your coverage from death benefit Option 1 to 2 or vice-versa. If you change
from Option 1 to 2, we also automatically reduce your Policy's specified
amount of insurance by the amount of your Policy's accumulation value (but not
below zero) at the time of the change. If you change from Option 2 to 1, we
automatically increase your Policy's specified amount by the amount of your
Policy's accumulation value.
Tax consequences of changes in insurance coverage. Please read "Tax Effects"
starting on page 17 of this prospectus to learn about possible tax
consequences of changing your insurance coverage under your Policy.
WHAT ADDITIONAL RIDER BENEFITS MIGHT I SELECT?
Under the terms of your Policy, there are currently no additional rider
benefits available.
HOW CAN I ACCESS MY INVESTMENT IN A POLICY?
Full surrender. You may at any time surrender your Policy in full. If you
do, we will pay you the accumulation value, less any Policy loans. We call
this amount your "cash surrender value".
Partial surrender. You may, at any time after the first Policy year, make a
partial surrender of your Policy's cash surrender value. A partial surrender
must be at least $5,000. If the Option 1 death benefit is then in effect, we
will also automatically reduce your Policy's specified amount of insurance by
the amount of your withdrawal and any related charges. We will not permit a
partial surrender if it would cause your accumulation value to fall below
$100,000 or your death benefit to fall below the minimum specified in your
Policy.
You may choose the investment option or options from which money that you
withdraw will be taken. Otherwise, we will allocate the withdrawal in the same
proportions as then apply for deducting monthly charges under your Policy or,
if that is not possible, in proportion to the amount of accumulation value you
then have in each investment option.
Exchange of Policy in Certain States. Certain states require that a policy
owner be given the right to exchange the Policy for a fixed benefit life
insurance policy, within either 18 or 24 months from the date of issue. This
right is subject to various conditions imposed by the states and us. In such
states, this right has been more fully described in your Policy or related
endorsements to comply with the applicable state requirements.
Transaction Fee. We will charge a $25 transaction fee for each partial
surrender you make. This charge will be deducted from the investment options
in the same ratio as the requested transfer.
Policy loans. You may at any time borrow from us an amount equal to your
Policy's cash surrender value less $100,000, less our estimate of three
months' charges and less the interest that will be payable on your loan
through your next Policy anniversary; this rule is not applicable in all
states. The minimum amount of each loan is $5,000.
We remove from your investment options an amount equal to your loan and hold
that amount as additional collateral for the loan. We will credit your Policy
with interest on this collateral amount at an effective annual rate of 4%
(rather than any amount you could otherwise earn in one of our investment
options), and we will charge you interest on your loan at an effective annual
rate of 4.75%. Loan interest is payable annually, on the Policy anniversary,
in advance, at a rate of 4.54%. Any amount not paid by its due date will
automatically be added to the loan balance as an additional loan. Interest you
pay on Policy loans will not, in most cases, be deductible on your tax
returns.
9
<PAGE>
You may choose which of your investment options the loan will be taken from.
If you do not so specify, we will allocate the loan in the same way that
charges under your Policy are being allocated. If this is not possible, we
will make the loan pro-rata from each investment option that you then are
using.
You may repay all or part (but not less than $5,000) of your loan at any
time prior to the death of the Insured while the Policy is in force. You must
designate any loan repayment as such. Otherwise, we will treat it as a premium
payment instead. We will invest any additional loan repayments you make in the
investment options you request. In the absence of such a request we will
invest the repayment in the same proportion as you then have selected for
premium payments that we receive from you. Any unpaid loan will be deducted
from the proceeds we pay following the insured person's death.
Preferred loan interest rate. We will credit a higher interest rate, but not
more than 4.75%, on an amount of the collateral securing Policy loans taken
out after the first 10 Policy years. The maximum amount of new loans that will
receive this preferred loan interest rate for any year is (a) 10% of your
Policy's accumulation value (including any loan collateral we are holding for
your Policy loans) at the beginning of the Policy year or (b) if less, your
Policy's maximum remaining loan value at that anniversary. We intend to set
the rate of interest we credit to your preferred collateral amount equal to
the loan interest rate you are paying, resulting in a zero net cost of
borrowing for that amount. We have full discretion to vary the preferred rate,
provided that it will always be greater than the rate we are then crediting in
connection with regular Policy loans, and will never be less than an effective
annual rate of 4.5%. Because we first offered the Policies in 1998, we have
not yet applied the preferred loan interest rate to any Policy loan amounts.
Maturity of your Policy. If the insured person is still living on the
"Maturity Date" shown on page 3 of your Policy, we will automatically pay you
the cash surrender value of the Policy, and the Policy will terminate. The
maturity date is the Policy anniversary nearest the insured person's 100th
birthday.
CAN I CHOOSE THE FORM IN WHICH AGL PAYS OUT THE PROCEEDS FROM MY POLICY?
Choosing a payment option. You may choose to receive the full proceeds from
the Policy as a single sum. This includes proceeds that become payable upon
the death of the insured person, full surrender or the maturity date.
Alternatively, you may elect that all or part of such proceeds be applied to
one or more of the following payment options:
. Option 1--Equal monthly payments for a specified period of time.
. Option 2--Equal monthly payments of a specified amount until all
amounts are paid out.
. Option 3--Equal monthly payments for the payee's life, but with
payments guaranteed for a specified number of years. These payments are
based on annuity rates that are set forth in the Policy or, at the
payee's request, the annuity rates that we then are using.
. Option 4--Proceeds left to accumulate with interest.
Additional payment options may also be available with our consent. We have
the right to veto any payment option, if the payee is a corporation or other
entity. You can read more about each of these options in our Policy form and
in the separate form of payment contract that we issue when any such option
takes effect.
Within 60 days after the insured person's death, any payee entitled to
receive proceeds as a single sum may elect one or more payment options.
Interest rates that we credit under each option will be at least 3%.
Change of payment option. You may change any payment option you have elected
at any time while the Policy is in force and before the start date of the
payment option.
10
<PAGE>
Tax impact. If a payment option is chosen, you or your beneficiary may have
tax consequences. You therefore should consult with a qualified tax adviser
before deciding whether to elect one or more payment options.
TO WHAT EXTENT CAN AGL VARY THE TERMS AND CONDITIONS OF THE POLICY IN
PARTICULAR CASES?
Listed below are some variations we may make in the terms of a Policy. Any
variations will be made only in accordance with uniform rules that we
establish.
Policies purchased through "internal rollovers." We maintain published rules
that describe the procedures necessary to replace the other life insurance we
issue with a Policy. Not all types of other insurance we issue are eligible to
be replaced with a Policy. Our published rules may be changed from time to
time, but are evenly applied to all our customers.
Policies purchased through term life conversions. Also, we maintain rules
about how to convert term insurance to a Legacy Plus Policy. This is referred
to as a term conversion. Term conversions are available to owners of term life
insurance we have issued. Any right to a term conversion is stated in the term
life insurance policy. Again, our published rules about term conversions may
be changed from time to time, but are evenly applied to all our customers.
State law requirements. AGL is subject to the insurance laws and regulations
in every jurisdiction in which Legacy Plus Policies are sold. As a result,
various time periods and other terms and conditions described in this
prospectus may vary depending on where you reside. These variations will be
reflected in your Policy and related endorsements.
Variations in expenses or risks. AGL may vary the charges and other terms of
the Policy where special circumstances result in sales, administrative or
other expenses, mortality risks or other risks that are different from those
normally associated with the Policy.
HOW WILL MY POLICY BE TREATED FOR INCOME TAX PURPOSES?
Generally, death benefits paid under a Policy are not subject to income tax,
and earnings on your accumulation value are not subject to income tax as long
as we do not pay them out to you. If we do pay any amount of your Policy's
accumulation value upon surrender, partial surrender, or maturity of your
Policy, all or part of that distribution may be treated as a return of the
premiums you paid, and therefore not subject to income tax.
Amounts you receive as Policy loans are not taxable to you, unless you have
paid such a large amount of premiums that your Policy becomes what the tax law
calls a "modified endowment contract." In that case, the loan will be taxed as
if it were a partial surrender. Furthermore, loans, partial surrenders and
other distributions from a modified endowment contract may require you to pay
additional taxes and penalties that otherwise would not apply.
For further information about the tax consequences of owning a Policy,
please read "Tax Effects" starting on page 17.
HOW DO I COMMUNICATE WITH AGL?
When we refer to "you," we mean the person who is duly authorized to take
any contemplated action with respect to a Policy. Generally, this is the owner
named in the Policy. Where a Policy has more than one owner, each owner
generally must join in any requested action, except for transfers and changes
in the allocation of future premiums or charges among the investment options.
General. You should mail or express checks and money orders for premium
payments and loan repayments directly to our Home Office.
11
<PAGE>
The following requests must be made in writing and signed by you: transfer
of accumulation value; loan; full surrender; partial surrender; change of
beneficiary or contingent beneficiary; change of allocation percentages for
premium payments; loan repayments or charges; change of death benefit option
or manner of death benefit payment; increase in specified insurance amount;
addition or cancellation of, or other action with respect to, election of a
payment option for Policy proceeds; tax withholding elections; and telephone
transaction privileges. You should mail or express these requests to our Home
Office at the appropriate address shown on the first page of this prospectus.
You should also communicate notice of the insured person's death, and related
documentation, to our Home Office.
We have special forms which should be used for loans, assignments, partial
and full surrenders, changes of owner or beneficiary, and all other
contractual changes. You will be asked to return your Policy when you request
a full surrender. You may obtain these forms from our Home Office or from your
AGL representative. Each communication must include your name, Policy number
and, if you are not the insured person, that person's name. We cannot process
any requested action that does not include all required information.
Telephone transactions. If you have a completed telephone authorization form
on file with us, you may make transfers, or change the allocation of future
premium payments or deduction of charges, by telephone, subject to the terms
of the form. We will honor telephone instructions from any person who provides
the correct information, so there is a risk of possible loss to you if
unauthorized persons use this service in your name. Our current procedure is
that only the owner or your AGL representative may make a transfer request by
phone. We are not liable for any acts or omissions based upon instructions
that we reasonably believe to be genuine. Our procedures include verification
of the Policy number, the identity of the caller, both the insured person's
and owner's names, and a form of personal identification from the caller. We
will mail you a prompt written confirmation of the transaction. If many people
seek to make telephone requests at or about the same time, or if our recording
equipment malfunctions, it may be impossible for you to make a telephone
request at the time you wish. If this occurs, you should submit a written
request. Also, if, due to malfunction or other circumstances, the recording of
your telephone request is incomplete or not fully comprehensible, we will not
process the transaction. The phone number for telephone requests is
1-888-325-9315.
The Policy is not designed for professional market timing organizations or
other entities utilizing programmed and frequent transfers. We reserve the
right at any time and without prior notice to any party to terminate, suspend,
or modify our policies or procedures regarding telephone requests or to cease
permitting telephone requests altogether.
12
<PAGE>
ILLUSTRATIONS OF HYPOTHETICAL POLICY BENEFITS
To help clarify how our Policy works, we have prepared the following tables:
<TABLE>
<CAPTION>
PAGE TO
SEE IN
THIS
TABLE PROSPECTUS
----- ----------
<S> <C>
Death Benefit Option 1--Current Charges........................... 14
Guaranteed Maximum Charges...................................... 15
</TABLE>
The tables show how death benefits, accumulation values, and cash surrender
values ("Policy benefits") under a hypothetical Legacy Plus Policy would vary
over time if the investment options had constant hypothetical gross annual
investment returns of 0%, 6% or 12% over the years covered by each table. The
tables are for a 45 year-old male non-tobacco user. A single premium payment
of $250,000 for an initial $1,090,988 of specified amount of coverage is
assumed to be paid at issue. The illustrations assume no Policy loan has been
taken. As illustrated, this Policy would be classified as a modified endowment
contract (See "Tax Effects" in Additional Information for further discussion).
Although the tables below do not include illustrations of a Policy with an
Option 2 death benefit, such a Policy would have higher death benefits and
lower cash surrender values.
Separate tables are included to illustrate both current and guaranteed
maximum charges. The charges assumed in the current charge tables include a
daily charge at an annual effective rate of .75% for the first 10 Policy
years, .50% for Policy years 11--20, and .25% thereafter and current monthly
insurance charges. The guaranteed maximum charge tables assume that these
charges will include a daily charge at an annual effective rate of .75% for
the first 10 Policy years, .50% for Policy years 11--20, and .25% thereafter,
and an additional charge of 1.5% of every premium and guaranteed maximum
insurance charges. In Texas and Oregon, the guaranteed maximum daily charge is
.35% per annum higher for certain periods of time than the daily charges
assumed in the maximum charge tables below. Therefore, an identical Policy
sold in those states would have values less than those illustrated if we
deducted the maximum charges.
The charges assumed by both the current and guaranteed maximum charge tables
also include 0.74% for expenses of the Mutual Funds, which is the unweighted
average of the advisory fees payable with respect to each Mutual Fund, after
all reimbursements, as reflected on page 7 of this prospectus, plus the
weighted average of all other operating expenses of each such Fund after all
reimbursements, as reflected on page 8 of this prospectus.
The second column of each table shows the effect of an amount equal to the
premiums invested to earn interest, after taxes, of 5% compounded annually.
Individual illustrations. On request, we will furnish you with a comparable
illustration based on your Policy's characteristics. If you request
illustrations more than once in any Policy year, we may charge $25 for the
illustration.
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<PAGE>
LEGACY PLUS
SINGLE PREMIUM $250,000.00 INITIAL SPECIFIED $1,090,988
DEATH BENEFIT OPTION 1
MALE AGE 45
NONSMOKER
ASSUMING CURRENT CHARGES
<TABLE>
<CAPTION>
CASH SURRENDER VALUE
DEATH BENEFIT ASSUMING ACCOUNT VALUE ASSUMING ASSUMING HYPOTHETICAL
HYPOTHETICAL GROSS HYPOTHETICAL GROSS GROSS
END OF ANNUAL RETURN OF ANNUAL RETURN OF ANNUAL RETURN OF
POLICY ACCUMULATED ----------------------------- ------------------------- -------------------------
YEAR PREMIUMS(1) 0.0% 6.0% 12.0% 0.0% 6.0% 12.0% 0.0% 6.0% 12.0%
- ------ ----------- --------- --------- --------- ------- ------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 262,500 1,090,988 1,090,988 1,090,988 244,730 259,580 274,432 244,730 259,580 274,432
2 275,625 1,090,988 1,090,988 1,090,988 239,076 269,153 301,006 239,076 269,153 301,006
3 289,406 1,090,988 1,090,988 1,090,988 233,654 279,338 330,579 233,654 279,338 330,579
4 303,877 1,090,988 1,090,988 1,090,988 227,963 289,675 362,997 227,963 289,675 362,997
5 319,070 1,090,988 1,090,988 1,090,988 222,059 300,234 398,641 222,059 300,234 398,641
6 335,024 1,090,988 1,090,988 1,090,988 215,978 311,068 437,916 215,978 311,068 437,916
7 351,775 1,090,988 1,090,988 1,090,988 209,742 322,217 481,252 209,742 322,217 481,252
8 369,364 1,090,988 1,090,988 1,090,988 203,330 333,686 529,101 203,330 333,686 529,101
9 387,832 1,090,988 1,090,988 1,090,988 196,691 345,453 581,947 196,691 345,453 581,947
10 407,224 1,090,988 1,090,988 1,090,988 189,702 357,439 640,303 189,702 357,439 640,303
15 519,732 1,090,988 1,090,988 1,381,903 155,590 427,456 1,031,271 155,590 427,456 1,031,271
20 663,324 1,090,988 1,090,988 1,969,072 112,436 507,996 1,613,994 112,436 507,996 1,613,994
</TABLE>
- --------
(1) Assumes net interest of 5% compounded annually.
THE VALUES WILL DIFFER IF PREMIUMS ARE PAID IN DIFFERENT AMOUNTS OR
FREQUENCIES.
THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE
DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL
INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN.
14
<PAGE>
LEGACY PLUS
SINGLE PREMIUM $250,000 INITIAL SPECIFIED $1,090,988
DEATH BENEFIT OPTION 1
MALE AGE 45
NONSMOKER
ASSUMING GUARANTEED CHARGES
<TABLE>
<CAPTION>
CASH SURRENDER VALUE
DEATH BENEFIT ASSUMING ACCOUNT VALUE ASSUMING ASSUMING HYPOTHETICAL
HYPOTHETICAL GROSS HYPOTHETICAL GROSS GROSS
END OF ANNUAL RETURN OF ANNUAL RETURN OF ANNUAL RETURN OF
POLICY ACCUMULATED ----------------------------- ------------------------- -------------------------
YEAR PREMIUMS(1) 0.0% 6.0% 12.0% 0.0% 6.0% 12.0% 0.0% 6.0% 12.0%
- ------ ----------- --------- --------- --------- ------- ------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 262,500 1,090,988 1,090,988 1,090,988 238,764 253,335 267,910 238,764 253,335 267,910
2 275,625 1,090,988 1,090,988 1,090,988 231,038 260,453 291,618 231,038 260,453 291,618
3 289,406 1,090,988 1,090,988 1,090,988 223,044 267,584 317,593 223,044 267,584 317,593
4 303,877 1,090,988 1,090,988 1,090,988 214,760 274,719 346,090 214,760 274,719 346,090
5 319,070 1,090,988 1,090,988 1,090,988 206,138 281,820 377,375 206,138 281,820 377,375
6 335,024 1,090,988 1,090,988 1,090,988 197,145 288,869 411,765 197,145 288,869 411,765
7 351,775 1,090,988 1,090,988 1,090,988 187,694 295,795 449,582 187,694 295,795 449,582
8 369,364 1,090,988 1,090,988 1,090,988 177,713 302,543 491,211 177,713 302,543 491,211
9 387,832 1,090,988 1,090,988 1,090,988 167,109 309,037 537,085 167,109 309,037 537,085
10 407,224 1,090,988 1,090,988 1,090,988 155,777 315,195 587,704 155,777 315,195 587,704
15 519,732 1,090,988 1,090,988 1,244,718 89,456 343,481 928,894 89,456 343,481 928,894
20 663,324 -- 1,090,988 1,749,133 -- 351,725 1,433,715 -- 351,725 1,433,715
</TABLE>
- --------
(1) Assumes net interest of 5% compounded annually.
THE VALUES WILL DIFFER IF PREMIUMS ARE PAID IN DIFFERENT AMOUNTS OR
FREQUENCIES.
THE HYPOTHETICAL INVESTMENT RESULTS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE
DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RESULTS. ACTUAL
INVESTMENT RESULTS MAY BE MORE OR LESS THAN THOSE SHOWN.
15
<PAGE>
ADDITIONAL INFORMATION
A general overview of the Policy appears at pages 1-15. The additional
information that follows gives more details, but generally does not repeat
what is set forth above.
<TABLE>
<CAPTION>
PAGE TO
SEE IN
THIS
CONTENTS OF ADDITIONAL INFORMATION PROSPECTUS
---------------------------------- ----------
<S> <C>
AGL.................................................................. 16
Separate Account VL-R................................................ 16
Tax Effects.......................................................... 17
Voting Privileges.................................................... 20
Your Beneficiary..................................................... 21
Assigning Your Policy................................................ 21
More About Policy Charges............................................ 21
Effective Date of Policy and Related Transactions.................... 22
Distribution of the Policies......................................... 23
Payment of Policy Proceeds........................................... 24
Adjustments to Death Benefit......................................... 24
Additional Rights That We Have....................................... 25
Performance Information.............................................. 25
Our Reports to Policy Owners......................................... 26
AGL's Management..................................................... 26
Legal Matters........................................................ 28
Independent Auditors ................................................ 28
Actuarial Expert..................................................... 28
Services Agreement................................................... 28
Certain Potential Conflicts.......................................... 28
Year 2000............................................................ 29
</TABLE>
Special words and phrases. If you want more information about any words or
phrases that you read in this prospectus, you may wish to refer to the Index
of Words and Phrases that appears at the end of this prospectus (page 67).
That index will tell you on what page you can read more about many of the
words and phrases that we use.
AGL
We are American General Life Insurance Company ("AGL"). AGL is a stock life
insurance company organized under the laws of Texas. AGL is a successor in
interest to a company originally organized under the laws of Delaware in 1917.
AGL is an indirect, wholly-owned subsidiary of American General Corporation
(formerly American General Insurance Company), a diversified financial
services holding company engaged primarily in the insurance business. The
commitments under the Policies are AGL's, and American General Corporation has
no legal obligation to back those commitments.
SEPARATE ACCOUNT VL-R
We hold the Mutual Fund shares in which any of your accumulation value is
invested in Separate Account VL-R. Separate Account VL-R is a "separate
account," as defined by the SEC and is registered as a unit investment trust
with the SEC under the Investment Company Act of 1940, as amended. We created
the separate account on May 6, 1997.
For record keeping and financial reporting purposes, Separate Account VL-R
is divided into 22 separate "divisions", 6 of which correspond to one of the 6
available investment options. The remaining 16 divisions represent investment
options available under another variable life policy we offer. We hold the
Mutual Fund shares in which we invest your accumulation value for an
investment option in the division that corresponds to that investment option.
16
<PAGE>
The assets in Separate Account VL-R are our property. Nevertheless, the
assets in Separate Account VL-R would be available only to satisfy the claims
of owners of the Policies, to the extent they have allocated their
accumulation value to Separate Account VL-R. Our other creditors could reach
only those Separate Account VL-R assets (if any) that are in excess of the
amount of our reserves and other contract liabilities under the Policies with
respect to Separate Account VL-R.
TAX EFFECTS
This discussion is based on current federal income tax law and
interpretations. It assumes that the policy owner is a natural person who is a
U.S. citizen and resident. The tax effects on corporate taxpayers, non-U.S.
residents or non-U.S. citizens, may be different. This discussion is general
in nature, and should not be considered tax advice, for which you should
consult a qualified tax adviser.
General. A Legacy Plus Policy will be treated as "life insurance" for
federal income tax purposes (a) if it meets the definition of life insurance
under Section 7702 of the Internal Revenue Code of 1986, as amended ("the
Code") and (b) for as long as the investments made by the underlying Mutual
Funds satisfy certain investment diversification requirements under Section
817(h) of the Code. We believe that the Policy will meet these requirements
and that:
. the death benefit received by the beneficiary under your Policy will not
be subject to federal income tax; and
. increases in your Policy's accumulation value as a result of interest or
investment experience will not be subject to federal income tax unless
and until there is a distribution from your Policy, such as a surrender
or a partial surrender.
The federal income tax consequences of a distribution from your Policy can
be affected by whether your Policy is determined to be a "modified endowment
contract" (which is discussed below). In all cases, however, the character of
all income that is described below as taxable to the payee will be ordinary
income (as opposed to capital gain).
Testing for modified endowment contract status. Your Policy will be a
"modified endowment contract" if, at any time during the first seven Policy
years, you have paid a cumulative amount of premiums that exceeds the premiums
that would have been paid by that time under a similar fixed-benefit insurance
policy that was designed (based on certain assumptions mandated under the
Code) to provide for paid-up future benefits after the payment of seven level
annual premiums. This is called the "seven-pay" test.
Whenever there is a "material change" under a policy, the policy will
generally be (a) treated as a new contract for purposes of determining whether
the policy is a modified endowment contract and (b) subjected to a new seven-
pay period and a new seven-pay limit. The new seven-pay limit would be
determined taking into account, under a prescribed formula, the accumulation
value of the policy at the time of such change. A materially changed policy
would be considered a modified endowment contract if it failed to satisfy the
new seven-pay limit. A material change for these purposes could occur as a
result of a change in death benefit option. A material change will occur as a
result of an increase in your Policy's specified amount of coverage, and
certain other changes.
If your Policy's benefits are reduced during the first seven Policy years
(or within seven years after a material change), the calculated seven-pay
premium limit will be redetermined based on the reduced level of benefits and
applied retroactively for purposes of the seven-pay test. (Such a reduction in
benefits could include, for example, a decrease in the specified amount
resulting from a partial surrender). If the premiums previously paid are
greater than the recalculated seven-payment premium level limit, the Policy
will become a modified endowment contract. A life insurance policy that is
received in exchange for a modified endowment contract will also be considered
a modified endowment contract.
Other effects of Policy changes. Changes made to your Policy (for example, a
decrease in benefits or a lapse or reinstatement of your Policy) may also have
other effects on your Policy. Such effects may include impacting
17
<PAGE>
the maximum amount of premiums that can be paid under your Policy, as well as
the maximum amount of accumulation value that may be maintained under your
Policy.
Taxation of pre-death distributions if your Policy is not a modified
endowment contract. As long as your Policy remains in force during the insured
person's lifetime, as a non-modified endowment contract, a Policy loan will be
treated as indebtedness, and no part of the loan proceeds will be subject to
current federal income tax. Interest on the loan generally will not be tax
deductible.
After the first 15 Policy years, the proceeds from a partial surrender will
not be subject to federal income tax except to the extent such proceeds exceed
your "basis" in your Policy. (Your basis generally will equal the premiums you
have paid, less the amount of any previous distributions from your Policy that
were not taxable.) During the first 15 Policy years, the proceeds from a
partial surrender could be subject to federal income tax, under a complex
formula, to the extent that your accumulation value exceeds your basis in your
Policy.
On the maturity date or upon full surrender, any excess in the amount of
proceeds we pay (including amounts we use to discharge any Policy loan) over
your basis in the Policy, will be subject to federal income tax. In addition,
if a Policy terminates after a grace period while there is a policy loan, the
cancellation of such loan and accrued loan interest will be treated as a
distribution and could be subject to tax under the above rules. Finally, if
you make an assignment of rights or benefits under your Policy you may be
deemed to have received a distribution from your Policy, all or part of which
may be taxable.
Taxation of pre-death distributions if your Policy is a modified endowment
contract. If your Policy is a modified endowment contract, any distribution
from your Policy during the insured person's lifetime will be taxed on an
"income-first" basis. Distributions for this purpose include a loan (including
any increase in the loan amount to pay interest on an existing loan or an
assignment or a pledge to secure a loan) or partial surrender. Any such
distributions will be considered taxable income to you to the extent your
accumulation value exceeds your basis in the Policy. For modified endowment
contracts, your basis is similar to the basis described above for other
policies, except that it also would be increased by the amount of any prior
loan under your Policy that was considered taxable income to you. For purposes
of determining the taxable portion of any distribution, all modified endowment
contracts issued by the same insurer (or its affiliate) to the same owner
(excluding certain qualified plans) during any calendar year are aggregated.
The Treasury Department has authority to prescribe additional rules to prevent
avoidance of "income-first" taxation on distributions from modified endowment
contracts.
A 10% penalty tax also will apply to the taxable portion of most
distributions from a policy that is a modified endowment contract. The penalty
tax will not, however, apply to distributions (i) to taxpayers 59 1/2 years of
age or older, (ii) in the case of a disability (as defined in the Code) or
(iii) received as part of a series of substantially equal periodic annuity
payments for the life (or life expectancy) of the taxpayer or the joint lives
(or joint life expectancies) of the taxpayer and his or her beneficiary. If
your Policy terminates after a grace period while there is a Policy loan, the
cancellation of such loan will be treated as a distribution to the extent not
previously treated as such and could be subject to tax, including the 10%
penalty tax, as described above. In addition, on the maturity date or upon a
full surrender, any excess of the proceeds we pay (including any amounts we
use to discharge any loan) over your basis in the Policy, will be subject to
federal income tax and, unless an exception applies, the 10% penalty tax.
Distributions that occur during a Policy year in which your Policy becomes a
modified endowment contract, and during any subsequent Policy years, will be
taxed as described in the two preceding paragraphs. In addition, distributions
from a policy within two years before it becomes a modified endowment contract
also will be subject to tax in this manner. This means that a distribution
made from a policy that is not a modified endowment contract could later
become taxable as a distribution from a modified endowment contract. The
Treasury Department has been authorized to prescribe rules which would treat
similarly other distributions made in anticipation of a policy becoming a
modified endowment contract.
18
<PAGE>
Policy lapses and reinstatements. A Policy which has lapsed may have the tax
consequences described above, even though you may be able to reinstate that
Policy. For tax purposes, some reinstatements may be treated as the purchase
of a new insurance contract.
Diversification. Under Section 817(h) of the Code, the Treasury Department
has issued regulations that implement investment diversification requirements.
Failure by us to comply with these regulations would disqualify your Policy as
a life insurance policy under Section 7702 of the Code. If this were to occur,
you would be subject to federal income tax on the income under the Policy for
the period of the disqualification and for subsequent periods. Separate
Account VL-R, through the Mutual Funds, intends to comply with these
requirements. Although we do not have direct control over the investments or
activities of the Mutual Funds, we will enter into agreements with them
requiring the Mutual Funds to comply with the diversification requirements of
the Section 817(h) Treasury Regulations.
In connection with the issuance of then temporary diversification
regulations, the Treasury Department stated that it anticipated the issuance
of guidelines prescribing the circumstances in which the ability of a policy
owner to direct his or her investment to particular Mutual Funds within
Separate Account VL-R may cause the policy owner, rather than the insurance
company, to be treated as the owner of the assets in the account. If you were
considered the owner of the assets of Separate Account VL-R, income and gains
from the account would be included in your gross income for federal income tax
purposes. Under current law, however, we believe that AGL, and not the owner
of a Policy, would be considered the owner of the assets of Separate Account
VL-R.
Estate and generation skipping taxes. If the insured person is the Policy's
owner, the death benefit under a Legacy Plus Policy will generally be
includable in the owner's estate for purposes of federal estate tax. If the
owner is not the insured person, under certain conditions, only an amount
approximately equal to the cash surrender value of the Policy would be
includable. Federal estate tax is integrated with federal gift tax under a
unified rate schedule. In general, estates less than $625,000 (or larger
amounts specified in the Code to commence in certain future years) will not
incur a federal estate tax liability. In addition, an unlimited marital
deduction may be available for federal estate tax purposes.
As a general rule, if a "transfer" is made to a person two or more
generations younger than the Policy's owner, a generation skipping tax may be
payable at rates similar to the maximum estate tax rate in effect at the time.
The generation skipping tax provisions generally apply to "transfers" that
would be subject to the gift and estate tax rules. Individuals are generally
allowed an aggregate generation skipping tax exemption of $1 million. Because
these rules are complex, you should consult with a qualified tax adviser for
specific information, especially where benefits are passing to younger
generations.
The particular situation of each policy owner, insured person or beneficiary
will determine how ownership or receipt of Policy proceeds will be treated for
purposes of federal estate and generation skipping taxes, as well as state and
local estate, inheritance and other taxes.
Pension and profit-sharing plans. If a life insurance policy is purchased by
a trust or other entity that forms part of a pension or profit-sharing plan
qualified under Section 401(a) of the Code for the benefit of participants
covered under the plan, the federal income tax treatment of such policies will
be somewhat different from that described above.
If purchased as part of a pension or profit-sharing plan, the reasonable net
premium cost for such amount of insurance is required to be included annually
in the plan participant's gross income. This cost (generally referred to as
the "P.S. 58" cost) is reported to the participant annually. If the plan
participant dies while covered by the plan and the policy proceeds are paid to
the participant's beneficiary, then the excess of the death benefit over the
policy's accumulation value will not be subject to federal income tax.
However, the policy's accumulation value will generally be taxable to the
extent it exceeds the participant's cost basis in the policy. The
participant's cost basis will generally include the costs of insurance
previously reported as income to the participant. Special rules may apply if
the participant had borrowed from the policy or was an owner-employee under
the plan.
19
<PAGE>
There are limits on the amounts of life insurance that may be purchased on
behalf of a participant in a pension or profit-sharing plan. Complex rules, in
addition to those discussed above, apply whenever life insurance is purchased
by a tax qualified plan. You should consult a qualified tax adviser.
Other employee benefit programs. Complex rules may also apply when a policy
is held by an employer or a trust, or acquired by an employee, in connection
with the provision of other employee benefits. These policy owners must
consider whether the policy was applied for by or issued to a person having an
insurable interest under applicable state law and with the insured person's
consent. The lack of an insurable interest or consent may, among other things,
affect the qualification of the policy as life insurance for federal income
tax purposes and the right of the beneficiary to receive a death benefit.
ERISA. Employers and employer-created trusts may be subject to reporting,
disclosure and fiduciary obligations under the Employee Retirement Income
Security Act of 1974, as amended. You should consult a qualified legal
adviser.
Our taxes. The operations of Separate Account VL-R are reported in our
federal income tax return, but we currently pay no income tax on Separate
Account VL-R's investment income and capital gains, because these items are,
for tax purposes, reflected in our variable life insurance policy reserves.
Therefore, no charge is currently being made to any Separate Account VL-R
division for taxes. We reserve the right to make a charge in the future for
taxes incurred; for example, a charge to Separate Account VL-R for income
taxes incurred by us that are allocable to the Policy.
We may have to pay state, local or other taxes in addition to applicable
taxes based on premiums. At present, these taxes are not substantial. If they
increase, charges may be made for such taxes when they are attributable to
Separate Account VL-R or allocable to the Policy.
Certain Mutual Funds in which your accumulation value is invested may elect
to pass through to AGL taxes withheld by foreign taxing jurisdictions on
foreign source income. Such an election will result in additional taxable
income and income tax to AGL. The amount of additional income tax, however,
may be more than offset by credits for the foreign taxes withheld which are
also passed through. These credits may provide a benefit to AGL.
When we withhold income taxes. Generally, unless you provide us with an
election to the contrary before we make the distribution, we are required to
withhold income tax from any proceeds we distribute as part of a taxable
transaction under your Policy. In some cases, where generation skipping taxes
may apply, we may also be required to withhold for such taxes unless we are
provided satisfactory written notification that no such taxes are due.
Tax changes. The U.S. Congress frequently considers legislation that, if
enacted, could change the tax treatment of life insurance policies. In
addition, the Treasury Department may amend existing regulations, issue
regulations on the qualification of life insurance and modified endowment
contracts, or adopt new interpretations of existing law. State and local tax
law or, if you are not a U.S. citizen and resident, foreign tax law, may also
affect the tax consequences to you, the insured person or your beneficiary,
and are subject to change. Any changes in federal, state, local or foreign tax
law or interpretation could have a retroactive effect. We suggest you consult
a qualified tax adviser.
VOTING PRIVILEGES
We are the legal owner of the Funds' shares held in Separate Account VL-R.
However, you may be asked to instruct us how to vote the Fund shares held in
the various Mutual Funds and attributable to your Policy at meetings of
shareholders of the Funds. The number of votes for which you may give
directions will be determined as of the record date for the meeting. The
number of votes that you may direct with respect to a particular Fund is equal
to (a) your accumulation value invested in that Fund divided by (b) the net
asset value of one share of that Fund. Fractional votes will be recognized.
20
<PAGE>
We will vote all shares of each Fund that we hold of record, including any
shares we own on our own behalf, in the same proportions as those shares for
which we have received instructions from owners participating in that Fund
through Separate Account VL-R.
If you are asked to give us voting instructions, we will send you the proxy
material and a form for providing such instructions. Should we determine that
we are no longer required to send the owner such materials, we will vote the
shares as we determine in our sole discretion.
In certain cases, we may disregard instructions relating to changes in a
Fund's investment manager or its investment policies. We will advise you if we
do and detail the reasons in our next report to policy owners. AGL reserves
the right to modify these procedures in any manner consistent with applicable
legal requirements and interpretations as in effect from time to time.
YOUR BENEFICIARY
You name your beneficiary when you apply for a Policy. The beneficiary is
entitled to the insurance benefits of the Policy. You may change the
beneficiary during the insured person's lifetime. We also require the consent
of any irrevocably named beneficiary. A new beneficiary designation is
effective as of the date you sign it, but will not affect any payments we may
make before we receive it. If no beneficiary is living when the insured person
dies, we will pay the insurance proceeds to the owner or the owner's estate.
ASSIGNING YOUR POLICY
You may assign (transfer) your rights in a Policy to someone else as
collateral for a loan or for some other reason. We will not be bound by an
assignment unless it is received in writing. Two copies of the assignment must
be forwarded to us. We are not responsible for any payment we make or any
action taken before we receive due and complete notice of the assignment in
good order. Nor are we responsible for the validity of the assignment. An
absolute assignment is a change of ownership. Because there may be unfavorable
tax consequences, including recognition of taxable income and the loss of
income tax-free treatment for any death benefit payable to the beneficiary,
you should consult a qualified tax adviser prior to making an assignment.
MORE ABOUT POLICY CHARGES
Purpose of our charges. The charges under the Policy are designed to cover,
in the aggregate, our direct and indirect costs of selling, administering and
providing benefits under the Policy. They are also designed, in the aggregate,
to compensate us for the risks we assume and services that we provide under
the Policy. These include mortality risks (such as the risk that insured
persons will, on average, die before we expect, thereby increasing the amount
of claims we must pay); investment risks (such as the risk that adverse
investment performance will make it more difficult for us to reduce the amount
of our daily charge for revenues below what we anticipate); sales risks (such
as the risk that the number of Policies we sell and the premiums we receive
net of withdrawals, are less than we expect, thereby depriving us of expected
economies of scale); regulatory risks (such as the risk that tax or other
regulations may be changed in ways adverse to issuers of variable life
insurance policies); and expense risks (such as the risk that the costs of
administrative services that the Policy requires us to provide will exceed
what we currently project).
If the charges that we collect from the Policy exceed our total costs in
connection with the Policy, we will earn a profit. Otherwise we will incur a
loss.
The current monthly insurance charge has been designed primarily to provide
funds out of which we can make payments of death benefits under the Policy as
insured persons die.
Any excess from the charges discussed in the preceding paragraph, are
primarily intended (a) to defray other expenses in connection with the
Policies (such as the costs of processing applications for Policies and other
unreimbursed administrative expenses, costs of paying marketing and
distribution expenses for the Policies, and costs of paying death claims if
the mortality experience of insured persons is worse than we expect), (b) to
compensate us for the risk we assume under the Policies, or (c) otherwise to
be retained by us as profit.
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<PAGE>
Although the preceding paragraphs describe the primary purposes for which
charges under the Policies have been designed, these distinctions are
imprecise and subject to considerable change over the life of a Policy. We
have full discretion to retain or use the revenues from any charge or charge
increase for any purpose, whether or not related to the Policies.
Change of tobacco use. If the person insured under your Policy is a tobacco
user, you may apply to us for an improved risk class if the insured person
meets our then applicable requirements for demonstrating that he or she has
ceased tobacco use for a sufficient period.
Gender neutral Policy. Our cost of insurance charge rates in Montana will
not be greater than the comparable male rates illustrated in this prospectus.
Congress and the legislatures of various states have from time to time
considered legislation that would require insurance rates to be the same for
males and females of the same age, rating class and tobacco user status. In
addition, employers and employee organizations should consider, in
consultation with counsel, the impact of Title VII of the Civil Rights Act of
1964 on the purchase of life insurance policies in connection with an
employment-related insurance or benefit plan. In a 1983 decision, the United
States Supreme Court held that, under Title VII, optional annuity benefits
under a deferred compensation plan could not vary on the basis of sex.
Cost of insurance rates. Because of specified amount increases, different
cost of insurance rates may apply to different increments of specified amount
under your Policy. If so, we attribute your accumulation value first to the
oldest increments of specified amount in order to compute our net amount at
risk at each cost of insurance rate. See "Monthly Insurance Charge" beginning
on page 6.
Miscellaneous. Each of the distributors or advisers of the Mutual Funds
listed on page 1 of this prospectus reimburses us, on a quarterly basis, for
certain administrative, Policy, and policy owner support expenses. These
reimbursements will be reasonable in relation to the services performed and
are not designed to result in a profit. These reimbursements are paid by the
distributors or the advisers, and will not be paid by the Mutual Funds, the
divisions or the owners. No payments have yet been made under these
arrangements, because no Policies have yet been issued.
EFFECTIVE DATE OF POLICY AND RELATED TRANSACTIONS
Valuation dates, times, and periods. We generally compute values under a
Policy on each day that we are open for business except, with respect to any
investment option, days on which the related Mutual Fund does not value its
shares. We call each such day a "valuation date."
We compute policy values as of 3:00 p.m., Central time, on each valuation
date. We call this our "close of business." We call the time from the close of
business on one valuation date to the close of business of the next valuation
date a "valuation period."
Date of receipt. Generally we consider that we have received a premium
payment or another communication from you on the day we actually receive it in
full and proper order at our Home Office. If we receive it after the close of
business on any valuation date, however, we consider that we have received it
on the day following that valuation date.
Commencement of insurance coverage. After you apply for a Policy, it can
sometimes take up to several weeks for us to gather and evaluate all the
information we need to decide whether to issue a Policy to you and, if so,
what the insured person's insurance rate class should be. We will not pay a
death benefit under a Policy unless (a) it has been delivered to and accepted
by the owner and at least the initial premium has been paid, and (b) at the
time of such delivery and payment, there have been no adverse developments in
the insured person's health or risk of death.
Date of issue; Policy months and years. After we approve an application for
a Policy and assign an appropriate insurance rate class, we prepare the
Policy. The day we begin to deduct charges will appear on page
22
<PAGE>
3 of your Policy and is called the "date of issue." Policy months and years
are measured from the date of issue. In order to preserve a younger age at
issue for the insured person, we may assign a date of issue to a Policy that
is up to 6 months earlier than otherwise would apply.
Monthly deduction days. Each charge that we deduct monthly is assessed
against your accumulation value at the close of business on the date of issue
and at the end of each subsequent valuation period that includes the first day
of a Policy month. We call these "monthly deduction days."
Commencement of investment performance. We begin to credit an investment
return to the accumulation value resulting from your initial premium payment
on the later of (a) the date of issue, or (b) the date all requirements needed
to place the Policy (whether a back-dated Policy or not) in force have been
satisfied, including underwriting approval and receipt in the Home Office of
the necessary premium.
Effective date of other premium payments and requests that you make. Premium
payments (after the first) and transactions implemented in response to
requests and elections made by you are generally effected at the end of the
valuation period in which we receive the payment, request or election and
based on prices and values computed as of that same time. Exceptions to this
general rule are as follows:
. Increases you request in the specified amount of insurance, and
reinstatements of a Policy that has lapsed take effect on the Policy's
monthly deduction day on or next following our approval of the
transaction;
. We may return premium payments if we determine that such premiums would
cause your Policy to become a modified endowment contract or to cease to
qualify as life insurance under federal income tax law or exceed the
maximum net amount at risk;
. If you exercise the right to return your Policy described on the first
page of this prospectus, your coverage will end when you mail us your
Policy or deliver it to your AGL representative; and
. If you pay a premium in connection with a request which requires our
approval, your payment will be applied when received rather than
following the effective date of the change requested so long as your
coverage is in force and the amount paid will not cause you to exceed
premium limitations under the Code. If we do not approve your request,
no premium will be refunded to you except to the extent necessary to
cure any violation of the maximum premium limitations under the Code.
This procedure will not apply to premiums remitted in connection with
reinstatement requests.
DISTRIBUTION OF THE POLICIES
American General Securities Incorporated ("AGSI") is the principal
underwriter of the Policies. AGSI is a wholly-owned subsidiary of AGL, a
wholly-owned subsidiary of American General Corporation ("American General"),
and its principal office is 2727 Allen Parkway, Houston, Texas, 77019. AGSI
was organized as a Texas corporation on March 8, 1983 and is a registered
broker-dealer under the Securities Exchange Act of 1934, as amended ("1934
Act") and is a member of the National Association of Securities Dealers, Inc.
("NASD"). AGSI is also the principal underwriter for AGL's Separate Accounts A
and D, and Separate Account E of American General Life Insurance Company of
New York, which is a wholly-owned subsidiary of AGL. These separate accounts
are registered investment companies.
AGL has entered into a distribution agreement with AGSI which acts as the
principal distributor of the Policies and provides certain marketing support
services for which it is compensated by AGL. Pursuant to the agreement, AGL
pays AGSI a distribution fee equal to the equivalent of .20% of each Policy's
average annual cash value. AGSI may enter into other agreements with broker-
dealers registered under the 1934 Act. AGSI has also entered into an
arrangement with Independent Advantage Financial and Insurance Services, Inc.,
a licensed insurance agency and another indirect wholly-owned subsidiary of
American General, to provide certain additional marketing support services.
23
<PAGE>
PAYMENT OF POLICY PROCEEDS
General. We will pay any death benefit, maturity benefit, cash surrender
value or loan proceeds within seven days after we receive the last required
form or request (and any other documents that may be required for payment of a
death benefit). If we do not have information about the desired manner of
payment within 60 days after the date of notification of the insured person's
death, we will pay the proceeds as a single sum, normally within seven days
thereafter.
Delay for check clearance. We reserve the right to defer payment of that
portion of your accumulation value that is attributable to a premium payment
made by check for a reasonable period of time (not to exceed 15 days) to allow
the check to clear the banking system.
Delay of Separate Account VL-R proceeds. We reserve the right to defer
payment of any death benefit, loan or other distribution that is derived from
that portion of your accumulation value that is allocated to Separate Account
VL-R, if (a) the New York Stock Exchange is closed other than customary
weekend and holiday closings, or trading on the New York Stock Exchange is
restricted; (b) an emergency exists, as a result of which disposal of
securities is not reasonably practicable or it is not reasonably practicable
to fairly determine the accumulation value; or (c) the SEC by order permits
the delay for the protection of owners. Transfers and allocations of
accumulation value among the investment options may also be postponed under
these circumstances. If we need to defer calculation of Separate Account VL-R
values for any of the foregoing reasons, all delayed transactions will be
processed at the next values that we do compute.
Delay to challenge coverage. We may challenge the validity of your insurance
Policy based on any material misstatements in your application and any
application for a change in coverage. However,
. We cannot challenge the Policy after it has been in effect, during the
insured person's lifetime, for two years from the date the Policy was
issued or restored after termination. (Some states may require that we
measure this time in some other way.)
. We cannot challenge any Policy change that requires evidence of
insurability (such as an increase in specified amount) after the change
has been in effect for two years during the insured person's lifetime.
ADJUSTMENTS TO DEATH BENEFIT
Suicide. If the insured person commits suicide within two years after the
date on which the Policy was issued, the death benefit will be limited to the
total of all premiums that have been paid to the time of death minus any
outstanding Policy loans and any partial surrenders. If the insured person
commits suicide within two years after the effective date of an increase in
specified amount that you requested, we will pay the death benefit based on
the specified amount which was in effect before the increase, plus the monthly
insurance deductions for the increase. Some states require that we compute
differently these periods for non-contestability following a suicide.
Wrong age or sex. If the age or gender of the insured person was misstated
on your application for a Policy (or for any increase in benefits), we will
adjust any death benefit to be what the monthly insurance charge deducted for
the current month would have purchased based on the correct information.
Death during grace period. If the insured person dies during the Policy's
grace period, we will deduct any overdue monthly charges from the insurance
proceeds.
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<PAGE>
ADDITIONAL RIGHTS THAT WE HAVE
We have the right at any time to:
. transfer the entire balance in an investment option in accordance with
any transfer request you make that would reduce your accumulation value
for that option to below $5,000;
. transfer the entire balance in proportion to any other investment
options you then are using, if the accumulation value in an investment
option is below $5,000 for any other reason;
. terminate the automatic rebalancing feature if your accumulation value
falls below $100,000;
. change the underlying Mutual Fund that any investment option uses;
. add or delete investment options, combine two or more investment
options, or withdraw assets relating to Legacy Plus from one investment
option and put them into another;
. operate Separate Account VL-R under the direction of a committee or
discharge such a committee at any time;
. operate Separate Account VL-R, or one or more investment options, in any
other form the law allows, including a form that allows us to make
direct investments. Separate Account VL-R may be charged an advisory fee
if its investments are made directly rather than through another
investment company. In that case, we may make any legal investments we
wish; or
. make other changes in the Policy that in our judgment are necessary or
appropriate to ensure that the Policy continues to qualify for tax
treatment as life insurance, or that do not reduce any cash surrender
value, death benefit, accumulation value, or other accrued rights or
benefits.
If there are any material changes in the underlying investments of an
investment option that you are using, you will be notified as required by law.
We intend to comply with all applicable laws in making any changes and, if
necessary, we will seek policy owner approval.
PERFORMANCE INFORMATION
From time to time, we may quote performance information for the divisions of
Separate Account VL-R in advertisements, sales literature, or reports to
owners or prospective investors.
We may quote performance information in any manner permitted under
applicable law. We may, for example, present such information as a change in a
hypothetical owner's cash value or death benefit. We also may present the
yield or total return of the division based on a hypothetical investment in a
Policy. The performance information shown may cover various periods of time,
including periods beginning with the commencement of the operations of the
division or the Mutual Funds in which it invests. The performance information
shown may reflect the deduction of one or more charges, such as the premium
charge, and we generally expect to exclude costs of insurance charges because
of the individual nature of these charges.
We may compare a division's performance to that of other variable life
separate accounts or investment products, as well as to generally accepted
indices or analyses, such as those provided by research firms and rating
services. In addition, we may use performance ratings that may be reported
periodically in financial publications, such as Money Magazine, Forbes,
Business Week, Fortune, Financial Planning and The Wall Street Journal. We
also may advertise ratings of AGL's financial strength or claims-paying
ability as determined by firms that analyze and rate insurance companies and
by nationally recognized statistical rating organizations.
Performance information for any division reflects the performance of a
hypothetical Policy and are not illustrative of how actual investment
performance would affect the benefits under your Policy. Therefore, you should
not consider such performance information to be an estimate or guarantee of
future performance.
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<PAGE>
OUR REPORTS TO POLICY OWNERS
Shortly after the end of each Policy year, we will mail you a report that
includes information about your Policy's current death benefit, accumulation
value, cash surrender value and policy loans. Notices will be sent to you to
confirm premium payments, transfers and certain other Policy transactions. We
will mail to you at your last known address of record, these and any other
reports and communications required by law. You should therefore give us
prompt written notice of any address change.
AGL'S MANAGEMENT
The directors, executive officers, and (to the extent responsible for
variable life operations) the other principal officers of AGL are listed
below.
<TABLE>
<CAPTION>
NAME BUSINESS EXPERIENCE WITHIN PAST FIVE YEARS
---- ------------------------------------------
<C> <S>
James S. D'Agostino, Jr. Director and Vice Chairman of American General Life
Insurance Company since May 1997. Director and
President American General Corporation since 1996 and
Senior Vice President (February 1993-August 1993).
Officer positions with other American General
Companies since July 1986.
Jon P. Newton Director and Vice Chairman of American General Life
Insurance Company since February 1996. Director of
American General Corporation since October 1995 and
Vice Chairman since April 1997; Vice Chairman and
General Counsel (October 1995-April 1997). Director
of other American General affiliates since October
1994. Prior thereto, Partner with Clark, Thomas,
Winter & Newton, Austin, Texas (February 1979-
February 1993). Directorships with Houston Museum of
Natural Science Board of Trustees since 1997;
University of Texas Law School Foundation Board of
Trustees, Austin, Texas since 1997; University of
Texas-Houston Health Science Center Development
Board, Houston, Texas since 1996; Texas Commerce
Bancshares, Houston, Texas (1985-1993); Texas
Commerce Bank, Austin, Texas (1979-1993); Lomas
Financial Corporation, Dallas, Texas (1983-1993);
Vista Properties, Inc., Dallas, Texas (1992-1993).
Rodney O. Martin, Jr. Chairman of the Board of American General Life
Insurance Company since July, 1998 and a Director
since August 1996. President and CEO (August 1996-
July 1998). President of American General Life
Insurance Company of New York (November 1995-August
1996). Vice President Agencies, with Connecticut
Mutual Life Insurance Company (1990-1995).
Ronald H. Ridlehuber Director, President and Chief Executive Officer of
American General Life Insurance Company since July,
1998. Senior Vice President and Chief Marketing
Officer of Jefferson-Pilot Life Insurance Company in
Greensboro, North Carolina (1993-1998). Prior to 1993
held various positions with Southland Life Insurance
Company in Dallas, Texas and Atlanta, Georgia
including Vice President, Sales.
David A. Fravel Director and Senior Vice President of American
General Life Insurance Company since November 1996.
Elected Executive Vice President in April, 1998.
Senior Vice President Massachusetts Mutual,
Springfield, Missouri (March 1996-June 1996); Vice
President, New Business, Connecticut Mutual Life,
Hartford, Connecticut (December 1978-March 1996).
Robert F. Herbert, Jr. Director, Senior Vice President and Chief Financial
Officer of American General Life Insurance Company
since May 1996, and Controller and Actuary from June
1988 to May 1996.
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
NAME BUSINESS EXPERIENCE WITHIN PAST FIVE YEARS
---- ------------------------------------------
<C> <S>
Royce G. Imhoff, II Director, Senior Vice President and Chief Marketing
Officer for American General Life Insurance Company
since November 1997, Vice President (August 1996-August
1997), and Regional Director (1992-1996).
John V. LaGrasse Director, Senior Vice President and Chief Systems
Officer of American General Life Insurance Company since
August 1996. Elected Executive Vice President in July,
1998. Prior thereto, Director of Citicorp Insurance
Services, Inc., Dover, Delaware (1986-1996).
Gary D. Reddick Executive Vice President of American General Life
Insurance Company since April 1998. Vice Chairman since
July 1997 and Executive Vice President-Administration of
The Franklin Life Insurance Company since February 1995.
Senior Vice President-Administration of American General
Corporation (October 1994-February 1995). Senior Vice
President for American General Life Insurance Company
(September 1986-October 1994).
Philip K. Polkinghorn Director of American General Life Insurance Company
since February 1997. Senior Vice President-Product
Development Center since April, 1998. Senior Vice
President and Chief Marketing Officer (December 1996-
September 1997). Prior thereto, Chief Financial Officer,
Connecticut Mutual Life Insurance Company (March 1995-
March 1996); Senior Vice President First Colony Life
Insurance Company, Lynchburg, Virginia (March 1996-
December 1996), and Chief Marketing Officer, Allmerica
Financial, Worcester, MA (March 1993-April 1994).
Wayne A. Barnard Senior Vice President and Chief Actuary of American
General Life Insurance Company since November 1997 and
Vice President since February, 1991 and Chief Actuary
since February, 1993.
F. Paul Kovach, Jr. Senior Vice President-Broker Dealers and FIMG for
American General Life Insurance Company since August
1997. Since October 1994, President and Director of
American General Securities Incorporated. Vice President
of Chubb Securities Corporation, Concord, New Hampshire,
(February 1990-October 1994).
Simon J. Leech In July 1997 named as Senior Vice President-Houston
Service Center for American General Life Insurance
Company. Various positions with American General Life
Company since 1981, including Director of POS in 1993,
and Vice President-Policy Administration in 1995.
Brian D. Murphy In April 1998 named as Senior Vice President-Insurance
Operations of American General Life Insurance Company.
Vice President-Sales, Phoenix Home Life, Hartford, CT
(January 1997-April 1998). Vice President of
Underwriting and Issue, Phoenix Home Life (July 1994-
January 1997). Various positions with Mutual of New
York, Syracuse, NY, including Agent, Agency Manager,
Marketing Life and Disability Income Underwriting
Management, (1978-July 1994).
Don M. Ward In February 1998 named as Senior Vice President-Variable
Products-Marketing of American General Life Insurance
Company. Vice President of Pacific Life Insurance
Company, Newport Beach, CA (1991-February 1998).
Larry M. Robinson In April 1998 named as Vice President-Variable Products-
Marketing of American General Life Insurance Company.
From July 1996 Vice President of American General Life
Insurance Company. Vice President of Business
Development of Allmerica Financial, Worcester, MA (1994-
1996). Vice President of Life Marketing at Nationwide
Insurance Enterprise, Columbus, Ohio (1991-1994).
</TABLE>
The principal business address of each person listed above is our Home
Office; except that the street number for Messrs. D'Agostino and Newton is 2929
Allen Parkway.
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<PAGE>
LEGAL MATTERS
We are not involved in any legal proceedings that would be considered
material with respect to a policy owner's interest in Separate Account VL-R.
Pauletta P. Cohn, Esquire, Associate General Counsel of the American General
Life Companies, an affiliate of AGL, has opined as to the validity of the
Policies. Mayer, Brown & Platt has advised AGL about certain federal
securities and tax law matters in connection with the Policies.
INDEPENDENT AUDITORS
The financial statements of AGL and the June 30, 1998 financial statements
of Separate Account VL-R included in this prospectus have been audited by
Ernst & Young, LLP, independent auditors, as set forth in their reports
appearing elsewhere herein. Such financial statements have been included in
this prospectus in reliance upon the reports of Ernst & Young, LLP given upon
the authority of such firm as experts in accounting and auditing. Ernst &
Young, LLP is located at One Houston Center, 1221 McKinney, Suite 2400,
Houston, Texas 77010-2007.
ACTUARIAL EXPERT
Actuarial matters in this prospectus have been examined by Wayne A. Barnard,
who is Senior Vice President and Chief Actuary of AGL. His opinion on
actuarial matters is filed as an exhibit to the registration statement we have
filed with the SEC in connection with the Policies.
SERVICES AGREEMENT
American General Life Companies ("AGLC") is party to an existing general
services agreement with AGL. AGLC, an affiliate of AGL, is a corporation
incorporated in Delaware on November 24, 1997. Pursuant to this agreement,
AGLC provides services to AGL, including most of the administration, data
processing, systems, customer services, product development, actuarial,
auditing, accounting and legal services for AGL and the Legacy Plus Policies.
CERTAIN POTENTIAL CONFLICTS
The Mutual Funds sell shares to separate accounts of insurance companies,
both affiliated and not affiliated with AGL. We currently do not foresee any
disadvantages to you arising out of this process. Nevertheless, differences in
treatment under tax and other laws, as well as other considerations, could
cause the interests of various owners to conflict. For example, violation of
the federal tax laws by one separate account investing in the Funds could
cause the contracts funded through another separate account to lose their tax-
deferred status, unless remedial action were taken. However, each Mutual Fund
has advised us that its board of trustees (or directors) intends to monitor
events in order to identify any material irreconcilable conflicts that
possibly may arise and to determine what action, if any, should be taken in
response. If we believe that a Fund's response to any such event
insufficiently protects our policy owners, we will see to it that appropriate
action is taken to do so. If it becomes necessary for any separate account to
replace shares of any Mutual Fund in which it invests, that Fund may have to
liquidate securities in its portfolio on a disadvantageous basis.
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<PAGE>
YEAR 2000
AGL and its affiliates are in the process of modifying its computer systems
to be Year 2000 compliant. During 1997, AGL and its affiliates incurred and
expensed $15 million (pretax) related to this project. AGL and its affiliates
estimate that it will incur future costs in excess of $45 million (pretax) for
additional internal staff, third-party vendors, and other expenses to render
its systems Year 2000 compliant.
AGL and its affiliates expect to substantially complete this project during
1998. However, risks and uncertainties exist in most significant systems
development projects. If conversion of AGL and its affiliates' systems is not
completed on a timely basis, due to non-performance by third-party vendors or
other unforeseen circumstances, the Year 2000 issue could have a material
adverse impact on the operations of AGL and its affiliates.
29
<PAGE>
FINANCIAL STATEMENTS
The financial statements of AGL contained in this prospectus should be
considered to bear only upon the ability of AGL to meet its obligations under
the Legacy Plus Policies. They should not be considered as bearing upon the
investment experience of Separate Account VL-R. Interim financial statements
of Separate Account VL-R are included because Separate Account VL-R commenced
operations in 1998.
<TABLE>
<CAPTION>
PAGE TO
SEE IN
THIS
FINANCIAL STATEMENTS OF SEPARATE ACCOUNT VL-R PROSPECTUS
- --------------------------------------------- ----------
<S> <C>
Report of Ernst & Young, LLP, Independent Auditors.................. 31
Statement of Net Assets as of June 30, 1998......................... 32
Statement of Operations for the six months ended June 30, 1998...... 32
Statement of Changes in Net Assets for the six months ended June 30,
1998............................................................... 33
Notes to Financial Statements....................................... 34
<CAPTION>
PAGE TO
SEE IN
CONSOLIDATED FINANCIAL STATEMENTS OF AMERICAN GENERAL LIFE INSURANCE THIS
COMPANY PROSPECTUS
- -------------------------------------------------------------------- ----------
<S> <C>
Unaudited Consolidated Balance Sheet as of June 30, 1998............ 39
Unaudited Consolidated Income Statement for the six months ended
June 30, 1998...................................................... 40
Report of Ernst & Young, LLP, Independent Auditors.................. 41
Consolidated Balance Sheets as of December 31, 1997 and 1996........ 42
Consolidated Income Statements for the years ended December 31,
1997, 1996 and 1995................................................ 43
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995................................... 44
Consolidated Statements of Cash Flows for the years ended December
31, 1997, 1996 and 1995............................................ 45
Notes to Consolidated Financial Statements.......................... 46
</TABLE>
30
<PAGE>
LOGO
[Letterhead of Ernst & Young LLP appears here]
REPORT OF INDEPENDENT AUDITORS
Board of Directors
American General Life Insurance Company
and
Policy Owners
American General Life Insurance Company Separate Account VL-R
We have audited the accompanying statement of net assets of American General
Life Insurance Company (the "Company") Separate Account VL-R as of June 30,
1998, and the related statements of operations and changes in net assets for
the six-month period ended June 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned as of June 30, 1998, by
correspondence with the transfer agents. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American General Life
Insurance Company Separate Account VL-R at June 30, 1998, the results of its
operations and the changes in its net assets for the six-month period ended
June 30, 1998, in conformity with generally accepted accounting principles.
LOGO
/s/ Ernst & Young LLP
August 12, 1998
Houston, Texas
31
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VL-R
STATEMENT OF NET ASSETS
JUNE 30, 1998
<TABLE>
<S> <C>
ASSETS:
Investment securities--at market (cost $783,853)................... $ 810,934
Due from American General Life Insurance Company................... 423
---------
Net Assets for Variable Life Insurance Policies.................. $ 811,357
=========
</TABLE>
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends from mutual funds.......................................... $ 1,727
EXPENSES:
Expense and mortality fee............................................ 397
-------
Net Investment Income.............................................. 1,330
-------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS:
Net realized gain on investments..................................... 0
Net unrealized gain on investments................................... 27,081
-------
Net Realized and Unrealized Gain on Investments.................... 27,081
-------
Increase in Net Assets Resulting from Operations................... $28,411
=======
</TABLE>
See accompanying notes.
32
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VL-R
STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<S> <C>
OPERATIONS:
Net investment income............................................... $ 1,330
Net realized gain on investments.................................... 0
Net unrealized gain on investments.................................. 27,081
--------
Increase in net assets resulting from operations.................. 28,411
--------
PRINCIPAL TRANSACTIONS:
Premiums, net of premium taxes...................................... 875,369
Cost of insurance and administrative expenses....................... (92,423)
Payments to contract owners:
Terminations and withdrawals...................................... 0
--------
Increase in net assets resulting from principal transactions........ 782,946
--------
Total Increase in Net Assets........................................ 811,357
NET ASSETS:
Beginning of period................................................. 0
--------
End of period....................................................... $811,357
========
</TABLE>
See accompanying notes.
33
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VL-R
NOTES TO FINANCIAL STATEMENTS
NOTE A-ORGANIZATION
American General Life Insurance Company Separate Account VL-R (the "Separate
Account") was established by resolution of the Board of Directors of American
General Life Insurance Company (the "Company") on May 6, 1997. The Separate
Account is registered under the Investment Company Act of 1940 as a unit
investment trust and consists of seventeen investment divisions at June 30,
1998.
The Separate Account Divisions (the "Divisions") which received their first
deposits in May 1998, are currently available through Platinum Investor I and
Platinum Investor II Variable Life Insurance Policies offered by the Company.
These Divisions, funded by series of independently managed mutual fund
portfolios ("Funds") are as follows:
AIM VARIABLE INSURANCE FUNDS, INC.: MORGAN STANLEY UNIVERSAL FUNDS,
V.I. International Equity Fund INC.:
V.I. Value Fund Equity Growth Portfolio
High Yield Portfolio
AMERICAN GENERAL SERIES PORTFOLIO
COMPANY: PUTNAM VARIABLE TRUST:
International Equities Fund Putnam VT Diversified Income Fund
MidCap Index Fund Putnam VT Growth and Income Fund
Money Market Fund Putnam VT International Growth and
Stock Index Fund Income Fund
DREYFUS VARIABLE INVESTMENT FUND: SAFECO RESOURCE SERIES TRUST:
Quality Bond Portfolio Equity Portfolio
Small Cap Portfolio Growth Portfolio
MFS VARIABLE INSURANCE TRUST: VAN KAMPEN LIFE INVESTMENT TRUST:
MFS Emerging Growth Series Strategic Stock Portfolio
NOTE B-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND BASIS OF PRESENTATION
The accompanying financial statements of the Separate Account Divisions have
been prepared on the basis of generally accepted accounting principles
("GAAP"). The accounting principles followed by the Divisions and the methods
of applying those principles are presented below or in the footnotes which
follow.
SECURITY VALUATION-The investments in shares of the Funds listed above are
valued at the closing net asset value (market) per share as determined by the
Funds on the day of measurement.
SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME-Security transactions
are accounted for on the date the order to buy or sell is executed ("trade
date"). Dividend income and distributions of capital gains are recorded on the
ex-dividend date and reinvested upon receipt. Realized gains and losses from
security transactions are determined on the basis of identified cost.
CHARGES AND EXPENSES
Deductions from premium payments. Certain jurisdictions require that
deductions be made from premium payment for taxes. The amount of such
deduction currently ranges from .75% to 3.5%. Prior to allocation to the
Separate Account, an additional 2.5% is deducted from each after-tax premium
payment.
34
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VL-R
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Separate Account charges. Currently, daily charges at an annual effective
rate of .75% on the average daily net asset value of the Divisions are paid to
the Company. These charges are made in return for the Company's assumption of
mortality and expense risks associated with the policies issued.
For all policies, a reduction in the current daily charge by .25% will occur
after year 10, and a further reduction of .25% will occur after year 20.
Because the policies were first offered in 1998, this decrease has not yet
occurred for any outstanding policy.
Other charges. Other charges paid to the Company include: deductions for
monthly administrative charges, the cost of insurance, additional benefit
riders and withdrawal charges.
The monthly administrative charge deduction is $6 for each policy in force.
An additional monthly expense deduction for Platinum Investor II policies is
charged during the first two policy years. The amount of this charge varies
from $0.0999 per $1,000 of specified amount to $1.88 per $1,000 of specified
amount, depending upon the age and other characteristics of the insured
person.
Since determination of both the insurance rate and the Company's net amount
at risk depends upon several factors, the cost of insurance deduction may vary
from month to month. Policy accumulation value, specified amount of insurance
and certain characteristics of the insured person, are among the variables
included in the calculation for the cost of insurance deduction.
Surrender charges are deducted for the Platinum Investor I policies if the
policy is surrendered during the first 10 years. Beginning in the fourth year,
the amount of the surrender charge decreases by a constant amount each year.
In addition, a $25 transaction fee per policy is charged for each partial
surrender made. No surrender charges or transaction fees were collected for
the six months ended June 30, 1998.
NOTE C-FEDERAL INCOME TAXES
The Company is taxed as a life insurance company under the Internal Revenue
Code and includes the operations of the Separate Account in determining its
federal income tax liability. Under existing federal income tax law, the
investment income and capital gains from sales of investments realized by the
Separate Account are not taxable. Therefore, no federal income tax provision
has been made.
NOTE D-YEAR 2000 CONTINGENCY (UNAUDITED)
Management has engaged in a program to render the Company's computer systems
(hardware and mainframe and personal applications software) Year 2000
compliant. The Company will incur internal staff costs as well as third-party
vendor and other expenses to prepare the systems for Year 2000. The cost of
testing and conversion of systems applications has not had, and is not
expected to have, a material adverse effect on the Company's results of
operations or financial condition. However, risks and uncertainties exist in
most significant systems development projects. If conversion of the Company's
systems is not completed on a timely basis, due to nonperformance by third-
party vendors or other unforeseen circumstances, the Year 2000 problem could
have a material adverse impact on the operations of the Company.
35
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VL-R
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE E-INVESTMENTS
Fund shares are purchased at net asset value with net policy transactions
(net premium payments less surrenders and amounts payable to the Company for
administrative, insurance and surrender charges) and reinvestment of
distributions made by the Funds. The following is a summary of shares of the
Funds owned as of June 30, 1998.
<TABLE>
<CAPTION>
NET VALUE OF UNREALIZED
ASSET SHARES AT COST OF APPRECIATION
FUND SHARES VALUE MARKET SHARES HELD (DEPRECIATION)
---- ---------- ------ --------- ----------- --------------
<S> <C> <C> <C> <C> <C>
AIM VARIABLE INSURANCE
FUNDS, INC.:
V.I. International
Equity Fund........... 0.000 $20.35 $ 0 $ 0 $ 0
V.I. Value Fund........ 7,457.465 24.67 183,976 175,821 8,155
-------- -------- -------
183,976 175,821 8,155
AMERICAN GENERAL SERIES
PORTFOLIO COMPANY:
International Equities
Fund.................. 0.000 12.06 0 0 0
MidCap Index Fund...... 336.929 25.42 8,565 8,299 266
Money Market Fund...... 34,573.370 1.00 34,573 34,573 0
Stock Index Fund....... 249.188 34.70 8,647 8,301 346
-------- -------- -------
51,785 51,173 612
DREYFUS VARIABLE
INVESTMENT FUND:
Quality Bond Portfolio. 0.000 11.91 0 0 0
Small Cap Portfolio.... 3,020.532 60.54 182,863 175,820 7,043
-------- -------- -------
182,863 175,820 7,043
MFS VARIABLE INSURANCE
TRUST:
MFS Emerging Growth
Series................ 0.000 19.45 0 0 0
MORGAN STANLEY UNIVERSAL
FUNDS, INC.:
Equity Growth
Portfolio............. 12,334.756 14.74 181,814 175,820 5,994
High Yield Portfolio... 0.000 11.01 0 0 0
-------- -------- -------
181,814 175,820 5,994
PUTNAM VARIABLE TRUST:
VT Diversified Income
Fund.................. 1,338.756 10.94 14,646 14,700 (54)
VT Growth and Income
Fund.................. 213.114 27.40 5,839 5,880 (41)
VT International Growth
and Income Fund....... 324.971 13.28 4,316 4,410 (94)
-------- -------- -------
24,801 24,990 (189)
SAFECO RESOURCE SERIES
TRUST:
Equity Portfolio....... 2,085.662 28.77 60,004 58,607 1,397
Growth Portfolio....... 4,577.229 27.46 125,691 121,622 4,069
-------- -------- -------
185,695 180,229 5,466
VAN KAMPEN LIFE
INVESTMENT TRUST:
Strategic Stock
Portfolio............. 0.000 11.25 0 0 0
-------- -------- -------
Total.................. $810,934 $783,853 $27,081
======== ======== =======
</TABLE>
The aggregate cost of purchases and proceeds from sales of investments for
the period ended June 30, 1998 were $1,519,295 and $735,442, respectively. The
cost of total investments owned at June 30, 1998 was the same for both
financial reporting and federal income tax purposes.
36
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VL-R
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE F-SUMMARY OF CHANGES IN UNITS
Summary of Changes in Units for the Period Ended June 30, 1998
<TABLE>
<CAPTION>
AIM V.I. AIM V.I. AGSPC AGSPC AGSPC
INTERNATIONAL VALUE INTERNATIONAL MIDCAP INDEX MONEY MARKET
EQUITY FUND FUND EQUITIES FUND FUND FUND
-------------- ------------------ ------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. 0.000 0.000 0.000 0.000 0.000
Purchase payments....... 0.000 0.000 0.000 0.000 85,258.281
Transfers between funds. 0.000 17,623.827 0.000 829.319 (74,712.995)
COI and administration
charges................ 0.000 0.000 0.000 0.000 (7,046.489)
Surrenders.............. 0.000 0.000 0.000 0.000 0.000
---------- ---------- ---------- ------- -----------
Outstanding at end of
period................. 0.000 17,623.827 0.000 829.319 3,498.797
========== ========== ========== ======= ===========
<CAPTION>
AGSPC DREYFUS DREYFUS MFS MORGAN STANLEY
STOCK INDEX QUALITY BOND SMALL CAP EMERGING GROWTH EQUITY GROWTH
FUND PORTFOLIO PORTFOLIO SERIES PORTFOLIO
-------------- ------------------ ------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. 0.000 0.000 0.000 0.000 0.000
Purchase payments....... 0.000 0.000 0.000 0.000 0.000
Transfers between funds. 829.319 0.000 17,711.214 0.000 17,640.530
COI and administration
charges................ 0.000 0.000 0.000 0.000 0.000
Surrenders.............. 0.000 0.000 0.000 0.000 0.000
---------- ---------- ---------- ------- -----------
Outstanding at end of
period................. 829.319 0.000 17,711.214 0.000 17,640.530
========== ========== ========== ======= ===========
<CAPTION>
MORGAN STANLEY PUTNAM VT PUTNAM VT PUTNAM VT SAFECO
HIGH YIELD DIVERSIFIED INCOME GROWTH AND INTL GROWTH AND EQUITY
PORTFOLIO FUND INCOME FUND INCOME FUND PORTFOLIO
-------------- ------------------ ------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. 0.000 0.000 0.000 0.000 0.000
Purchase payments....... 0.000 0.000 0.000 0.000 0.000
Transfers between funds. 0.000 1,469.984 587.994 440.995 5,861.072
COI and administration
charges................ 0.000 0.000 0.000 0.000 0.000
Surrenders.............. 0.000 0.000 0.000 0.000 0.000
---------- ---------- ---------- ------- -----------
Outstanding at end of
period................. 0.000 1,469.984 587.994 440.995 5,861.072
========== ========== ========== ======= ===========
<CAPTION>
SAFECO VAN KAMPEN LIT
GROWTH STRATEGIC STOCK
PORTFOLIO PORTFOLIO
-------------- ------------------
<S> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. 0.000 0.000
Purchase payments....... 0.000 0.000
Transfers between funds. 12,636.546 0.000
COI and administration
charges................ 0.000 0.000
Surrenders.............. 0.000 0.000
---------- ----------
Outstanding at end of
period................. 12,636.546 0.000
========== ==========
</TABLE>
37
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VL-R
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE G-NET ASSETS REPRESENTED BY:
<TABLE>
<CAPTION>
JUNE 30, 1998
------------------------------
UNITS UNIT VALUE AMOUNT
---------- ---------- --------
<S> <C> <C> <C>
UNITS OUTSTANDING:
AIM VARIABLE INSURANCE FUNDS, INC.:
AIM V.I. International Equity Fund............ 0.000 $10.000000 $ 0
AIM V.I. Value Fund........................... 17,623.827 10.437299 183,945
--------
183,945
--------
AMERICAN GENERAL SERIES PORTFOLIO COMPANY:
International Equities Fund................... 0.000 10.000000 0
MidCap Index Fund............................. 829.319 10.324636 8,562
Money Market Fund............................. 3,498.797 10.041460 35,133
Stock Index Fund.............................. 829.319 10.423558 8,644
--------
52,339
--------
DREYFUS VARIABLE INVESTMENT FUND:
Quality Bond Portfolio........................ 0.000 10.000000 0
Small Cap Portfolio........................... 17,711.214 10.322999 182,833
--------
182,833
--------
MFS VARIABLE INSURANCE TRUST:
MFS Emerging Growth Series.................... 0.000 10.000000 0
--------
MORGAN STANLEY UNIVERSAL FUNDS, INC.:
Equity Growth Portfolio....................... 17,640.530 10.304911 181,784
High Yield Portfolio.......................... 0.000 10.000000 0
--------
181,784
--------
PUTNAM VARIABLE TRUST:
Putnam VT Diversified Income Fund............. 1,469.984 9.959193 14,640
Putnam VT Growth and Income Fund.............. 587.994 9.926772 5,837
Putnam VT International Growth and Income
Fund......................................... 440.995 9.781966 4,314
--------
24,791
--------
SAFECO RESOURCE SERIES TRUST:
Equity Growth................................. 5,861.072 10.236099 59,995
Growth Portfolio.............................. 12,636.546 9.944948 125,670
--------
185,665
--------
VAN KAMPEN LIFE INVESTMENT TRUST:
Strategic Stock Portfolio..................... 0.000 10.000000 0
--------
Value of Units Outstanding at June 30, 1998..... $811,357
========
</TABLE>
38
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
UNAUDITED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
ASSETS JUNE 30, 1998
------ --------------
(IN THOUSANDS)
<S> <C>
Investments:
Fixed maturity securities, at fair value (amortized cost-
$27,328,947)................................................. $28,716,667
Equity securities, at fair value (cost-$13,008)............... 14,696
Mortgage loans on real estate................................. 1,664,063
Policy loans.................................................. 1,131,687
Investment real estate........................................ 130,010
Other long-term investments................................... 50,310
Short-term investments........................................ 150,629
-----------
Total investments............................................... 31,858,062
Cash............................................................ 27,298
Investment in Parent Company (cost-$8,597)...................... 49,804
Indebtedness from affiliates.................................... 77,401
Accrued investment income....................................... 454,769
Accounts receivable............................................. 255,963
Deferred policy acquisition costs............................... 1,072,776
Property and equipment.......................................... 34,667
Other assets.................................................... 157,239
Assets held in separate accounts................................ 13,898,985
-----------
Total assets.................................................... $47,886,964
===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C>
Liabilities:
Future policy benefits........................................ $28,844,322
Other policy claims and benefits payable...................... 69,246
Other policyholders' funds.................................... 401,343
Federal income taxes.......................................... 670,979
Indebtedness to affiliates.................................... 3,740
Other liabilities............................................. 629,312
Liabilities related to separate accounts...................... 13,898,985
-----------
Total liabilities............................................... 44,517,927
Shareholders' equity:
Common stock, $10 par value, 600,000 shares authorized,
issued, and outstanding...................................... 6,000
Preferred stock, $100 par value, 8,500 shares authorized,
issued, and outstanding...................................... 850
Additional paid-in capital.................................... 1,242,106
Net unrealized investment gains............................... 638,178
Retained earnings............................................. 1,481,903
-----------
Total shareholders' equity...................................... 3,369,037
-----------
Total liabilities and shareholders' equity...................... $47,886,964
===========
</TABLE>
39
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
UNAUDITED CONSOLIDATED INCOME STATEMENT
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
1998
--------------
(IN THOUSANDS)
<S> <C>
Revenues:
Premiums and other considerations.............................. $ 234,825
Net investment income.......................................... 1,149,155
Net realized investment gains (losses)......................... 5,072
Other.......................................................... 34,982
----------
Total revenues................................................... 1,424,034
Benefits and expenses:
Benefits....................................................... 889,007
Operating costs and expenses................................... 211,749
Interest expense............................................... 5
----------
Total benefits and expenses...................................... 1,100,761
----------
Income before income tax expense................................. 323,273
Income tax expense............................................... 108,785
----------
Net income....................................................... $ 214,488
==========
</TABLE>
40
<PAGE>
LOGO
[Letterhead of Ernst & Young LLP appears here]
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
American General Life Insurance Company
We have audited the accompanying consolidated balance sheets of American
General Life Insurance Company (an indirectly wholly owned subsidiary of
American General Corporation) and subsidiaries as of December 31, 1997 and
1996, and the related consolidated statements of income, shareholders' equity,
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of American General
Life Insurance Company and subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
LOGO
/s/ Ernst & Young LLP
February 23, 1998
41
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
ASSETS 1997 1996
------ ----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Investments:
Fixed maturity securities, at fair value (amortized
cost-$26,131,207 in 1997 and $24,762,134 in 1996)... $27,386,715 $25,395,381
Equity securities, at fair value (cost-$19,208 in
1997 and $17,642 in 1996)........................... 20,555 21,114
Mortgage loans on real estate........................ 1,659,921 1,707,843
Policy loans......................................... 1,093,694 1,006,137
Investment real estate............................... 129,364 145,442
Other long-term investments.......................... 55,118 43,344
Short-term investments............................... 100,061 94,882
----------- -----------
Total investments...................................... 30,445,987 28,413,584
Cash................................................... 99,284 33,550
Investment in Parent Company (cost-$8,597 in 1997 and
1996)................................................. 37,823 28,597
Indebtedness from affiliates........................... 96,519 86,488
Accrued investment income.............................. 433,111 392,058
Accounts receivable.................................... 208,209 170,457
Deferred policy acquisition costs...................... 835,031 1,042,783
Property and equipment................................. 33,827 35,414
Other assets........................................... 132,659 134,289
Assets held in separate accounts....................... 11,242,270 7,727,189
----------- -----------
Total assets........................................... $43,564,720 $38,064,409
=========== ===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Liabilities:
Future policy benefits............................... $27,849,893 $26,558,538
Other policy claims and benefits payable............. 42,677 41,679
Other policyholders' funds........................... 398,314 376,675
Federal income taxes................................. 543,379 402,361
Indebtedness to affiliates........................... 4,712 3,376
Other liabilities.................................... 421,861 325,630
Liabilities related to separate accounts............. 11,242,270 7,727,189
----------- -----------
Total liabilities.................................. 40,503,106 35,435,448
Shareholders' equity:
Common stock, $10 par value, 600,000 shares
authorized, issued, and outstanding................. 6,000 6,000
Preferred stock, $100 par value, 8,500 shares
authorized, issued, and outstanding................. 850 850
Additional paid-in capital........................... 1,184,743 933,342
Net unrealized investment gains...................... 427,526 219,151
Retained earnings.................................... 1,442,495 1,469,618
----------- -----------
Total shareholders' equity............................. 3,061,614 2,628,961
Total liabilities and shareholders' equity............. $43,564,720 $38,064,409
=========== ===========
</TABLE>
See accompanying notes.
42
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
CONSOLIDATED INCOME STATEMENTS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Premiums and other considerations........... $ 428,721 $ 382,923 $ 342,420
Net investment income....................... 2,198,623 2,095,072 2,011,088
Net realized investment gains (losses)...... 29,865 28,502 (1,942)
Other....................................... 53,370 41,968 27,172
---------- ---------- ----------
Total revenues............................ 2,710,579 2,548,465 2,378,738
Benefits and expenses:
Benefits.................................... 1,757,504 1,689,011 1,641,206
Operating costs and expenses................ 379,012 347,369 309,110
Interest expense............................ 782 830 2,180
---------- ---------- ----------
Total benefits and expenses................... 2,137,298 2,037,210 1,952,496
---------- ---------- ----------
Income before income tax expense.............. 573,281 511,255 426,242
Income tax expense............................ 198,724 176,660 143,947
---------- ---------- ----------
Net income.................................... $ 374,557 $ 334,595 $ 282,295
========== ========== ==========
</TABLE>
See accompanying notes.
43
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Common stock:
Balance at beginning of
year................... $ 6,000 $ 6,000 $ 6,000
Change during year...... -- -- --
---------- ---------- ----------
Balance at end of year.... 6,000 6,000 6,000
Preferred stock:
Balance at beginning of
year................... 850 850 --
Change during year...... -- -- 850
---------- ---------- ----------
Balance at end of year.... 850 850 850
Additional paid-in
capital:
Balance at beginning of
year................... 933,342 858,075 850,358
Capital contribution
from Parent Company.... 250,000 75,000 --
Other changes during
year................... 1,401 267 7,717
---------- ---------- ----------
Balance at end of year.... 1,184,743 933,342 858,075
Net unrealized investment
gains (losses):
Balance at beginning of
year................... 219,151 493,594 (730,900)
Change during year...... 208,375 (274,443) 1,224,494
---------- ---------- ----------
Balance at end of year.... 427,526 219,151 493,594
Retained earnings:
Balance at beginning of
year................... 1,469,618 1,324,703 1,249,109
Net income.............. 374,557 334,595 282,295
Dividends paid.......... (401,680) (189,680) (206,701)
---------- ---------- ----------
Balance at end of year.... 1,442,495 1,469,618 1,324,703
---------- ---------- ----------
Total shareholders'
equity................... $3,061,614 $2,628,961 $2,683,222
========== ========== ==========
</TABLE>
See accompanying notes.
44
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.............................. $ 374,557 $ 334,595 $ 282,295
Adjustments to reconcile net income to
net cash (used in) provided by
operating activities:
Change in accounts receivable......... (37,752) 3,846 (18,654)
Change in future policy benefits and
other policy claims.................. (1,143,736) (543,193) (70,383)
Amortization of policy acquisition
costs................................ 115,467 102,189 68,295
Policy acquisition costs deferred..... (219,339) (188,001) (203,607)
Change in other policyholders' funds.. 21,639 (69,126) 63,174
Provision for deferred income tax
expense.............................. 13,264 12,388 (9,773)
Depreciation.......................... 16,893 16,993 18,119
Amortization.......................... (28,276) (30,758) (35,825)
Change in indebtedness to/from
affiliates........................... (8,695) 4,432 7,596
Change in amounts payable to brokers.. 31,769 (25,260) 30,964
Net (gain) loss on sale of
investments.......................... (29,865) (28,502) 1,942
Other, net............................ 30,409 32,111 46,863
----------- ----------- -----------
Net cash (used in) provided by
operating activities............... (863,665) (378,286) 181,006
INVESTING ACTIVITIES
Purchases of investments and loans made. (29,638,861) (27,245,453) (14,573,323)
Sales or maturities of investments and
receipts from repayment of loans....... 28,300,238 25,889,422 12,528,185
Sales and purchases of property and
equipment, net......................... (9,230) (8,057) (12,114)
----------- ----------- -----------
Net cash used in investing activities... (1,347,853) (1,364,088) (2,057,252)
FINANCING ACTIVITIES
Policyholder account deposits........... 4,187,191 3,593,380 3,372,522
Policyholder account withdrawals........ (1,759,660) (1,746,987) (1,258,560)
Dividends paid.......................... (401,680) (189,680) (206,701)
Capital contribution from Parent........ 250,000 75,000 --
Other................................... 1,401 267 67
----------- ----------- -----------
Net cash provided by financing
activities............................. 2,277,252 1,731,980 1,907,328
----------- ----------- -----------
Increase (decrease) in cash............. 65,734 (10,394) 31,082
Cash at beginning of year............... 33,550 43,944 12,862
----------- ----------- -----------
Cash at end of year..................... $ 99,284 $ 33,550 $ 43,944
=========== =========== ===========
</TABLE>
Interest paid amounted to approximately $1,004,000, $1,080,000, and
$1,933,000 in 1997, 1996, and 1995, respectively.
See accompanying notes.
45
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NATURE OF OPERATIONS
American General Life Insurance Company (the "Company") is a wholly owned
subsidiary of AGC Life Insurance Company, which is a wholly owned subsidiary
of American General Corporation (the "Parent Company"). The Company's wholly
owned life insurance subsidiaries are American General Life Insurance Company
of New York ("AGNY") and The Variable Annuity Life Insurance Company
("VALIC").
The Company offers a complete portfolio of the standard forms of universal
life, interest-sensitive whole life, term life, structured settlements, and
fixed and variable annuities throughout the United States. In addition, a
variety of equity products is sold through its broker/dealer, American General
Securities, Inc. The Company serves the estate planning needs of middle- and
upper-income households and the insurance needs of small- to medium-sized
businesses. AGNY offers a broad array of traditional and interest-sensitive
insurance, in addition to individual annuity products. VALIC provides tax-
deferred retirement annuities and employer-sponsored retirement plans to
employees of health care, educational, public sector, and other not-for-profit
organizations throughout the United States.
1. ACCOUNTING POLICIES
1.1 PREPARATION OF FINANCIAL STATEMENTS
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") and include the accounts of
the Company and its wholly owned life insurance subsidiaries, AGNY and VALIC.
Transactions with the Parent Company and other subsidiaries of the Parent
Company are not eliminated from the financial statements of the Company. All
other material intercompany transactions have been eliminated in
consolidation.
The preparation of financial statements requires management to make
estimates and assumptions that affect amounts reported in the financial
statements and disclosures of contingent assets and liabilities. Ultimate
results could differ from those estimates.
46
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1.2 STATUTORY ACCOUNTING
The Company and its wholly owned life insurance subsidiaries are required to
file financial statements with state regulatory authorities. State insurance
laws and regulations prescribe accounting practices for calculating statutory
net income and equity. In addition, state regulators may permit statutory
accounting practices that differ from prescribed practices. The use of such
permitted practices by the Company and its wholly owned life insurance
subsidiaries did not have a material effect on statutory equity at December
31, 1997.
Statutory financial statements differ from GAAP. Significant differences
were as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income:
Statutory net income (1997 balance is
unaudited).............................. $ 327,813 $ 284,070 $ 197,769
Deferred policy acquisition costs........ 103,872 85,812 135,312
Deferred income taxes.................... (13,264) (12,388) 9,773
Adjustments to policy reserves........... (30,162) (19,954) (77,591)
Goodwill amortization.................... (2,067) (2,169) (2,195)
Net realized gain on investments......... 20,139 14,140 22,874
Gain on sale of subsidiary............... -- -- 661
Other, net............................... (31,774) (14,916) (4,308)
---------- ---------- ----------
GAAP net income........................ $ 374,557 $ 334,595 $ 282,295
========== ========== ==========
Shareholders' equity:
Statutory capital and surplus (1997
balance is unaudited)................... $1,636,327 $1,441,768 $1,298,323
Deferred policy acquisition costs........ 835,031 1,042,783 605,501
Deferred income taxes.................... (535,703) (410,007) (549,663)
Adjustments to policy reserves........... (319,680) (297,434) (311,065)
Acquisition-related goodwill............. 51,424 55,626 57,795
Asset valuation reserve ("AVR").......... 255,975 291,205 263,295
Interest maintenance reserve ("IMR")..... 9,596 63 3,114
Investment valuation differences......... 1,272,339 643,289 1,417,775
Benefit plans, pretax.................... 6,103 6,749 6,023
Surplus from separate accounts........... (150,928) (106,026) (76,645)
Other, net............................... 1,130 (39,055) (31,231)
---------- ---------- ----------
Total GAAP shareholders' equity............ $3,061,614 $2,628,961 $2,683,222
========== ========== ==========
</TABLE>
The more significant differences between GAAP and statutory accounting
principles are that under GAAP: (a) acquisition costs related to acquiring new
business are deferred and amortized (generally in proportion to the present
value of expected gross profits from surrender charges and investment,
mortality, and expense margins), rather than being charged to operations as
incurred; (b) future policy benefits are based on estimates of mortality,
interest, and withdrawals generally representing the Company's experience,
which may differ from those based on statutory mortality and interest
requirements without consideration of withdrawals; (c) deferred federal income
taxes are provided for significant timing differences between income reported
for financial reporting purposes and income reported for federal income tax
purposes; (d) certain assets (principally furniture and equipment, agents'
debit balances, computer software, and certain other receivables) are reported
as assets rather than being charged to retained earnings; (e) acquisitions are
accounted for using the purchase method of accounting rather than being
accounted for as equity investments; and (f) fixed maturity investments are
carried at fair value rather than amortized cost. In addition, statutory
accounting principles require life insurance companies to establish an AVR and
an IMR. The AVR is designed to address the credit-related risk for bonds,
47
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
preferred stocks, derivative instruments, and mortgages and market risk for
common stocks, real estate, and other invested assets. The IMR is composed of
investment- and liability-related realized gains and losses that result from
interest rate fluctuations. These realized gains and losses, net of tax, are
amortized into income over the expected remaining life of the asset sold or
the liability released.
1.3 INSURANCE CONTRACTS
The insurance contracts accounted for in these financial statements include
primarily long-duration contracts. Long-duration contracts include traditional
whole life, endowment, guaranteed renewable term life, universal life, limited
payment, and investment contracts. Long-duration contracts generally require
the performance of various functions and services over a period of more than
one year. The contract provisions generally cannot be changed or canceled by
the insurer during the contract period; however, most new contracts written by
the Company allow the insurer to revise certain elements used in determining
premium rates or policy benefits, subject to guarantees stated in the
contracts.
1.4 INVESTMENTS
Fixed Maturity and Equity Securities
All fixed maturity and equity securities are currently classified as
available-for-sale and recorded at fair value. After adjusting related balance
sheet accounts as if the unrealized gains (losses) had been realized, the net
adjustment is recorded in net unrealized gains (losses) on securities within
shareholders' equity. If the fair value of a security classified as available-
for-sale declines below its cost and this decline is considered to be other
than temporary, the security is reduced to its fair value, and the reduction
is recorded as a realized loss.
Mortgage Loans
Mortgage loans are reported at amortized cost, net of an allowance for
losses. The allowance for losses covers all nonperforming loans, consisting of
loans restructured or delinquent 60 days or more, and loans for which
management has a concern based on its assessment of risk factors, such as
potential nonpayment or nonmonetary default. The allowance is based on a loan-
specific review and a formula that reflects past results and current trends.
Impaired loans, those for which the Company determines it is probable that
all amounts due under the contractual terms will not be collected, are
reported at the lower of amortized cost or fair value of the underlying
collateral, less estimated costs to sell.
Policy Loans
Policy loans are reported at unpaid principal balances adjusted periodically
for uncollectible amounts.
Investment Real Estate
Investment real estate consists of income-producing real estate, foreclosed
real estate, and the American General Center, an office complex in Houston.
The Company classifies all investment real estate, except the American General
Center, as available-for-sale. Real estate available-for-sale is carried at
the lower of cost less accumulated depreciation, if applicable, or fair value
less costs to sell. Changes in estimates of fair value less costs to sell are
recognized as realized gains (losses) through a valuation allowance.
Real estate held-for-investment is carried at cost less accumulated
depreciation and impairment reserves and write-downs, if applicable.
Impairment losses are recorded whenever circumstances indicate that a property
48
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
might be impaired and the estimated undiscounted future cash flows of the
property are less than the carrying amount. In such event, the property is
written down to fair value, determined by market prices, third-party
appraisals, or expected future cash flows discounted at market rates. Any
write-down is recognized as a realized loss, and a new cost basis is
established.
Investment Income
Interest on fixed maturity securities, performing and restructured mortgage
loans, and policy loans is recorded as income when earned and is adjusted for
any amortization of premium or discount. Interest on impaired mortgage loans
is recorded as income when received. Dividends are recorded as income on ex-
dividend dates.
Realized Investment Gains (Losses)
Realized investment gains (losses) are recognized using the specific-
identification method and include declines in fair value of investments below
cost that are considered to be other than temporary.
1.5 SEPARATE ACCOUNTS
Separate accounts are assets and liabilities associated with certain
contracts, principally annuities; the investment risk lies solely with the
contract holder rather than the Company. Consequently, the Company's liability
for these accounts equals the value of the account assets. Investment income,
realized investment gains (losses), and policyholder account deposits and
withdrawals related to separate accounts are excluded from the consolidated
statements of income and cash flows. Assets held in separate accounts are
primarily shares in mutual funds, which are carried at fair value based on the
quoted net asset value per share.
1.6 DEFERRED POLICY ACQUISITION COSTS ("DPAC")
Certain costs of writing an insurance policy, including agents' commissions,
underwriting and marketing expenses, are deferred and reported as DPAC.
DPAC associated with interest-sensitive life insurance contracts, insurance
investment contracts, and participating life insurance contracts, to the
extent recoverable from expected future gross profits, is deferred and
amortized generally in proportion to the present value of expected future
gross profits from surrender charges and investment, mortality, and expense
margins. Expected future gross profits are adjusted to include the impact of
realized and unrealized gains (losses) as if net unrealized investment gains
(losses) had been realized at the balance sheet date. The impact of this
adjustment is included in the net unrealized gains (losses) on securities
within shareholders' equity. DPAC associated with all other insurance
contracts, to the extent recoverable from future policy revenues, is amortized
over the premium-paying period of the related contracts using assumptions that
are consistent with those used in computing policy benefit reserves.
The Company reviews the carrying value of DPAC on at least an annual basis.
In determining whether the carrying amount is appropriate, the Company
considers estimated future gross profits or future premiums, as applicable for
the type of contract. In all cases, the Company considers expected mortality,
interest earned and credited rates, persistency, and expenses.
1.7 PREMIUM RECOGNITION
Most receipts for annuities and interest-sensitive life insurance policies
are classified as deposits instead of revenue. Revenues for these contracts
consist of mortality, expense, and surrender charges assessed against the
49
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
account balance. Policy charges that compensate the Company for future
services are deferred and recognized in income over the period earned, using
the same assumptions used to amortize DPAC (see Note 1.6).
For limited-payment contracts, net premiums are recorded as revenue, and the
difference between the gross premium received and the net premium is deferred
and recognized in income in a constant relationship to insurance in force. For
all other contracts, premiums are recognized when due. When the revenue is
recorded, an estimate of the cost of the related benefit is recorded in the
future policy benefits account on the consolidated balance sheet. Also, this
cost is recorded in the consolidated statement of income as a benefit in the
current year and in all future years during which the policy is expected to be
renewed.
1.8 OTHER ASSETS
Acquisition-related goodwill, which is included in other assets, is charged
to expense in equal amounts over 40 years. The carrying value of goodwill is
regularly reviewed for indicators of impairment in value.
1.9 DEPRECIATION
Provision for depreciation of American General Center, data processing
equipment, and furniture and fixtures is computed on the straight-line method
over the estimated useful lives of the assets.
1.10 POLICY AND CONTRACT CLAIMS RESERVES
Substantially all of the Company's insurance and annuity liabilities relate
to long-duration contracts which generally require performance over a period
of more than one year. The contract provisions normally cannot be changed or
canceled by the Company during the contract period.
For interest-sensitive and investment contracts, reserves equal the sum of
the policy account balance and deferred revenue charges. In establishing
reserves for limited payment and other long-duration contracts, an estimate is
made of the cost of future policy benefits to be paid as a result of present
and future claims due to death, disability, surrender of a policy, and payment
of an endowment. Reserves for traditional insurance products are determined
using the net level premium method. Based on past experience, consideration is
given to expected policyholder deaths, policy lapses, surrenders, and
terminations. Consideration is also given to the possibility that the
Company's experience with policyholders will be worse than expected. Interest
assumptions used to compute reserves ranged from 2.0% to 13.5% at December 31,
1997.
The claims reserves are determined using case-basis evaluation and
statistical analyses and represent estimates of the ultimate net cost of
unpaid claims. These estimates are reviewed; and as adjustments become
necessary, such adjustments are reflected in current operations. Since these
reserves are based on estimates, the ultimate settlement of claims may vary
from the amounts included in the accompanying financial statements. Although
it is not possible to measure the degree of variability inherent in such
estimates, management believes claim reserves are reasonable.
1.11 REINSURANCE
The Company limits its exposure to loss on any single insured to $1.5
million by ceding additional risks through reinsurance contracts with other
insurers. Ceded reinsurance becomes a liability of the reinsurer assuming the
risk. The Company diversifies its risk of exposure to reinsurance loss by
using several reinsurers that have strong claims-paying ability ratings. If a
reinsurer could not meet its obligations, the Company would reassume the
liability. The likelihood of a material reinsurance liability being reassumed
by the Company is considered to be remote.
50
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Benefits paid and future policy benefits related to ceded reinsurance
contracts are recorded as reinsurance receivables. The cost of reinsurance is
recognized over the life of the underlying reinsured policies using
assumptions consistent with those used to account for the underlying policies.
1.12 PARTICIPATING POLICY CONTRACTS
Participating life insurance contracts contain dividend payment provisions
that entitle the policyholder to participate in the earnings of the contracts.
Participating life insurance contracts accounted for 2.22% and 2.47% of life
insurance in force at December 31, 1997 and 1996, respectively. Such business
is accounted for in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 120.
1.13 INCOME TAXES
The Company and its life insurance subsidiaries, together with certain other
life insurance subsidiaries of the Parent Company, are included in a life/non-
life consolidated tax return with the Parent Company and its noninsurance
subsidiaries. The Company participates in a tax sharing agreement with other
companies included in the consolidated tax return. Under this agreement, tax
payments are made to the Parent Company as if the companies filed separate tax
returns; and companies incurring operating and/or capital losses are
reimbursed for the use of these losses by the consolidated return group.
Income taxes are provided for in accordance with SFAS No. 109. Under this
standard, deferred tax assets and liabilities are calculated using the
differences between the financial reporting basis and the tax basis of assets
and liabilities, using the enacted tax rate. The effect of a tax rate change
is recognized in income in the period of enactment. Under SFAS No. 109, state
income taxes are included in income tax expense.
1.14 NEW ACCOUNTING STANDARD NOT YET ADOPTED
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
Reporting Comprehensive Income, which establishes standards for reporting and
displaying comprehensive income and its components in the financial
statements. Beginning in 1998, the Company must adopt this statement for all
periods presented. Application of this statement will not change recognition
or measurement of net income and, therefore, will not impact the Company's
consolidated results of operations or financial position.
2. INVESTMENTS
2.1 INVESTMENT INCOME
Investment income by type of investment was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Investment income:
Fixed maturities............................ $1,966,528 $1,846,549 $1,759,358
Equity securities........................... 1,067 1,842 6,773
Mortgage loans on real estate............... 157,035 175,833 185,022
Investment real estate...................... 22,157 22,752 16,397
Policy loans................................ 62,939 58,211 52,939
Other long-term investments................. 3,135 2,328 1,996
Short-term investments...................... 8,626 9,280 6,234
Investment income from affiliates........... 11,094 11,502 12,570
---------- ---------- ----------
Gross investment income....................... 2,232,581 2,128,297 2,041,289
Investment expenses........................... 33,958 33,225 30,201
---------- ---------- ----------
Net investment income......................... $2,198,623 $2,095,072 $2,011,088
========== ========== ==========
</TABLE>
51
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The carrying value of investments that have produced no investment income
during 1997 was less than 1% of total invested assets. The ultimate
disposition of these investments is not expected to have a material effect on
the Company's results of operations and financial position.
2.2 NET REALIZED INVESTMENT GAINS (LOSSES)
Realized gains (losses) by type of investment were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities:
Gross gains.................................... $ 42,966 $ 46,498 $ 38,657
Gross losses................................... (34,456) (47,293) (41,022)
-------- -------- --------
Total fixed maturities........................... 8,510 (795) (2,365)
Equity securities................................ 1,971 18,304 9,710
Other investments................................ 19,384 10,993 (9,287)
-------- -------- --------
Net realized investment gains (losses) before
tax............................................. 29,865 28,502 (1,942)
Income tax expense............................... 10,452 9,976 547
-------- -------- --------
Net realized investment gains (losses) after tax. $ 19,413 $ 18,526 $ (2,489)
======== ======== ========
</TABLE>
2.3 FIXED MATURITY AND EQUITY SECURITIES
All fixed maturity and equity securities are classified as available-for-
sale and reported at fair value (see Note 1.4). Amortized cost and fair value
at December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAIN LOSS FAIR VALUE
----------- ---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Fixed maturity securities:
Corporate securities:
Investment-grade............... $17,913,942 $ 906,235 $17,551 $18,802,626
Below investment-grade......... 950,438 34,290 4,032 980,696
Mortgage-backed securities*..... 6,614,704 278,143 4,260 6,888,587
U.S. government obligations..... 289,406 46,529 74 335,861
Foreign governments............. 318,212 18,076 3,534 332,754
State and political
subdivisions................... 44,505 1,686 -- 46,191
----------- ---------- ------- -----------
Total fixed maturity securities.. $26,131,207 $1,284,959 $29,451 $27,386,715
=========== ========== ======= ===========
Equity securities................ $ 19,208 $ 2,145 $ 239 $ 21,114
=========== ========== ======= ===========
Investment in Parent Company..... $ 8,597 $ 29,226 $ -- $ 37,823
=========== ========== ======= ===========
</TABLE>
- --------
* Primarily include pass-through securities guaranteed by and mortgage
obligations ("CMOs") collateralized by the U.S. government and government
agencies.
52
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAIN LOSS FAIR VALUE
----------- ---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
DECEMBER 31, 1996
Fixed maturity securities:
Corporate securities:
Investment-grade............... $15,639,170 $528,602 $ 90,379 $16,077,393
Below investment-grade......... 898,187 29,384 5,999 921,572
Mortgage-backed securities*..... 7,547,616 186,743 54,543 7,679,816
U.S. government obligations..... 313,759 26,597 1,050 339,306
Foreign governments............. 313,655 13,255 248 326,662
State and political
subdivisions................... 48,553 1,003 226 49,330
----------- -------- -------- -----------
Redeemable preferred stocks..... 1,194 108 -- 1,302
----------- -------- -------- -----------
Total fixed maturity securities.. $24,762,134 $785,692 $152,445 $25,395,381
=========== ======== ======== ===========
Equity securities................ $ 17,642 $ 3,021 $ 108 $ 20,555
=========== ======== ======== ===========
Investment in Parent Company..... $ 8,597 $ 20,000 $ -- $ 28,597
=========== ======== ======== ===========
</TABLE>
- --------
* Primarily include pass-through securities guaranteed by and mortgage
obligations ("CMOs") collateralized by the U.S. government and government
agencies.
Net unrealized gains (losses) on securities included in shareholders' equity
at December 31 were as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Gross unrealized gains.............................. $ 1,316,330 $ 808,713
Gross unrealized losses............................. (29,690) (152,553)
DPAC and other fair value adjustments............... (621,867) (315,117)
Deferred federal income taxes....................... (237,247) (121,892)
----------- -----------
Net unrealized gains on securities.................. $ 427,526 $ 219,151
=========== ===========
The contractual maturities of fixed maturity securities at December 31, 1997
were as follows:
<CAPTION>
AMORTIZED
COST FAIR VALUE
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
Fixed maturity securities, excluding mortgage-backed
securities:
Due in one year or less........................... $ 205,719 $ 207,364
Due after one year through five years............. 5,008,933 5,216,174
Due after five years through ten years............ 9,163,681 9,604,447
Due after ten years............................... 5,138,169 5,470,143
Mortgage-backed securities.......................... 6,614,705 6,888,587
----------- -----------
Total fixed maturity securities..................... $26,131,207 $27,386,715
=========== ===========
</TABLE>
Actual maturities may differ from contractual maturities, since borrowers
may have the right to call or prepay obligations. In addition, corporate
requirements and investment strategies may result in the sale of investments
before maturity. Proceeds from sales of fixed maturities were $14.8 billion,
$16.2 billion, and $7.3 billion during 1997, 1996, and 1995, respectively.
53
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2.4 MORTGAGE LOANS ON REAL ESTATE
Diversification of the geographic location and type of property
collateralizing mortgage loans reduces the concentration of credit risk. For
new loans, the Company requires loan-to-value ratios of 75% or less, based on
management's credit assessment of the borrower. The mortgage loan portfolio
was distributed as follows at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
OUTSTANDING PERCENT PERCENT
AMOUNT OF TOTAL NONPERFORMING
------------- -------- -------------
(IN MILLIONS)
<S> <C> <C> <C>
DECEMBER 31, 1997
Geographic distribution:
South Atlantic........................... $ 456 27.5% 1.8%
Pacific.................................. 340 20.5 14.4
Mid-Atlantic............................. 288 17.3 --
East North Central....................... 186 11.2 --
Mountain................................. 151 9.1 2.7
West South Central....................... 132 7.9 .1
East South Central....................... 94 5.7 --
West North Central....................... 19 1.1 --
New England.............................. 17 1.1 --
Allowance for losses....................... (23) (1.4) --
------ -----
Total...................................... $1,660 100.0% 3.6%
====== =====
Property type:
Office................................... $ 622 37.5% 4.6%
Retail................................... 463 27.9 3.0
Industrial............................... 324 19.5 1.8
Apartments............................... 223 13.4 6.1
Hotel/motel.............................. 40 2.4 --
Other.................................... 11 .7 --
Allowance for losses....................... (23) (1.4) --
------ -----
Total...................................... $1,660 100.0% 3.6%
====== =====
DECEMBER 31, 1996
Geographic distribution:
South Atlantic........................... $ 522 30.6% 8.1%
Pacific.................................. 407 23.8 8.1
Mid-Atlantic............................. 231 13.5 --
East North Central....................... 168 9.8 --
Mountain................................. 153 9.0 2.8
West South Central....................... 141 8.2 5.3
East South Central....................... 109 6.4 --
West North Central....................... 13 0.8 --
New England.............................. 13 0.8 --
Allowance for losses....................... (49) (2.9) --
------ -----
Total...................................... $1,708 100.0% 5.0%
====== =====
Property type:
Office................................... $ 590 34.5% --%
Retail................................... 502 29.4 2.5
Industrial............................... 304 17.8 6.0
Apartments............................... 264 15.5 8.3
Hotel/motel.............................. 54 3.2 --
Other.................................... 43 2.5 78.8
Allowance for losses....................... (49) (2.9) --
------ -----
Total...................................... $1,708 100.0% 5.0%
====== =====
</TABLE>
54
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Impaired mortgage loans on real estate and related interest income were as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------
1997 1996
------ ------
(IN MILLIONS)
<S> <C> <C>
Impaired loans:
With allowance*................................................ $ 35 $ 60
Without allowance.............................................. -- --
------ ------
Total impaired loans............................................. $ 35 $ 60
------ ------
</TABLE>
- --------
* Represents gross amounts before allowance for mortgage loan losses of $10
million and $9 million, respectively.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Average investment.............................................. $48 $72 $102
Interest income earned.......................................... $ 3 $ 6 $ 8
Interest income-cash basis...................................... $-- $ 6 $ 8
</TABLE>
2.5 INVESTMENT SUMMARY
Investments of the Company were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------
CARRYING
COST FAIR VALUE AMOUNT
----------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities:
Bonds:
United States government and government
agencies and authorities................. $ 289,406 $ 335,861 $ 335,861
States, municipalities, and political
subdivisions............................. 44,505 46,191 46,191
Foreign governments....................... 318,212 332,754 332,754
Public utilities.......................... 1,848,546 1,952,724 1,952,724
Mortgage-backed securities................ 6,614,704 6,888,587 6,888,587
All other corporate bonds................. 17,015,834 17,830,598 17,830,598
----------- ---------- -----------
Total fixed maturities...................... 26,131,207 27,386,715 27,386,715
Equity securities:
Common stocks:
Industrial, miscellaneous, and other...... 5,604 5,785 5,785
Nonredeemable preferred stocks............ 13,604 15,329 15,329
----------- ---------- -----------
Total equity securities..................... 19,208 21,114 21,114
Mortgage loans on real estate*.............. 1,659,921 XXX 1,659,921
Investment real estate...................... 129,364 XXX 129,364
Policy loans................................ 1,093,694 XXX 1,093,694
Other long-term investments................. 55,118 XXX 55,118
Short-term investments...................... 100,061 XXX 100,061
----------- ---------- -----------
Total investments........................... $29,188,573 $ XXX $30,445,987
=========== ========== ===========
</TABLE>
- --------
* Amount is net of a $23 million allowance for losses.
55
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. DEFERRED POLICY ACQUISITION COSTS
The balance of DPAC at December 31 and the components of the change reported
in operating costs and expenses for the years then ended were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance at January 1....................... $1,042,783 $ 605,501 $ 1,479,115
Capitalization........................... 219,339 188,001 203,607
Amortization............................. (115,467) (102,189) (68,295)
Change in the effect of SFAS No. 115..... (311,624) 351,470 (1,008,926)
---------- ---------- -----------
Balance at December 31..................... $ 835,031 $1,042,783 $ 605,501
========== ========== ===========
</TABLE>
4. OTHER ASSETS
Other assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Goodwill...................................................... $ 51,424 $ 55,626
Other......................................................... 81,235 78,663
-------- --------
Total other assets............................................ $132,659 $134,289
======== ========
</TABLE>
5. FEDERAL INCOME TAXES
5.1 TAX LIABILITIES
Income tax liabilities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Current tax payable (receivable)............................ $ 7,676 $ (7,646)
Deferred tax liabilities, applicable to:
Net income................................................ 298,456 288,115
Net unrealized investment gains........................... 237,247 121,892
-------- --------
Total deferred tax liabilities.............................. 535,703 410,007
-------- --------
Total current and deferred tax liabilities.................. $543,379 $402,361
======== ========
</TABLE>
56
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Components of deferred tax liabilities and assets at December 31 were as
follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities applicable to:
Deferred policy acquisition costs....................... $ 226,653 $ 308,802
Basis differential of investments....................... 486,194 254,402
Other................................................... 139,298 130,423
--------- ---------
Total deferred tax liabilities............................ 852,145 693,627
Deferred tax assets applicable to:
Policy reserves......................................... (232,539) (219,677)
Other................................................... (83,903) (63,943)
--------- ---------
Total deferred tax assets before valuation allowance...... (316,442) (283,620)
Valuation allowance....................................... -- --
--------- ---------
Total deferred tax assets, net of valuation allowance..... (316,442) (283,620)
--------- ---------
Net deferred tax liabilities.............................. $ 535,703 $ 410,007
========= =========
</TABLE>
A portion of life insurance income earned prior to 1984 is not taxable
unless it exceeds certain statutory limitations or is distributed as
dividends. Such income, accumulated in policyholders' surplus accounts,
totaled $93.6 million at December 31, 1997. At current corporate rates, the
maximum amount of tax on such income is approximately $32.8 million. Deferred
income taxes on these accumulations are not required because no distributions
are expected.
5.2 TAX EXPENSE
Components of income tax expense for the year were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current expense................................... $185,460 $164,272 $153,720
Deferred expense (benefit):
Deferred policy acquisition cost................ 27,644 21,628 38,275
Policy reserves................................. (27,496) (27,460) (49,177)
Basis differential of investments............... 3,769 4,129 3,710
Other, net...................................... 9,347 14,091 (2,581)
-------- -------- --------
Total deferred expense (benefit).................. 13,264 12,388 (9,773)
-------- -------- --------
Income tax expense................................ $198,724 $176,660 $143,947
======== ======== ========
</TABLE>
A reconciliation between the income tax expense computed by applying the
federal income tax rate (35%) to income before taxes and the income tax
expense reported in the financial statement is presented below.
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax at statutory percentage of GAAP
pretax income $200,649 $178,939 $149,185
Tax-exempt investment income.................... (9,493) (9,347) (10,185)
Goodwill........................................ 723 759 768
Tax on sale of subsidiary....................... -- -- (661)
Other........................................... 6,845 6,309 4,840
-------- -------- --------
Income tax expense.............................. $198,724 $176,660 $143,947
======== ======== ========
</TABLE>
57
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5.3 TAXES PAID
Income taxes paid amounted to approximately $168 million, $182 million, and
$90 million in 1997, 1996, and 1995, respectively.
5.4 TAX RETURN EXAMINATIONS
The Parent Company and the majority of its subsidiaries file a consolidated
federal income tax return. The Internal Revenue Service has completed
examinations of the Company's tax returns through 1988 and is currently
examining tax returns for 1989 through 1996. In addition, the tax returns of
companies recently acquired are also being examined. Although the final
outcome of any issues raised in examination is uncertain, the Company believes
that the ultimate liability, including interest, will not exceed amounts
recorded in the consolidated financial statements.
6. TRANSACTIONS WITH AFFILIATES
Affiliated notes and accounts receivable were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
--------------- ---------------
PAR BOOK PAR BOOK
VALUE VALUE VALUE VALUE
------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
American General Corporation, 9 3/8%, due 2008. $ 4,725 $ 3,288 $ 4,725 $ 3,239
American General Corporation, 8 1/4%, due 2004. 17,125 32,953 19,572 19,572
American General Corporation, Restricted
Subordinated Note, 13 1/2%, due 2002.......... 31,494 31,494 33,550 33,550
------- ------- ------- -------
Total notes receivable from affiliates......... 53,344 67,735 57,847 56,361
Accounts receivable from affiliates............ -- 28,784 -- 30,127
------- ------- ------- -------
Indebtedness from affiliates................... $53,344 $96,519 $57,847 $86,488
======= ======= ======= =======
</TABLE>
Various American General companies provide services to the Company,
principally mortgage servicing and investment advisory services. The Company
paid approximately $33,916,000, $22,083,000, and $21,006,000 for such services
in 1997, 1996, and 1995, respectively. Accounts payable for such services at
December 31, 1997 and 1996 were not material. In addition, the Company rents
facilities and provides services to various American General companies. The
Company received approximately $6,455,000, $1,255,000, and $2,086,000 for such
services and rent in 1997, 1996, and 1995, respectively. Accounts receivable
for rent and services at December 31, 1997 and 1996 were not material.
The Company has 8,500 shares of $100 par value cumulative preferred stock
authorized and outstanding with an $80 dividend rate, redeemable at $1,000 per
share after December 31, 2000. The holder of this stock, the Franklin Life
Insurance Company ("Franklin"), an affiliated company, is entitled to one vote
per share, voting together with the holders of common stock.
During 1996, the Company's residential mortgage loan portfolio of $42
million was sold to American General Finance at carrying value plus accrued
interest.
7. STOCK-BASED COMPENSATION
Certain officers of the Company participate in American General
Corporation's stock and incentive plans which provide for the award of stock
options, restricted stock awards, performance awards, and incentive awards to
key employees. Stock options constitute the majority of such awards. Expense
related to stock options is
58
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
measured as the excess of the market price of the stock at the measurement
date over the exercise price. The measurement date is the first date on which
both the number of shares that the employee is entitled to receive and the
exercise price are known. Under the stock option plans, no expense is
recognized, since the market price equals the exercise price at the
measurement date.
Under an alternative accounting method, compensation expense arising from
stock options would be measured at the estimated fair value of the options at
the date of grant. Had compensation expense for the stock options been
determined using this method, net income would have been as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net income as reported............................... $374,557 $334,595 $282,295
Net income pro forma................................. 373,328 334,029 281,821
</TABLE>
The average fair values of the options granted during 1997, 1996, and 1995
were $10.33, $7.07, and $6.93, respectively. The fair value of each option was
estimated at the date of grant using a Black-Scholes option pricing model. The
weighted average assumptions used to estimate the fair value of the stock
options were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Dividend yield.......................................... 3.0% 4.0% 4.0%
Expected volatility..................................... 22.0% 22.3% 23.0%
Risk-free interest rate................................. 6.4% 6.2% 6.9%
Expected life........................................... 6 YEARS 6 years 6 years
</TABLE>
8. BENEFIT PLANS
8.1 PENSION PLANS
The Company has noncontributory, defined benefit pension plans covering most
employees. Pension benefits are based on the participant's average monthly
compensation and length of credited service offset by an amount that complies
with federal regulations. The Company's funding policy is to contribute
annually no more than the maximum amount deductible for federal income tax
purposes. The Company uses the projected unit credit method for computing
pension expense.
The components of pension expense and underlying assumptions were as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Service cost-benefits earned during period........ $ 1,891 $ 1,826 $ 1,346
Interest cost on projected benefit obligation..... 2,929 2,660 2,215
Actual return on plan assets...................... (15,617) (9,087) (10,178)
Amortization of unrecognized net asset............ -- (261) (888)
Amortization of unrecognized prior service cost... 195 197 197
Deferral of net asset gain........................ 10,148 4,060 5,724
Amortization of gain.............................. -- 68 38
-------- ------- --------
Total pension income.............................. $ (454) $ (537) $ (1,546)
======== ======= ========
Assumptions:
Weighted average discount rate on benefit
obligation..................................... 7.25% 7.50% 7.25%
Rate of increase in compensation levels......... 4.00% 4.00% 4.00%
Expected long-term rate of return on plan
assets......................................... 10.00% 10.00% 10.00%
</TABLE>
59
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The funded status of the plans and the prepaid pension expenses included in
other assets at December 31 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligation:
Vested.................................................... $ 32,926 $ 27,558
Nonvested................................................. 3,465 4,000
Additional minimum liability.............................. -- 205
-------- --------
Accumulated benefit obligation.............................. 36,391 31,763
Effect of increase in compensation levels................... 7,002 5,831
-------- --------
Projected benefit obligation................................ 43,393 37,594
Plan assets at fair value................................... 80,102 65,159
-------- --------
Plan assets in excess of projected benefit obligation....... 36,709 27,565
Unrecognized net gain....................................... (23,548) (15,881)
Unrecognized prior service cost............................. 78 274
-------- --------
Prepaid pension expense..................................... $ 13,239 $ 11,958
======== ========
</TABLE>
More than 85% of the plan assets were invested in fixed maturity and equity
securities at the plan's most recent balance sheet date.
8.2 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company and its life insurance subsidiaries, together with certain other
insurance subsidiaries of the Parent Company, have life, medical, supplemental
major medical, and dental plans for certain retired employees and agents. Most
plans are contributory, with retiree contributions adjusted annually to limit
employer contributions to predetermined amounts. The Company has reserved the
right to change or eliminate these benefits at any time.
The life plans are fully insured. A portion of the retiree medical and
dental plans are funded through a voluntary employees' beneficiary association
("VEBA") established in 1994; the remainder is unfunded and self-insured. All
of the retiree medical and dental plans' assets held in the VEBA were invested
in readily marketable securities at its most recent balance sheet date.
The plans' combined funded status and the accrued postretirement benefit
cost included in other liabilities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31
---------------
1997 1996
------- ------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligation:
Retirees.................................................... $ 2,469 $5,199
Fully eligible active plan participants..................... 259 251
Other active plan participants.............................. 3,214 2,465
------- ------
Accumulated postretirement benefit obligation................. 5,942 7,915
Plan assets at fair value..................................... 159 106
------- ------
Accumulated postretirement benefit obligation in excess of
plan assets at fair value.................................... 5,783 7,809
Unrecognized net gain......................................... (1,950) (243)
------- ------
Accrued postretirement benefit cost........................... $ 3,833 $7,566
======= ======
Weighted-average discount rate on postretirement benefit
obligation 7.25% 7.50%
</TABLE>
60
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of postretirement benefit expense were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost-benefits earned..................................... $211 $218 $171
Interest cost on accumulated postretirement benefit obligation... 390 626 638
---- ---- ----
Postretirement benefit expense................................... $601 $844 $809
==== ==== ====
</TABLE>
9. DERIVATIVE FINANCIAL INSTRUMENTS
9.1 USE OF DERIVATIVE FINANCIAL INSTRUMENTS
The Company's use of derivative financial instruments is generally limited
to interest rate and currency swap agreements, and options to enter into
interest rate swap agreements (call swaptions). The Company accounts for its
derivative financial instruments as hedges. Hedge accounting requires a high
correlation between changes in fair values or cash flows or the derivative
financial instruments and the specific items being hedged, both at inception
and throughout the life of the hedge.
9.2 INTEREST RATE AND CURRENCY SWAP AGREEMENTS
Interest rate swap agreements are used to convert specific investment
securities from a floating to a fixed-rate basis, or vice versa, and to hedge
against the risk of rising prices on anticipated investment security
purchases. Currency swap agreements are infrequently used to effectively
convert cash flows from specific investment securities denominated in foreign
currencies into U.S. dollars at specified exchange rates, and to hedge against
currency rate fluctuations on anticipated investment security purchases.
The difference between amounts paid and received on swap agreements is
recorded on an accrual basis as an adjustment to net investment income or
interest expense, as appropriate, over the periods covered by the agreements.
The related amount payable to or receivable from counterparties is included in
other liabilities or assets.
The fair values of swap agreements are recognized in the consolidated
balance sheet if they hedge investments carried at fair value or if they hedge
anticipated purchases of such investments. In this event, changes in the fair
value of a swap agreement are reported in net unrealized gains on securities
included in shareholders' equity, consistent with the treatment of the related
investment security. For swap agreements hedging anticipated investment
purchases, the net swap settlement amount or unrealized gain or loss is
deferred and included in the measurement of the anticipated transaction when
it occurs.
Swap agreements generally have terms of two to ten years. Any gain or loss
from early termination of a swap agreement is deferred and amortized into
income over the remaining term of the related investment. If the underlying
investment is extinguished or sold, any related gain or loss on swap
agreements is recognized in income. Average floating rates may change
significantly, thereby affecting future cash flows.
61
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Interest rate and currency swap agreements related to investment securities
at December 31 were as follows:
<TABLE>
<CAPTION>
1997 1995
---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Interest rate swap agreements to pay fixed rate:
Notional amount..................................... $ 15 $ 60
Average receive rate................................ 6.74% 6.19%
Average pay rate.................................... 6.48% 6.42%
Interest rate swap agreements to receive fixed rate:
Notional amount..................................... $ 144 $ 44
Average receive rate................................ 6.89% 6.84%
Average pay rate.................................... 6.37% 6.01%
Currency swap agreements (receive U.S. dollars/pay
Canadian dollars):
Notional amount (in U.S. dollars)................... $ 139 $ 99
Average exchange rate............................... 1.50 1.57
</TABLE>
9.3 CALL SWAPTIONS
Options to enter into interest rate swap agreements are used to limit the
Company's exposure to reduced spreads between investment yields and interest
crediting rates should interest rates decline significantly over prolonged
periods. During such periods, the spread between investment yields and
interest crediting rates may be reduced as a result of certain limitations on
the Company's ability to manage interest crediting rates. Call swaptions allow
the Company to enter into interest rate swap agreements to receive fixed rates
and pay lower floating rates, effectively increasing the spread between
investment yields and interest crediting rates.
Premiums paid to purchase call swaptions are included in investments and are
amortized to net investment income over the exercise period of the swaptions.
If a call swaption is terminated, any gain is deferred and amortized to
insurance and annuity benefits over the expected life of the insurance and
annuity contracts and any unamortized premium is charged to income. If a call
swaption ceases to be an effective hedge, any related gain or loss is
recognized in income.
During 1997, the Company purchased call swaptions which expire in 1998.
These call swaptions had a notional amount of $1.35 billion and strike rates
ranging from 4.5% to 5.5% at December 31, 1997. Should the strike rates remain
below market rates, the call swaptions will expire and the Company's exposure
would be limited to the premiums paid.
9.4 CREDIT AND MARKET RISK
Derivative financial instruments expose the Company to credit risk in the
event of non-performance by counterparties. The Company limits this exposure
by entering into agreements with counterparties having high credit ratings and
by regularly monitoring the ratings. The Company does not expect any
counterparty to fail to meet its obligation; however, non-performance would
not have a material impact on the Company's consolidated results of operations
and financial position.
The Company's exposure to market risk is mitigated by the offsetting effects
of changes in the value of the agreements and the related items being hedged.
Derivative financial instruments related to investment securities did not
have a material effect on net investment income in 1997, 1996 or 1995.
62
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures About Fair Value of Financial Instruments,
requires disclosure of the fair value of financial instruments. This standard
excludes certain financial instruments and all nonfinancial instruments,
including policyholder liabilities for life insurance contracts from its
disclosure requirements. Care should be exercised in drawing conclusions based
on fair value, since (1) the fair values presented do not include the value
associated with all of the Company's assets and liabilities and (2) the
reporting of investments at fair value without a corresponding revaluation of
related policyholder liabilities can be misinterpreted.
Carrying amounts and fair values for those financial instruments covered by
SFAS 107 at December 31, 1997 are presented below:
<TABLE>
<CAPTION>
FAIR CARRYING
VALUE AMOUNT
------- --------
(IN MILLIONS)
----------------
<S> <C> <C>
Assets:
Fixed maturity and equity securities *....................... $27,408 $27,408
Mortgage loans on real estate................................ $ 1,702 $ 1,660
Policy loans................................................. $ 1,127 $ 1,094
Investment in parent company................................. $ 38 $ 38
Indebtedness from affiliates................................. $ 97 $ 97
Liabilities:
Insurance investment contracts............................... $24,011 $24,497
</TABLE>
- --------
* Includes derivative financial instruments with negative fair value of $4.2
million and $10.8 million and positive fair value of $7.2 million and $.6
million at December 31, 1997 and 1996, respectively.
The following methods and assumptions were used to estimate the fair values
of financial instruments:
FIXED MATURITY AND EQUITY SECURITIES
Fair values of fixed maturity and equity securities were based on quoted
market prices, where available. For investments not actively traded, fair
values were estimated using values obtained from independent pricing
services or, in the case of some private placements, by discounting
expected future cash flows using a current market rate applicable to yield,
credit quality, and average life of investments.
MORTGAGE LOANS ON REAL ESTATE
Fair value of mortgage loans was estimated primarily using discounted cash
flows based on contractual maturities and risk-adjusted discount rates.
POLICY LOANS
Fair value of policy loans was estimated using discounted cash flows and
actuarially determined assumptions incorporating market rates.
INVESTMENT IN PARENT COMPANY
The fair value of the investment in Parent Company is based on quoted
market prices of American General Corporation common stock.
INSURANCE INVESTMENT CONTRACTS
Insurance investment contracts do not subject the Company to significant
risks arising from policyholder mortality or morbidity. The majority of the
Company's annuity products are considered insurance
63
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
investment contracts. Fair value of insurance investment contracts was
estimated using cash flows discounted at market interest rates.
INDEBTEDNESS FROM AFFILIATES
Indebtedness from affiliates is composed of accounts receivable and notes
receivable from affiliates. Due to the short-term nature of accounts
receivable, fair value is assumed to equal carrying value. Fair value of
notes receivable was estimated using discounted cash flows based on
contractual maturities and discount rates that were based on U.S. Treasury
rates for similar maturity ranges.
11. DIVIDENDS PAID
American General Life Insurance Company paid $402 million, $189 million, and
$207 million in dividends on common stock to AGC Life Insurance Company in
1997, 1996, and 1995, respectively. The 1995 dividends included $701 thousand
in the form of furniture and equipment. In addition, in 1996, the Company paid
$680 thousand in dividends on preferred stock to Franklin.
12. RESTRICTIONS, COMMITMENTS, AND CONTINGENCIES
The Company and its insurance subsidiaries are restricted by state insurance
laws as to the amounts they may pay as dividends without prior approval from
their respective state insurance departments. At December 31, 1997,
approximately $2.6 billion of consolidated shareholders' equity represents net
assets of the Company which cannot be transferred, in the form of dividends,
loans, or advances to the Parent Company. Approximately $2.0 billion of
consolidated shareholders' equity is similarly restricted as to transfer from
its subsidiaries to the Company.
Generally, the net assets of the Company's subsidiaries available for
transfer to the Parent are limited to the amounts that the subsidiaries' net
assets, as determined in accordance with statutory accounting practices,
exceed minimum statutory capital requirements. However, payments of such
amounts as dividends may be subject to approval by regulatory authorities and
are generally limited to the greater of 10% of policyholders' surplus or the
previous year's statutory net gain from operations.
The Company has various leases, substantially all of which are for office
space and facilities. Rentals under financing leases, contingent rentals, and
future minimum rental commitments and rental expense under operating leases
are not material.
In recent years, various life insurance companies have been named as
defendants in class action lawsuits relating, to life insurance pricing and
sales practices, and a number of these lawsuits has resulted in substantial
settlements. The Company is a defendant in such purported class action
lawsuits, asserting claims related to pricing and sales practices. These
claims are being defended vigorously by the Company. Given the uncertain
nature of litigation and the early stages of this litigation, the outcome of
these actions cannot be predicted at this time. The Company nevertheless
believes that the ultimate outcome of all such pending litigation should not
have a material adverse effect on the Company's financial position; however,
it is possible that settlements or adverse determinations in one or more of
these actions or other future proceedings could have a material adverse effect
on results of operations for a given period. No provision has been made in the
consolidated financial statements related to this pending litigation because
the amount of loss, if any, from these actions cannot be reasonably estimated
at this time.
The Company is a party to various other lawsuits and proceedings arising in
the ordinary course of business. Many of these lawsuits and proceedings arise
in jurisdictions, such as Alabama, that permit damage awards
64
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
disproportionate to the actual economic damages incurred. Based upon
information presently available, the Company believes that the total amounts
that will ultimately be paid, if any, arising from these lawsuits and
proceedings will not have a material adverse effect on the Company's results
of operations and financial position. However, it should be noted that the
frequency of large damage awards, including large punitive damage awards, that
bear little or no relation to actual economic damages incurred by plaintiffs
in jurisdictions like Alabama continues to increase and creates the potential
for an unpredictable judgment in any given suit.
The increase in the number of insurance companies that are under regulatory
supervision has resulted, and is expected to continue to result, in increased
assessments by state guaranty funds to cover losses to policyholders of
insolvent or rehabilitated insurance companies. Those mandatory assessments
may be partially recovered through a reduction in future premium taxes in
certain states. At December 31, 1997 and 1996, the Company has accrued $7.6
million and $16.1 million, respectively, for guaranty fund assessments, net of
$4.3 million and $4.1 million, respectively, of premium tax deductions. The
Company has recorded receivables of $9.7 million and $10.9 million at December
31, 1997 and 1996, respectively, for expected recoveries against the payment
of future premium taxes. Expenses incurred for guaranty fund assessments were
$2.1 million, $6.0 million, and $22.4 million in 1997, 1996, and 1995,
respectively.
13. REINSURANCE
Reinsurance transactions for the years ended December 31, 1997, 1996, and
1995 were as follows:
<TABLE>
<CAPTION>
CEDED TO ASSUMED PERCENTAGE OF
GROSS OTHER FROM OTHER AMOUNT ASSUMED
AMOUNT COMPANIES COMPANIES NET AMOUNT TO NET
----------- ----------- ---------- ----------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1997
Life insurance in force. $45,963,710 $10,926,255 $4,997 $35,042,452 0.01%
=========== =========== ====== ===========
Premiums:
Life insurance and
annuities............ $ 100,357 $ 37,294 $ 75 $ 63,138 0.12%
Accident and health
insurance............ 1,208 172 -- 1,036 0.00%
----------- ----------- ------ -----------
Total premiums.......... $ 101,565 $ 37,466 $ 75 $ 64,174 0.12%
=========== =========== ====== ===========
DECEMBER 31, 1996
Life insurance in force. $44,535,841 $ 8,625,465 $5,081 $35,915,457 0.01%
=========== =========== ====== ===========
Premiums:
Life insurance and
annuities............ $ 104,225 $ 34,451 $ 36 $ 69,810 0.05%
Accident and health
insurance............ 1,426 64 -- 1,362 0.00%
----------- ----------- ------ -----------
Total premiums.......... $ 105,651 $ 34,515 $ 36 $ 71,172 0.05%
=========== =========== ====== ===========
DECEMBER 31, 1995
Life insurance in force. $44,637,599 $ 7,189,493 $5,771 $37,453,877 0.02%
=========== =========== ====== ===========
Premiums:
Life insurance and
annuities............ $ 103,780 $ 26,875 $ 171 $ 77,076 0.22%
Accident and health
insurance............ 1,510 82 -- 1,428 0.00%
----------- ----------- ------ -----------
Total premiums.......... $ 105,290 $ 26,957 $ 171 $ 78,504 0.22%
=========== =========== ====== ===========
</TABLE>
Reinsurance recoverable on paid losses was approximately $2,278,000,
$6,904,000, and $6,190,000 at December 31, 1997, 1996, and 1995, respectively.
Reinsurance recoverable on unpaid losses was approximately $3,210,000,
$4,282,000, and $2,775,000 at December 31, 1997, 1996, and 1995, respectively.
65
<PAGE>
AMERICAN GENERAL LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. ACQUISITIONS
Effective December 31, 1995, the Company purchased Franklin United Life
Insurance Company, a subsidiary of Franklin, which is a wholly owned
subsidiary of the Parent Company. This purchase was effected through issuance
of $8.5 million in preferred stock to Franklin. The acquisition was accounted
for using the purchase method of accounting and is not material to the
operations of the Company.
15. YEAR 2000 CONTINGENCY (UNAUDITED)
Management has been engaged in a program to render the Company's computer
systems (hardware and mainframe and personal applications software) Year 2000
compliant. The Company will incur internal staff costs as well as third-party
vendor and other expenses to prepare the systems for Year 2000. The cost of
testing and conversion of systems applications has not had, and is not
expected to have, a material adverse effect on the Company's results of
operations or financial condition. However, risks and uncertainties exist in
most significant systems development projects. If conversion of the Company's
systems is not completed on a timely basis, due to nonperformance by third-
party vendors or other unforeseen circumstances, the Year 2000 problem could
have a material adverse impact on the operations of the Company.
66
<PAGE>
INDEX OF WORDS AND PHRASES
This index should help you to locate more information about some of the
terms and phrases used in this prospectus.
<TABLE>
<CAPTION>
PAGE TO
SEE IN
THIS
DEFINED TERM PROSPECTUS
------------ ----------
<S> <C>
accumulation value........... 5
AGLC......................... 28
AGL.......................... 16
amount at risk............... 4
automatic rebalancing........ 4
basis........................ 18
beneficiary.................. 21
cash surrender value......... 9
close of business............ 22
Code......................... 17
cost of insurance rates...... 22
daily charge................. 6
date of issue................ 22
death benefit................ 5
dollar cost averaging........ 4
full surrender............... 9
Fund......................... 1
investment option............ 1
lapse........................ 8
Legacy Plus.................. 1
loan, loan interest.......... 9
maturity, maturity date...... 10
modified endowment contract.. 17
monthly deduction day........ 23
</TABLE>
<TABLE>
<CAPTION>
PAGE TO
SEE IN
THIS
DEFINED TERM PROSPECTUS
------------ ----------
<S> <C>
Mutual Fund............... 1
monthly insurance charge.. 6
Option 1, 2............... 5
partial surrender......... 9
payment option............ 10
planned periodic premium.. 8
Policy.................... 1
Policy loan............... 9
Policy month, year........ 22
preferred loan interest... 10
premium payments.......... 4
premiums.................. 4
prospectus................ 3
reinstate, reinstatement.. 8
SEC....................... 2
separate account.......... 16
Separate Account VL-R..... 16
seven-pay test............ 17
specified amount.......... 5
surrender................. 9
telephone transactions.... 12
transfers................. 4
valuation date, period.... 22
</TABLE>
We have filed a registration statement relating to Separate Account VL-R and
the Policy with the SEC. The registration statement, which is required by the
Securities Act of 1933, includes additional information that is not required
in this prospectus. If you would like the additional information, you may
obtain it from the SEC's main office in Washington, D.C. You will have to pay
a fee for the material.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS (OR ANY SALES
LITERATURE APPROVED BY AGL) IN CONNECTION WITH THE OFFER OF THE POLICIES, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED. THE POLICIES ARE NOT AVAILABLE IN ALL
JURISDICTIONS, AND THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY
JURISDICTION TO ANY PERSON TO WHOM SUCH OFFER WOULD BE UNLAWFUL THEREIN.
67
