<PAGE>
1933 Act Registration No.33-77470
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF
SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM
N-8B-2
POST-EFFECTIVE AMENDMENT NO. 4
SEPARATE ACCOUNT VUL-2
of
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
(Exact Name of Trust)
THE AMERICAN FRANKLIN LIFE ROSS D. FRIEND., ESQ.
INSURANCE COMPANY Senior Vice President,
(Name of Depositor) Secretary and General Counsel
#1 Franklin Square THE AMERICAN FRANKLIN LIFE
Springfield, Illinois 62713 INSURANCE COMPANY
(Address of Depositor's #1 Franklin Square
Principal Executive Offices) Springfield, Illinois 62713
(Name and Address of Agent for Service)
Insurance Company's Telephone Number,
including Area Code: (800) 528-2011
Copy to:
STEPHEN E. ROTH, ESQ.
SUTHERLAND, ASBILL & BRENNAN, L.L.P.
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
Securities Being Registered: Units of Interest in Separate Account VUL-2 issued
under EquiBuilder III flexible premium variable life policies.
Pursuant to Rule 24f-2 of the Investment Company Act of 1940, Registrant has
elected to register an indefinite number units of interest in Separate Account
VUL-2 under EquiBuilder III flexible premium variable life insurance policies.
Registrant filed a Form 24F-2 for the fiscal year ended December 31, 1996 on
February 26, 1997.
It is proposed that this filing will become effective (check appropriate box)
|_| immediately upon filing pursuant to paragraph (b)
|X| on April 30, 1997 pursuant to paragraph (b)
|_| 60 days after filing pursuant to paragraph (a) (i)
|_| on April 30, 1997 pursuant to paragraph (a) (i) of Rule 485
|_| this post-effective amendment designates a new effective date
for a previously filed post-effective amendment.
<PAGE>
SEPARATE ACCOUNT VUL-2 OF
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
Post-Effective Amendment No. 4
Reconciliation and Tie
Registration Item
of Form N-8B-2 Location in Prospectus
-------------- ----------------------
1.......................................... Cover Page.
2.......................................... Cover Page.
3.......................................... Inapplicable.
4.......................................... Distribution of the Policies.
5, 6, 7.................................... Separate Account Investment Choices
- The Separate Account and Its
Investment Divisions.
8.......................................... Index to Financial Statements.
9.......................................... Legal Proceedings.
10(a)...................................... The Beneficiary; Assignment of a
Policy.
10(b)...................................... Policy Account Value -
Determination of the Unit Value;
Dividends.
10(c), 10(d)............................... The Features of EquiBuilder III
Policies - Death Benefits, -
Maturity Benefit, - Changing the
Face Amount of Insurance; Separate
Account Investment Choices - Right
to Change Operations; Deductions
and Charges - Surrender Charge, -
Other Transaction Charges, -
Allocation of Policy Account
Charges; Policy Account
Transactions - Changing Premium and
Deduction Allocation Percentages, -
Transfers of Policy Account Value
Among Investment Divisions, -
Borrowing from the Policy Account,
- Withdrawing Money from the Policy
Account, - Surrendering the Policy
for Its Net Cash Surrender Value;
Additional Information About
EquiBuilder III Policies - Right To
Examine the Policy; Payment of
Proceeds; The Guaranteed Interest
Division - Transfers from the
Guaranteed Interest Division.
10(e)...................................... Additional Information About
EquiBuilder III Policies - Lapse of
the Policy, - Reinstatement of the
Policy.
10(f)...................................... Separate Account Investment Choices
- The Funds, - Right to Change
Operations; Voting Rights of a
Policy Owner.
10(g)(1), 10(g)(2), 10(h)(1), 10(h)(2)..... Separate Account Investment Choices
- The Funds, - Right to Change
Operations; Deductions and Charges
- Charges Against the Policy
Account - Changes in Monthly
Charges; Voting Rights of a Policy
Owner.
10(g)(3), 10(g)(4), 10(h)(3), 10(h)(4)..... Inapplicable.
10(i)...................................... The Features of EquiBuilder III
Policies - Changes in EquiBuilder
III Policies, - Flexible Premium
Payments, - Additional Benefits;
Separate Account Investment
Choices; Policy Account Value; Tax
Effects; Payment Options; Payment
of Proceeds.
<PAGE>
Registration Item
of Form N-8B-2 Location in Prospectus
-------------- ----------------------
11......................................... Separate Account Investment Choices
- The Funds, - Investment Policies
of the Portfolios of the Funds, -
Ownership of the Assets of the
Separate Account.
12(a), 12(c), 12(d)........................ Separate Account Investment Choices
- The Funds.
12(b), 12(e)............................... Inapplicable.
13(a)...................................... Summary - Investment Choices of
EquiBuilder III Policies, -
Deductions and Charges; Separate
Account Investment Choices - The
Investment Manager of the Funds;
Deductions and Charges.
13(b), 13(c), 13(d), 13(e), 13(g).......... Inapplicable.
13(f)...................................... Distribution of the Policies.
14......................................... The Features of EquiBuilder III
Policies - Policy Issuance
Information; Limitations on
American Franklin's Rights to
Challenge a Policy; Distribution of
the Policies - Applications.
15......................................... The Features of EquiBuilder III
Policies - Flexible Premium
Payments; Separate Account
Investment Choices (Introduction);
Deductions and Charges - Deductions
from Premiums; Policy Account
Transactions - Changing Premium and
Deduction Allocation Percentages.
16......................................... Separate Account Investment Choices
- (Introduction), - The Separate
Account and Its Investment
Divisions, - The Funds; Policy
Account Value - Amounts in the
Separate Account; Policy Account
Transactions - Changing Premium and
Deduction Allocation Percentages, -
Transfers of Policy Account Value
Among Investment Divisions, - Loan
Requests, - Repaying the Loan; The
Guaranteed Interest Division -
Transfers from the Guaranteed
Interest Division; Additional
Information About EquiBuilder III
Policies - Policy Periods,
Anniversaries, Dates and Ages.
17(a), 17(b), 17(c)........................ The Features of EquiBuilder III
Policies - Death Benefits, -
Maturity Benefit, - Changing the
Face Amount of Insurance, - Changes
in EquiBuilder III Policies, -
Flexible Premium Payments, -
Additional Benefits; Separate
Account Investment Choices - Right
to Change Operations; Policy
Account Value; Policy Account
Transactions - Changing Premium and
Deduction Allocation Percentages, -
Transfers of Policy Account Value
Among Investment Divisions, -
Borrowing from the Policy Account,
- Withdrawing Money from the Policy
Account, - Surrendering the Policy
for Its Net Cash Surrender Value;
The Guaranteed Interest Division -
Transfers from the Guaranteed
Interest Division; Additional
Information About EquiBuilder III
Policies - Right To Examine the
Policy, - Lapse of Policy, -
Reinstatement of the Policy; Tax
Effects; Payment Options; Payment
of Proceeds.
18(a)...................................... Policy Account Value -
Determination of the Unit Value.
18(b), 18(d)............................... Inapplicable.
<PAGE>
Registration Item
of Form N-8B-2 Location in Prospectus
-------------- ----------------------
18(c)...................................... Summary - Investment Choices of
EquiBuilder III Policies, -
Deductions and Charges; Separate
Account Investment Choices -
Ownership of the Assets of the
Separate Account; Deductions and
Charges - Charges Against the
Separate Account - Tax Reserve; The
Guaranteed Interest Division
(Introduction); Tax Effects.
19......................................... Reports to Policy Owners;
Distribution of the Policies;
Voting Rights of a Policy Owner.
20(a)...................................... Separate Account Investment Choices
- The Funds, - Right to Change
Operations; Deductions and Charges
- Charges Against the Policy
Account - Changes in Monthly
Charges; Voting Rights of a Policy
Owner.
20(b)...................................... Separate Account Investment Choices
- The Separate Account and Its
Investment Divisions.
20(c), 20(d), 20(e), 20(f)................. Inapplicable.
21(a)...................................... Policy Account Transactions -
Borrowing from the Policy Account,
- Loan Requests, - Policy Loan
Interest, - When Interest is Due, -
Repaying the Loan, - The Effects of
a Policy Loan on the Policy
Account; Tax Effects - Policy
Proceeds.
21(b), 21(c)............................... Inapplicable.
22......................................... Limits on American Franklin's Right
To Challenge a Policy.
23......................................... Inapplicable.
24......................................... The Features of EquiBuilder III
Policies; Additional Information.
25......................................... The American Franklin Life
Insurance Company.
26......................................... Inapplicable.
27......................................... The American Franklin Life
Insurance Company; Other Policies
and Contracts.
28......................................... The American Franklin Life
Insurance Company; Management.
29......................................... The American Franklin Life
Insurance Company; Management.
30, 31, 32, 33, 34......................... Inapplicable.
35......................................... The American Franklin Life
Insurance Company; Distribution of
the Policies.
36, 37..................................... Inapplicable.
38, 39..................................... Distribution of the Policies.
40......................................... Inapplicable.
41(a)...................................... Distribution of the Policies.
<PAGE>
Registration Item
of Form N-8B-2 Location in Prospectus
-------------- ----------------------
41(b), 41(c), 42, 43....................... Inapplicable.
44(a)(1)................................... Policy Account Value -
Determination of the Unit Value.
44(a)(2), 44(a)(3)......................... The Features of EquiBuilder III
Policies - Death Benefits, -
Maturity Benefit, - Changes in
EquiBuilder III Policies; Separate
Account Investment Choices -
(Introduction), - The Separate
Account and Its Investment
Divisions, - The Funds, - Right to
Change Operations; Deductions and
Charges; Policy Account Value;
Policy Account Transactions -
Changing Premium and Deduction
Allocation Percentages, - Transfers
of Policy Account Value Among
Investment Divisions, - Borrowing
from the Policy Account, - Loan
Requests, - Repaying the Loan, -
Withdrawing Money from the Policy
Account, - Surrendering the Policy
for Its Net Cash Surrender Value;
The Guaranteed Interest Division -
Transfers from the Guaranteed
Interest Division; Additional
Information About EquiBuilder III
Policies - Right To Examine the
Policy, - Policy Periods,
Anniversaries, Dates and Ages;
Payment of Proceeds.
44(a)(4)................................... Deductions and Charges - Charges
Against the Separate Account - Tax
Reserve; Tax Effects.
44(a)(5)................................... Deductions And Charges - Deductions
From Premiums.
44(a)(6)................................... Deductions And Charges - Deductions
From Premiums, - Charges Against
the Policy Account, - Charges
Against the Separate Account, -
Surrender Charge; Policy Account
Value - Amounts In the Separate
Account, - Determination of the
Unit Value.
44(b)...................................... The Features of EquiBuilder III
Policies - Death Benefits, -
Maturity Benefit, - Changes in
EquiBuilder III Policies; Separate
Account Investment Choices
(Introduction), - The Separate
Account and Its Investment
Divisions, - The Funds, - Right to
Change Operations; Deductions and
Charges; Policy Account Value;
Policy Account Transactions -
Changing Premium and Deduction
Allocation Percentages, - Transfers
of Policy Account Value Among
Investment Divisions, - Borrowing
from the Policy Account, - Loan
Requests, - Repaying the Loan, -
Withdrawing Money from the Policy
Account, - Surrendering the Policy
for Its Net Cash Surrender Value;
The Guaranteed Interest Division -
Transfers from the Guaranteed
Interest Division; Additional
Information About EquiBuilder III
Policies - Right To Examine the
Policy, - Policy Periods,
Anniversaries, Dates and Ages; Tax
Effects; Payment of Proceeds.
44(c) The Features of EquiBuilder III
Policies - Death Benefits, -
Maturity Benefit, - Changes in
EquiBuilder III Policies, -
Flexible Premium Payments; Separate
Account Investment Choices -
(Introduction), - The Separate
Account and Its Investment
Divisions, - The Funds; Deductions
and Charges; Policy Account Value;
Policy Account Transactions
Changing Premium and Deduction
Allocation Percentages, Transfers
of Policy Account Value Among
Investment Divisions, - Borrowing
from the Policy
<PAGE>
Registration Item
of Form N-8B-2 Location in Prospectus
-------------- ----------------------
Account, - Loan Requests, -
Repaying the Loan, Withdrawing
Money from the Policy Account, -
Surrendering the Policy for Its Net
Cash Surrender Value;The Guaranteed
Interest Division - Transfers from
the Guaranteed Interest Division;
Additional Information About
EquiBuilder III Policies - Right To
Examine the Policy, - Policy
Periods, Anniversaries, Dates and
Ages; Tax Effects; Payment of
Proceeds.
45......................................... Inapplicable.
46(a)...................................... The Features of EquiBuilder III
Policies - Death Benefits, -
Maturity Benefit, - Changes in
EquiBuilder III Policies; Separate
Account Investment Choices -
(Introduction), - The Separate
Account and Its Investment
Divisions, - the Funds, - Right to
Change Operations; Deductions and
Charges; Policy Account Value;
Policy Account Transactions -
Changing Premium and Deduction
Allocation Percentages, - Transfers
of Policy Account Value Among
Investment Divisions, - Borrowing
from the Policy Account, - Loan
Requests, - Repaying the Loan, -
Withdrawing Money from the Policy
Account, - Surrendering the Policy
for Its Net Cash Surrender Value;
The Guaranteed Interest Division -
Transfers from the Guaranteed
Interest Division; Additional
Information About EquiBuilder III
Policies - Right To Examine the
Policy, - Policy Periods,
Anniversaries, Dates and Ages; Tax
Effects; Payment of Proceeds.
46(b), 47, 48, 49, 50...................... Inapplicable.
51(a) - (j)................................ Summary; Detailed Information About
American Franklin and EquiBuilder
III Policies; Additional
Information.
52(a)...................................... Separate Account Investment Choices
- The Funds, - Right to Change
Operations.
52(b), 52(d)............................... Inapplicable.
52(c)...................................... Separate Account Investment Choices
- The Funds, - Right to Change
Operations; Deductions and Charges
- Charges Against the Policy
Account - Changes in Monthly
Charges; Voting Rights of a Policy
Owner.
53(a)...................................... Tax Effects; Payment Options;
Assignment of a Policy; Employee
Benefit Plans.
53(b), 54, 55, 56, 57, 58.................. Inapplicable.
59......................................... Financial Statements.
<PAGE>
================================================================================
Flexible Premium Variable Life Insurance Policy
EQUIBUILDER III(TM)
Issued by
The American Franklin Life Insurance Company
Prospectus Dated April 30, 1997
Principal Office of both Funds located at:
82 Devonshire Street
Boston, Massachusetts 02109
Variable Insurance Products Fund and
Variable Insurance Products Fund II
Prospectus Dated April 30, 1997
THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION NOR HAS THE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
EquiBuilder III is a trademark of The American Franklin Life Insurance Company
- --------------------------------------------------------------------------------
<PAGE>
EquiBuilder III(TM)
Flexible Premium Variable Life Insurance Policy
Issued by
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
This Prospectus describes EquiBuilder III, individual flexible premium
variable life insurance policies issued by The American Franklin Life Insurance
Company ("American Franklin"). EquiBuilder III policies provide life insurance
coverage with flexibility in death benefits, premium payments and investment
choices. Capitalized terms not otherwise defined on this cover page have the
meanings designated within this Prospectus. EquiBuilder III is a trademark of
American Franklin.
EquiBuilder III pays a death benefit to a beneficiary designated by the
Policy Owner when the Insured Person dies if the policy is still in effect. The
Policy Owner may choose Option A, a fixed death benefit that equals the Face
Amount of the policy, or Option B, a variable death benefit that equals the Face
Amount of the policy plus the value of the Policy Account established for the
policy as described in the next paragraph. Under either option, a death benefit
equal to a percentage of the Policy Account on the day the Insured Person dies
will be paid if that benefit would be greater.
American Franklin makes a deduction from each premium for sales expenses
(subject to an annual maximum deduction) and for any applicable premium taxes.
The net premium is put in the Policy Account established for each policy. The
Policy Owner may instruct American Franklin to allocate amounts in the Policy
Account to American Franklin's Guaranteed Interest Division (which is part of
American Franklin's General Account and pays interest at a declared guaranteed
rate) or to one or more of the investment divisions of American Franklin's
Separate Account VUL-2 (the "Separate Account"), or both. However, until the
first business day fifteen days after the Issue Date of the policy, the Policy
Account will be invested in the Money Market division. Money Market, High
Income, Equity-Income, Growth, Overseas, Investment Grade Bond, Asset Manager,
Index 500, Asset Manager: Growth and Contrafund divisions are available for
investment through the Separate Account.
Funds allocated to any of the investment divisions of the Separate Account
are invested in shares of a corresponding portfolio of either the Variable
Insurance Products Fund or the Variable Insurance Products Fund II
(individually, a "Fund," and collectively, the "Funds"), each of which is a
mutual fund. The Prospectus of the Funds, attached to this Prospectus, describes
the investment objectives, policies and risks of each of the portfolios of the
Funds. Ten portfolios of the Funds are currently available: Money Market, High
Income, Equity-Income, Growth, Overseas, Investment Grade Bond, Asset Manager,
Index 500, Asset Manager: Growth and Contrafund. See "Separate Account
Investment Choices - The Funds," below.
The value of a Policy Account allocated to the investment divisions of the
Separate Account will vary with the investment performance of the corresponding
portfolios of the Funds; there is no minimum guaranteed cash value for amounts
allocated to the investment divisions of the Separate Account and if the
investment
<PAGE>
performance of the corresponding portfolios of the Funds is adverse, the value
of a Policy Account can decline. The value of the Guaranteed Interest Division
will depend on the interest rates declared. A Policy Account will also be
increased by additional net premiums paid by the Policy Owner and will be
reduced by charges made by American Franklin for the cost of the insurance
provided by the policy and for expenses. A surrender charge may be imposed if a
policy is surrendered or lapses or if the Policy Owner reduces the policy's Face
Amount.
After the first premium, the Policy Owner may decide, within limits, the
amount and frequency of premium payments. The Policy Owner may also increase or
decrease the amount of insurance protection, within limits.
American Franklin's Home Office and principal executive office is #1
Franklin Square, Springfield, Illinois 62713, telephone (800) 528-2011.
Inquiries and notices should be addressed to American Franklin's Administrative
Office at that address.
The Policy Owner has the right to examine the policy offered hereby and
return it to American Franklin for a refund. See "Additional Information About
EquiBuilder III Policies - Right to Examine the Policy," below, for information
about the manner in which this right may be exercised and about limitations on
that right.
The policies described herein are not intended for use in connection with
qualified plans or trusts under the Internal Revenue Code.
This Prospectus should be read carefully for details on the policy being
offered and kept for future reference. This Prospectus is not valid unless it is
attached to the current Prospectus for the Funds.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Because of the deductions and charges applicable to the purchase of new
insurance offered hereby, it may not be to a purchaser's advantage to replace
existing insurance or, if a purchaser already owns a flexible premium insurance
policy, to acquire additional insurance through the purchase of a policy
described in this Prospectus.
THE PURCHASE OF THE POLICY INVOLVES CERTAIN RISKS. Because it is a
variable life insurance policy, the value of the Policy reflects the investment
performance of the selected investment divisions. Investment results can vary
both up and down and can even decrease the value of the premium payments.
Therefore, Policy Owners could lose all or part of the money they have invested.
American Franklin does not guarantee the value of the Policy. Rather, Policy
Owners bear all investment risks.
<PAGE>
Life insurance is intended to be a long-term investment. Policy Owners
should evaluate their insurance needs and the Policy's long-term investment
potential and risks before purchasing the Policy.
Partial withdrawals and surrender of the Policy are subject to tax, and
before the Policy Owner attains age 59 1/2, may also be subject to a 10% federal
penalty tax. Loans may be taxable if the policy becomes a "modified endowment
contract."
The date of this Prospectus is April 30, 1997
Copyright 1997 The American Franklin Life Insurance Company.
All rights reserved.
<PAGE>
TABLE OF CONTENTS
Page
----
Definitions................................................................ iv
Summary
Features of EquiBuilder III Policies....................................... 1
Investment Choices of EquiBuilder III Policies............................. 2
Deductions and Charges..................................................... 3
Policy Accounts............................................................ 5
Additional Information About EquiBuilder III Policies...................... 5
Detailed Information About American Franklin and EquiBuilder III Policies
The American Franklin Life Insurance Company............................... 6
The Features of EquiBuilder III Policies................................... 7
How EquiBuilder III Policies Differ from Whole Life Insurance......... 7
Death Benefits........................................................ 7
Policy Issuance Information........................................... 8
Maturity Benefit...................................................... 8
Changes in EquiBuilder III Policies................................... 8
Changing the Face Amount of Insurance................................. 9
Changing Death Benefit Options........................................ 9
When Policy Changes Go into Effect.................................... 10
Flexible Premium Payments............................................. 10
Additional Benefits................................................... 11
Disability Waiver Benefit........................................... 11
Accidental Death Benefit............................................ 11
Children's Term Insurance........................................... 11
Term Insurance on an Additional Insured Person...................... 11
Separate Account Investment Choices........................................ 11
The Separate Account and Its Investment Divisions..................... 11
The Funds............................................................. 12
Investment Policies of the Portfolios of the Funds.................... 12
The Investment Manager of the Funds................................... 13
Ownership of the Assets of the Separate Account....................... 14
Right to Change Operations............................................ 14
Deductions and Charges..................................................... 15
Deductions from Premiums.............................................. 15
Charges Against the Policy Account.................................... 15
Administrative Charge............................................... 15
Cost of Insurance Charge............................................ 16
Charges for Additional Benefits..................................... 16
Changes in Monthly Charges.......................................... 16
Charges Against the Separate Account.................................. 16
Mortality and Expense Risks......................................... 17
Charges Against the Funds........................................... 17
Tax Reserve......................................................... 17
Surrender Charge...................................................... 17
Other Transaction Charges............................................. 19
Partial Withdrawal of Net Cash Surrender Value...................... 19
Increase in the Face Amount of Insurance............................ 19
Transfers........................................................... 19
i
<PAGE>
TABLE OF CONTENTS (Continued)
Page
----
Illustrations....................................................... 19
Expenses of the Funds................................................. 19
Allocation of Policy Account Charges.................................. 20
Policy Account Value....................................................... 20
Amounts in the Separate Account....................................... 21
Determination of the Unit Value....................................... 21
Policy Account Transactions................................................ 22
Changing Premium and Deduction Allocation Percentages ................ 22
Transfers of Policy Account Value Among Investment Divisions.......... 22
Borrowing from the Policy Account..................................... 22
Loan Requests......................................................... 23
Policy Loan Interest.................................................. 23
When Interest is Due.................................................. 23
Repaying the Loan..................................................... 24
The Effects of a Policy Loan on the Policy Account.................... 24
Lapse of the Policy................................................... 24
Withdrawing Money from the Policy Account............................. 24
Withdrawal Charges.................................................... 25
The Effects of a Partial Withdrawal................................... 25
Surrendering the Policy for Its Net Cash Surrender Value.............. 25
The Guaranteed Interest Division........................................... 26
Amounts in the Guaranteed Interest Division........................... 26
Interest on Amounts in the Guaranteed Interest Division............... 26
Transfers from the Guaranteed Interest Division....................... 27
Additional Information About EquiBuilder III Policies...................... 27
Right to Examine the Policy........................................... 27
Lapse of the Policy................................................... 27
Reinstatement of the Policy........................................... 28
Policy Periods, Anniversaries, Dates and Ages......................... 28
Federal Tax Considerations................................................. 28
Introduction.......................................................... 28
Tax Status of the Policy.............................................. 29
Tax Treatment of Policy Benefits...................................... 30
American Franklin's Income Taxes...................................... 31
Income Tax Withholding................................................ 31
Illustrations of Death Benefits, Policy Account and Cash Surrender
Values, and Accumulated Premiums........................................... 32
Additional Information..................................................... 38
Voting Rights of a Policy Owner............................................ 38
Voting Rights of the Funds............................................ 38
Determination of Voting Shares........................................ 38
How Shares of the Funds Are Voted..................................... 38
Voting Privileges of Participants in Other Separate Accounts.......... 39
Separate Account Voting Rights........................................ 39
Reports to Policy Owners................................................... 39
Limits on American Franklin's Right to Challenge a Policy.................. 39
Payment Options............................................................ 40
The Beneficiary............................................................ 41
Assignment of a Policy..................................................... 41
Employee Benefit Plans..................................................... 41
Payment of Proceeds........................................................ 42
ii
<PAGE>
TABLE OF CONTENTS (Continued)
Page
----
Dividends.................................................................. 42
Distribution of the Policies............................................... 42
Applications.......................................................... 43
Reinsurance Agreement with Integrity Life Insurance Company................ 43
State Regulation........................................................... 43
Legal Matters.............................................................. 44
Legal Proceedings.......................................................... 44
Experts.................................................................... 44
Registration Statement..................................................... 44
Other Policies and Contracts............................................... 44
Management................................................................. 45
Financial Statements....................................................... F-1
THE POLICY IS NOT AVAILABLE IN ALL STATES. THIS PROSPECTUS DOES NOT CONSTITUTE
AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
AMERICAN FRANKLIN DOES NOT AUTHORIZE ANY INFORMATION OR REPRESENTATIONS
REGARDING THE OFFERING DESCRIBED IN THIS PROSPECTUS OTHER THAN AS CONTAINED IN
THIS PROSPECTUS OR ANY ATTACHED SUPPLEMENT THERETO OR IN ANY SUPPLEMENTAL SALES
MATERIAL AUTHORIZED BY AMERICAN FRANKLIN.
iii
<PAGE>
DEFINITIONS
Set forth below is a glossary of certain terms used in this Prospectus.
Administrative Office-The address of the Administrative Office of American
Franklin is #1 Franklin Square, Springfield, Illinois 62713-0001.
Age-The age of the Insured Person on his or her birthday nearest the date on
which a determination of the Insured Person's age is made.
American Franklin-The American Franklin Life Insurance Company, an Illinois
stock life insurance company and the issuer of the EquiBuilder III individual
flexible premium variable life insurance policies described in this Prospectus.
Amount at risk-The difference between the amount of the Policy Account and the
current death benefit of a policy at any time.
Cash Surrender Value-The amount of the Policy Account less any applicable
surrender charges.
Code-The Internal Revenue Code of 1986, as amended.
Date of Payment-Normally, the day of receipt by American Franklin at its
Administrative Office of a check for the full initial premium of a policy.
Face Amount-The face amount of insurance shown on the Policy Information page of
a policy. The Face Amount is the minimum death benefit payable under a policy
while the policy remains in effect. The death benefit proceeds will be reduced
by any outstanding loan and loan interest on the policy and any due and unpaid
charges.
Final Policy Date-The policy anniversary nearest the Insured Person's 95th
birthday. American Franklin will pay to the Policy Owner the amount of the
Policy Account, net of any outstanding loan and loan interest on the policy, if
the Insured Person is still living on the Final Policy Date.
Fund(s)-Each of Variable Insurance Products Fund, a "series" type mutual fund,
five portfolios of which are available for investment of amounts allocated to
the investment divisions of the Separate Account, and Variable Insurance
Products Fund II, a "series" type mutual fund having five portfolios in which
amounts allocated to the investment divisions of the Separate Account are
invested, is referred to as a Fund. Both are referred to collectively as the
Funds.
Guaranteed Interest Division-A part of American Franklin's General Account in
which amounts in a Policy Account other than those allocated to the Separate
Account earn interest at a rate stipulated in advance and guaranteed by American
Franklin.
Insured Person-The person whose life is insured under a policy.
Issue Date-The date that American Franklin actually issues a policy.
Net Cash Surrender Value-Cash Surrender Value less any outstanding loan and loan
interest on the policy.
Net premium-The amount of any premium paid by the Policy Owner less the amount
of applicable state and local premium taxes, if any, and less a sales expense
deduction equal to 5% of each premium paid during any policy year until total
premiums for that policy year equal the Target Premium.
Policy Account-The sum of amounts allocated to the investment divisions of the
Separate Account and American Franklin's Guaranteed Interest Division for a
particular policy.
iv
<PAGE>
Definitions (continued)
Policy anniversary-An anniversary of the Register Date of a policy while the
policy is in effect.
Policy month-A month-long period beginning on the Register Date and on the same
day in each subsequent calendar month while a policy is in effect.
Policy Owner-The person designated as such on the Policy Information page of a
policy.
Policy year-An annual period beginning on the Register Date and on each
anniversary of the Register Date while the policy is in effect.
Register Date-The earlier of the Issue Date or the Date of Payment.
Separate Account-Separate Account VUL-2, a segregated investment account of
American Franklin established under the Insurance Law of the State of Illinois
in which amounts in a Policy Account other than those in the Guaranteed Interest
Division are held for investment in one of the portfolios of the Funds. The
value of amounts in the Separate Account will fluctuate in accordance with the
performance of the corresponding portfolios of the Funds.
Target Premium-A hypothetical premium equal to the annual premium necessary to
maintain a fixed-benefit whole life policy with a face amount equal to the
initial Face Amount of an EquiBuilder III policy for a person of the same age
and sex as the Insured Person. The Target Premium for each EquiBuilder III
policy is shown on the Policy Information page of the policy.
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Summary
This Prospectus describes the regular EquiBuilder III(TM) policy. There
may be differences between a particular policy and the description contained
herein because of requirements of the state in which a policy is issued. These
differences will be reflected in the policy. Also American Franklin reserves the
right to make modifications in light of particular circumstances.
Unless indicated otherwise, the discussion of the terms of a
representative policy contained in this Prospectus assumes that there is no
policy loan outstanding, that the policy is not in a grace period and that state
variations will be covered by a supplement or a policy endorsement, as
appropriate.
The policies described herein are not intended for use in connection with
qualified plans or trusts under the Code.
The purpose of the policy offered hereby is to provide insurance
protection for a policy's beneficiary. The policy is not similar to or
comparable to a mutual fund's systematic investment plan.
The following Summary of this Prospectus should be read in conjunction
with the detailed information appearing elsewhere herein.
EquiBuilder III(TM) is a trademark of American Franklin.
Features of EquiBuilder III(TM) Policies
Insurance Benefit Options
EquiBuilder III policies offer insurance on the life of the Insured
Person. American Franklin will pay a death benefit when the Insured Person dies.
American Franklin will pay a maturity benefit in lieu of a death benefit if the
Insured Person is still living on the policy anniversary nearest his or her 95th
birthday. Two death benefit options are available.
Option A provides a death benefit equal to the Face Amount of the policy;
and
Option B provides a death benefit equal to the Face Amount of the policy,
plus the value of the Policy Account.
Option B entails a higher cost of insurance charge and will cause the
value of the Policy Account to be less than if Option A were chosen.
Under either option, a death benefit equal to a percentage multiple of the
Policy Account on the day the Insured Person dies will be paid if that death
benefit would be greater than the death benefit payable under the option
selected. Any outstanding loans or unpaid charges will be deducted before any
death benefits are paid. Proceeds may be paid in a lump sum or under a variety
of payment plans.
A policy will remain in force only so long as an amount remains in the
Policy Account sufficient to cover cost of insurance and other expense
deductions and any surrender charge that would then be due.
American Franklin will not issue an EquiBuilder III policy with a Face
Amount of less than $50,000.
See "The Features Of EquiBuilder III Policies-Death Benefits" and "Payment
Options" below.
Policy Accounts
An account (the "Policy Account") is established by American Franklin in
its records for each policy at the time of issue. After deduction of certain
charges from premiums, the balance of each premium is credited to the Policy
Account. A Policy Owner may allocate his or her Policy Account for investment to
the Guaranteed Interest Division, which pays a declared interest rate, or to one
or more of the investment divisions of the Separate Account, or both. See
"Separate Account Investment Choices," below. Until the first business day 15
days following the Issue Date of a policy, the initial net premium and all other
net premiums received during such period will be allocated to the Money Market
division of
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the Separate Account. See "Additional Information About EquiBuilder III Policies
- - Policy Periods, Anniversaries, Dates and Ages."
The value of the Policy Account reflects the amount and frequency of
premium payments, deductions and charges for the cost of insurance and expenses,
the investment experience of amounts allocated to the Separate Account, interest
earned on amounts allocated to the Guaranteed Interest Division, loans and
partial withdrawals. There is no minimum guaranteed Policy Account value with
respect to any amounts allocated to the investment divisions of the Separate
Account and, if the investment performance of the portfolios corresponding to
the investment divisions of the Separate Account is adverse, the value of a
Policy Account can decline. See "Policy Account Value," below.
Policy Changes
At any time after the first policy year while a policy is in force, the
Policy Owner may change the death benefit option chosen and may also increase or
decrease the Face Amount of the policy, within limits. See "The Features Of
EquiBuilder III Policies-Changes In EquiBuilder III Policies," "-Changing the
Face Amount of Insurance," and "-Changing Death Benefit Options," below. Certain
policy changes, such as a decrease in the Face Amount of a policy, may have
adverse federal tax consequences. See "Federal Tax Considerations," below.
Flexible Premium Payments
The frequency and the amount of premium payments are determined by the
Policy Owner, within certain limits. An initial minimum premium is required
based on the age, sex and risk class of the Insured Person and the Face Amount
of the policy. A Policy Owner may stipulate a planned periodic premium as a
guideline for future premiums, but if the planned premiums are not paid
insurance coverage will continue so long as the policy has sufficient Net Cash
Surrender Value to cover monthly charges. The Policy Owner need not pay premiums
of any set amount (except that the minimum premium is $100) or according to any
set schedule, but may have to make additional premium payments to keep the
policy in force if the policy's Net Cash Surrender Value is insufficient to
cover monthly charges. Payment of stipulated planned periodic premiums may not
always provide sufficient Net Cash Surrender Value to cover monthly charges. See
"The Features of EquiBuilder III Policies-Flexible Premium Payments," below.
Additional Benefits May Be Available
Additional benefits to the policy may be added by rider. These benefits
may include an accidental death benefit, life insurance for additional insured
persons, life insurance for children and a disability waiver benefit to waive
the cost of monthly deductions. The cost of any additional benefits will be
deducted monthly from the Policy Account. See "The Features of EquiBuilder III
Policies-Additional Benefits," below.
Investment Choices of EquiBuilder III Policies
A Policy Owner may allocate amounts in his or her Policy Account for
investment to either the Guaranteed Interest Division, which pays interest at a
declared rate, or to any one or more of the investment divisions of the Separate
Account, or both. The current investment divisions are:
Money Market
High Income
Equity-Income
Growth
Overseas
Investment Grade Bond
Asset Manager
Index 500
Asset Manager: Growth
Contrafund
Amounts allocated to any of the investment divisions are invested by American
Franklin in shares of a corresponding portfolio of the Variable Insurance
Products
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Fund or of the Variable Insurance Products Fund II (individually, a "Fund," and
collectively, the "Funds"), each of which is a "series" type mutual fund. The
portfolios of the Funds have different investment objectives, policies and
risks. See "Separate Account Investment Choices - The Funds," below.
In order to effect allocations to the investment divisions of the Separate
Account, American Franklin will purchase and redeem shares of the corresponding
portfolios of the Funds according to the Policy Owner's premium and deduction
allocation percentages, respectively. The shares of the Funds are sold
exclusively to separate accounts of insurance companies. Purchase and redemption
of shares will be made at net asset value through Fidelity Distributors
Corporation ("FDC") acting as distributor for the Funds.
Fidelity Management & Research Company ("Fidelity Management") is the
investment manager of the Funds. Fidelity Management is registered with the
Securities and Exchange Commission under the Investment Advisers Act of 1940.
See "Separate Account Investment Choices - The Investment Manager of the Funds,"
below, for information concerning the advisory fees that the Funds pay to
Fidelity Management.
Fidelity is one of America's largest investment management organizations.
It includes a number of different companies, which provide a variety of
financial services and products. Each portfolio of the Funds employs various
Fidelity companies to perform certain activities required for its operation.
Fidelity Management is the original Fidelity company, founded in 1946. It
provides a number of mutual funds and other clients with investment research and
portfolio management services. It maintains a large staff of experienced
investment personnel and a full complement of related support facilities. As of
March 31, 1997, Fidelity Management advised funds having more than 29 million
shareholder accounts with a total value of more than $432 billion.
For a full description of the Funds, see the Prospectus of the Funds,
which is attached to this Prospectus, and the Statements of Additional
Information of the Funds referred to therein. Certain portfolios described in
the Prospectus of the Funds are not available under the policy. See also
"Separate Account Investment Choices" and "The Guaranteed Interest Division,"
below.
Deductions and Charges
Deductions from Premiums
A deduction for any applicable taxes is made from premium payments. The
amount of tax will vary from one jurisdiction to another. Taxes currently range
up to 5%. In addition, American Franklin makes a sales expense deduction equal
to 5% of each premium paid during any policy year until total premiums for the
policy year equal the Target Premium. This deduction is designed to recover some
expenses of distributing policies. A contingent deferred sales charge may also
be imposed during the first ten policy years if a policy is surrendered or
lapses or the Face Amount is reduced. After such deduction, the balance (the
"net premium") is placed in the Policy Account. See "Deductions and
Charges-Deductions from Premiums" and "Deductions and Charges-Surrender Charge,"
below.
Charges Against the Policy Account
Certain amounts are charged against every Policy Account by American
Franklin at the beginning of each policy month. These are:
an administrative charge (currently $6 per month plus an additional
charge of $24 per month for each of the first 12 months a policy is in
effect);
a charge for additional benefits, if any; and
a cost of insurance charge, which is based on the Insured Person's
age, sex and risk class, and the amount of insurance.
American Franklin guarantees that the monthly administrative and cost of
insurance charges against the Policy Account will never be more than the maximum
amounts shown in each policy.
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In addition, charges will be made upon each of the following:
a partial withdrawal of Net Cash Surrender Value (currently $25 or
2% of the amount withdrawn, whichever is less);
an increase in the Face Amount of insurance (currently a $1.50
administrative charge for each $1,000 increase, up to a maximum charge of
$300); or
a transfer between investment divisions in any policy year in which
four transfers have already been made (up to $25 for each additional
transfer).
The Policy Owner generally may specify the manner in which charges against
the Policy Account are to be allocated. See "Deductions and Charges-Charges
Against the Policy Account" and "Deductions and Charges-Other Transaction
Charges," below.
Charges Against the Separate Account
American Franklin imposes a daily charge at an effective annual rate of
.75% of the value of the assets in the investment divisions of the Separate
Account for certain mortality and expense risks that American Franklin assumes.
In addition, the value of the assets in the investment divisions of the Separate
Account will be effected by investment management fees and other direct expenses
of the Funds. See "Deductions and Charges-Charges Against the Separate Account,"
below.
Surrender Charge
During the first ten policy years, a surrender charge will be deducted
from the Policy Account if:
the policy is surrendered for its Net Cash Surrender Value; or
the policy is permitted to lapse at the end of a grace period.
Any request for a reduction of the Face Amount of a policy during
the first ten policy years will be considered a partial surrender and a pro rata
portion of the surrender charge will be deducted. The maximum total surrender
charge applicable to a particular policy is specified in the policy and is
approximately equivalent to 50% of one "target" premium, which is based on the
annual premium for a fixed whole life insurance policy on the life of the
Insured Person. At the end of the sixth policy year and at the end of each of
the four succeeding policy years, the maximum surrender charge is reduced by an
amount equal to 20% of the initial maximum surrender charge until, after the end
of the tenth policy year, there is no surrender charge. Subject to the maximum
surrender charge, the surrender charge will equal 25% of actual premiums paid
during the first policy year up to one target premium plus 9% of all other
premiums actually paid. The surrender charge is a contingent deferred sales
charge designed to recover some expenses of distributing policies which are
surrendered in their early years. See "Deductions and Charges-Surrender Charge,"
below. The expenses of distributing policies are also recovered through a sales
expense deduction in the amount of 5% of each premium paid during any policy
year until total premiums for that policy year equal the Target Premium. See
"Deductions and Charges-Deductions from Premiums," below.
Other Transaction Charges
Charges will also be imposed for certain illustrations of expected death
benefits and policy account values. See "Deductions and Charges - Other
Transaction Charges."
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Policy Accounts
Transfers Among Investment Divisions
A Policy Owner may transfer amounts in the Policy Account among the
investment divisions. Transfers among investment divisions of the Separate
Account or into the Guaranteed Interest Division take effect on the date
American Franklin receives the request for transfer from the Policy Owner.
Transfers out of the Guaranteed Interest Division may be made only on or within
30 days after a policy anniversary and are limited in amount. Minimum amounts
are required for each transfer, usually $500. If more than four transfers a
policy year are made, an administrative charge may be deducted from the Policy
Account. See "Policy Account Transactions-Transfers of Policy Account Value
Among Investment Divisions" and "The Guaranteed Interest Division-Transfers from
the Guaranteed Interest Division," below.
Borrowing Against the Policy Account
The Policy Owner may borrow a total amount up to 90% of the Cash Surrender
Value of his policy using the policy as security for the loan. A minimum loan
amount, usually $500, will be stated in the policy. Policy loan interest accrues
daily at a rate adjusted annually. For more information see "Policy Account
Transactions-Borrowing from the Policy Account," below. Loans are deducted from
the amount payable on surrender of the Policy and are also deducted from any
death benefit payable. Loan interest accrues daily and, if it is not repaid each
year, it is capitalized. Depending upon investment performance of the investment
divisions and the amounts borrowed, loans may cause a Policy to lapse. If the
Policy is not a modified endowment contract, lapse of the Policy with loans
outstanding may result in adverse tax consequences. (See "Federal Tax
Considerations.")
Withdrawing Cash from the Policy Account
After a policy has been in effect for a year, the Policy Owner may make a
partial withdrawal of Net Cash Surrender Value from the Policy Account. The
current minimum withdrawal is $500, and each withdrawal is subject to certain
other requirements. A charge (currently $25 or 2% of the amount withdrawn,
whichever is less) will be deducted from the Policy Account for each withdrawal.
See "Policy Account Transactions-Withdrawing Money from the Policy Account,"
below.
Surrendering the Policy for Cash
Each EquiBuilder III policy has a Cash Surrender Value, which is the
difference between the value of the Policy Account and any surrender charge
which applies during the first ten policy years. If the policy is surrendered
for cash, the Policy Owner will receive the Net Cash Surrender Value, which is
the Cash Surrender Value less any outstanding loan and loan interest due. See
"Policy Account Transactions-Surrendering the Policy for Its Net Cash Surrender
Value," below. During the initial policy years, the applicable surrender charge
may represent a substantial portion of the premiums paid. See "Illustrations of
Death Benefits, Policy Account and Cash Surrender Values, and Accumulated
Premiums," below.
Additional Information About EquiBuilder III Policies
Right to Examine the Policy
The Policy Owner has the right to examine the policy and to return it to
American Franklin for a refund. A refund request must be postmarked by the
latest of:
10 days after the Policy Owner receives the policy;
10 days after American Franklin mails the Policy Owner a notice of
this right; or 45 days after the Policy Owner signed the application
for the policy.
See "Additional Information About EquiBuilder III Policies-Right to Examine the
Policy," below.
Federal Tax Considerations of EquiBuilder III Policies
Generally, the death benefit paid to the beneficiary of a policy is not
subject to federal income tax. In addition, under current federal tax law, the
Policy Owner does not have to pay income tax on any
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earnings in the Policy Account as long as they remain in the Policy Account. The
federal tax treatment of distributions from a policy (including loans,
assignments, pledges, partial withdrawals and distributions on maturity, lapse
or surrender) may depend on whether the policy is treated as a "modified
endowment contract." A policy will be treated as a modified endowment contract
if, in general, the cumulative amount of premiums paid during specified periods
exceeds certain levels relating to death benefits provided under the policy. See
"Federal Tax Considerations," below.
Lapse of the Policy
A policy can lapse if the Net Cash Surrender Value is insufficient to pay
monthly charges. This situation can result even while a Policy Account has
positive value if potential surrender charges and policy loans are large enough
so that there is not enough left to cover monthly charges. Payment of planned
premiums does not guarantee the continuation of the policy. Also, failure to pay
premiums will not automatically cause the policy to terminate. However,
additional premium payments will be needed if the Net Cash Surrender Value is
not sufficient to pay monthly charges. American Franklin will give the Policy
Owner notice that additional premiums are required before a policy is
terminated. See "Additional Information About EquiBuilder III Policies-Lapse of
the Policy," below.
Inquiries and Notices
All inquiries and notices regarding the policies should be directed to
American Franklin at its Administrative Office at #1 Franklin Square,
Springfield, Illinois 62713-0001. Currently, certain transactions under the
policies may be effected by telephone. American Franklin reserves the right to
suspend telephone transaction privileges at any time. American Franklin will
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine, and if these procedures are followed, will not be liable
for any losses due to unauthorized or fraudulent instructions. Procedures
followed for telephone transactions may involve requiring some form of personal
identification, providing written confirmation of the transaction, and recording
telephone instructions.
Detailed Information About American Franklin and EquiBuilder III Policies
The American Franklin Life Insurance Company
The American Franklin Life Insurance Company ("American Franklin") is a
legal reserve stock life, accident and health insurance company organized under
the laws of the State of Illinois in 1981. It is engaged in the writing of
variable universal life insurance and variable annuities. American Franklin has
another separate account (Separate Account VUL) which issues interests in
variable insurance policies having policy features that are similar to those of
EquiBuilder III policies but the assets of which are invested in a different
open-end management investment company. American Franklin no longer offers new
policies having an interest in Separate Account VUL. American Franklin also has
a separate account which issues interests in variable annuities. American
Franklin is presently authorized to write insurance in forty-six states, the
District of Columbia and Puerto Rico. American Franklin's home office is located
at #1 Franklin Square, Springfield, Illinois 62713.
American Franklin is a wholly-owned subsidiary of The Franklin Life
Insurance Company ("The Franklin"). The Franklin is a legal reserve stock life
insurance company organized under the laws of the State of Illinois in 1884. The
Franklin issues individual life insurance, annuity and accident and health
insurance policies, group annuities and group life and health insurance and
offers a variety of whole life, life, retirement income and level and decreasing
term insurance plans. Its home office is located at #1 Franklin Square,
Springfield, Illinois 62713. The Franklin is not the issuer of the policies
offered by this Prospectus, however, it has certain indirect obligations in
respect to those policies arising from The Franklin's undertakings to the
issuer, American Franklin, as a reinsurer of portions of the death benefits
provided under the policies.
American General Corporation ("American General") through its wholly-owned
subsidiary, AGC Life Insurance Company, owns all of the outstanding shares of
common stock of The Franklin. The address of AGC Life Insurance Company is
American General Center, Nashville, Tennessee 37250-0001. The address of
American General is 2929 Allen Parkway, Houston, Texas 77019-2155.
American General is one of the largest diversified financial services
organizations in the United States. American General's operating subsidiaries
are leading providers of retirement services,
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<PAGE>
consumer loans, and life insurance. American General was incorporated as a
general business corporation in Texas in 1980 and is the successor to American
General Insurance Company, an insurance company incorporated in Texas in 1926.
American General has advised American Franklin that there was no person
who was known to it to be the beneficial owner of 10% or more of the voting
power of American General as of January 29, 1997.
The Features of EquiBuilder III Policies
How EquiBuilder III Policies Differ from Whole Life Insurance
EquiBuilder III policies are designed to provide life insurance coverage
with flexibility in death benefits, premium payments and investment choices.
EquiBuilder III policies are different from traditional whole life insurance in
that the Policy Owner is not required to pay scheduled premiums and may, within
limits, choose the amount and frequency of premium payments. EquiBuilder III
policies also provide for two different types of death benefit options and the
Policy Owner may change options. Another feature of EquiBuilder III policies
which is not available under traditional whole life insurance is that the Policy
Owner generally has the ability to increase or decrease the Face Amount without
purchasing a new policy. However, evidence of insurability may be required. In
addition, the Policy Owner may direct the investment of net premiums, which will
determine, in part, the value of the Policy Account.
Death Benefits
American Franklin will pay a death benefit (net of any policy loan and
loan interest and any overdue charges) to the beneficiary of a policy when the
Insured Person dies. The Policy Owner may choose from two death benefit options:
Option A and Option B. Option A provides a benefit that equals the Face Amount
of the policy. Except as described below, the Option A benefit is fixed. Option
B provides a benefit that equals the Face Amount of the policy plus the amount
in the Policy Account on the day the Insured Person dies. Under Option B, the
value of the benefit is variable and fluctuates with the amount in the Policy
Account. Option B entails a higher monthly cost of insurance charge than Option
A and will cause the value of the Policy Account, and hence the Net Cash
Surrender Value of the policy, to be less than if Option A were chosen, all
other things being equal.
Under both options, an alternate death benefit based on provisions of the
federal income tax law applies if it would provide a greater benefit (before
deductions for any outstanding policy loan and loan interest) than the option
selected. This benefit is a percentage multiple of the amount in the Policy
Account. The percentage declines as the Insured Person gets older. The benefit
will be the amount in the Policy Account on the day the Insured Person dies
multiplied by the percentage for the Insured Person's age (as of his or her
nearest birthday) at the beginning of the policy year of the Insured Person's
death. For ages that are not shown on the table set forth below, the applicable
percentages will decrease by a ratable portion for each full year.
Table of Death Benefits
Based On Policy Account Values
- --------------------------------------------------------------------------------
Minimum Death Benefit As Percentage
Insured Person's Age Of The Policy Account
- --------------------------------------------------------------------------------
40 or under 250%
45 215
50 185
55 150
60 130
65 120
70 115
75 to 90 105
95 100
For example, if the Insured Person were 40 years old and the amount in the
Policy Account were $100,000, the death benefit would be at least $250,000 (250%
of $100,000).
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These percentages are based on provisions of federal tax law which require
a minimum death benefit in relation to cash value for a policy to qualify as
life insurance. See "Federal Tax Considerations," below.
Under either Option A or Option B, the length of time a policy remains in
force depends on the Net Cash Surrender Value of the policy. Because the charges
that maintain the policy are deducted from the Policy Account, coverage will
last as long as the Net Cash Surrender Value (the amount in the Policy Account
minus the surrender charge and any outstanding policy loan and loan interest)
can cover these deductions. (See "Additional Information about EquiBuilder III
Policies-Lapse of the Policy," below.) The investment experience (which may be
either positive or negative) of any amounts in the investment divisions of the
Separate Account and the interest earned in the Guaranteed Interest Division
will affect the amount in the Policy Account. As a result, the returns from
these divisions will affect the length of time a policy remains in force. See
"Policy Account Value," below.
Policy Owners who prefer to have insurance coverage that varies with the
investment experience of their Policy Account should choose Option B. In no
event will the death benefit under Option B be less than the greater of the Face
Amount of the policy or the alternate death benefit described above (in either
case, less any outstanding policy loan and loan interest). Policy Owners who
prefer to have insurance coverage that does not vary in amount and that has
lower cost of insurance charges should choose Option A.
Policy Issuance Information
American Franklin will not issue a new policy having a Face Amount that is
less than $50,000 nor will it issue a policy in respect of an Insured Person who
is older than 75.
No insurance under a policy will take effect: (a) until a policy is
delivered and the full initial premium is paid while the person proposed to be
insured is living and (b) unless the information in the application continues to
be true and complete, without material change, as of the time the premium is
paid.
See "The Features of EquiBuilder III Policies-Flexible Premium Payments"
and "Distribution of the Policies-Applications," below for additional
information concerning procedures for obtaining a policy.
Maturity Benefit
If the Insured Person is still living on the policy anniversary nearest
his or her 95th birthday, American Franklin will pay the Policy Owner the amount
in the Policy Account net of any outstanding loan and loan interest. The policy
will then end.
Changes in EquiBuilder III Policies
EquiBuilder III policies provide the Policy Owner flexibility to choose
from a variety of strategies, described in the sections that follow, which
enable the Policy Owner to increase or decrease his or her insurance protection.
A reduction in Face Amount lessens emphasis on the policy's insurance
coverage by reducing both the death benefit and the amount at risk (the
difference between the current death benefit under the policy and the amount of
the Policy Account). The reduced amount at risk results in lower cost of
insurance charges against the Policy Account. See "The Features of EquiBuilder
III Policies-Changing the Face Amount of Insurance," below. A partial withdrawal
of Net Cash Surrender Value reduces the Policy Account and death benefit while
providing a cash payment, but does not reduce the amount at risk or the cost of
insurance charges. See "Policy Account Transactions-Withdrawing Money from the
Policy Account," below. Choosing not to make premium payments may have the
effect of reducing the Policy Account. Reducing the Policy Account will, under
Option A, increase the amount at risk (and thereby increase cost of insurance
charges) while leaving the death benefit unchanged; under Option B, it will
decrease the death benefit while leaving the amount at risk and the cost of
insurance charge unchanged. See "The Features of EquiBuilder III
Policies-Flexible Premium Payments," below.
Increases in the Face Amount emphasize insurance coverage by increasing
both the death benefit and the amount at risk. See "The Features of EquiBuilder
III Policies-Changing the Face Amount of
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Insurance," below. Additional premium payments may increase the Policy Account,
which has the effect, under Option A, of reducing the amount at risk and cost of
insurance charge while leaving the death benefit unchanged, or, under Option B,
of increasing the death benefit while leaving the amount at risk and cost of
insurance charge unchanged. See "The Features of EquiBuilder III
Policies-Flexible Premium Payments," below.
Changing the Face Amount of Insurance
Any time after the first policy year while a policy is in force, the
Policy Owner may change the policy's Face Amount. This may be done by sending a
written request to American Franklin's Administrative Office. Any change will be
subject to American Franklin's approval and the following conditions:
If the Face Amount is to be increased, satisfactory evidence that
the Insured Person is still insurable must be provided. American
Franklin's current procedure if the Insured Person has become a more
expensive risk is to ask the Policy Owner to confirm that he or she wishes
to pay higher cost of insurance charges on the amount of the increase.
Any increase in the Face Amount must be at least $10,000. Monthly
deductions from the Policy Account for the cost of insurance will
increase, beginning on the date the increase in the Face Amount takes
effect. In addition, a one-time administrative charge for each increase
will be made against the Policy Account. This charge is currently $1.50
for each additional $1,000 of insurance up to a maximum charge of $300. An
increase in the Face Amount will not increase the maximum surrender
charge.
The Face Amount may not be reduced below the minimum American
Franklin requires to issue a policy at the time of the reduction. Monthly
charges against the Policy Account for the cost of insurance will decrease
if the Face Amount is reduced. If the Face Amount is reduced during the
first ten policy years, a pro rata share of the applicable surrender
charge will be made against the Policy Account. See `'Deductions and
Charges-Surrender Charge," below.
American Franklin's current procedure is to disapprove a requested
decrease in the Face Amount if it would cause the alternate death benefit to
apply. Instead, the Policy Owner will be requested to make a partial withdrawal
of Net Cash Surrender Value from the Policy Account and then a decrease in the
Face Amount. See "The Features of EquiBuilder III Policies-Death Benefits,"
below.
American Franklin's current procedure, if the Policy Owner requests a Face
Amount decrease when there has been a previous increase in the Face Amount, is
to apply the decrease first against the most recent increase in the Face Amount.
Decreases will then be applied to prior increases in the Face Amount in the
reverse order in which such increases took place, and then to the original Face
Amount.
Policy changes that result in a reduction of the death benefit, such as a
decrease in the Face Amount, may cause a policy to become a "modified endowment
contract." See "Federal Tax Considerations," below.
Changing Death Benefit Options
At any time after the first policy year while a policy is in force, the
Policy Owner may change the death benefit option by sending a written request to
American Franklin's Administrative Office. If the death benefit is changed from
Option A to Option B, the Face Amount will be decreased by the amount in the
Policy Account on the date of the change. Such a change may not be permitted if
it would reduce the Face Amount below the minimum American Franklin requires to
issue a policy at the time of the reduction. If the death benefit is changed
from Option B to Option A, the Face Amount of insurance will be increased by the
amount in the Policy Account on the date of the change.
No evidence of insurability will be required for the increase in the Face
Amount that occurs when a change is made from Option B to Option A, nor will any
charge be made for this increase. No surrender charge is made for the decrease
in the Face Amount that occurs when a change is made from Option A to Option B.
These increases and decreases in the Face Amount are made so that the amount of
the death benefit remains the same on the date of the change. When the death
benefit remains the same, there is no change in the net amount at risk, which is
the amount on which cost of insurance charges are
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based (see "Deductions and Charges-Charges Against the Policy Account-Cost of
Insurance Charge," below).
When Policy Changes Go into Effect
Any change in the Face Amount or death benefit option of a policy will go
into effect at the beginning of the policy month following the date American
Franklin approves a request for the change. After a request is approved,
American Franklin will send the Policy Owner a written notice of the approval
showing each change. The Policy Owner should attach this notice to his or her
policy. American Franklin may also request that the policy be returned to its
Administrative Office so that the appropriate changes may be made.
In some cases, a change requested by the Policy Owner may not be approved
because it might disqualify the policy as life insurance under applicable
federal tax law. American Franklin will send the Policy Owner a written notice
of its decision to disapprove any requested change for this reason. See "Federal
Tax Considerations," below.
Flexible Premium Payments
The Policy Owner may choose the amount and frequency of premium payments,
as long as they are within the limits described below. Even though premiums are
flexible, the Policy Information page of each policy will show a "planned"
periodic premium. The planned premium is determined by the Policy Owner within
limits set by American Franklin when the Policy Owner applied for a policy and
is not necessarily designed to equal the amount of premiums that will keep the
policy in effect. Planned premiums are generally the amount the Policy Owner
decides he or she wants to pay and can be changed at any time.
The Policy Owner must pay a minimum initial premium on or before the date
on which the policy is delivered by American Franklin. The insurance will not go
into effect until American Franklin receives this minimum initial premium.
American Franklin determines the applicable minimum initial premium based on the
age, sex and risk class of the Insured Person, the initial Face Amount of the
policy and any additional benefits selected. The first premium payment may be
made by check or money order payable to "The American Franklin Life Insurance
Company." Any additional premiums should be made by check or money order payable
to "The American Franklin Life Insurance Company" and should be sent directly to
its Administrative Office.
American Franklin will send the Policy Owner premium reminder notices
based on the planned premium unless the Policy Owner requests American Franklin
not to do so in his or her application or by writing to American Franklin's
Administrative Office. Nevertheless, the Policy Owner may make the planned
payment, skip the planned payment or change the frequency or the amount of the
payment.
Generally, the Policy Owner may pay other premiums at any time and in any
amount, as long as each payment is at least $100. (Policies issued in some
states may have different minimum premium payments.) American Franklin may
increase this minimum upon 90 days' written notice. American Franklin may also
reject premium payments in a policy year if the payments would cause the policy
to cease to qualify as life insurance under federal tax law. See "Federal Tax
Considerations," below.
If the Policy Owner stops paying premiums temporarily or permanently, the
policy will continue in effect until the Net Cash Surrender Value can no longer
cover the monthly charges against the Policy Account for the benefits selected.
In addition, it should be noted that planned premiums may not be sufficient to
maintain a policy because of investment experience, policy changes or other
factors.
The tables set forth below under "Illustrations of Death Benefits, Policy
Account and Cash Surrender Values, and Accumulated Premiums" illustrate how the
key financial elements of EquiBuilder III policies work. The tables show death
benefits and Policy Account and Cash Surrender Values with Face Amounts and
planned annual premiums of different amounts for Insured Persons of different
ages.
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Additional Benefits
A policy may include additional benefits. A charge will be made against
the Policy Account monthly for each additional benefit. These benefits may be
cancelled at any time. More details will be included in the policy if any of
these benefits are selected. The following additional benefits are currently
available:
Disability Waiver Benefit. With this benefit, monthly charges from
the Policy Account are waived if the Insured Person becomes totally
disabled on or after the Insured Person's fifth birthday and the
disability continues for six months. If the disability starts before the
policy anniversary nearest the Insured Person's 60th birthday, American
Franklin will waive monthly charges for life as long as the disability
continues. If the disability starts after that, the charges will be waived
only up to the policy anniversary nearest the Insured Person's 65th
birthday (as long as the disability continues).
Accidental Death Benefit. American Franklin will pay an additional
benefit if the Insured Person dies from bodily injury that results from an
accident, provided the Insured Person dies before the policy anniversary
nearest his or her 70th birthday.
Children's Term Insurance. This benefit provides term life insurance
on the lives of the Insured Person's children, including natural children,
stepchildren and legally adopted children, who have not yet reached their
eighteenth birthdays. The charge for this benefit covers all children
under eighteen. They are covered only until the Insured Person reaches age
65 or the child reaches age 25, whichever first occurs.
Term Insurance on an Additional Insured Person. Term insurance may
be obtained for another person, such as the Insured Person's spouse, under
a policy. A separate charge will be deducted for each additional insured
person.
Separate Account Investment Choices
After certain amounts are deducted from each premium, the balance, called
the net premium, is put into the Policy Account established for each policy. The
net premium is credited to the Policy Account as of the date the premium payment
is received at American Franklin's Administrative Office, or, if later, the
Register Date. The net premium is credited to the Policy Account prior to
deductions of any charges against the Policy Account due on that date. See
"Deductions and Charges-Deductions from Premiums," below. The Policy Account
will be invested in the Money Market division until the first business day
fifteen days after the Issue Date of the policy. At that time, the Policy
Account will be allocated to the Guaranteed Interest Division or to one or more
of the investment divisions of the Separate Account or both, according to the
directions provided in the policy application. These instructions will apply to
any subsequent premium until the Policy Owner provides new instructions to
American Franklin at its Administrative Office. Premium allocation percentages
may be any whole number from zero to 100, but the sum must equal 100. See "The
Guaranteed Interest Division," below.
The Separate Account and Its Investment Divisions
The Separate Account was established on April 9, 1991 under the Insurance
Law of the State of Illinois, and is a unit investment trust registered with the
Securities and Exchange Commission under the Investment Company Act of 1940.
This registration does not involve any supervision by the Securities and
Exchange Commission of the management or investment policies of the Separate
Account. A unit investment trust is a type of investment company. The Separate
Account meets the definition of a "separate account" under federal securities
laws. The Separate Account has several investment divisions, each of which
invests in shares of a corresponding portfolio of the Variable Insurance
Products Fund or of the Variable Insurance Products Fund II (individually, a
"Fund," and collectively, the "Funds"). Currently, Money Market, High Income,
Equity-Income, Growth, Overseas, Investment Grade Bond, Asset Manager, Index
500, Asset Manager: Growth and Contrafund divisions are available for investment
under EquiBuilder III policies. The Separate Account also issues interests under
EquiBuilder II variable life insurance policies, which have policy features that
are similar to those of EquiBuilder III policies but which have a different
sales charge structure.
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The Funds
Each of the Funds is a diversified open-end management investment company,
more commonly called a mutual fund. As "series" type mutual funds, they issue
several different "series" of stock, each of which relates to a different Fund
portfolio. The Funds currently have an aggregate of ten portfolios, each of
which has different investment objectives, policies and risks.
The Funds do not impose a sales charge or "load" for buying and selling
their shares. The Funds' shares are bought and sold by the Separate Account at
net asset value pursuant to agreements between American Franklin, the Funds and
the Funds' principal underwriter, Fidelity Distributors Corporation ("FDC"), 82
Devonshire Street, Boston, Massachusetts 02109. The Bank of New York, 110
Washington Street, New York, New York, is custodian of Money Market, High Income
and Investment Grade Bond Portfolio's assets; The Chase Manhattan Bank N.A.,
1211 Avenue of the Americas, New York, New York 10036, is custodian of
Equity-Income, Overseas, Asset Manager and Asset Manager: Growth Portfolios'
assets; and Brown Brothers Harriman & Co., 40 Water Street, Boston,
Massachusetts, is custodian of Growth, Index 500 and Contrafund Portfolios'
assets. The custodians take no part in determining the investment policies of
the portfolios or in deciding which securities are purchased or sold by the
portfolios.
The Funds sell their shares to separate accounts of insurance companies.
See "Voting Rights of a Policy Owner-Voting Privileges of Participants in Other
Separate Accounts" for information about measures that will be taken to protect
Policy Owners in the event of a conflict of interest between the Separate
Account and other separate accounts that invest in the Funds.
More detailed information about the Funds, their investment policies,
risks, expenses and all other aspects of their operations appears in their
Prospectus, which is attached to this Prospectus, and in their Statements of
Additional Information referred to therein. See "Expenses of the Funds", below,
for additional information relating to expenses of the Funds.
Investment Policies of the Portfolios of the Funds
Each portfolio of the Funds has a different investment objective which it
tries to achieve by following separate investment policies. The objectives and
policies of each portfolio will affect its return and its risks. The investment
experiences of the divisions of the Separate Account depend on the performances
of the corresponding portfolios. The investment objectives, policies,
restrictions and risks of the portfolios of the Funds are described in detail in
the Prospectus for the Funds, which is attached to this Prospectus, and in the
Funds' Statements of Additional Information. The policies and objectives of the
portfolios of the Variable Insurance Products Fund corresponding to the
divisions currently available for investment under EquiBuilder III policies may
be summarized as follows:
Money Market Portfolio seeks to obtain as high a level of current
income as is consistent with preserving capital and providing liquidity.
The portfolio will invest only in high-quality U.S. dollar denominated
money market securities of domestic and foreign issuers.
High Income Portfolio seeks to obtain a high level of current income
by investing primarily in high yielding, lower rated, fixed-income
securities, while also considering growth of capital. The portfolio may
purchase lower-quality bonds which provide poor protection for payment of
principal and interest (commonly referred to as "junk bonds"). For a
discussion of the risks of investment in these securities, please see the
Prospectus for the Funds, which is attached to this Prospectus.
Equity-Income Portfolio seeks reasonable income by investing
primarily in income-producing equity securities. In choosing these
securities, the portfolio will also consider the potential for capital
appreciation. The portfolio's goal is to achieve a yield which exceeds the
composite yield on the securities comprising the Standard & Poor's 500
Composite Stock Price Index.
Growth Portfolio seeks to achieve capital appreciation. The
portfolio normally purchases common stocks, although its investments are
not restricted to any one type of security. Capital appreciation may also
be found in other types of securities including bonds and preferred
stocks.
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Overseas Portfolio seeks long-term growth of capital primarily
through investments in foreign securities. Overseas Portfolio provides a
means for investors to diversify their own portfolios by participating in
companies and economies outside of the United States.
The policies and objectives of the portfolios of the Variable Insurance
Products Fund II corresponding to the divisions currently available for
investment under EquiBuilder III policies may be summarized as follows:
Investment Grade Bond Portfolio seeks as high a level of current
income as is consistent with the preservation of capital by investing in a
broad range of investment-grade fixed-income securities. The portfolio
will maintain dollar-weighted average portfolio maturity of ten years or
less.
Asset Manager Portfolio seeks a high total return with reduced risk
over the long-term by allocating its assets among domestic and foreign
stocks, bonds and short-term fixed-income instruments.
Index 500 Portfolio seeks investment results that correspond to the
total return (i.e., the combination of capital changes and income) of
common stocks publicly traded in the United States, as represented by
Standard & Poor's 500 Composite Stock Price Index, while keeping
transaction costs and other expenses low.
Asset Manager: Growth Portfolio seeks to maximize total return over
the long term through investments in stocks, bonds and short-term
instruments.
Contrafund Portfolio seeks to increase the value of investments over
the long term by investing in securities of companies that are undervalued
or out-of-favor.
Except for the Money Market, Investment Grade Bond and Index 500
Portfolios, the portfolios may purchase lower-quality bonds which provide poor
protection for payment of principal and interest (commonly referred to as "junk
bonds"). These securities are highly speculative. Lower-quality bonds involve
greater risk of default or price changes than securities assigned a higher
quality rating due to changes in the issuer's creditworthiness. This is an
aggressive approach to income investing. For a discussion of the risks of
investment in these securities, please see the Prospectus for the Funds, which
is attached to this Prospectus.
There is no guarantee that any portfolio of the Funds will achieve its
objective. In addition, the Funds' Prospectus advises that no single portfolio
constitutes a balanced investment plan.
The Investment Manager of the Funds
Subject to the approval and supervision of the Funds' Boards of Trustees,
Fidelity Management manages the day-to-day investment operations of the Funds
and exercises overall responsibility for the investment and reinvestment of the
Funds' assets. See the Prospectus of the Funds for a description of the
experience and qualifications of Fidelity Management.
Fidelity is one of America's largest investment management organizations
and has its principal business address at 82 Devonshire Street, Boston,
Massachusetts. It includes a number of different companies, which provide a
variety of financial services and products. Each portfolio of the Funds employs
various Fidelity companies to perform certain activities required for its
operation.
Fidelity Management is the original Fidelity company, founded in 1946. It
provides a number of mutual funds and other clients with investment research and
portfolio management services. It maintains a large staff of experienced
investment personnel and a full complement of related support facilities.
Fidelity Management is a registered investment adviser under the Investment
Advisers Act of 1940. As of March 31, 1997, Fidelity Management advised funds
having more than 29 million shareholder accounts with a total value of more than
$432 billion. FMR Corp. is the ultimate parent of Fidelity Management and FDC.
Members of the Edward C. Johnson 3d family are the predominant owners of a class
of shares of common stock representing approximately 49% of the voting power of
FMR Corp. Under the Investment Company Act of 1940, control of a company is
presumed where one individual or group of individuals owns more than 25% of the
voting stock of that company; therefore, the
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Johnson family may be deemed under the Investment Company Act of 1940 to form a
controlling group with respect to FMR Corp.
Ownership of the Assets of the Separate Account
Under Illinois law, American Franklin owns the assets of the Separate
Account and uses them to support EquiBuilder III policies, other existing
variable life policies and other variable life policies it may issue in the
future. The portion of the Separate Account's assets supporting these policies
may not be used to satisfy liabilities arising out of any other business of
American Franklin. Under certain unlikely circumstances, one investment division
of the Separate Account may be liable for claims relating to the operations of
another division. In addition to premiums from EquiBuilder III policies,
American Franklin may allocate premiums from other policies to the Separate
Account. These policy owners will participate in the Separate Account in
proportion to the amounts in the Separate Account relating to their policies.
American Franklin may also permit charges owed to it to stay in the Separate
Account. Thus, American Franklin may also participate proportionately in the
Separate Account. These accumulated amounts belong to American Franklin and
American Franklin may transfer them from the Separate Account to its General
Account at any time.
Right to Change Operations
American Franklin reserves the right to change or add investment companies
in which Policy Accounts will be invested and to modify how it or the Separate
Account operates. American Franklin intends to comply with applicable law in
making any changes and, if necessary, will seek Policy Owner approval. American
Franklin has the right to:
add investment divisions to, or remove investment divisions from,
the Separate Account, combine two or more divisions within the Separate
Account, or withdraw assets relating to EquiBuilder III policies from one
investment division and put them into another;
register or end the registration of the Separate Account under the
Investment Company Act of 1940;
operate the Separate Account under the direction of a committee or
discharge such a committee at anytime (the committee may be composed
entirely of persons who are "interested persons" of American Franklin
within the meaning of the Investment Company Act of 1940);
restrict or eliminate any voting rights of Policy Owners or other
people who have voting rights that affect the Separate Account;
operate the Separate Account or one or more of its investment
divisions in any other form the law allows, including a form that allows
the Separate Account to make direct investments. The Separate Account may
be charged an advisory fee if its investments are made directly, rather
than through an investment company. American Franklin may invest the
assets of the Separate Account in any legal investments. In choosing these
investments American Franklin will rely on its own or outside counsel for
advice. In addition, American Franklin may disapprove any change in
investment advisers or in investment policy unless a law or regulation
provides differently; and
modify the provisions of the policies to assure qualification under
the pertinent provisions of the Code or to comply with other applicable
federal or state laws.
If any changes are made that result in a material change in the underlying
investments of an investment division, Policy Owners will be notified as
required by law. American Franklin may, for example, cause an investment
division to invest in a mutual fund other than or in addition to the Funds. If,
as a result of any such material change, a Policy Owner then wishes to transfer
the amount of his or her Policy Account invested in one investment division to
another division of the Separate Account or to the Guaranteed Interest Division,
he or she may do so without charge, by giving written instructions to American
Franklin at its Administrative Office. At the same time, the manner in which net
premiums and deductions are allocated may be changed.
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Deductions and Charges
For information regarding other charges see also "Policy Account
Transactions," below.
Deductions From Premiums
Unless a loan is outstanding (see "Policy Account Transactions-Repaying
the Loan," below), any payment received by American Franklin before the Final
Policy Date is treated as a premium. The Final Policy Date is the policy
anniversary nearest the Insured Person's 95th birthday. Applicable taxes and a
sales expense deduction (subject to an annual maximum deduction) are deducted
from all premiums. The balance of each premium (the net premium) is placed in
the Policy Account.
All states and certain other jurisdictions (cities, counties,
municipalities) tax premium payments and some levy other charges. Taxes
currently range up to 5%. American Franklin deducts the applicable tax from each
premium payment. This is a tax to American Franklin, so the Policy Owner cannot
deduct it on his or her income tax return. The amount of the tax will vary
depending on the jurisdiction in which the Policy Owner resides. Since the tax
is a percentage of the premium, the amount of the tax will also vary with the
amount of the premium. This deduction for taxes will be increased or decreased
to reflect any changes in the applicable tax based on premiums. In addition, if
a Policy Owner changes his or her place of residence, the deduction will be
changed to the tax rate of the new jurisdiction. The Policy Owner should notify
American Franklin if he or she changes residence.
American Franklin makes a sales expense deduction equal to 5% of each
premium paid during any policy year until the total premiums for the policy year
equal the Target Premium. (See "Definitions," above, and "Deductions and
Charges-Surrender Charge," below, for more information concerning the Target
Premium). No sales expense deduction is made for premiums in excess of a Target
Premium paid during that policy year. During the next policy year, American
Franklin will again make a sales expense deduction equal to 5% of each premium
until total premiums paid during that policy year equal the Target Premium. A
Policy Owner can reduce aggregate sales expense deductions by concentrating
premium payments in a few policy years so that the premiums paid in each of
those years exceed a target premium. However, concentration of premium payments
during a policy's early policy years, and in particular during the first policy
year, may increase the contingent deferred sales charge that will be imposed if
the policy is surrendered or, in some instances, if the Face Amount of the
policy is reduced or the policy is permitted to lapse during the first ten
policy years. See "Deductions and Charges - Surrender Charge," below. In
addition, concentration of premium payments during the first seven policy years
can increase the likelihood that a policy will be considered a modified
endowment contract. See "Federal Tax Considerations Policy Proceeds," below.
Sales expense deductions are made to help recover some expenses of
distributing the EquiBuilder III policies. These expenses include agents'
commissions and the printing of the EquiBuilder III prospectus and sales
literature. Sales expenses are also recovered through a contingent deferred
sales charge, which will be imposed if the policy is surrendered or, in some
instances, if the Face Amount of the policy is reduced or the policy is
permitted to lapse during the first ten policy years. The amount of sales
expense deductions and contingent deferred sales charges in any policy year is
not necessarily related to actual sales expenses in that year. See "Deductions
and Charges-Surrender Charge," and "Distribution of the Policies," below.
Charges Against the Policy Account
At the beginning of each policy month, the following charges are made
against each Policy Account. Additional charges against amounts in the Separate
Account are described under "Deductions and Charges-Charges Against the Separate
Account," below.
Administrative Charge. The current charge is $6 per month. This charge is
designed to cover the continuing costs of maintaining the EquiBuilder III
policies, such as premium billing and collection, claim processing, policy
transactions, record keeping, communications with Policy Owners and other
expenses and overhead. This charge may be raised to reflect higher costs, but
American Franklin guarantees it will never be more than $12 per month. At the
beginning of each of the first twelve policy months that a policy is in effect,
an additional administrative charge of $24 per month will be deducted. This
charge
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permits American Franklin to recover the costs of issuance and placement of the
policy such as application processing, medical examinations, establishment of
policy records and underwriting costs (determining insurability and assigning
the Insured Person to a risk class).
Cost of Insurance Charge. The monthly cost of insurance is American
Franklin's current monthly cost of insurance rate multiplied by the amount at
risk at the beginning of the policy month divided by $1,000. The amount at risk
is the difference between the current death benefit and the amount in the Policy
Account. If the current death benefit for the month is increased due to the
requirements of federal tax law (see "The Features of EquiBuilder III
Policies-Death Benefits," above), the amount at risk for the month will also
increase. For this purpose the amount of each Policy Account is determined
before deduction of the cost of insurance charge but after all other charges due
on that date. The amount of the cost of insurance charge will vary from month to
month with changes in the amount at risk and with increasing age of the Insured
Person.
The cost of insurance rate is based on the sex, age and risk class of the
Insured Person and the Face Amount size band of the policy at the time of the
charge. American Franklin may change these rates from time to time, but they
will never be more than the guaranteed maximum rates set forth in a particular
policy. The maximum charges are based on the Commissioner's 1980 Standard
Ordinary Male and Female Mortality Tables. The table below shows the current and
guaranteed maximum monthly cost of insurance rates per $1,000 of amount at risk
for a male non-tobacco user at various ages. In Montana and Massachusetts there
will be no distinctions based on sex. 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 and risk
class. In addition, employers and Employee Organizations should consider the
impact of Title VII of the Civil Rights Act of 1964 on the purchase of an
EquiBuilder III policy in connection with an employment related insurance or
benefit plan. See "Employee Benefit Plans," below. Where required, American
Franklin will provide cost of insurance charges that do not distinguish between
males and females.
Illustrative Table of Monthly Cost of Insurance Rates for
Male Non-Tobacco (rounded) per $1,000 of Amount at Risk
$50,000 - $199,999 $200,000 and Over
Face Amount Size Band Face Amount Size Band
--------------------- ---------------------
Attained Guaranteed Current Guaranteed Current
Age Maximum Rate Rate Maximum Rate Rate
--- ------------ ---- ------------ ----
5 $ .08 $ .08 $ .08 $ .08
15 .11 .11 .11 .10
25 .15 .10 .15 .10
35 .18 .11 .18 .10
45 .38 .20 .38 .17
55 .88 .49 .88 .42
65 2.14 1.42 2.14 1.20
For a male non-tobacco user, age 35, with a $100,000 Face Amount Option A
policy, an initial premium of $1,000, and a 2% premium tax, the cost of
insurance for the first month will be $10.90. This example reflects deduction of
a 5% sales expense deduction and the current administrative charges ($6 per
month plus the additional charge of $24 per month that applies for the first 12
policy months) and uses the current cost of insurance rate ($.11 per $1,000).
Charges for Additional Benefits. The cost of any additional benefits will
be deducted monthly. These charges may be changed, but each policy contains
tables showing the guaranteed maximum rates for all of these insurance costs.
Changes in Monthly Charges. Any changes in the cost of insurance, charges
for additional benefits or administrative charges will be by class of Insured
Person and will be based on changes in future expectations about such things as
investment earnings, mortality, the length of time policies will remain in
effect, expenses and taxes.
Charges Against The Separate Account
The amount in the Policy Account which is allocated to the investment
divisions of the Separate Account will be reduced proportionately by the
following fees and charges, which are allocated to the
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investment divisions of the Separate Account. These fees and charges will not be
made against amounts allocated to the Guaranteed Interest Division.
Mortality and Expense Risks. American Franklin makes a charge for assuming
mortality and expense risks. American Franklin guarantees that monthly
administrative and cost of insurance deductions from the Policy Account will
never be greater than the maximum amounts shown in the policy. The mortality
risk assumed is that insured persons will live for shorter periods than
estimated. When this happens, American Franklin has to pay a greater amount of
death benefit than expected in relation to the cost of insurance charges it
received. The expense risk assumed is that the cost of issuing and administering
policies will be greater than expected. American Franklin makes a daily charge
for mortality and expense risks at an effective annual rate of .75% of the value
of the assets in the Separate Account attributable to EquiBuilder III policies.
This charge is reflected in the unit values for the investment divisions of the
Separate Account. See "Policy Account Value-Determination of Unit Value," below.
If the money collected from this charge is not needed, it will be to American
Franklin's gain.
Charges Against the Funds. The Separate Account purchases shares of the
Funds at net asset value. That price reflects investment management fees and
other direct expenses that have already been deducted from the assets of the
Funds. The Funds do not impose a sales charge. See "The Investment Adviser of
the Funds," above and the Funds' Prospectuses and Statements of Additional
Information for details concerning the Funds' investment management fees and
other expenses.
Tax Reserve. American Franklin reserves the right to make a charge in the
future for taxes or reserves set aside for taxes, which will reduce the
investment income of the investment divisions of the Separate Account. See
"Federal Tax Considerations," below.
Surrender Charge
If a policy is totally surrendered, or, in some instances, if the Face
Amount of the policy is reduced or the policy is permitted to lapse during the
first ten policy years, a surrender charge is imposed as a means to recover
sales expenses. See "Deductions and Charges-Deductions from Premiums," above,
and "Distribution of the Policies," below. The amount of the surrender charge
will vary depending on the policy year in which the redemption occurs and the
amount of premium paid. No surrender charge will be applicable after the tenth
policy year. If during the first ten policy years a policy is not surrendered or
permitted to lapse and the Face Amount is not reduced, no surrender charge will
be incurred.
The surrender charge is a contingent deferred sales load. It is a
contingent load because it is imposed only if the Policy Owner surrenders his or
her policy (or reduces its Face Amount or lets it lapse) during the first ten
policy years. It is a deferred load because it is not deducted from premiums.
The amount of the load in a policy year is not necessarily related to actual
sales expense in that year. See "Deductions and Charges-Deductions from
Premiums," above, and "Distribution of the Policies," below.
The surrender charge is the difference between the amount in a particular
Policy Account and the Cash Surrender Value of the related policy during the
first ten policy years.
In the first ten policy years, a surrender charge will be imposed if the
Policy Owner:
totally surrenders his or her policy for its Net Cash Surrender
Value;
reduces the Face Amount of his or her policy; or
lets his or her policy lapse.
Surrender charges are based on "Target" Premiums. Target Premiums are not
based on the "planned" premium the Policy Owner determines. See "The Features Of
EquiBuilder III Policies - Flexible Premium Payments." Target Premiums are based
on the age and sex of the Insured Person and the initial Face Amount of the
policy. In general, a Target Premium would equal the amount of annual premium
necessary to maintain a fixed-benefit whole life policy for the same face amount
on the life of the Insured Person.
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The maximum surrender charge for a policy will be shown on the Policy
Information page of a policy and will equal 50% of one Target Premium. This
maximum will not vary based on the amount of premiums paid or when they are
paid. At the end of the sixth policy year, and at the end of each of the four
succeeding policy years, the maximum surrender charge is reduced by an amount
equal to 20% of the initial maximum surrender charge. After the end of the tenth
policy year, there is no surrender charge.
Subject to the maximum surrender charge, the surrender charge is
calculated based on actual premium payments. The surrender charge equals 25% of
premium payments made during the first policy year up to the amount of one
Target Premium and 9% of any additional premiums paid during the first ten
policy years, but not more than 50% of one Target Premium.
Paying less than one Target Premium in the first policy year will reduce
the surrender charge only if not more than approximately five Target Premiums
are paid before surrender or lapse (i.e., only if the maximum surrender charge
is not reached). However, structuring payments in this manner will increase the
risk that a policy will lapse (and that a surrender charge will be incurred that
would not have been incurred if the policy had remained in force). If payments
are structured in this manner, the amounts in the Policy Account would need to
receive favorable investment performance for the policy not to lapse. In
addition, paying less premiums may increase cost of insurance charges (which are
based on amount at risk). Attempting to structure the timing and amount of
premium payments to reduce the potential surrender charge below the maximum is
not recommended.
EXAMPLE: Assume the purchase of a $200,000 initial Face Amount policy for
a male age 40. This policy would have a Target Premium of $2,280 and a maximum
surrender charge of $1,140 ($2,280 x 50%). Also, assume that all premium
payments are made at the beginning of each policy year. The following table
shows the surrender charge which would apply under different premium payment
assumptions if surrender of the policy were to occur during the indicated policy
year:
During Year Premium Charge Premium Charge Premium Charge
1 $3,000 $ 635 $2,280 $ 570 $1,140 $ 285
2 3,000 905 2,280 775 3,420 593
3 3,000 1,140 2,280 980 2,280 790
4 3,000 1,140 2,280 1,140 2,280 1,003
5 3,000 1,140 2,280 1,140 2,280 1,140
6 3,000 1,140 2,280 1,140 2,280 1,140
7 3,000 912 2,280 912 2,280 912
8 3,000 684 2,280 684 2,280 684
9 3,000 456 2,280 456 2,280 456
10 3,000 228 2,280 228 2,280 228
The maximum surrender charge will be reduced by the amount of any pro rata
surrender charge previously imposed in connection with a decrease in the Face
Amount of a policy.
During the first ten policy years, a decrease in the Face Amount of a
policy may be considered a partial surrender and American Franklin will deduct a
portion of the surrender charge. If the Face Amount of a policy is increased and
then decreased, a surrender charge will apply only to a decrease below the
original Face Amount (i.e., the Face Amount at the Issue Date). Generally, the
pro rata surrender charge for a partial surrender will be determined by dividing
the amount of the Face Amount decrease (excluding the portion that merely
reverses a prior increase) by the original Face Amount and multiplying the
fraction by the surrender charge which would apply if the policy were
surrendered.
For example, assume that a policy is issued for a male age 40 with a Face
Amount of $200,000. In the third policy year, the Policy Owner decides to
decrease this Face Amount by $100,000. Assume also that an annual premium of
$3,000 was paid for each of the first three policy years and that the maximum
surrender charge for the third policy year is $1,140. To determine the portion
of the surrender charge:
Divide the amount of the Face Amount decrease by the initial Face
Amount. ($100,000 / $200,000 = .5)
Then multiply this fraction by the maximum surrender charge in
effect before the decrease.
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<PAGE>
Pro rata surrender charge = .5 x $1,140 = $570.
Thus, the Policy Owner would be charged $570 for decreasing the Face
Amount of this policy from $200,000 to $100,000 during the third policy year.
The maximum surrender charge payable in the future will be reduced
proportionately. American Franklin would send the Policy Owner a new Policy
Information page that shows the new maximum charges. The Policy Owner will pay
the maximum only if he or she surrenders the policy or lets the policy lapse
after paying enough premiums to reach the maximum.
Other Transaction Charges
In addition to the deductions and charges described above, fees for
certain policy transactions are charged against the Policy Account:
Partial Withdrawal of Net Cash Surrender Value. There is an
administrative charge that is currently $25 or 2% of the amount withdrawn,
whichever is less, each time a partial withdrawal is made. See "Policy
Account Transactions-Withdrawing Money from the Policy Account," below.
Increase in the Face Amount of Insurance. There is an administrative
charge that is currently $1.50 for each $1,000 of increase up to a maximum
charge of $300. See "The Features of EquiBuilder III Policies-Changes in
EquiBuilder III Policies," above.
Transfers. If more than four transfers of Policy Account value are
made in a policy year among investment divisions, a charge of up to a
maximum of $25 for each additional transfer in that policy year may be
made. However, if all of the assets are transferred to the Guaranteed
Interest Division, no transfer charge will be imposed. See "Policy Account
Transactions-Transfers of Policy Account Value Among Investment
Divisions," below. A request for transfer involving the simultaneous
transfer of funds from or to more than one investment division will be
considered one transfer.
Illustrations. If, after a policy is issued, a Policy Owner requests
more than one illustration of projected death benefits and Policy Account
and Cash Surrender Values in a policy year, a fee may be charged. See
`'Illustrations of Death Benefits, Policy Account and Cash Surrender
Values and Accumulated Premiums," below.
The fees for partial withdrawals, increases in face amount and transfers are
guaranteed never to exceed the amounts stated above. See also "Deductions and
Charges-Surrender Charge," above.
Expenses of the Funds
For managing each portfolio's investments and business affairs, each
portfolio pays Fidelity Management a monthly fee. See the Prospectus and
Statement of Additional Information of the Funds for a description of the way in
which these fees are calculated. Each portfolio also pays fees to other
companies affiliated with Fidelity Management for various services. Fidelity
Management has entered into sub-advisory agreements with affiliated companies
with respect to management of the High Income, Overseas, Money Market, Asset
Manager, Asset Manager: Growth and Contrafund Portfolios. The following table
shows the management fees, other expenses and total annual expenses paid during
fiscal 1996 by each portfolio, expressed as a percentage of average daily assets
of each portfolio:
<TABLE>
Portfolio Management Fee Other Expenses Total Annual Expenses
- --------- -------------- -------------- ---------------------
<S> <C> <C> <C>
Money Market Portfolio 0.21% 0.09% 0.30%
High Income Portfolio 0.59% 0.12% 0.71%
Equity-Income Portfolio 0.51% 0.07% 0.58%(1)
Growth Portfolio 0.61% 0.08% 0.69%(1)
Overseas Portfolio 0.76% 0.17% 0.93%(1)
Investment Grade Bond Portfolio 0.45% 0.13% 0.58%
Asset Manager Portfolio 0.64% 0.10% 0.74%(1)
Index 500 Portfolio 0.13% 0.15% 0.28%(2)
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Portfolio Management Fee Other Expenses Total Annual Expenses
- --------- -------------- -------------- ---------------------
<S> <C> <C> <C> <C>
Contrafund Portfolio 0.61% 0.13% 0.74%(1)
Asset Manager: Growth Portfolio 0.65% 0.22% 0.87%(1)
</TABLE>
(1) A portion of the brokerage commissions the Funds paid was used to reduce its
expenses . In addition, the Funds have entered into arrangements with their
custodian and transfer agent whereby interest earned on uninvested cash balances
was used to reduce custodian and transfer agent expenses. Including these
reductions total annual expenses would have been: for Equity-Income Portfolio:
0.56%; for Growth Portfolio: 0.67%; for Overseas Portfolio: 0.92%; for Asset
Manager Portfolio: 0.73%; for Asset Manager: Growth Portfolio: 0.85%; and for
Contrafund Portfolio: 0.71%.
(2) The Funds' expenses were voluntarily reduced by the Funds' investment
adviser. Absent reimbursement, management fees, other expenses, and total annual
expenses would have been: for Index 500 Portfolio: 0.28%, 0.15% and 0.43%,
respectively.
Fidelity Management may, from time to time, agree to reimburse a portfolio
for management fees and other expenses above a specified percentage of average
net assets. Reimbursement arrangements, which may be terminated at any time
without notice, will increase a portfolio's yield. If Fidelity Management
discontinues a reimbursement arrangement, an affected portfolio's expenses will
go up and its yield will be reduced. Fidelity Management retains the ability to
be repaid by a portfolio for expense reimbursements if expenses fall below the
limit prior to the end of the fiscal year. Repayment by a portfolio will lower
its yield.
See the Prospectus and the Statements of Additional Information of the
Funds for more information about the services provided by and the fees paid to
Fidelity Management and its affiliated companies.
Affiliates of Fidelity Management may compensate American Franklin or an
affiliate for administrative, distribution or other services relating to the
portfolios of the Funds. Such compensation is generally based on assets of the
portfolios attributable to the policies and certain other variable contracts
issued by American Franklin and its affiliates.
Allocation of Policy Account Charges
Generally, charges against each Policy Account for monthly charges or
certain transaction fees are allocated among the investment divisions of the
Separate Account and the unloaned portion of the Guaranteed Interest Division in
accordance with the deduction allocation percentages specified by the Policy
Owner in his or her application or in accordance with subsequent instructions
received by American Franklin from the Policy Owner. However, deductions for the
first policy month will generally be made from the Money Market division. See
"Separate Account Investment Choices."
Allocation percentages for deductions may be any whole numbers (from zero
to one hundred) which add up to one hundred. A Policy Owner may change deduction
allocation percentages by giving instructions to American Franklin at its
Administrative Office. Changes will be effective as of the date they are
received by American Franklin.
Charges for partial withdrawals of Net Cash Surrender Value and transfers
of Policy Account values will be subtracted equally among the divisions from
which the transactions were made. If American Franklin cannot make a charge as
described above, it will make the charge based on the proportion that the
unloaned amounts in the Guaranteed Interest Division, if any, and the amounts in
the investment divisions of the Separate Account bear to the total unloaned
value of the Policy Account.
Policy Account Value
The amount in a Policy Account is the sum of the amounts allocated to the
Guaranteed Interest Division and to the various investment divisions of the
Separate Account. The amount in a Policy Account also reflects various
deductions and charges. Monthly charges are made as of the first day of each
policy month. Transaction charges or surrender charges are made as of the
effective date of the transaction (for example, administrative charges for
increases in Face Amount are made as of the next monthly policy anniversary
after American Franklin approves the Policy Owner's request).
20
<PAGE>
Charges against the Separate Account are reflected daily. Any amount
allocated to an investment division of the Separate Account will increase or
decrease depending on the investment experience of that division. For amounts
allocated to the investment divisions of the Separate Account, there is no
guaranteed minimum cash value. The value of amounts in a Policy Account
allocated to the Guaranteed Interest Division is guaranteed. See "The Guaranteed
Interest Division," below.
Amounts in the Separate Account
Amounts allocated, transferred or added to the investment divisions of the
Separate Account are used to purchase units representing undivided interests in
the various divisions. The amount in each division is represented by the value
of the units credited to the Policy Account for that division. The number of
units purchased or redeemed in an investment division of the Separate Account is
calculated by dividing the dollar amount of the transaction by the division's
unit value next calculated at the close of business on the date of the
transaction (see "Additional Information About EquiBuilder III Policies-Policy
Periods, Anniversaries, Dates and Ages," below, regarding the date that the net
amount of the initial premium is credited to the Policy Account and interim
allocation of the initial net premium and any other net premium received prior
to the time that 15 days have elapsed after the Issue Date, and see "Policy
Account Transactions" and "The Guaranteed Interest Division-Transfers from the
Guaranteed Interest Division," below, regarding the effective dates of Policy
Account transactions). The number of units for an investment division at any
time is the number of units purchased less the number of units redeemed. The
value of units fluctuates with the investment performance of the corresponding
portfolio of a Fund, which reflects the investment income and realized and
unrealized capital gains and losses of the portfolio and the Fund's expenses.
The unit values also reflect charges American Franklin makes against the
Separate Account. The number of units credited to a Policy Account, however,
will not vary because of changes in unit values. On any given day, the value a
Policy Account has in an investment division of the Separate Account is the unit
value times the number of units credited to the Policy Account in that division.
The units of each investment division of the Separate Account have different
unit values.
Units of an investment division are purchased when the Policy Owner
allocates premiums, repays loans or transfers amounts to that division. Units
are redeemed or sold when the Policy Owner makes withdrawals or transfers
amounts from an investment division of the Separate Account (including transfers
for loans) and to pay the death benefit when the Insured Person dies. American
Franklin also redeems units for monthly charges or other charges from the
Separate Account.
Determination of the Unit Value
American Franklin determines unit values for each investment division of
the Separate Account at the end of each business day. Generally, a business day
is any day American Franklin is open and the New York Stock Exchange is open for
trading. American Franklin will not process any policy transactions as of any
day that is not a business day other than to issue a policy anniversary report,
make monthly charge deductions and pay the death benefit under a policy. The
initial unit value for each investment division was set at $100. Subsequently,
the unit value for any business day is equal to the unit value for the preceding
business day multiplied by the net investment factor for that division on that
business day.
American Franklin determines a net investment factor for each investment
division every business day as follows:
First, the value of the shares belonging to the division in the
corresponding Fund portfolio at the close of business that day is
determined (before giving effect to any policy transactions for that day,
such as premium payments or surrenders). For this purpose, American
Franklin uses the share value reported to it by the Fund;
Next, any dividends or capital gains distributions paid by the Fund
for the corresponding portfolio on that day are added;
Then, this sum is divided by the value of the amounts in the
investment division at the close of business on the immediately preceding
business day (after giving effect to any policy transactions on that day);
21
<PAGE>
Then, a daily asset charge for each calendar day between business
days is subtracted (for example, a Monday calculation may include charges
for Saturday and Sunday). The daily charge is .00002063, which is an
effective annual rate of .75%. This charge is for mortality and expense
risks assumed by American Franklin under the policy;
Finally, any daily charge for taxes or amounts set aside as a
reserve for taxes is subtracted.
Generally, this means that unit values are adjusted to reflect what
happens to the Funds, and also for the mortality and expense risk charge and any
charge for taxes.
Policy Account Transactions
The transactions described below may have different effects on the Policy
Account, death benefit, Face Amount or cost of insurance. The Policy Owner
should consider the net effects before combining Policy Account transactions.
See "The Features of EquiBuilder III Policies-Changes in EquiBuilder III
Policies," above. Certain transactions also entail charges. For information
regarding other charges, see "Deductions And Charges," above.
Changing Premium and Deduction Allocation Percentages
A Policy Owner may change the allocation percentages of his or her net
premiums or of his or her monthly deductions by giving instructions to American
Franklin at its Administrative Office. These changes will go into effect as of
the date American Franklin receives the request at its Administrative Office and
will affect transactions on and after that date.
Transfers of Policy Account Value Among Investment Divisions
A Policy Owner may transfer amounts from any investment division of the
Separate Account to any other investment division of the Separate Account or to
the Guaranteed Interest Division. A Policy Owner may make up to four transfers
of Policy Account value among investment divisions of the Separate Account in
each policy year without charge. Depending on the overall cost of performing
these transactions, American Franklin may charge up to a current maximum of $25
for each additional transfer, except that no charge will be imposed for a
transfer of all amounts in the investment divisions of the Separate Account to
the Guaranteed Interest Division. If all amounts are in the Guaranteed Interest
Division, the policy will not vary for investment experience. To make a
transfer, the Policy Owner should give instructions to American Franklin at its
Administrative Office.
If a charge is imposed for making a transfer, American Franklin will
allocate the charge as described under "Deductions And Charges-Allocation of
Policy Account Charges," above. All simultaneous transfers included in one
transfer request count as one transfer for purposes of any fee.
A transfer from an investment division of the Separate Account will take
effect as of the date American Franklin receives instructions to make the
transfer. The minimum amount American Franklin will transfer on any date will be
shown on the Policy Information page in each policy and is usually $500. This
minimum need not come from any one investment division or be transferred to any
one investment division as long as the total amount transferred that day equals
or exceeds the minimum. However, American Franklin will transfer the entire
amount in any investment division of the Separate Account even if it is less
than the minimum specified in a policy. Policy Owners should note that future
premiums will continue to be allocated to investment divisions of the Separate
Account or the Guaranteed Interest Division in accordance with existing
allocations unless instructions are also given with respect to changing them.
Special rules apply to transfers from the Guaranteed Interest Division.
See "The Guaranteed Interest Division-Transfers From The Guaranteed Interest
Division," below.
Borrowing from the Policy Account
At any time that a policy has a Net Cash Surrender Value, the Policy Owner
may borrow money from American Franklin using only his or her policy as security
for the loan. The maximum aggregate amount that will be loaned is equal to 90%
of the Cash Surrender Value of the policy on the date the request for
22
<PAGE>
a loan is received by American Franklin at its Administrative Office. Any new
loan must be at least the minimum amount shown on the Policy Information page of
a policy, usually $500. If the Policy Owner requests an additional loan, the
amounts of any outstanding loan and loan interest will be added to the
additional amount requested and the original loan will be cancelled. Thus, only
one loan will be outstanding at any time. Any amount that secures a loan remains
part of the Policy Account but is assigned to the Guaranteed Interest Division.
This loaned amount earns interest at a rate that American Franklin expects will
be different from the interest rate for unloaned amounts in the Guaranteed
Interest Division. See "Federal Tax Considerations-Policy Proceeds," below, with
respect to the federal income tax consequences of a loan.
Loan Requests
Requests for loans should be made to American Franklin at its
Administrative Office. The Policy Owner may specify how much of the loan should
be taken from the unloaned amount, if any, of his or her Policy Account
allocated to the Guaranteed Interest Division and how much should be taken from
the amounts allocated to the investment divisions of the Separate Account. If a
loan is requested from an investment division of the Separate Account, American
Franklin will redeem units sufficient to cover that part of the loan and
transfer the amount to the loaned portion of the Guaranteed Interest Division.
The amounts in each division will be determined as of the day American Franklin
receives the request for a loan at its Administrative Office.
If the Policy Owner does not specify how to allocate a loan, the loan will
be allocated according to the Policy Owner's deduction allocation percentages.
If the loan cannot be allocated based on these percentages, American Franklin
will allocate it based on the proportions of the unloaned amount, if any, of the
Policy Owner's Policy Account allocated to the Guaranteed Interest Division and
the respective amounts allocated to each investment division of the Separate
Account to the unloaned value of the Policy Account.
Policy Loan Interest
Interest on a policy loan accrues daily at an adjustable interest rate.
American Franklin determines the rate at the beginning of each policy year. The
same rate applies to any outstanding policy loans and any new amounts borrowed
during the year. American Franklin will notify the Policy Owner of the current
rate when a loan is requested. American Franklin determines loan rates as
follows. The maximum rate is the greater of:
5-1/2% ; or
the "Published Monthly Average" for the calendar month that ends two
months before the interest rate is set. The "Published Monthly Average" is
the Monthly Average Corporates yield shown in Moody's Corporate Bond Yield
Averages published by Moody's Investor Services, Inc.
If this average is no longer published, American Franklin will use any
successor or the average established by the insurance supervisory official of
the jurisdiction in which the policy is delivered. American Franklin will not
charge more than the maximum rate permitted by applicable law. American Franklin
may also set a rate lower than the maximum.
Any change in the rate from one year to the next will be at least 1/2 of
1%. The current loan interest rate will only change, therefore, if the Published
Monthly Average differs from the previous loan interest rate by at least 1/2 of
1%. American Franklin will give advance notice of any increase in the interest
rate on any loans outstanding.
When Interest is Due
Interest is due on each policy anniversary. If interest is not paid when
it is due, it will be added to the outstanding loan and allocated based on the
deduction allocation percentages for the Policy Account then in effect. This
means American Franklin makes an additional loan to pay the interest and
transfers amounts from the investment divisions of the Separate Account and the
unloaned portion of the Guaranteed Interest Division to make the loan. If
American Franklin cannot allocate the interest based on these percentages, it
will allocate it as described above for allocating the loan.
23
<PAGE>
Repaying the Loan
All or part of a policy loan may be repaid at any time while the Insured
Person is alive and a policy is in force. While a policy loan is outstanding,
American Franklin will apply all amounts it receives in respect of that policy
to repayment of the policy loan unless the payment is accompanied by written
instructions that it is to be considered a premium.
American Franklin will first allocate loan repayments to the Guaranteed
Interest Division until the amount of any loans originally allocated to that
division is repaid. For example, if a Policy Owner borrowed $500 from the
Guaranteed Interest Division and $500 from the Equity-Income Division, no
repayments may be allocated to the Equity-Income Division until the $500
borrowed from the Guaranteed Interest Division is repaid. After this amount has
been repaid, the Policy Owner may specify how subsequent repayments should be
allocated. If the Policy Owner does not give instructions, American Franklin
will allocate repayments based on current premium allocation percentages at the
time repayment is made.
The Effects of a Policy Loan on the Policy Account
A loan against a policy will have a permanent effect on the value of the
Policy Account and, therefore, on benefits under the policy, even if the loan is
repaid. When a loan is made against a policy, the amount of the loan is set
aside in the Guaranteed Interest Division where it earns a declared rate for
loaned amounts. The loan amount will not be available for investment in the
investment divisions of the Separate Account or in the unloaned portion of the
Guaranteed Interest Division.
The interest rate for loaned amounts in the Guaranteed Interest Division
is expected to be different from the rate that applies to unloaned amounts in
the Guaranteed Interest Division. Generally, it will be 2% less than the
interest rate charged on the loan, minus any charge for taxes or reserves for
taxes, but never less than 4-1/2%. Each month, this interest is added to
unloaned amounts of the Policy Account in the Guaranteed Interest Division.
The impact of a loan on a Policy Account will depend, on one hand, on the
investment experience of the investment divisions of the Separate Account and
the rates declared for the unloaned portion of the Guaranteed Interest Division
and, on the other hand, the rates declared for the loaned portion of the
Guaranteed Interest Division. For example, if $1,000 is borrowed against $5,000
in the Money Market Division, the $1,000 will be set aside in the Guaranteed
Interest Division. This $1,000 would not be affected by any increases or
decreases in the value of units in the Money Market Division. However, the
$1,000 earns interest at a declared interest rate.
Lapse of the Policy
A policy loan may also affect the amount of time that the insurance
provided by a policy remains in force. For example, a policy may lapse more
quickly when a loan is outstanding because the loaned amount cannot be used to
cover the monthly charges that are made against the Policy Account. If these
charges exceed the Net Cash Surrender Value of the policy, then the lapse
provisions of the policy will apply. Since the policy permits loans up to 90% of
the Cash Surrender Value, additional premium payments may be required to keep
the policy in force if the maximum amount is borrowed. For more information
about these provisions, see "Additional Information About EquiBuilder III
Policies-Lapse of the Policy," below.
Withdrawing Money from the Policy Account
After a policy has been in effect for a year, the Policy Owner may request
a partial withdrawal of the Net Cash Surrender Value by making a written request
to American Franklin at its Administrative Office. Any withdrawal is subject to
certain conditions. It must:
be at least $500;
24
<PAGE>
not cause the death benefit to fall below the minimum for which
American Franklin would issue the policy at the time (see "Policy Account
Transactions-The Effects of a Partial Withdrawal," below); and
not cause the policy to fail to qualify as life insurance under
applicable tax law.
The Policy Owner may specify how much of the withdrawal he or she
wants taken from each investment division. If no instructions are given,
American Franklin will make the withdrawal on the basis of the then
current deduction allocation percentages. If American Franklin cannot
withdraw the amount based on the Policy Owner's directions or on the
deduction allocation percentages, American Franklin will withdraw the
amount based on the proportions of the unloaned amount, if any, of the
Policy Account allocated to the Guaranteed Interest Division and the
respective amounts allocated to the investment divisions of the Separate
Account to the total unloaned value of the Policy Account. For example, if
50% of a Policy Account is in the Guaranteed Interest Division and 50% is
in the Money Market Division and the Policy Owner wants to withdraw
$1,000, American Franklin would take $500 from each division.
Withdrawal Charges
When a partial withdrawal of Net Cash Surrender Value is made, a current
expense charge of $25 or 2% of the amount withdrawn, whichever is less, will be
charged against the Policy Account. This charge will be allocated equally among
the divisions from which the withdrawal was made. If the charge cannot be
allocated in this manner, it will be allocated as described under "Deductions
And Charges-Allocation of Policy Account Charges," above.
The Effects of a Partial Withdrawal
A partial withdrawal of Net Cash Surrender Value reduces the amount in the
Policy Account. It also reduces the Cash Surrender Value and the death benefit
on a dollar-for-dollar basis. If the death benefit based on a percentage
multiple applies, the reduction in death benefit can be greater. See "The
Features of EquiBuilder III Policies-Death Benefits," above. If death benefit
Option A is selected, the Face Amount of the policy will also be reduced so
there will be no change in the amount at risk. No pro rata surrender charge will
be deducted in connection with a reduction in Face Amount made in connection
with a partial withdrawal of Net Cash Surrender Value. An endorsement will be
sent to the Policy Owner to reflect this change. The Policy Owner may be asked
to return the policy to American Franklin's Administrative Office to make a
change. A partial withdrawal will not affect the Face Amount of the policy if
death benefit Option B is in effect. The withdrawal and these reductions will be
effective as of the date American Franklin receives the request at its
Administrative Office. See "Federal Tax Considerations-Policy Proceeds," below,
for the tax consequences of a partial withdrawal. A policy loan may be more
advantageous if the Policy Owner's need for cash is temporary.
Surrendering the Policy for Its Net Cash Surrender Value
During the first ten policy years, the Cash Surrender Value of a policy is
the amount in the Policy Account minus the surrender charge described under
"Deductions And Charges - Surrender Charge," above. After ten policy years, the
Cash Surrender Value and Policy Account are equal. During the initial policy
years, the applicable surrender charge may represent a substantial portion of
the premiums paid. See "Illustrations of Death Benefits, Policy Account and Cash
Surrender Values, and Accumulated Premiums," below.
A policy may be surrendered for its Net Cash Surrender Value at any time
while the Insured Person is living. This may be done by sending a written
request and the policy to American Franklin at its Administrative Office. The
Net Cash Surrender Value of the policy equals the Cash Surrender Value minus any
outstanding loan and loan interest. American Franklin will compute the Net Cash
Surrender Value as of the date a request for surrender and the policy are
received by American Franklin at its Administrative Office, and all insurance
coverage under the policy will end on that date.
25
<PAGE>
The Guaranteed Interest Division
A Policy Owner may allocate some or all of a Policy Account to the
Guaranteed Interest Division, which is part of American Franklin's General
Account and pays interest at a declared rate guaranteed by American Franklin for
each policy year. The principal, after charges, is also guaranteed by American
Franklin. The General Account supports American Franklin's insurance and annuity
obligations. Because of applicable exemptive and exclusionary provisions,
interests in the Guaranteed Interest Division have not been registered under the
Securities Act of 1933, and neither the Guaranteed Interest Division nor the
General Account has been registered as an investment company under the
Investment Company Act of 1940. Accordingly, neither the General Account, the
Guaranteed Interest Division nor any interests therein are generally subject to
regulation under the 1933 Act or the 1940 Act. American Franklin has been
advised that the staff of the Securities and Exchange Commission has not made a
review of the disclosures which are included in this Prospectus which relate to
the General Account and the Guaranteed Interest Division. These disclosures,
however, may be subject to certain generally applicable provisions of the
federal securities law relating to the accuracy and completeness of statements
made in a prospectus.
Amounts in the Guaranteed Interest Division
A Policy Owner may accumulate amounts in the Guaranteed Interest Division
by:
allocating net premiums and loan repayments;
transferring amounts from the investment divisions of the Separate
Account; or
earning interest on amounts already allocated to the Guaranteed
Interest Division.
The amount allocated to the Guaranteed Interest Division at any time is
the sum of all net premiums and loan repayments allocated to that division and
all transfers and earned interest, and includes amounts securing any policy loan
outstanding. This amount is reduced by amounts transferred or withdrawn from and
charges allocated to this division.
Interest on Amounts in the Guaranteed Interest Division
American Franklin pays a declared interest rate on all amounts in the
Guaranteed Interest Division. At policy issuance and prior to each policy
anniversary, American Franklin declares the rates that will apply to amounts in
the Guaranteed Interest Division for the following policy year. Different rates
are paid on unloaned and loaned amounts in the Guaranteed Interest Division.
These annual interest rates will never be less than the minimum guaranteed
interest rate of 4-1/2%. Interest is compounded daily at an effective annual
rate that equals the declared rate for each policy year.
At the end of each policy month, American Franklin will credit interest to
amounts in the Guaranteed Interest Division in the following way:
amounts in the Guaranteed Interest Division during the entire policy
month are credited with interest from the beginning to the end of the
month;
amounts added to the Guaranteed Interest Division during the month
from net premiums or loan repayments are credited with interest from the
date American Franklin receives them. The only exception to this rule
applies to the initial net premium payment. American Franklin will
allocate the initial net premium to the Money Market division until 15
days after the Issue Date (any other net premium received during this
period will be allocated in the same way), and will then allocate the
amounts in the Policy Account to the Guaranteed Interest Division and the
investment divisions of the Separate Account in accordance with the Policy
Owner's premium allocation percentages. See "Additional Information About
EquiBuilder III-Policy Periods, Anniversaries, Dates and Ages," below;
amounts transferred to the Guaranteed Interest Division are credited
with interest from the date of the transfer to the end of the month; and
amounts charged against or withdrawn from the Guaranteed Interest
Division are credited with interest from the beginning of the policy month
to the date of the charge or withdrawal.
26
<PAGE>
Interest credited to any loaned amounts in the Guaranteed Interest
Division is allocated to the unloaned portion of the Guaranteed Interest
Division and the investment divisions of the Separate Account in accordance with
the Policy Owner's premium allocation percentages at the end of the policy year
or at the time of a full loan repayment.
Transfers from the Guaranteed Interest Division
A Policy Owner may request a transfer of unloaned amounts in the
Guaranteed Interest Division to one or more of the investment divisions of the
Separate Account. American Franklin will make the transfer as of the date a
written request for transfer is received, provided that the request is received
within 30 days after a policy anniversary. The maximum amount that may be
transferred is the greater of 25% of the unloaned value in the Guaranteed
Interest Division on the date the transfer takes effect or the minimum transfer
amount shown in the policy when it is issued. The smallest amount that may be
transferred is the lesser of the unloaned value in the Guaranteed Interest
Division on the date the transfer takes effect or the minimum transfer amount
shown in the policy.
Additional Information About EquiBuilder III Policies
Right to Examine the Policy
Each Policy Owner has a right to examine the policy. If for any reason the
Policy Owner is not satisfied with it, he or she may cancel the policy within
the time limits described below. The Policy Owner may cancel the policy by
sending it with a written request to cancel to American Franklin's
Administrative Office.
A request to cancel the policy must be postmarked no later than the
latest of the following three dates:
10 days after the Policy Owner receives his or her policy;
10 days after American Franklin mails the Policy Owner a written
notice disclosing the right to cancel (Notice of Withdrawal Right); or
45 days after the Policy Owner signs Part 1 of the policy
application.
If the Policy Owner cancels the policy, American Franklin will, within
seven days of receipt of the policy and a duly executed, timely notice of
cancellation, refund an amount equal to the premiums paid.
Insurance coverage ends when a Policy Owner sends a request for
cancellation.
Lapse of the Policy
If the Net Cash Surrender Value of a policy is insufficient to pay the
charges that are made against the Policy Account each month, or if the total of
any policy loan plus loan interest exceeds the Cash Surrender Value of a policy,
American Franklin will commence procedures to terminate the policy. American
Franklin will notify the Policy Owner and any assignee shown on its records in
writing that the Net Cash Surrender Value is insufficient to pay monthly charges
or that an outstanding policy loan plus loan interest exceeds the Cash Surrender
Value of the policy, that a grace period has begun during which the Policy Owner
must pay an additional premium to prevent lapse of the policy, and that a
specified amount of premium, which will cover estimated monthly charges for
three months, must be paid to avoid lapse of the policy. The grace period
extends for 61 days beginning on the day American Franklin sends the Policy
Owner notice that the grace period is starting.
If American Franklin receives payment of at least the stipulated amount
before the end of the grace period, the amount paid will be used to satisfy the
overdue charges. Any balance left will be placed in the Policy Account and
allocated in the same manner as previous premium payments. A payment of less
than the stipulated amount received before the end of the grace period will be
applied to overdue charges but will not prevent lapse of the policy.
27
<PAGE>
If American Franklin does not receive payment within the 61 days, the
policy will lapse without value. American Franklin will withdraw any amount left
in the Policy Account and apply this amount to the charges owed to it, including
any applicable surrender charge.
If the Insured Person dies during the grace period, American Franklin will
pay the insurance benefits to the beneficiary, minus any outstanding policy loan
and loan interest and overdue charges.
Reinstatement of the Policy
A Policy Owner may reinstate his or her policy within three years after it
lapses if:
evidence is provided that the Insured Person is still insurable; and
a premium payment sufficient to keep the policy in force for three
months after the date it is reinstated is paid to American Franklin.
The effective date of the reinstated policy will be the beginning of the
policy month which coincides with or follows the date American Franklin approves
the reinstatement application. Upon reinstatement, the maximum surrender charge
for the policy will be reduced by the amount of all surrender charges previously
imposed on the policy, and for purposes of determining any future surrender
charges on the policy, the policy will be deemed to have been in effect since
the original Register Date. Previous loans will not be reinstated.
Policy Periods, Anniversaries, Dates and Ages
Policy years, policy months and policy anniversaries are measured from the
Register Date shown on the Policy Information page in the policy. Each policy
month begins on the same day in each calendar month as the day of the month of
the Register Date. For purposes of receiving Policy Owner requests, American
Franklin is open from 8:00 a.m. to 4:00 p.m., Springfield, Illinois time.
The Register Date is the earlier of the Issue Date or the Date of Payment.
The Date of Payment will normally be the day of receipt of a check for the full
initial premium at American Franklin's Administrative Office. The Issue Date,
shown on the Policy Information page of each policy, is the date a policy is
actually issued, and depends on the underwriting and other requirements for
issuing a particular policy. Contestability is measured from the Issue Date, as
is the suicide exclusion.
The initial net premium will be put in the Policy Account as of the Date
of Payment. The initial net premium will be allocated to the Money Market
division of the Separate Account, regardless of the Policy Owner's premium
allocation percentages, until the first business day 15 days after the Issue
Date. Any other net premium received during that period will also be allocated
to the Money Market division. On the first business day 15 days after the Issue
Date, the amount in the Policy Account will be reallocated in accordance with
the Policy Owner's premium allocation percentages. Charges and deductions under
the policy are first made as of the Register Date. See "The Features of
EquiBuilder III Policies-Death Benefits," above, regarding the commencement of
insurance coverage.
The Final Policy Date is the policy anniversary nearest the Insured
Person's 95th birthday. The policy ends on that date if the Insured Person is
still alive and the maturity benefit is paid.
Generally, references in this Prospectus to the age of the Insured Person
refer to his or her age on the birthday nearest to that particular date.
Federal Tax Considerations
Introduction
The following summary provides a general description of the federal income
tax considerations associated with your purchase of the Policy and does not
purport to be complete or to cover all situations. American Franklin advises
that counsel or other competent tax advisors should be consulted for more
complete information. This discussion is based upon American Franklin's
understanding of the present federal income tax laws as they are currently
interpreted by the Internal Revenue Service (the
28
<PAGE>
"Service"). No representation is made as to the likelihood of continuation of
the present federal income tax laws or of the current interpretations by the
Service.
Tax Status of the Policy
Code section 7702 sets forth the definition of a life insurance contract
for federal tax purposes. The Secretary of the Treasury (the "Treasury") is
authorized to prescribe regulations implementing section 7702. While proposed
regulations and other interim guidance has been issued, final regulations have
not been adopted. In short, guidance as to how section 7702 is to be adopted is
limited. If a Policy were determined not to be a life insurance contract for
purposes of section 7702, such Policy would not qualify for the favorable tax
treatment normally provided to a life insurance policy.
With respect to a Policy issued on the basis of a standard rate class,
American Franklin believes (largely in reliance on IRS Notice 88-128 and the
proposed regulations under section 7702, issued on July 5, 1991) that such a
Policy should meet the section 7702 definition of a "life insurance contract."
With respect to a policy that is issued on a substandard basis (i.e., a premium
class involving higher than standard mortality risk), there is less guidance, in
particular as to how the mortality and other expense requirements of section
7702 should be applied in determining whether such a policy meets the section
7702 definition of a life insurance contract. If it is subsequently determined
that a policy does not satisfy section 7702, American Franklin may take whatever
steps are appropriate and necessary to attempt to cause such a Policy to comply
with section 7702. For these reasons, American Franklin reserves the right to
restrict Policy transactions as necessary to attempt to continue its
qualification as a life insurance contract under section 7702.
In addition to the definitional test described above, section 817(h)
mandates that the investments of the Separate Account must be "adequately
diversified" in accordance with Treasury regulations in order for the Policy to
qualify as a life insurance contract under section 7702 of the Code. The
Separate Account, through the Funds, intends to comply with the diversification
requirements prescribed in Treas. Reg. ss.1.817-5, which affect how the Fund's
assets are to be invested.
In certain circumstances, owners of variable life insurance contracts may
be considered the owners, for federal income tax purposes, of the assets of the
separate account used to support their contracts. In those circumstances, income
and gains from the separate account assets would be includable in the variable
contract owner's gross income. The Service has stated in published rulings that
a variable contract owner will be considered the owner of separate account
assets if the contract owner possesses incidents of ownership in those assets,
such as the ability to exercise investment control over the assets. The Treasury
also announced, in connection with the issuance of temporary regulations
concerning diversification, that those regulations "do not provide guidance
concerning the circumstances in which investor control of the investments of a
segregated asset account may cause the investor (i.e., the Policy Owner), rather
than the insurance company, to be treated as the owner of the assets in the
account." This announcement also stated that guidance would be issued by way of
regulations or rulings on the "extent to which policyholders may direct their
investments to particular subaccounts without being treated as owners of the
underlying assets."
The ownership rights under the Policy are similar to, but different in
certain respects from, those described by the Service in rulings in which it was
determined that policy owners were not owners of separate account assets. For
example, the Policy Owner has additional flexibility in allocating premium
payments and policy values. These differences could result in a Policy Owner
being treated as the owner of a pro rata portion of the assets of the Separate
Account. In addition, American Franklin does not know what standards will be set
forth, if any, in the regulations or rulings which the Treasury has stated it
expects to issue. American Franklin therefore reserves the right to modify the
Policy as necessary to attempt to prevent a Policy Owner from being considered
the owner of a pro rata share of the assets of the Separate Account or to
otherwise qualify the Policy for favorable tax treatment.
The policies may be used in various arrangements, including nonqualified
deferred compensation or salary continuance plans, split dollar insurance plans,
executive bonus plans, retiree medical benefit plans and others. The tax
consequences of such plans may vary depending on the particular facts and
circumstances of each individual arrangement. American Franklin does not
guarantee the tax treatment of any such arrangement. Therefore, if you are
contemplating the use of the Policies in any arrangement
29
<PAGE>
the value of which depends in part on its tax consequences, you should be sure
to consult a qualified tax advisor regarding the tax attributes of the
particular arrangement.
The following discussion assumes that the policy will qualify as a life
insurance contract for federal income tax purposes.
Tax Treatment of Policy Benefits
In General. American Franklin believes that the proceeds and cash value
increases of a Policy should be treated in a manner consistent with a
flexible-benefit life insurance policy for federal income tax purposes. Thus,
the Death Benefit under the Policy should be excludable from the gross income of
the Beneficiary under Code section 101(a)(1).
Depending on the circumstances, the exchange of a Policy, a change in the
Policy's death benefit option (i.e., a change from option A to option B or vice
versa), a policy loan, a withdrawal, a surrender, or an assignment of the Policy
may have federal income tax consequences. In addition, federal, state and local
transfer, and other tax consequences of ownership or receipt of Policy proceeds
depend on the circumstances of each Policy Owner or Beneficiary.
Generally, the Policy Owner will not be deemed to be in constructive
receipt of the Policy Account, including increments thereof, until there is a
distribution. The tax consequences of distributions from, and loans taken from
or secured by a Policy, depend on whether the Policy is classified as a
"Modified Endowment Contract." Whether a Policy is or is not a modified
endowment contract, upon a complete surrender or lapse of a Policy, or when
benefits are paid at such a Policy's maturity, if the amounts received plus the
amount of indebtedness exceeds the total investment in the Policy the excess
will generally be treated as ordinary income subject to tax.
Modified Endowment Contracts. Code section 7702A establishes a class of life
insurance contracts designated as "Modified Endowment Contracts," which applies
to Policies entered into or materially changed after June 20, 1988.
Due to the Policy's flexibility, classification as a Modified Endowment
Contract will depend on the individual circumstances of each Policy. In general,
a Policy will be a Modified Endowment Contract if the accumulated premiums paid
at any time during the first seven policy years exceeds the sum of the net level
premiums which would have been paid on or before such time if the Policy
provided for paid-up future benefits after the payment of seven level annual
premiums. The determination of whether a policy will be a Modified Endowment
Contract after a material change generally depends upon the relationship of the
death benefit and Policy Account at the time of such change and the additional
premiums paid in the seven years following the material change.
The rules relating to whether a Policy will be treated as a Modified
Endowment Contract are extremely complex and cannot be adequately described in
the limited confines of this summary. Therefore, a current or prospective Policy
Owner should consult with a competent advisor to determine whether a policy
transaction will case the Policy to be treated as a Modified Endowment Contract.
American Franklin will, however, monitor Policies and will attempt to notify a
Policy Owner on a timely basis if his or her Policy is, in American Franklin's
judgment, in jeopardy of becoming a Modified Endowment Contract.
Distributions from Policies Classified as Modified Endowment Contracts. Policies
classified as Modified Endowment Contracts will be subject to the following tax
rules. First, all distributions, including distributions upon surrender and
partial surrenders from such a Policy, are treated as ordinary income subject to
tax up to the amount equal to the excess (if any) of the Policy Account
immediately before the distribution over the investment in the Policy (described
below) at such time. Second, loans taken from or secured by, such a Policy are
treated as distributions from such a Policy and taxed accordingly. Past due loan
interest that is added to the loan amount will be treated as a loan. Third, a 10
percent additional income tax is included in income except where the
distribution or loan is made on or after the Policy Owner attains age 59 1/2, is
attributable to the Policy Owner's becoming disabled, or is part of a series of
substantially equal periodic payments for the life (or life expectancy) of the
Policy Owner or the joint lives (or joint life expectancies) of the Policy Owner
and the Policy Owner's Beneficiary.
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<PAGE>
If a Policy becomes a modified endowment contract after it is issued,
distributions that occur during the policy year it becomes a modified endowment
contract and any subsequent policy year will be taxed as distributions from a
modified endowment contract. In addition, distributions from a Policy within two
years before it becomes a modified endowment contract will be taxed as
distributions from a modified endowment contract.
Distributions From Policies Not Classified as Modified Endowment Contracts.
Distributions from a policy that is not a Modified Endowment Contract, are
generally treated as first recovering the investment in the Policy (described
below) and then, only after the return of all such investment in the Policy, as
distributing taxable income. An exception to this general rule occurs in the
case of a decrease in the Policy's death benefit or any other change that
reduces benefits under the Policy in the first fifteen years after the policy is
issued and that results in a cash distribution to the Policy Owner in order for
the Policy to continue complying with the section 7702 definitional limits. Such
a cash distribution will be taxed in whole or in part as ordinary income (to the
extent of any gain in the Policy) under rules prescribed in section 7702.
Loans from, or secured by, a policy that is not a Modified Endowment
Contract are not treated as distributions. Instead, such loans generally are
treated as indebtedness of the Policy Owner.
Finally, neither distributions (including distributions upon surrender)
nor loans from, or secured by, a Policy that is not a Modified Endowment
Contract are subject to the 10 percent additional tax.
Policy Loans. Generally, interest paid on any loan under a Policy is not
deductible. Before taking a Policy loan, a Policy Owner should consult a tax
adviser as to the tax consequences of such a loan.
Investment in the Policy. Investment in the Policy means (i) the aggregate
amount of any premiums or other consideration paid for a Policy, minus (ii) the
aggregate amount received under the Policy which is excluded from gross income
of the Policy Owner (except that the amount of any loan from, or secured by, a
Policy that is a Modified Endowment Contract, to the extent such amount is
excluded from gross income, will be disregarded), plus (iii) the amount of any
loan from, or secured by a Policy that is a Modified Endowment Contract to the
extent that such amount is included in the gross income of the Policy Owner.
Multiple Policies. All modified Endowment Contracts that are issued by American
Franklin (and its affiliates) to the same Policy Owner during any calendar year
are treated as one Modified Endowment Contract for purposes of determining the
amount includable in the gross income under Code section 72(e).
American Franklin's Income Taxes
Under the life insurance company tax provisions of the Code, variable life
insurance generally is treated in a manner consistent with fixed-benefit life
insurance. The operations of the Separate Account are included in American
Franklin's federal income tax return and American Franklin pays no federal
income tax on investment income and capital gains reflected in variable life
insurance policy reserves. Consequently, no charge is currently being made to
any division of the Separate Account for federal income taxes of American
Franklin. American Franklin reserves the right, however, to make such a charge
in the future, if it incurs federal income tax which is attributable to the
Separate Account. If such a charge were made, it would be set aside as a
provision for taxes which would be kept in the affected division rather than in
the General Account. It is anticipated that Policy Owners would benefit from any
investment earnings that are not needed to maintain this provision.
American Franklin may have to pay state and local taxes (in addition to
applicable taxes based on premiums) in several states. At present, these taxes
are not substantial. If they increase, however, charges may be made for such
taxes when they are attributable to the Separate Account.
Income Tax Withholding
Generally, unless the Policy Owner provides, in accordance with prescribed
procedures, a written election to the contrary before a taxable distribution is
made, American Franklin is required to withhold income tax from any portion of
the money the Policy Owner receives if he or she withdraws money from
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<PAGE>
the Policy Account or surrenders the policy or if the policy matures. If the
Policy Owner does not wish American Franklin to withhold tax from the payment,
or if it does not withhold enough, the Policy Owner may have to pay taxes later.
Penalties may be applicable under the estimated tax rules if a Policy Owner's
withholding and estimated tax payments are insufficient.
Illustrations of Death Benefits, Policy Account
and Cash Surrender Values, and Accumulated Premiums
The tables set forth below are intended to illustrate how the key
financial elements of a policy work. The tables show how death benefits and
Policy Account and Cash Surrender Values ("policy benefits") could vary over an
extended period of time if the investment divisions of the Separate Account had
constant hypothetical gross annual investment returns of 0%, 4%, 8% or 12% over
the years covered by each table. The policy benefits will differ from those
shown in the tables if the annual investment returns are not absolutely
constant. That is, the figures will be different if the returns averaged 0%, 4%,
8% or 12%, over a period of years but went above or below those figures in
individual policy years. The policy benefits will also differ, depending on a
particular Policy Owner's premium allocation to each division, if the overall
actual rates of return averaged 0%, 4%, 8% or 12%, but went above or below those
figures for the individual investment divisions. The tables are for male
non-tobacco users. Planned premium payments are assumed to be paid at the
beginning of each policy year. The difference between the Policy Account and the
Cash Surrender Value in the first ten years is the surrender charge.
The tables illustrate cost of insurance and expense charges (policy cost
factors) at both current rates (which are described under "Deductions and
Charges-Deductions from the Policy Account-Cost of Insurance Charge" and
"Deductions and Charges-Charges Against the Separate Account," above) and at the
maximum rates American Franklin guarantees in the policies. The amounts shown
illustrate policy benefits on the last day of selected policy years. The
illustrations reflect a daily charge against the Separate Account investment
divisions. This charge includes a .75% annual charge against the investment
divisions of the Separate Account for mortality and expense risks and the effect
on each division's investment experience of the charges to the Funds' assets for
management (.52% of aggregate average daily net assets is assumed) and direct
expenses of the Funds (estimated at .14% of aggregate average daily net assets).
The effect of these adjustments is that on a 0% gross rate of return the net
rate of return would be - 1.41%, on 4% it would be 2.59%, on 8% it would be
6.59% and on 12% it would be 10.59%. Management fees and direct expenses of the
Funds vary by portfolio and may vary from year to year. During 1996 the
aggregate actual charge for management fees and direct expenses incurred by
certain portfolios of the Funds as a percentage of average daily net assets
exceeded the figures assumed. Fidelity Management has voluntarily agreed to
reimburse the management fees and other expenses above a specified percentage of
average net assets of some of the portfolios and to use a portion of the
brokerage commissions paid by certain portfolios to reduce their total expenses.
Such arrangements, which may be terminated at any time without notice, will
increase a portfolio's yield.
The tables reflect a deduction from each premium for taxes (a 2% deduction
is assumed) and a sales expense deduction in the amount of 5% of each premium
paid during any policy year until total premiums for that policy year equal the
Target Premium. There are tables for both Death Benefit Option A and Death
Benefit Option B and each option is illustrated using current and guaranteed
policy cost factors. The current cost tables assume that the monthly
administrative charge remains constant at $6. The guaranteed tables assume that
the monthly administrative charge is $6 in the first year and $12 thereafter. In
each case, deduction of the current additional monthly administrative charge of
$24 per month to cover costs of establishing a policy is assumed in each of the
first 12 policy months. The tables reflect the fact that no deduction is
currently made for federal or state income taxes. If a charge is made for those
taxes in the future, it will take a higher rate of return to produce after-tax
returns of 0%, 4%, 8% or 12%. All illustrations assume that no transfers,
withdrawals, policy loans, or changes in Face Amount or Death Benefit Option
will be made and that no additional benefits are added to the policy.
The second column of each table shows what would happen if an amount equal
to the gross premiums were invested to earn interest, after taxes, of 5%
compounded annually. These tables show that if a policy is surrendered in its
very early years for payment of its Cash Surrender Value, that Cash Surrender
Value will be low in comparison to the amount of the premiums accumulated with
interest. Thus, the cost of owning a policy for a relatively short time will be
high.
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<PAGE>
At the request of an applicant for a policy, American Franklin will
furnish a comparable illustration based on the age and sex of the proposed
Insured Person, standard risk assumptions, a stipulated initial Face Amount and
proposed premiums. Upon request after issuance American Franklin will also
provide an illustration of future policy benefits based on both guaranteed and
current cost factor assumptions and actual Policy Account value. If
illustrations are requested more than once in any policy year, a charge may be
imposed.
Table of Contents For Illustrations
Initial Face Amount $200,000 Male Non-Tobacco
Premium Page
Age 40, Option A-Current Charges $3,000 34
Age 40, Option A-Guaranteed Charges $3,000 34
Age 40, Option B-Current Charges $3,000 35
Age 40, Option B-Guaranteed Charges $3,000 35
Initial Face Amount $100,000 Male Non-Tobacco
Premium Page
Age 40, Option A-Current Charges $1,500 36
Age 40, Option A-Guaranteed Charges $1,500 36
Age 40, Option B-Current Charges $1,500 37
Age 40, Option B-Guaranteed Charges $1,500 37
33
<PAGE>
EquiBuilder III (TM)Flexible Premium Variable Life Insurance
The American Franklin Life Insurance Company
<TABLE>
<CAPTION>
INITIAL FACE AMOUNT $200,000 MALE AGE 40 NON-TOBACCO
DEATH BENEFIT OPTION A ASSUMING CURRENT CHARGES
Insurance Benefit(2) Policy Account(2)
Last Day Assuming Hypothetical Gross Assuming Hypothetical Gross
of Annual Investment Return of Annual Investment Return of
Policy Accumulated
Year Premiums(1) 0% 4% 8% 12% 0% 4% 8% 12%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 3,150 $200,000 $200,000 $200,000 $200,000 $ 2,149 $ 2,248 $ 2,347 $ 2,447
2 6,458 200,000 200,000 200,000 200,000 4,531 4,824 5,125 5,434
3 9,930 200,000 200,000 200,000 200,000 6,858 7,445 8,064 8,717
4 13,577 200,000 200,000 200,000 200,000 9,132 10,114 11,177 12,328
5 17,406 200,000 200,000 200,000 200,000 11,352 12,830 14,475 16,301
6 21,426 200,000 200,000 200,000 200,000 13,520 15,598 17,972 20,678
7 25,647 200,000 200,000 200,000 200,000 15,610 18,390 21,653 25,476
8 30,080 200,000 200,000 200,000 200,000 17,624 21,210 25,536 30,743
9 34,734 200,000 200,000 200,000 200,000 19,565 24,061 29,635 36,535
10 39,620 200,000 200,000 200,000 200,000 21,433 26,944 33,968 42,911
11 44,751 200,000 200,000 200,000 200,000 23,230 29,860 38,552 49,937
12 50,139 200,000 200,000 200,000 200,000 24,984 32,839 43,433 57,714
13 55,796 200,000 200,000 200,000 200,000 26,663 35,851 48,602 66,298
14 61,736 200,000 200,000 200,000 200,000 28,270 38,901 54,085 75,786
15 67,972 200,000 200,000 200,000 200,000 29,805 41,991 59,906 86,282
16 74,521 200,000 200,000 200,000 200,000 31,265 45,117 66,087 97,902
17 81,397 200,000 200,000 200,000 200,000 32,611 48,248 72,628 110,757
18 88,617 200,000 200,000 200,000 200,000 33,865 51,403 79,577 125,011
19 96,198 200,000 200,000 200,000 200,000 35,021 54,581 86,964 140,833
20 104,158 200,000 200,000 200,000 212,244 36,070 57,773 94,823 158,391
25 (Age 65) 150,340 200,000 200,000 200,000 338,537 39,353 73,784 142,690 277,489
</TABLE>
PLANNED PREMIUM $3,000
Cash Surrender Value(2)
Last Day Assuming Hypothetical Gross
of Annual Investment Return of
Policy Accumulated
Year Premiums(1) 0% 4% 8% 12%
1 $ 3,150 $ 1,514 $ 1,613 $ 1,712 $ 1,812
2 6,458 3,626 3,919 4,220 4,530
3 9,930 5,718 6,305 6,924 7,577
4 13,577 7,992 8,974 10,037 11,188
5 17,406 10,212 11,690 13,335 15,161
6 21,426 12,380 14,458 16,832 19,538
7 25,647 14,698 17,478 20,741 24,564
8 30,080 16,940 20,526 24,852 30,059
9 34,734 19,109 23,605 29,179 36,079
10 39,620 21,205 26,716 33,740 42,683
11 44,751 23,230 29,860 38,552 49,937
12 50,139 24,984 32,839 43,433 57,714
13 55,796 26,663 35,851 48,602 66,298
14 61,736 28,270 38,901 54,085 75,786
15 67,972 29,805 41,991 59,906 86,282
16 74,521 31,265 45,117 66,087 97,902
17 81,397 32,611 48,248 72,628 110,757
18 88,617 33,865 51,403 79,577 125,011
19 96,198 35,021 54,581 86,964 140,833
20 104,158 36,070 57,773 94,823 158,391
25 (Age 65) 150,340 39,353 73,784 142,690 277,489
EquiBuilder III (TM)Flexible Premium Variable Life Insurance
The American Franklin Life Insurance Company
<TABLE>
<CAPTION>
INITIAL FACE AMOUNT $200,000 MALE AGE 40 NON-TOBACCO
DEATH BENEFIT OPTION A ASSUMING GUARANTEED CHARGES
Insurance Benefit(2) Policy Account(2)
Last Day Assuming Hypothetical Gross Assuming Hypothetical Gross
of Annual Investment Return of Annual Investment Return of
Policy Accumulated
Year Premiums(1) 0% 4% 8% 12% 0% 4% 8% 12%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 3,150 $200,000 $200,000 $200,000 $200,000 $ 2,149 $ 2,248 $ 2,347 $ 2,447
2 6,458 200,000 200,000 200,000 200,000 4,124 4,408 4,701 5,002
3 9,930 200,000 200,000 200,000 200,000 6,023 6,576 7,162 7,780
4 13,577 200,000 200,000 200,000 200,000 7,844 8,749 9,733 10,801
5 17,406 200,000 200,000 200,000 200,000 9,585 10,925 12,422 14,092
6 21,426 200,000 200,000 200,000 200,000 11,242 13,099 15,232 17,677
7 25,647 200,000 200,000 200,000 200,000 12,814 15,269 18,170 21,589
8 30,080 200,000 200,000 200,000 200,000 14,299 17,433 21,243 25,864
9 34,734 200,000 200,000 200,000 200,000 15,691 19,587 24,458 30,538
10 39,620 200,000 200,000 200,000 200,000 16,987 21,723 27,821 35,655
11 44,751 200,000 200,000 200,000 200,000 18,182 23,840 31,340 41,265
12 50,139 200,000 200,000 200,000 200,000 19,263 25,921 35,014 47,413
13 55,796 200,000 200,000 200,000 200,000 20,217 27,955 38,847 54,158
14 61,736 200,000 200,000 200,000 200,000 21,033 29,929 42,842 61,565
15 67,972 200,000 200,000 200,000 200,000 21,692 31,826 47,000 69,706
16 74,521 200,000 200,000 200,000 200,000 22,186 33,635 51,333 78,674
17 81,397 200,000 200,000 200,000 200,000 22,503 35,343 55,848 88,575
18 88,617 200,000 200,000 200,000 200,000 22,636 36,943 60,565 99,534
19 96,198 200,000 200,000 200,000 200,000 22,573 38,422 65,498 111,697
20 104,158 200,000 200,000 200,000 200,000 22,301 39,767 70,666 125,230
25(Age 65) 150,340 200,000 200,000 200,000 267,426 16,718 43,424 100,602 219,202
</TABLE>
PLANNED PREMIUM $3,000
Cash Surrender Value(2)
Last Day Assuming Hypothetical Gross
of Annual Investment Return of
Policy Accumulated
Year Premiums(1) 0% 4% 8% 12%
1 $ 3,150 $ 1,514 $ 1,613 $ 1,712 $ 1,812
2 6,458 3,219 3,503 3,796 4,097
3 9,930 4,883 5,436 6,022 6,640
4 13,577 6,704 7,609 8,593 9,661
5 17,406 8,445 9,785 11,282 12,952
6 21,426 10,102 11,959 14,092 16,537
7 25,647 11,902 14,357 17,258 20,677
8 30,080 13,615 16,749 20,559 25,180
9 34,734 15,235 19,131 24,002 30,082
10 39,620 16,759 21,495 27,593 35,427
11 44,751 18,182 23,840 31,340 41,265
12 50,139 19,263 25,921 35,014 47,413
13 55,796 20,217 27,955 38,847 54,158
14 61,736 21,033 29,929 42,842 61,565
15 67,972 21,692 31,826 47,000 69,706
16 74,521 22,186 33,635 51,333 78,674
17 81,397 22,503 35,343 55,848 88,575
18 88,617 22,636 36,943 60,565 99,534
19 96,198 22,573 38,422 65,498 111,697
20 104,158 22,301 39,767 70,666 125,230
25(Age 65) 150,340 16,718 43,424 100,602 219,202
(1) Assumes net interest of 5% compounded annually.
(2) Assumes no policy loan has been made.
The death benefits and Policy Account and Cash Surrender Values will differ if
premiums are paid in different amounts or frequencies. It is emphasized that the
hypothetical investment results are illustrative only and should not be deemed a
representation of past or future investment results. Actual investment results
may be more or less than those shown. The death benefits and Policy Account and
Cash Surrender Values for a policy would be different from those shown if actual
rates of investment return applicable to the policy averaged 0%, 4%, 8% or 12%
over a period of years, but also fluctuated above or below that average for
individual policy years. The death benefits and Policy Account and Cash
Surrender Values for a policy would also be different from those shown,
depending on the investment allocations made to the investment divisions of the
Separate Account and the different rates of return of the Funds' portfolios, if
the actual rates of investment return applicable to the policy averaged 0%, 4%,
8% and 12%, but varied above or below that average for individual divisions. No
representations can be made that these hypothetical rates of return can be
achieved for any one year or sustained over any period of time.
34
<PAGE>
EquiBuilder III (TM)Flexible Premium Variable Life Insurance
The American Franklin Life Insurance Company
<TABLE>
<CAPTION>
INITIAL FACE AMOUNT $200,000 MALE AGE 40 NON-TOBACCO
DEATH BENEFIT OPTION B ASSUMING CURRENT CHARGES
Insurance Benefit(2) Policy Account(2)
Last Day Assuming Hypothetical Gross Assuming Hypothetical Gross
of Annual Investment Return of Annual Investment Return of
Policy Accumulated
Year Premiums(1) 0% 4% 8% 12% 0% 4% 8% 12%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 3,150 $202,145 $202,244 $202,343 $202,443 $ 2,145 $ 2,244 $ 2,343 $ 2,443
2 6,458 204,520 204,812 205,112 205,421 4,520 4,812 5,112 5,421
3 9,930 206,836 207,420 208,037 208,687 6,836 7,420 8,037 8,687
4 13,577 209,093 210,069 211,128 212,272 9,093 10,069 11,128 12,272
5 17,406 211,290 212,759 214,393 216,207 11,290 12,759 14,393 16,207
6 21,426 213,431 215,492 217,846 220,530 13,431 15,492 17,846 20,530
7 25,647 215,484 218,237 221,467 225,251 15,484 18,237 21,467 25,251
8 30,080 217,452 220,996 225,269 230,412 17,452 20,996 25,269 30,412
9 34,734 219,337 223,769 229,263 236,061 19,337 23,769 29,263 36,061
10 39,620 221,138 226,556 233,460 242,246 21,138 26,556 33,460 42,246
11 44,751 222,856 229,356 237,874 249,026 22,856 29,356 37,874 49,026
12 50,139 224,522 232,201 242,550 256,493 24,522 32,201 42,550 56,493
13 55,796 226,099 235,052 247,465 264,682 26,099 35,052 47,465 64,682
14 61,736 227,591 237,912 252,638 273,671 27,591 37,912 52,638 73,671
15 67,972 228,996 240,779 258,084 283,541 28,996 40,779 58,084 83,541
16 74,521 230,307 243,645 263,812 294,379 30,307 43,645 63,812 94,379
17 81,397 231,481 246,464 269,793 306,237 31,481 46,464 69,793 106,237
18 88,617 232,541 249,257 276,067 319,248 32,541 49,257 76,067 119,248
19 96,198 233,479 252,012 282,643 333,523 33,479 52,012 82,643 133,523
20 104,158 234,283 254,715 289,525 349,180 34,283 54,715 89,525 149,180
25(Age 65) 150,340 235,850 266,862 328,733 450,416 35,850 66,862 128,733 250,416
</TABLE>
PLANNED PREMIUM $3,000
Cash Surrender Value(2)
Last Day Assuming Hypothetical Gross
of Annual Investment Return of
Policy Accumulated
Year Premiums(1) 0% 4% 8% 12%
1 $ 3,150 $ 1,510 $ 1,609 $ 1,709 $ 1,808
2 6,458 3,615 3,907 4,208 4,516
3 9,930 5,696 6,280 6,897 7,547
4 13,577 7,953 8,929 9,988 11,132
5 17,406 10,150 11,619 13,253 15,067
6 21,426 12,291 14,352 16,706 19,390
7 25,647 14,572 17,325 20,555 24,339
8 30,080 16,768 20,312 24,585 29,728
9 34,734 18,881 23,313 28,807 35,605
10 39,620 20,910 26,328 33,232 42,018
11 44,751 22,856 29,356 37,874 49,026
12 50,139 24,522 32,201 42,550 56,493
13 55,796 26,099 35,052 47,465 64,682
14 61,736 27,591 37,912 52,638 73,671
15 67,972 28,996 40,779 58,084 83,541
16 74,521 30,307 43,645 63,812 94,379
17 81,397 31,481 46,464 69,793 106,237
18 88,617 32,541 49,257 76,067 119,248
19 96,198 33,479 52,012 82,643 133,523
20 104,158 34,283 54,715 89,525 149,180
25(Age 65) 150,340 35,850 66,862 128,733 250,416
EquiBuilder III (TM)Flexible Premium Variable Life Insurance
The American Franklin Life Insurance Company
<TABLE>
<CAPTION>
INITIAL FACE AMOUNT $200,000 MALE AGE 40 NON-TOBACCO
DEATH BENEFIT OPTION B ASSUMING GUARANTEED CHARGES
Insurance Benefit(2) Policy Account(2)
Last Day Assuming Hypothetical Gross Assuming Hypothetical Gross
of Annual Investment Return of Annual Investment Return of
Policy Accumulated
Year Premiums(1) 0% 4% 8% 12% 0% 4% 8% 12%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 3,150 $202,145 $202,244 $202,343 $202,443 $ 2,145 $2,244 $ 2,343 $ 2,443
2 6,458 204,105 204,388 204,680 204,979 4,105 4,388 4,680 4,979
3 9,930 205,982 206,531 207,112 207,726 5,982 6,531 7,112 7,726
4 13,577 207,771 208,667 209,640 210,697 7,771 8,667 9,640 10,697
5 17,406 209,471 210,793 212,269 213,916 9,471 10,793 12,269 13,916
6 21,426 211,076 212,901 214,997 217,399 11,076 12,901 14,997 17,399
7 25,647 212,584 214,988 217,827 221,173 12,584 14,988 17,827 21,173
8 30,080 213,992 217,049 220,761 225,262 13,992 17,049 20,761 25,262
9 34,734 215,295 219,075 223,800 229,693 15,295 19,075 23,800 29,693
10 39,620 216,486 221,059 226,942 234,495 16,486 21,059 26,942 34,495
11 44,751 217,561 222,993 230,187 239,699 17,561 22,993 30,187 39,699
12 50,139 218,504 224,857 233,523 245,329 18,504 24,857 33,523 45,329
13 55,796 219,301 226,634 236,941 251,414 19,301 26,634 36,941 51,414
14 61,736 219,937 228,304 240,429 257,986 19,937 28,304 40,429 57,986
15 67,972 220,394 229,844 243,968 265,071 20,394 29,844 43,968 65,071
16 74,521 220,662 231,236 247,551 272,712 20,662 31,236 47,551 72,712
17 81,397 220,727 232,462 251,162 280,952 20,727 32,462 51,162 80,952
18 88,617 220,586 233,509 254,796 289,844 20,586 33,509 54,796 89,844
19 96,198 220,224 234,356 258,437 299,441 20,224 34,356 58,437 99,441
20 104,158 219,630 234,983 262,072 309,803 19,630 34,983 62,072 109,803
25(Age 65) 150,340 212,195 233,441 278,879 374,780 12,195 33,441 78,879 174,780
</TABLE>
PLANNED PREMIUM $3,000
Cash Surrender Value(2)
Last Day Assuming Hypothetical Gross
of Annual Investment Return of
Policy Accumulated
Year Premiums(1) 0% 4% 8% 12%
1 $ 3,150 $ 1,510 $ 1,609 $ 1,709 $ 1,808
2 6,458 3,200 3,483 3,775 4,075
3 9,930 4,842 5,391 5,972 6,586
4 13,577 6,631 7,527 8,500 9,557
5 17,406 8,331 9,653 11,129 12,776
6 21,426 9,936 11,761 13,857 16,259
7 25,647 11,672 14,076 16,915 20,261
8 30,080 13,308 16,365 20,077 24,578
9 34,734 14,839 18,619 23,344 29,237
10 39,620 16,258 20,831 26,714 34,267
11 44,751 17,561 22,993 30,187 39,699
12 50,139 18,504 24,857 33,523 45,329
13 55,796 19,301 26,634 36,941 51,414
14 61,736 19,937 28,304 40,429 57,986
15 67,972 20,394 29,844 43,968 65,071
16 74,521 20,662 31,236 47,551 72,712
17 81,397 20,727 32,462 51,162 80,952
18 88,617 20,586 33,509 54,796 89,844
19 96,198 20,224 34,356 58,437 99,441
20 104,158 19,630 34,983 62,072 109,803
25(Age 65) 150,340 12,195 33,441 78,879 174,780
(1) Assumes net interest of 5% compounded annually.
(2) Assumes no policy loan has been made.
The death benefits and Policy Account and Cash Surrender Values will differ if
premiums are paid in different amounts or frequencies. It is emphasized that the
hypothetical investment results are illustrative only and should not be deemed a
representation of past or future investment results. Actual investment results
may be more or less than those shown. The death benefits and Policy Account and
Cash Surrender Values for a policy would be different from those shown if actual
rates of investment return applicable to the policy averaged 0%, 4%, 8% or 12%
over a period of years, but also fluctuated above or below that average for
individual policy years. The death benefits and Policy Account and Cash
Surrender Values for a policy would also be different from those shown,
depending on the investment allocations made to the investment divisions of the
Separate Account and the different rates of return of the Funds' portfolios, if
the actual rates of investment return applicable to the policy averaged 0%, 4%,
8% and 12%, but varied above or below that average for individual divisions. No
representations can be made that these hypothetical rates of return can be
achieved for any one year or sustained over any period of time.
35
<PAGE>
EquiBuilder III(TM)Flexible Premium Variable Life Insurance
The American Franklin Life Insurance Company
<TABLE>
<CAPTION>
INITIAL FACE AMOUNT $100,000 MALE AGE 40 NON-TOBACCO
DEATH BENEFIT OPTION A ASSUMING CURRENT CHARGES
Insurance Benefit(2) Policy Account(2)
Last Day Assuming Hypothetical Gross Assuming Hypothetical Gross
of Annual Investment Return of Annual Investment Return of
Policy Accumulated
Year Premiums(1) 0% 4% 8% 12% 0% 4% 8% 12%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,575 $100,000 $100,000 $100,000 $100,000 $ 884 $ 929 $ 975 $ 1,021
2 3,229 100,000 100,000 100,000 100,000 2,027 2,160 2,298 2,439
3 4,965 100,000 100,000 100,000 100,000 3,142 3,411 3,695 3,995
4 6,788 100,000 100,000 100,000 100,000 4,227 4,681 5,172 5,703
5 8,703 100,000 100,000 100,000 100,000 5,285 5,971 6,734 7,580
6 10,713 100,000 100,000 100,000 100,000 6,314 7,281 8,386 9,644
7 12,824 100,000 100,000 100,000 100,000 7,302 8,599 10,121 11,902
8 15,040 100,000 100,000 100,000 100,000 8,246 9,923 11,944 14,374
9 17,367 100,000 100,000 100,000 100,000 9,150 11,255 13,863 17,087
10 19,810 100,000 100,000 100,000 100,000 10,012 12,594 15,882 20,065
11 22,376 100,000 100,000 100,000 100,000 10,834 13,942 18,014 23,344
12 25,069 100,000 100,000 100,000 100,000 11,630 15,314 20,279 26,967
13 27,898 100,000 100,000 100,000 100,000 12,385 16,694 22,672 30,964
14 30,868 100,000 100,000 100,000 100,000 13,096 18,081 25,201 35,373
1 33,986 100,000 100,000 100,000 100,000 13,767 19,479 27,880 40,249
16 37,261 100,000 100,000 100,000 100,000 14,409 20,900 30,733 45,655
17 40,699 100,000 100,000 100,000 100,000 15,010 22,332 33,761 51,645
18 44,309 100,000 100,000 100,000 100,000 15,561 23,768 36,973 58,284
19 48,099 100,000 100,000 100,000 100,000 16,059 25,207 40,382 65,653
20 52,079 100,000 100,000 100,000 100,000 16,497 26,643 44,002 73,839
25(Age 65) 75,170 100,000 100,000 100,000 158,111 17,606 33,660 65,948 129,599
</TABLE>
PLANNED PREMIUM $1,500
Cash Surrender Value(2)
Last Day Assuming Hypothetical Gross
of Annual Investment Return of
Policy Accumulated
Year Premiums(1) 0% 4% 8% 12%
1 $ 1,575 $ 566 $ 612 $ 657 $ 703
2 3,229 1,575 1,708 1,845 1,987
3 4,965 2,572 2,841 3,125 3,425
4 6,788 3,657 4,111 4,602 5,133
5 8,703 4,715 5,401 6,164 7,010
6 10,713 5,744 6,711 7,816 9,074
7 12,824 6,846 8,143 9,665 11,446
8 15,040 7,904 9,581 11,602 14,032
9 17,367 8,922 11,027 13,635 16,859
10 19,810 9,898 12,480 15,768 19,951
11 22,376 10,834 13,942 18,014 23,344
12 25,069 11,630 15,314 20,279 26,967
13 27,898 12,385 16,694 22,672 30,964
14 30,868 13,096 18,081 25,201 35,373
1 33,986 13,767 19,479 27,880 40,249
16 37,261 14,409 20,900 30,733 45,655
17 40,699 15,010 22,332 33,761 51,645
18 44,309 15,561 23,768 36,973 58,284
19 48,099 16,059 25,207 40,382 65,653
20 52,079 16,497 26,643 44,002 73,839
25(Age 65) 75,170 17,606 33,660 65,948 129,599
EquiBuilder III (TM)Flexible Premium Variable Life Insurance
The American Franklin Life Insurance Company
<TABLE>
<CAPTION>
INITIAL FACE AMOUNT $100,000 MALE AGE 40 NON-TOBACCO PLANNED PREMIUM $1,500
DEATH BENEFIT OPTION A ASSUMING CURRENT CHARGES
Insurance Benefit(2) Policy Account(2) Cash Surrender Value(2)
Last Day Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross
of Annual Investment Return of Annual Investment Return of Annual Investment Return of
Policy Accumulated
Year Premiums(1) 0% 4% 8% 12% 0% 4% 8% 12% 0% 4% 8% 12%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,575 $100,000 $100,000 $100,000 $100,000 $ 884 $ 929 $ 975 $ 1,021 $ 566 $ 612 $ 657 $ 703
2 3,229 100,000 100,000 100,000 100,000 1,802 1,931 2,063 2,200 1,349 1,478 1,611 1,747
3 4,965 100,000 100,000 100,000 100,000 2,683 2,934 3,199 3,479 2,113 2,364 2,629 2,909
4 6,788 100,000 100,000 100,000 100,000 3,525 3,936 4,383 4,868 2,955 3,366 3,813 4,298
5 8,703 100,000 100,000 100,000 100,000 4,328 4,938 5,619 6,379 3,758 4,368 5,049 5,809
6 10,713 100,000 100,000 100,000 100,000 5,089 5,935 6,907 8,021 4,519 5,365 6,337 7,451
7 12,824 100,000 100,000 100,000 100,000 5,809 6,928 8,251 9,810 5,353 6,472 7,795 9,354
8 15,040 100,000 100,000 100,000 100,000 6,484 7,915 9,654 11,761 6,142 7,573 9,312 11,419
9 17,367 100,000 100,000 100,000 100,000 7,115 8,893 11,116 13,891 6,887 8,665 10,888 13,663
10 19,810 100,000 100,000 100,000 100,000 7,697 9,859 12,642 16,217 7,583 9,745 12,528 16,103
11 22,376 100,000 100,000 100,000 100,000 8,229 10,811 14,234 18,763 8,229 10,811 14,234 18,763
12 25,069 100,000 100,000 100,000 100,000 8,703 11,741 15,891 21,548 8,703 11,741 15,891 21,548
13 27,898 100,000 100,000 100,000 100,000 9,114 12,644 17,612 24,596 9,114 12,644 17,612 24,596
14 30,868 100,000 100,000 100,000 100,000 9,456 13,511 19,398 27,936 9,456 13,511 19,398 27,936
15 33,986 100,000 100,000 100,000 100,000 9,719 14,334 21,249 31,599 9,719 14,334 21,249 31,599
16 37,261 100,000 100,000 100,000 100,000 9,898 15,107 23,166 35,624 9,898 15,107 23,166 35,624
17 40,699 100,000 100,000 100,000 100,000 9,988 15,823 25,153 40,057 9,988 15,823 25,153 40,057
18 44,309 100,000 100,000 100,000 100,000 9,985 16,478 27,217 44,953 9,985 16,478 27,217 44,953
19 48,099 100,000 100,000 100,000 100,000 9,882 17,064 29,361 50,374 9,882 17,064 29,361 50,374
20 52,079 100,000 100,000 100,000 100,000 9,673 17,574 31,593 56,394 9,673 17,574 31,593 56,394
25(Age 65) 75,170 100,000 100,000 100,000 120,187 6,476 18,413 44,177 98,514 6,476 18,413 44,177 98,514
</TABLE>
(1) Assumes net interest of 5% compounded annually.
(2) Assumes no policy loan has been made.
The death benefits and Policy Account and Cash Surrender Values will differ if
premiums are paid in different amounts or frequencies. It is emphasized that the
hypothetical investment results are illustrative only and should not be deemed a
representation of past or future investment results. Actual investment results
may be more or less than those shown. The death benefits and Policy Account and
Cash Surrender Values for a policy would be different from those shown if actual
rates of investment return applicable to the policy averaged 0%, 4%, 8% or 12%
over a period of years, but also fluctuated above or below that average for
individual policy years. The death benefits and Policy Account and Cash
Surrender Values for a policy would also be different from those shown,
depending on the investment allocations made to the investment divisions of the
Separate Account and the different rates of return of the Funds' portfolios, if
the actual rates of investment return applicable to the policy averaged 0%, 4%,
8% and 12%, but varied above or below that average for individual divisions. No
representations can be made that these hypothetical rates of return can be
achieved for any one year or sustained over any period of time.
36
<PAGE>
EquiBuilder III(TM) Flexible Premium Variable Life Insurance
The American Franklin Life Insurance Company
<TABLE>
<CAPTION>
INITIAL FACE AMOUNT $100,000 MALE AGE 40 NON-TOBACCO PLANNED PREMIUM $1,500
DEATH BENEFIT OPTION B ASSUMING CURRENT CHARGES
Insurance Benefit(2) Policy Account(2) Cash Surrender Value(2)
Last Day Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross
of Annual Investment Return of Annual Investment Return of Annual Investment Return of
Policy Accumulated
Year Premiums(1) 0% 4% 8% 12% 0% 4% 8% 12% 0% 4% 8% 12%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,575 $100,882 $100,927 $100,973 $101,019 $ 882 $ 927 $ 973 $ 1,019 $ 565 $ 610 $ 656 $ 701
2 3,229 102,022 102,155 102,292 102,432 2,022 2,155 2,292 2,432 1,569 1,702 1,839 1,980
3 4,965 103,130 103,398 103,682 103,980 3,130 3,398 3,682 3,980 2,560 2,828 3,112 3,410
4 6,788 104,207 104,658 105,147 105,675 4,207 4,658 5,147 5,675 3,637 4,088 4,577 5,105
5 8,703 105,253 105,934 106,692 107,532 5,253 5,934 6,692 7,532 4,683 5,364 6,122 6,962
6 10,713 106,267 107,226 108,321 109,568 6,267 7,226 8,321 9,568 5,697 6,656 7,751 8,998
7 12,824 107,236 108,519 110,024 111,785 7,236 8,519 10,024 11,785 6,780 8,063 9,568 11,329
8 15,040 108,156 109,810 111,804 114,201 8,156 9,810 11,804 14,201 7,814 9,468 11,462 13,859
9 17,367 109,030 111,101 113,666 116,838 9,030 11,101 13,666 16,838 8,802 10,873 13,438 16,610
10 19,810 109,855 112,388 115,614 119,714 9,855 12,388 15,614 19,714 9,741 12,274 15,500 19,600
11 22,376 110,635 113,674 117,654 122,860 10,635 13,674 17,654 22,860 10,635 13,674 17,654 22,860
12 25,069 111,383 114,972 119,807 126,316 11,383 14,972 19,807 26,316 11,383 14,972 19,807 26,316
13 27,898 112,082 116,265 122,062 130,098 12,082 16,265 22,062 30,098 12,082 16,265 22,062 30,098
14 30,868 112,730 117,548 124,421 134,235 12,730 17,548 24,421 34,235 12,730 17,548 24,421 34,235
15 33,986 113,329 118,824 126,896 138,770 13,329 18,824 26,896 38,770 13,329 18,824 26,896 38,770
16 37,261 113,893 120,106 129,506 143,755 13,893 20,106 29,506 43,755 13,893 20,106 29,506 43,755
17 40,699 114,406 121,378 132,243 149,224 14,406 21,378 32,243 49,224 14,406 21,378 32,243 49,224
18 44,309 114,859 122,628 135,105 155,214 14,859 22,628 35,105 55,214 14,859 22,628 35,105 55,214
19 48,099 115,247 123,850 138,094 161,777 15,247 23,850 38,094 61,777 15,247 23,850 38,094 61,777
20 52,079 115,562 125,035 141,209 168,962 15,562 25,035 41,209 68,962 15,562 25,035 41,209 68,962
25(Age 65) 75,170 115,816 130,091 158,706 215,476 15,816 30,091 58,706 115,476 15,816 30,091 58,706 115,476
</TABLE>
EquiBuilder III (TM)Flexible Premium Variable Life Insurance
The American Franklin Life Insurance Company
<TABLE>
<CAPTION>
INITIAL FACE AMOUNT $100,000 MALE AGE 40 NON-TOBACCO PLANNED PREMIUM $1,500
DEATH BENEFIT OPTION B ASSUMING GUARANTEED CHARGES
Insurance Benefit(2) Policy Account(2) Cash Surrender Value(2)
Last Day Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross
of Annual Investment Return of Annual Investment Return of Annual Investment Return of
Policy Accumulated
Year Premiums(1) 0% 4% 8% 12% 0% 4% 8% 12% 0% 4% 8% 12%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 1,575 $100,882 $100,927 $100,973 $101,019 $ 882 $ 927 $ 973 $ 1,019 $ 565 $ 610 $ 656 $ 701
2 3,229 101,793 101,921 102,053 102,189 1,793 1,921 2,053 2,189 1,341 1,469 1,601 1,737
3 4,965 102,664 102,913 103,176 103,455 2,664 2,913 3,176 3,455 2,094 2,343 2,606 2,885
4 6,788 103,491 103,898 104,341 104,821 3,491 3,898 4,341 4,821 2,921 3,328 3,771 4,251
5 8,703 104,276 104,877 105,549 106,298 4,276 4,877 5,549 6,298 3,706 4,307 4,979 5,728
6 10,713 105,013 105,845 106,800 107,894 5,013 5,845 6,800 7,894 4,443 5,275 6,230 7,324
7 12,824 105,703 106,800 108,094 109,620 5,703 6,800 8,094 9,620 5,247 6,344 7,638 9,164
8 15,040 106,344 107,739 109,433 111,486 6,344 7,739 9,433 11,486 6,002 7,397 9,091 11,144
9 17,367 106,933 108,659 110,815 113,504 6,933 8,659 10,815 13,504 6,705 8,431 10,587 13,276
10 19,810 107,467 109,555 112,240 115,686 7,467 9,555 12,240 15,686 7,353 9,441 12,126 15,572
11 22,376 107,945 110,424 113,707 118,047 7,945 10,424 13,707 18,047 7,945 10,424 13,707 18,047
12 25,069 108,356 111,255 115,209 120,596 8,356 11,255 15,209 20,596 8,356 11,255 15,209 20,596
13 27,898 108,696 112,040 116,741 123,343 8,696 12,040 16,741 23,343 8,696 12,040 16,741 23,343
14 30,868 108,956 112,769 118,297 126,302 8,956 12,769 18,297 26,302 8,956 12,769 18,297 26,302
15 33,986 109,127 113,430 119,865 129,484 9,127 13,430 19,865 29,484 9,127 13,430 19,865 29,484
16 37,261 109,205 114,015 121,442 132,905 9,205 14,015 21,442 32,905 9,205 14,015 21,442 32,905
17 40,699 109,182 114,513 123,020 136,583 9,182 14,513 23,020 36,583 9,182 14,513 23,020 36,583
18 44,309 109,056 114,919 124,593 140,541 9,056 14,919 24,593 40,541 9,056 14,919 24,593 40,541
19 48,099 108,821 115,222 126,155 144,800 8,821 15,222 26,155 44,800 8,821 15,222 26,155 44,800
20 52,079 108,471 115,412 127,696 149,383 8,471 15,412 27,696 49,383 8,471 15,412 27,696 49,383
25(Age 65) 75,170 104,498 113,973 134,419 177,857 4,498 13,973 34,419 77,857 4,498 13,973 34,419 77,857
</TABLE>
(1) Assumes net interest of 5% compounded annually.
(2) Assumes no policy loan has been made.
The death benefits and Policy Account and Cash Surrender Values will differ if
premiums are paid in different amounts or frequencies. It is emphasized that the
hypothetical investment results are illustrative only and should not be deemed a
representation of past or future investment results. Actual investment results
may be more or less than those shown. The death benefits and Policy Account and
Cash Surrender Values for a policy would be different from those shown if actual
rates of investment return applicable to the policy averaged 0%, 4%, 8% or 12%
over a period of years, but also fluctuated above or below that average for
individual policy years. The death benefits and Policy Account and Cash
Surrender Values for a policy would also be different from those shown,
depending on the investment allocations made to the investment divisions of the
Separate Account and the different rates of return of the Funds' portfolios, if
the actual rates of investment return applicable to the policy averaged 0%, 4%,
8% and 12%, but varied above or below that average for individual divisions. No
representations can be made that these hypothetical rates of return can be
achieved for any one year or sustained over any period of time.
37
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Additional Information
Voting Rights of a Policy Owner
Voting Rights of the Funds
As was explained in "Separate Account Investment Choices," above, the
assets in the divisions of the Separate Account are invested in shares of the
corresponding portfolios of the Funds. American Franklin is the legal owner of
the shares and, as such, has the right to vote on certain matters. Among other
things, it may vote to:
a. elect the Boards of Trustees of the Funds;
b. ratify the selection of independent auditors for the Funds; and
c. vote on any other matters described in the current prospectuses of
the Funds or requiring a vote by shareholders under the Investment
Company Act of 1940.
Even though American Franklin owns the shares, American Franklin will
provide Policy Owners the opportunity to tell it how to vote the number of
shares that are allocated to their policies. American Franklin will vote those
shares at meetings of shareholders of the Funds according to such instructions.
If American Franklin does not receive instructions in time from all Policy
Owners, it will vote shares for which no instructions have been received in a
portfolio in the same proportion as it votes shares for which it received
instructions in that portfolio. American Franklin will also vote any shares of
the Funds that it is entitled to vote directly due to amounts it has accumulated
in the Separate Account in the same proportions that Policy Owners vote. If the
federal securities laws or regulations or interpretations of them change so that
American Franklin is permitted to vote shares of the Funds without seeking
instructions from Policy Owners or to restrict Policy Owner voting, American
Franklin may do so.
Determination of Voting Shares
A Policy Owner may participate in voting only on matters concerning a
Fund's portfolios in which his or her assets have been invested. American
Franklin determines the number of a Fund's shares in each division that are
attributable to a particular policy by dividing the amount in the Policy Account
allocated to that division by the net asset value of one share of the
corresponding portfolio as of the record date set by the Fund's Board for the
Fund's shareholders meeting. The record date for this purpose must be at least
10 and no more than 90 days before the meeting of the Fund. American Franklin
will count fractional shares for these purposes.
For example, suppose that a Policy Account has a net value of $3,000, with
50% of this amount being attributable to the Equity-Income division and 50%
being attributable to the Money Market division, which means that $1,500 is in
each division. Assume that the net asset value of one share in the corresponding
Equity-Income Portfolio is $150 and the net asset value of one share in the
corresponding Money Market Portfolio is $100. If the $1,500 in each division is
divided by the net asset value of one share, the Policy Owner will have the
right to instruct American Franklin regarding 10 shares for the Equity-Income
division and 15 shares for the Money Market division.
American Franklin will send proxy material and a form for giving voting
instructions to each Policy Owner that has voting rights. In certain cases,
American Franklin may disregard instructions relating to approval of investments
or contracts with an adviser to a Fund or relating to changes in a Fund's
investment adviser, principal underwriter or the investment policies of its
portfolios. If it does so, American Franklin will advise the Policy Owners and
give its reasons in the next semiannual report to Policy Owners.
How Shares of the Funds Are Voted
All shares of the Funds are entitled to one vote. The votes of all
divisions are cast together on an aggregate basis, except on matters where the
interests of the portfolios differ. In such cases, voting is on a
portfolio-by-portfolio basis. In these cases, the approval of the shareholders
in one portfolio is not needed to make a decision in another portfolio. Examples
of matters that would require a portfolio-by-portfolio vote are changes in the
fundamental investment policy of a particular portfolio or approval of an
38
<PAGE>
investment advisory agreement. Shareholders in a portfolio not affected by a
particular matter generally would not be entitled to vote on it.
Voting Privileges of Participants in Other Separate Accounts
Shares of the Funds may be owned by other separate accounts of American
Franklin or by separate accounts of other insurance companies affiliated or
unaffiliated with American Franklin. Shares owned by these separate accounts
will probably be voted according to the instructions of the owners of insurance
policies and contracts issued by those other insurance companies. Moreover,
American Franklin expects that the number of shares owned in the Funds by
separate accounts of insurance companies that are not affiliated with American
Franklin will initially exceed the number of shares owned by the Separate
Account. These factors will dilute the effect of the voting instructions of
Policy Owners. American Franklin currently does not foresee any disadvantages to
Policy Owners arising out of this. The Securities and Exchange Commission has
granted the Funds exemptive orders pursuant to the Investment Company Act of
1940 that permit the Funds to offer their shares to separate accounts, like the
Separate Account, that are maintained by life insurance companies that are not
affiliated with the Funds. Those exemptive orders impose several conditions on
the Funds and participating separate accounts to protect the holders of
interests in the various separate accounts investing in shares of the Funds. The
Boards of Trustees of the Funds have agreed 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 by, and at the
expense of, American Franklin or one or more of the other participating
insurance companies. American Franklin and the other participating insurance
companies are obligated to report potential or existing conflicts of interest to
the Funds' Boards of Trustees. If American Franklin believes that a Fund's
response to any of those events insufficiently protects Policy Owners, American
Franklin will take appropriate action to protect Policy Owners. Corrective
action for an irreconcilable conflict of interest involving the Separate Account
might include withdrawal of the assets of the Separate Account from a Fund.
Also, if American Franklin ever believes that any of the Funds' portfolios is so
large as to impair materially the investment performance of a portfolio or a
Fund, American Franklin will examine other investment options.
Separate Account Voting Rights
Under the Investment Company Act of 1940, certain actions (such as some of
those described under "Separate Account Investment Choices-Right to Change
Operations," above) may require Policy Owner approval. In that case, a Policy
Owner will be entitled to one vote for every $100 of value allocated to his or
her policy in the investment divisions of the Separate Account, and a
proportionate fractional vote for any amount less than $100. American Franklin
will cast votes attributable to amounts retained in the investment divisions of
the Separate Account in the same proportions as votes cast by Policy Owners.
Reports To Policy Owners
After the end of each policy year, each Policy Owner will be sent a report
that shows the current death benefit for his or her policy, the value of his or
her Policy Account, information about investment divisions, the Cash Surrender
Value of his or her policy, the amount of any outstanding policy loans, the
amount of any interest owed on the loan and information about the current loan
interest rate. The annual report will also show any transactions involving the
Policy Owner's Policy Account that occurred during the year. Transactions
include premium allocations, deductions, and any transfers or withdrawals that
were made in that year. American Franklin will also send semi-annual reports
with financial information on the Separate Account and the Funds, including a
list of the investments held by each portfolio.
In addition, reports will also contain any other information that is
required by the insurance supervisory official in the jurisdiction in which a
policy is delivered.
Notices will be sent to Policy Owners for transfers of amounts between
investment divisions and certain other policy transactions.
Limits On American Franklin's Right To Challenge A Policy
American Franklin can challenge the validity of an insurance policy (based
on material misstatements
39
<PAGE>
in the application or, with respect to any policy change, based on material
misstatements in the application for the change) if it appears that the Insured
Person is not actually covered by the policy under American Franklin's rules.
However, there are some limits on how and when American Franklin can challenge
the policy.
Except on the basis of fraud, American Franklin 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 reinstated. (Some states may
require this time to be measured in some other way.)
Except on the basis of fraud, American Franklin cannot challenge any
policy change that requires evidence of insurability (such as an increase in
Face Amount) after the change has been in effect for two years during the
Insured Person's lifetime.
American Franklin can challenge at any time (and require proof of
continuing disability) an additional benefit that provides benefits to the
Insured Person in the event that the Insured Person becomes totally disabled.
If the Insured Person dies within the time that the validity of the policy
may be challenged, American Franklin may delay payment until it decides whether
to challenge the policy.
If the Insured Person's age or sex is misstated on any application, the
death benefit and any additional benefits provided will be those which would
have been purchased by the most recent deduction for the cost of insurance and
the cost of any additional benefits at the Insured Person's correct age and sex.
If the Insured Person commits suicide within two years after the date on
which the policy was issued or reinstated, the death benefit will be limited to
the total of all premiums that have been paid to the time of death minus the
amount of any outstanding policy loan and loan interest and minus any partial
withdrawals of Net Cash Surrender Value. If the Insured Person commits suicide
within two years after the effective date of an increase in death benefit that
the Policy Owner requested, American Franklin will pay the death benefit which
was in effect before the increase, plus the monthly cost of insurance deductions
for the increase (including the expense charge). (Some states require this time
to be measured by some other date.)
Payment Options
Policy benefits or other payments such as the Net Cash Surrender Value or
death benefit may be paid immediately in one sum or another form of payment
described below may be designated for all or part of the proceeds. Payments
under these options are not affected by the investment experience of any
investment division of the Separate Account. Instead, interest accrues pursuant
to the options chosen (such interest will be appropriately includable in federal
gross income of the beneficiary). If the Policy Owner does not arrange for a
specific form of payment before the Insured Person dies, the beneficiary will
have his choice. However, if the Policy Owner makes an arrangement for payment
of the money, the beneficiary cannot change that choice after the Insured Person
dies. Payment Options will also be subject to American Franklin's rules at the
time of selection. Currently, these alternate payment options are only available
if the proceeds applied are $1,000 or more and any periodic payment will be at
least $20.
The following payment options are generally available:
Income Payments for a Fixed Period: American Franklin will pay the
amount applied in equal installments (including applicable interest) for a
specific number of years, for up to 30 years.
Life Income with Payments Guaranteed for a Fixed Term of Years:
American Franklin will pay the money at agreed intervals as a definite
number of equal payments and as long thereafter as the payee lives. The
Policy Owner (or beneficiary in some cases) may choose any one of four
definite periods: 5, 10, 15 or 20 years.
Proceeds at Interest: The money will stay on deposit with American
Franklin while the payee is alive. Interest will accrue on the money at a
declared interest rate, and interest will be paid at agreed upon
intervals.
40
<PAGE>
Fixed Amount: American Franklin will pay the sum in installments in
a specified amount. Installments will be paid until the original amount,
together with any interest, has been exhausted.
American Franklin guarantees interest under the foregoing options at the
rate of 3% a year.
American Franklin may also pay or credit excess interest on the options
from time to time. The rate and manner of payment or crediting will be
determined by American Franklin. Under the second option no excess interest will
be paid on the part of the proceeds used to provide payments beyond the fixed
term of years.
The beneficiary or any other person who is entitled to receive payment may
name a successor to receive any amount that would otherwise be paid to that
person's estate if that person died. No successor may be named if a payment
option chosen is contingent on the life of a beneficiary. The person who is
entitled to receive payment may change the successor at any time.
American Franklin must approve any arrangements that involve more than one
of the payment options, or a payee who is not a natural person (for example, a
corporation), or a payee who is a fiduciary. Also, the details of all
arrangements will be subject to American Franklin's rules at the time the
arrangements take effect. This includes rules on the minimum amount payable
under an option, minimum amounts for installment payments, withdrawal or
commutation rights (rights to cancel an arrangement involving payments over time
in return for a lump sum payment), the naming of people who are entitled to
receive payment and their successors and the ways of proving age and survival.
A Policy Owner may change his or her choice of a payment option (and may
make later changes) and that change will take effect in the same way as it would
if a beneficiary were being changed. (See "The Beneficiary," below). Any amounts
paid under the payment options will not be subject to the claims of creditors or
to legal process, to the extent that the law provides.
The Beneficiary
An applicant for a policy must name a beneficiary when he or she applies
for a policy. The beneficiary is entitled to the insurance benefits of the
policy. The Policy Owner may change the beneficiary during the Insured Person's
lifetime by written notice satisfactory to American Franklin at its
Administrative Office. The change will take effect on the date the notice is
signed. However, the change will be subject to all payments made and actions
taken by American Franklin under the Policy before American Franklin receives
the notice at its Administrative Office. If the beneficiary is changed, any
previous arrangement made as to a payment option for benefits is canceled. A
payment option for the new beneficiary may be chosen.
At the time of the Insured Person's death, the benefit will be paid
equally to the primary beneficiaries, or, if no primary beneficiaries are
living, the first contingent beneficiaries (if any), or, if no primary or first
contingent beneficiaries are living, the second contingent beneficiaries (if
any). If no beneficiary is living when the Insured Person dies, the death
benefit will be paid to the Policy Owner, or to the executors or administrators
of the Policy Owner.
Assignment of A Policy
The Policy Owner may assign (transfer) his or her rights in a policy to
someone else as collateral for a loan or for some other reason. In order to do
so the Policy Owner must send a copy of the assignment to American Franklin's
Administrative Office. American Franklin is not responsible for any payment made
or any action taken before it has received notice of the assignment (or of
termination of the assignment) or for the validity of the assignment. An
absolute assignment is a change of ownership. The federal income tax treatment
of a policy that has been assigned for valuable consideration may be different
from the federal income tax treatment described herein.
Employee Benefit Plans
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 EquiBuilder III policies in connection with an
41
<PAGE>
employment-related insurance or benefit plan. The United States Supreme Court
held, in a 1983 decision, that, under Title VII, optional annuity benefits under
a deferred compensation plan could not vary on the basis of sex.
The policies described herein are not intended for use in connection with
qualified plans or trusts under the Code.
Payment of Proceeds
American Franklin will pay any death benefits, Net Cash Surrender Value or
loan proceeds within seven days after it receives the required form or request
(and other documents that may be required) at its Administrative Office. Death
benefits are determined as of the date of death of the Insured Person and will
not be affected by subsequent changes in the unit values of the investment
divisions of the Separate Account. Interest will be paid in respect of the
period from the date of death to the date of payment.
American Franklin may, however, delay payment for one or more of the
following reasons:
American Franklin contests the policy or is deciding whether or not
to contest the policy;
American Franklin cannot determine the amount of the payment because
the New York Stock Exchange is closed, because trading in securities has
been restricted by the Securities and Exchange Commission, or because the
Securities and Exchange Commission has declared that an emergency exists;
or
The Securities and Exchange Commission by order permits American
Franklin to delay payment to protect the Policy Owners.
American Franklin may defer payment of any Net Cash Surrender Value
or loan amount from the Guaranteed Interest Division for up to six months
after receipt of a request. American Franklin will pay interest of at
least 3% a year from the date a request for withdrawal of Net Cash
Surrender Value is received if payment from the Guaranteed Interest
Division is delayed more than 30 days.
Dividends
No dividends are paid on the policies offered by this Prospectus.
Distribution of the Policies
Franklin Financial Services Corporation ("Franklin Financial"), a Delaware
corporation and a wholly-owned subsidiary of The Franklin Life Insurance
Company, is the principal underwriter, as defined by the Investment Company Act
of 1940, of the EquiBuilder III policies for the Separate Account under a Sales
Agreement between Franklin Financial and the Separate Account. Franklin
Financial's principal executive office is at #1 Franklin Square, Springfield,
Illinois 62713.
Franklin Financial is registered with the Securities and Exchange
Commission as a broker-dealer under the Securities and Exchange Act of 1934 and
is a member of the National Association of Securities Dealers, Inc. Franklin
Financial also acts as principal underwriter for Franklin Life Variable Annuity
Funds A and B and Franklin Life Money Market Variable Annuity Fund C, which are
separate accounts of The Franklin Life Insurance Company and registered
investment companies issuing interests in variable annuity contracts. Franklin
Financial also acts as principal underwriter for Separate Account VUL of
American Franklin, which is a registered investment company issuing interests in
variable life insurance contracts having policy features that are similar to
those of EquiBuilder III policies but the assets of which are invested in a
different open-end management investment company. American Franklin no longer
offers new policies having an interest in that separate account. Franklin
Financial is the principal underwriter of American Franklin's EquiBuilder II
variable life insurance policies under which interests in the Separate Account
are issued. The EquiBuilder II policies have policy features that are similar to
those of the EquiBuilder III policies but have a different sales charge
structure.
42
<PAGE>
Policies are sold primarily by persons who are insurance agents or brokers
for American Franklin authorized by applicable law to sell life and other forms
of personal insurance, including variable life insurance. Pursuant to an
agreement between American Franklin and Franklin Financial, Franklin Financial
has agreed to employ and supervise agents chosen by American Franklin to sell
the policies and to use its best efforts to qualify such persons as registered
representatives of Franklin Financial.
Franklin Financial incurs certain sales expenses, such as sales literature
preparation and related costs, in connection with the sale of the policies
pursuant to a Sales Agreement with American Franklin. Sales expense deductions
made from each premium and surrender charges imposed in connection with the
surrender of a policy and certain reductions of Face Amount are paid to Franklin
Financial as a means to recover sales expenses. Such sales expense deductions
and surrender charges are not necessarily related to Franklin Financial's actual
sales expenses in any particular year. To the extent sales expenses are not
covered by sales expense deductions and surrender charges, Franklin Financial
will cover them from other assets.
Commissions earned by registered representatives of Franklin Financial on
the sale of the policies range up to 73% of premiums paid during the first
policy year. Pursuant to an Agreement between American Franklin and Franklin
Financial, American Franklin has agreed to pay such commissions and Franklin
Financial has agreed to remit to American Franklin the excess of all sales
expense deductions and surrender charges paid to Franklin Financial over the
sales and promotional expenses incurred by Franklin Financial to the extent
necessary to reimburse American Franklin for commissions or other remuneration
paid in connection with sales of the policies. Such Agreement also provides that
the amount of such commissions and other remuneration not so reimbursed shall be
deemed to have been contributed by American Franklin to the capital of Franklin
Financial. Commissions and other remuneration will be paid by American Franklin
from other sources, including mortality and expense risk charges or other
charges in connection with the EquiBuilder III policies, or from its General
Account to the extent it does not receive reimbursement from Franklin Financial.
Franklin Financial also may enter into agreements with American Franklin
and each such agent with respect to the supervision of such agent. The policies
also may be sold by persons who are registered representatives of other
registered broker-dealers who are members of the National Association of
Securities Dealers, Inc., and with whom Franklin Financial may enter into a
selling agreement.
Registration as a broker-dealer does not mean that the Securities and
Exchange Commission has in any way passed upon the financial standing, fitness
or conduct of any broker or dealer, upon the merits of any securities offering
or upon any other matter relating to the business of any broker or dealer.
Salesmen and employees selling policies, where required, are also licensed as
securities salesmen under state law.
Applications
When an application for a policy is completed, it is submitted to American
Franklin. American Franklin makes the decision to issue a policy based on the
information in the application and its standards for issuing insurance and
classifying risks. If it decides not to issue a policy, any premium paid will be
refunded.
Reinsurance Agreement with Integrity Life Insurance Company
American Franklin has entered into a reinsurance agreement with Integrity
Life Insurance Company ("Integrity") in respect of the EquiBuilder III policies.
This agreement was terminated as to policies sold on or after January 1, 1997
but will continue as to business in force prior to that date.
Integrity is a subsidiary of ARM Financial Group, Inc., a financial
services company controlled by Morgan Stanley & Co. Incorporated, an investment
banking firm headquartered in New York, New York.
State Regulation
As a life insurance company organized and operated under Illinois law,
American Franklin is subject to statutory provisions governing such companies
and to regulation by the Illinois Director of Insurance. An annual statement is
filed with the Director on or before March 1 of each year covering the
operations of
43
<PAGE>
American Franklin for the preceding year and its financial condition on December
31 of such year. American Franklin's books and accounts are subject to review
and examination by the Illinois Insurance Department at all times, and a full
examination of its operations is conducted by the National Association of
Insurance Commissioners ("NAIC") periodically. The NAIC has divided the country
into six geographic zones. A representative of each such zone may participate in
the examination.
In addition, American Franklin is subject to the insurance laws and
regulations of the jurisdictions other than Illinois in which it is licensed to
operate. Generally, the insurance departments of such jurisdictions apply the
law of Illinois in determining permissible investments for American Franklin.
Legal Matters
Sutherland, Asbill & Brennan, L.L.P. of Washington, D.C. has provided
advice on certain matters relating to the federal securities laws.
Legal Proceedings
Neither American Franklin nor the Separate Account is a party to any
material legal proceedings.
Experts
The statement of net assets as of December 31, 1996 and the related
statement of operations for the year then ended and the statements of changes in
net assets for each of the two years then ended of the Separate Account,
appearing herein, have been audited by Ernst & Young LLP, independent auditors,
as set forth in their report thereon appearing elsewhere herein. The balance
sheets of American Franklin at December 31, 1996 and 1995 and the statements of
operations, shareholder's equity and cash flows of American Franklin for the
year ended December 31, 1996, the eleven months ended December 31, 1995 and the
one month ended January 31, 1995 have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein. The statements of operations, shareholder's equity and cash flows of
American Franklin for the year ended December 31, 1994 have been audited by
Coopers & Lybrand L.L.P., independent accountants, as set forth in their report
thereon appearing elsewhere herein. Such financial statements referred to above
are included in reliance upon such reports given upon the authority of such
firms as experts in accounting and auditing.
Actuarial matters in this Prospectus have been examined by Robert M.
Beuerlein, who is Executive Vice President and Actuary of American Franklin. His
opinion on actuarial matters is filed as an exhibit to the Registration
Statement relating to the policies filed with the SEC.
Registration Statement
A Registration Statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, with respect to the
policies offered hereby. This Prospectus does not contain all the information
set forth in the Registration Statement and amendments thereto and exhibits
filed as a part thereof, to all of which reference is hereby made for further
information concerning American Franklin, the Separate Account and the policies
offered hereby. Statements contained in this Prospectus as to the content of
policies and other legal instruments are summaries. For a complete statement of
the terms thereof, reference is made to such instruments as filed.
Other Policies and Contracts
American Franklin may offer, under other prospectuses, other variable life
policies or variable annuity contracts having interests in the Separate Account
and containing terms and conditions different from those of the policies offered
hereby. Interests in the Separate Account are also issued under American
Franklin's EquiBuilder II variable life insurance policies, which have policy
features that are similar to those of EquiBuilder III policies but which have a
different sales charge structure.
44
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Management
The following persons hold the positions designated with respect to
American Franklin. The table also shows their principal occupations during the
past five years and any positions held with The Franklin and Franklin Financial.
Position Held With
American Franklin
Name Principal Occupations During and Franklin
---- Past 5 Years Financial
---------------------------- ------------------
Wayne A. Barnard** Vice President and Chief Vice President,
Actuary, American General Life American Franklin.
Insurance Company, Houston,
Texas.
Earl W. Baucom Senior Vice President and Chief Director, Senior
Financial Officer, The Franklin, Vice President and
since June 10, 1996; Director, Chief Financial
The Franklin, since August 21, Officer, American
1996; Chief Financial Officer, Franklin.
Providian Direct Insurance, from
October, 1993 to December, 1995;
Controller, Providian
Corporation, prior to October,
1993.
Robert M. Beuerlein Senior Vice President-Actuarial Director, Executive
and Director, The Franklin; Vice Vice President and
President, The Franklin, from Actuary, American
April, 1991 to January, 1993; Franklin; Director,
Executive Vice President and Franklin Financial.
Actuary, American Franklin; Vice
President and Actuary, American
Franklin, prior to January,
1992.
Brady W. Creel Senior Vice President, Chief Director, Senior
Marketing Officer and Director, Vice President and
The Franklin since September 3, Chief Marketing
1996; Regional Manager, The Officer, American
Franklin, prior to September, Franklin.
1996.
Robert M. Devlin* Chairman of the Board, The Chairman of the
Franklin, since August 21, 1996; Board, American
Director, The Franklin, since Franklin.
February, 1995; Senior Chairman,
The Franklin, from February,
1995 to August, 1996; Chief
Executive Officer, American
General Corporation, Houston,
Texas, since October 24, 1996;
Director, American General
Corporation; President, American
General Corporation, from
October, 1995 to October, 1996;
Vice Chairman, American General
Corporation, prior to October,
1995; President and Chief
Investment Officer, American
General Life Insurance Company,
Houston, Texas, prior to 1993.
45
<PAGE>
Position Held With
American Franklin
Name Principal Occupations During and Franklin
---- Past 5 Years Financial
---------------------------- ------------------
Barbara Fossum Vice President, The Franklin; Vice President,
prior to June, 1995, Vice American Franklin.
President, American General Life
Insurance Company, Houston,
Texas.
Ross D. Friend Senior Vice President, General Director, Senior
Counsel and Secretary, The Vice President,
Franklin, since September 3, General Counsel and
1996; Attorney-In-Charge, Secretary, American
Prudential Life Insurance Franklin; Director,
Company, Jacksonville, Florida, Vice President and
from July, 1995 to September, Secretary, Franklin
1996; Chief Legal Officer, Financial.
Confederation Life Insurance
Company, Atlanta, Georgia, prior
to July, 1995.
Robert J. Gibbons Director, President and Chief President and
Executive Officer, The Franklin; Director, American
President and Chief Executive Franklin; Chairman
Officer, American General Life of the Board and
Insurance Company of New York, Chief Executive
Syracuse, New York, prior to Officer, Franklin
February, 1995; Senior Vice Financial.
President and Chief Marketing
Officer, American General Life
Insurance Company of New York,
prior to June, 1994.
Robert F. Herbert ** Senior Vice President and Chief Vice President,
Financial Officer, American American Franklin.
General Life Insurance Company,
Houston, Texas, since May of
1996; Controller, American
General Life Insurance Company,
prior to May of 1996.
Harold S. Hook Chairman and Director, American Senior Chairman and
General Corporation, Houston, Director, American
Texas; Chief Executive Officer, Franklin.
American General Corporation,
prior to October, 1996.
Simon J. Leech** Vice President, American General Vice President and
Life Insurance Company, Houston, Administrative
Texas. Officer, American
Franklin.
Thomas K. McCracken Vice President, The Franklin. Vice President,
American Franklin.
Mark R. McGuire Vice President, The Franklin, Vice President and
since January 6, 1997; Administrative
Consultant/Manager, American Officer, American
General Life Insurance Company, Franklin.
Houston, Texas, prior to
January, 1997.
46
<PAGE>
Position Held With
American Franklin
Name Principal Occupations During and Franklin
---- Past 5 Years Financial
---------------------------- ------------------
Jon P. Newton* Director and Vice Chairman, The Director and Vice
Franklin, since January 31, Chairman, American
1996; Vice Chairman and General Franklin.
Counsel, American General
Corporation, 2929 Allen Parkway,
Houston, Texas 77019 since
October 26, 1995; Senior Vice
President and General Counsel,
American General Corporation,
prior thereto.
Gary D. Reddick Director and Executive Vice Executive Vice
President, The Franklin, since President-
February, 1995; Senior Vice Administration and
President, American General Director, American
Corporation, Houston, Texas Franklin; Director
prior to February, 1995; Senior and Executive Vice
Vice President, American General President, Franklin
Life Insurance Company, Houston, Financial.
Texas, prior to October, 1994.
T. Clayton Spires Director, Corporate Tax, The Director, Corporate
Franklin, since February 3, Tax, American
1997; Assistant Vice President Franklin.
and Tax Manager, First Colony
Life, Lynchburg, Virginia, prior
to February, 1997.
Timothy W. Still** Vice President, American General Vice President and
Life Insurance Company, Houston, Administrative
Texas, since October of 1995; Officer, American
Vice President, The Continuum Franklin.
Company, Kansas City, Missouri,
prior to August of 1995.
Peter V. Tuters* Vice President, Chief Investment Vice President,
Officer and Director, The Chief Investment
Franklin, since February, 1995; Officer and
Senior Vice President, since Director, American
1992, and Chief Investment Franklin.
Officer, since December, 1993,
American General Corporation,
Houston, Texas; Vice President,
Crown Life Insurance Company,
Toronto, Ontario, Canada, prior
thereto.
J. Alan Vala Vice President and Agency Vice President and
Secretary, The Franklin. Agency Secretary,
American Franklin;
Vice President and
Assistant Secretary,
Franklin Financial.
Diane S. Workman Vice President-Administration, Vice President-
American Franklin; Assistant Administration,
Vice President, American American Franklin.
Franklin, prior to April, 1992.
47
<PAGE>
The principal business address of each individual with an asterisk next to
his name is 2929 Allen Parkway, Houston, Texas 77019. The principal business
address of each individual with two asterisks next to his name is 2727-A Allen
Parkway, Houston, Texas 77019. The principal business address of each other
individual is in care of The Franklin Life Insurance Company, #1 Franklin
Square, Springfield, Illinois 62713.
48
<PAGE>
Index To Financial Statements
Page
The Separate Account:
Report of Independent Auditors....................................... F-2
Audited Financial Statements:
Statement of Net Assets, December 31, 1996 ................ F-3-F-4
Statement of Operations for the year ended
December 31, 1996......................................... F-5--F-6
Statements of Changes in Net Assets for the
years ended December 31, 1996 and 1995.................... F-7-F-8
Notes to Financial Statements ............................ F-9-F-12
The American Franklin Life Insurance Company:*
Report of Independent Auditors...................................... F-13
Report of Independent Accountants................................... F-14
Audited Financial Statements:
Balance Sheet, December 31, 1996 and 1995 .............. F-15-F-16
Statement of Operations for the year ended
December 31, 1996, the eleven months ended
December 31, 1995, the one month ended January
31, 1995, and year ended December 31, 1994.................... F-17
Statement of Shareholder's Equity for the year
ended December 31, 1996, the eleven months
ended December 31, 1995, the one month ended
January 31, 1995, and year ended December 31,
1994.......................................................... F-18
Statement of Cash Flows for the year ended
December 31, 1996, the eleven months ended
December 31, 1995, the one month ended January
31, 1995, and year ended December 31, 1994.................... F-19
Notes to Financial Statements ........................... F-20-F-37
- ----------
* The financial statements of American Franklin contained herein should be
considered only as bearing upon the ability of American Franklin to meet
its obligations under the policies offered hereby.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The American Franklin Life Insurance Company
Policyowners of Separate Account VUL-2
We have audited the accompanying statement of net assets of Separate Account
VUL-2 (comprising, respectively, the Money Market, Equity-Income, Growth,
Overseas, High Income, Investment Grade Bond, Asset Manager, Index 500, Asset
Manager: Growth and Contrafund Divisions) as of December 31, 1996, and the
related statement of operations for the year then ended and the statement of
changes in net assets for the Money Market, Equity-Income, Growth, Overseas,
High Income, Investment Grade Bond, Asset Manager, and Index 500 Divisions for
each of the two years in the period then ended and for the Asset Manager: Growth
and Contrafund Divisions for the year ended December 31, 1996 and for the period
from May 1, 1995 (date of inception) to December 31, 1995. These financial
statements are the responsibility of Separate Account VUL-2 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. Our procedures included
confirmation of securities owned as of December 31, 1996 by correspondence with
the custodian. 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 financial position of each of the respective
Divisions constituting Separate Account VUL-2 at December 31, 1996, and the
results of their operations and changes in net assets for the periods referred
to above in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Ernst & Young LLP
Chicago, Illinois
February 7, 1997
F-2
<PAGE>
The American Franklin Life Insurance Company
Separate Account VUL-2
Statement of Net Assets
December 31, 1996
<TABLE>
<CAPTION>
Money Equity-
Market Income Growth Overseas
Division Division Division Division
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Investments in Variable Insurance Products
Fund and Variable Insurance Products Fund II,
at fair value:
(Cost: Money Market Division-$3,168,568
Equity-Income Division-$19,620,876
Growth Division-$28,191,058
Overseas Division-$5,971,802
High Income Division-$1,158,220
Investment Grade Bond Division-$1,600,173
Asset Manager Division-$17,686,621
Index 500 Division-$5,630,711
Asset Manager: Growth Division-$1,223,056
Contrafund Division-$4,398,939) $ 3,160,222 $ 23,909,248 $ 34,557,566 $ 6,758,747
-------------------------------------------------------------
Due (to) from General Account (4,397) (83,398) (89,960) (16,091)
-------------------------------------------------------------
Net Assets (Note 1) $ 3,155,825 $ 23,825,850 $ 34,467,606 $ 6,742,656
=============================================================
Unit Value, at December 31, 1996 (Note 4) $ 120.68 $ 236.34 $ 223.47 $ 152.96
=============================================================
Units Outstanding, at December 31, 1996 26,149 100,813 154,236 44,082
=============================================================
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
High Investment Asset Index
Income Grade Bond Manager 500
Division Division Division Division
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Investments in Variable Insurance Products
Fund and Variable Insurance Products Fund II,
at fair value:
(Cost: Money Market Division-$3,168,568
Equity-Income Division-$19,620,876
Growth Division-$28,191,058
Overseas Division-$5,971,802
High Income Division-$1,158,220
Investment Grade Bond Division-$1,600,173
Asset Manager Division-$17,686,621
Index 500 Division-$5,630,711
Asset Manager: Growth Division-$1,223,056
Contrafund Division-$4,398,939) $ 1,231,360 $1,690,668 $ 20,618,615 $ 6,493,419
--------------------------------------------------------------
Due (to) from General Account (2,579) 2,595 (10,236) (50,458)
--------------------------------------------------------------
Net Assets (Note 1) $ 1,228,781 $1,693,263 $ 20,608,379 $ 6,442,961
==============================================================
Unit Value, at December 31, 1996 (Note 4) $ 141.63 $ 135.81 $ 171.77 $ 178.33
==============================================================
Units Outstanding, at December 31, 1996 8,676 12,468 119,978 36,130
==============================================================
</TABLE>
Asset Contra-
Manager: fund
Growth Division Division
---------------------------
Assets
Investments in Variable Insurance Products
Fund and Variable Insurance Products Fund II,
at fair value:
(Cost: Money Market Division-$3,168,568
Equity-Income Division-$19,620,876
Growth Division-$28,191,058
Overseas Division-$5,971,802
High Income Division-$1,158,220
Investment Grade Bond Division-$1,600,173
Asset Manager Division-$17,686,621
Index 500 Division-$5,630,711
Asset Manager: Growth Division-$1,223,056
Contrafund Division-$4,398,939) $ 1,301,826 $ 4,982,856
-----------------------------
Due (to) from General Account (3,795) (12,799)
-----------------------------
Net Assets (Note 1) $ 1,298,031 $ 4,970,057
=============================
Unit Value, at December 31, 1996 (Note 4) $ 137.89 $ 145.66
=============================
Units Outstanding, at December 31, 1996 9,413 34,121
=============================
F-4
<PAGE>
The American Franklin Life Insurance Company
Separate Account VUL-2
Statement of Operations
For the Year Ended December 31, 1996
<TABLE>
<CAPTION>
Money Equity-
Market Income Growth Overseas
Division Division Division Division
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Income
Income (Note 2)
Dividends from Variable Insurance Products Fund
and Variable Insurance Products Fund II $ 106,308 $ 620,081 $1,499,258 $124,922
Expenses (Note 3)
Mortality and expense risk charge 16,302 125,434 193,522 43,059
-----------------------------------------------------------
Net Investment Income 90,006 494,647 1,305,736 81,863
Net Realized and Unrealized Gain (Loss) on
Investments (Note 2)
Net realized gain -- 119,363 217,472 72,428
Net unrealized appreciation (depreciation)
Beginning of year (16,651) 2,184,503 4,076,355 311,707
End of year (8,346) 4,288,372 6,366,508 786,945
-----------------------------------------------------------
Net change in unrealized appreciation
(depreciation) during the year 8,305 2,103,869 2,290,153 475,238
-----------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Investments 8,305 2,223,232 2,507,625 547,666
-----------------------------------------------------------
Net Increase in Net Assets Resulting From Operations $ 98,311 $2,717,879 $3,813,361 $629,529
===========================================================
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
High Investment Asset Index
Income Grade Bond Manager 500
Division Division Division Division
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Income
Income (Note 2)
Dividends from Variable Insurance Products Fund
and Variable Insurance Products Fund II $44,629 $ 67,329 $1,083,783 $ 54,322
Expenses (Note 3)
Mortality and expense risk charge 5,331 10,936 133,141 20,338
-------------------------------------------------------------
Net Investment Income 39,298 56,393 950,642 33,984
Net Realized and Unrealized Gain (Loss) on
Investments (Note 2)
Net realized gain 8,967 3,089 212,679 55,003
Net unrealized appreciation (depreciation)
Beginning of year 34,035 97,417 1,504,898 108,871
73,140 90,495 2,931,994 862,708
End of year -------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) during the year 39,105 (6,922) 1,427,096 753,837
-------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Investments 48,072 (3,833) 1,639,775 808,840
-------------------------------------------------------------
Net Increase in Net Assets Resulting From Operations $87,370 $ 52,560 $2,590,417 $842,824
=============================================================
<CAPTION>
Asset Contra-
Manager: fund
Growth Division Division
------------------------------
<S> <C> <C>
Investment Income
Income (Note 2)
Dividends from Variable Insurance Products Fund
and Variable Insurance Products Fund II $ 60,282 $ 10,025
Expenses (Note 3)
Mortality and expense risk charge 4,120 16,235
----------------------------
Net Investment Income 56,162 (6,210)
Net Realized and Unrealized Gain (Loss) on
Investments (Note 2)
Net realized gain 3,633 14,914
Net unrealized appreciation (depreciation)
Beginning of year (5,088) 3,252
78,770 583,917
End of year ----------------------------
Net change in unrealized appreciation
(depreciation) during the year 83,858 580,665
----------------------------
Net Realized and Unrealized Gain (Loss) on Investments 87,491 595,579
----------------------------
Net Increase in Net Assets Resulting From Operations $ 143,653 $ 589,369
============================
</TABLE>
F-6
<PAGE>
The American Franklin Life Insurance Company
Separate Account VUL-2
Statements of Changes in Net Assets
<TABLE>
<CAPTION>
Money Equity
Market Income Growth Overseas
For the Year Ended December 31, 1996 Division Division Division Division
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in Net Assets
From Operations:
Net investment income $ 90,006 $ 494,647 $ 1,305,736 $ 81,863
Net realized gain on investments -- 119,363 217,472 72,428
Net change in unrealized appreciation
(depreciation) on investments 8,305 2,103,869 2,290,153 475,238
-----------------------------------------------------------------------
Net increase in net assets from operations 98,311 2,717,879 3,813,361 629,529
From Policy Related Transactions:
Net contract purchase payments 14,105,404 8,358,063 11,727,262 2,440,157
Transfers for policy related transactions (745,614) (3,518,149) (5,082,906) (1,085,007)
Transfers between Separate Account VUL-2's
Divisions, net (12,247,504) 3,540,795 4,024,505 (158,617)
-----------------------------------------------------------------------
Net increase in net assets from policy related
transactions 1,112,286 8,380,709 10,668,861 1,196,533
-----------------------------------------------------------------------
Increase in Net Assets 1,210,597 11,098,588 14,482,222 1,826,062
Net Assets, Beginning of Year 1,945,228 12,727,262 19,985,384 4,916,594
-----------------------------------------------------------------------
Net Assets, End of Year $ 3,155,825 $ 23,825,850 $ 34,467,606 $ 6,742,656
=======================================================================
<CAPTION>
For the Year Ended December 31, 1995 Money Equity
Market Income Growth Overseas
Division Division Division Division
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in Net Assets
From Operations:
Net investment income $ 66,629 $ 440,894 $ (60,677) $ (7,823)
Net realized gain on investments -- 40,704 151,058 66,933
Net change in unrealized appreciation
(depreciation) on investments (16,634) 2,014,215 3,739,989 333,802
-----------------------------------------------------------------------
Net increase in net assets from operations 49,995 2,495,813 3,830,370 392,912
From Policy Related Transactions:
Net contract purchase payments 9,553,276 4,440,835 6,313,439 2,213,517
Transfers for policy related transactions (1,532,534) (1,949,178) (3,063,501) (971,018)
Transfers between Separate Account VUL-2's
Divisions, net (7,343,769) 2,161,554 3,028,169 194,533
-----------------------------------------------------------------------
Net increase in net assets from policy related
transactions 676,973 4,653,211 6,278,107 1,437,032
-----------------------------------------------------------------------
Increase in Net Assets 726,968 7,149,024 10,108,477 1,829,944
Net Assets, Beginning of Year 1,218,260 5,578,238 9,876,907 3,086,650
-----------------------------------------------------------------------
Net Assets, End of Year $ 1,945,228 $ 12,727,262 $ 19,985,384 $ 4,916,594
=======================================================================
</TABLE>
*For the period from May 1, 1995 (date of inception) to December 31, 1995.
See Notes to Financial Statements.
F-7
<PAGE>
<TABLE>
<CAPTION>
High Investment Asset Index
Income Grade Bond Manager 500
For the Year Ended December 31, 1996 Division Division Division Division
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in Net Assets $ 39,298 $ 56,393 $ 950,642 $ 33,984
From Operations: 8,967 3,089 212,679 55,003
Net investment income
Net realized gain on investments
Net change in unrealized appreciation
(depreciation) on investments 39,105 (6,922) 1,427,096 753,837
--------------------------------------------------------------
Net increase in net assets from operations 87,370 52,560 2,590,417 842,824
From Policy Related Transactions:
Net contract purchase payments 533,704 486,742 5,498,237 2,673,909
Transfers for policy related transactions (192,712) (275,951) (3,080,444) (790,840)
Transfers between Separate Account VUL-2's
Divisions, net 360,417 107,298 (498,477) 2,664,359
--------------------------------------------------------------
Net increase in net assets from policy related
transactions 701,409 318,089 1,919,316 4,547,428
--------------------------------------------------------------
Increase in Net Assets 788,779 370,649 4,509,733 5,390,252
Net Assets, Beginning of Year 440,002 1,322,614 16,098,646 1,052,709
--------------------------------------------------------------
Net Assets, End of Year $ 1,228,781 $ 1,693,263 $ 20,608,379 $ 6,442,961
==============================================================
<CAPTION>
Asset Contra-
Manager: fund
For the Year Ended December 31, 1996 Growth Division Division
------------------------------
<S> <C> <C>
Change in Net Assets $ 56,162 $ (6,210)
From Operations: 3,633 14,914
Net investment income
Net realized gain on investments
Net change in unrealized appreciation
(depreciation) on investments 83,858 580,665
------------------------------
Net increase in net assets from operations 143,653 589,369
From Policy Related Transactions:
Net contract purchase payments 654,319 2,330,711
Transfers for policy related transactions (178,249) (624,350)
Transfers between Separate Account VUL-2's
Divisions, net 437,562 1,823,964
------------------------------
Net increase in net assets from policy related
transactions 913,632 3,530,325
------------------------------
Increase in Net Assets 1,057,285 4,119,694
Net Assets, Beginning of Year 240,746 850,363
------------------------------
Net Assets, End of Year $ 1,298,031 $ 4,970,057
==============================
<CAPTION>
High Investment Asset Index
Income Grade Bond Manager 500
For the Year Ended December 31, 1995 Division Division Division Division
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in Net Assets
From Operations:
Net investment income $ 9,157 $ 22,030 $ 116,822 $ (49)
Net realized gain on investments 1,720 6,701 46,591 5,233
Net change in unrealized appreciation
(depreciation) on investments 35,612 127,405 1,835,083 108,269
---------------------------------------------------------------
Net increase in net assets from operations 46,489 156,136 1,998,496 113,453
From Policy Related Transactions:
Net contract purchase payments 147,592 357,309 5,308,184 387,804
Transfers for policy related transactions (67,407) (189,702) (2,682,494) (102,537)
Transfers between Separate Account VUL-2's
Divisions, net 175,345 135,745 1,269,576 525,783
---------------------------------------------------------------
Net increase in net assets from policy related
transactions 255,530 303,352 3,895,266 811,050
---------------------------------------------------------------
Increase in Net Assets 302,019 459,488 5,893,762 924,503
Net Assets, Beginning of Year 137,983 863,126 10,204,884 128,206
---------------------------------------------------------------
Net Assets, End of Year $ 440,002 $ 1,322,614 $ 16,098,646 $ 1,052,709
===============================================================
<CAPTION>
Asset Contra-
Manager: fund
For the Year Ended December 31, 1995 Growth Division* Division*
------------------------------
<S> <C> <C>
Change in Net Assets
From Operations:
Net investment income $ 9,993 $ 9,511
Net realized gain on investments 850 3,999
Net change in unrealized appreciation
(depreciation) on investments (5,088) 3,252
------------------------------
Net increase in net assets from operations 5,755 16,762
From Policy Related Transactions:
Net contract purchase payments 91,291 362,528
Transfers for policy related transactions (10,306) (51,008)
Transfers between Separate Account VUL-2's
Divisions, net 154,006 522,081
------------------------------
Net increase in net assets from policy related
transactions 234,991 833,601
------------------------------
Increase in Net Assets 240,746 850,363
Net Assets, Beginning of Year -- --
------------------------------
Net Assets, End of Year $ 240,746 $ 850,363
==============================
</TABLE>
F-8
<PAGE>
The American Franklin Life Insurance Company
Separate Account VUL-2
Notes to Financial Statements
December 31, 1996
1. NATURE OF OPERATIONS
The American Franklin Life Insurance Company (American Franklin) is a
wholly-owned subsidiary of The Franklin Life Insurance Company. American
Franklin established Separate Account VUL-2 (Account) as a unit investment
trust registered under the Investment Company Act of 1940. The Account,
which consists of ten investment divisions, was established on April 9,
1991 in conformity with Illinois Insurance Law. The assets in each
division are invested in units of beneficial interest (shares) of a
designated portfolio (Portfolio) of two mutual funds, sponsored by
Fidelity Investments, Variable Insurance Products Fund and Variable
Insurance Products Fund II (Funds). The Money Market, Equity-Income,
Growth, Overseas, and High Income Divisions of the Account are invested in
shares of a corresponding Portfolio of Variable Insurance Products Fund,
while the Investment Grade Bond, Asset Manager, Index 500, Asset Manager:
Growth and Contrafund Divisions of the Account are invested in shares of a
corresponding Portfolio of Variable Insurance Products Fund II. The
Account's financial statements should be read in conjunction with the
financial statements of the Funds. The Account commenced operations on
September 30, 1991.
The Account was established by American Franklin to support the operations
of American Franklin's EquiBuilder II(TM) Flexible Premium Variable Life
Insurance Policies (EquiBuilder II Policies). The Account also supports
the operations of American Franklin's EquiBuilder III(TM) Flexible Premium
Variable Life Insurance Policies (EquiBuilder III Policies) (the
EquiBuilder II Policies and the EquiBuilder III Policies are referred to
collectively as the Policies).
Franklin Financial Services Corporation, a wholly-owned subsidiary of The
Franklin Life Insurance Company, acts as the principal underwriter, as
defined in the Investment Company Act of 1940, of the Policies. The assets
of the Account are the property of American Franklin. The portion of the
Account's assets applicable to the Policies is not chargeable with
liabilities arising out of any other business American Franklin may
conduct.
The net assets of the Account may not be less than the reserves applicable
to the Policies. Assets may also be set aside in American Franklin's
General Account based on the amounts allocated under the Policies to
American Franklin's Guaranteed Interest Division and for policy loans.
Additional assets are set aside in American Franklin's General Account to
provide for (i) the unearned portion of the monthly charges for mortality
costs and administrative expenses made under the Policies and (ii) other
policy benefits.
2. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of the Account are as follows:
Investments in shares of the Funds are carried at fair value. Investments
in shares of the Funds are valued at the net asset values of the
respective Portfolios of the Funds corresponding to the investment
divisions of the Account. Investment transactions are recorded on the
trade date. Dividends are recorded as received. Realized gains and losses
on sales of the Funds' shares are determined based on the specific
identification method.
The operations of the Account are included in the federal income tax
return of American Franklin. Under the provisions of the Policies,
American Franklin has the right to charge the Account for federal income
tax attributable to the Account. No charge is currently being made against
the Account for such tax since, under current tax law, American Franklin
pays no tax on investment income and capital gains reflected in variable
life insurance policy reserves. However, American Franklin retains the
right to charge for any federal income tax incurred which is attributable
to the Account if the law is changed. Charges for state and local taxes,
if any, attributable to the Account may also be made.
F-9
<PAGE>
The American Franklin Life Insurance Company
Separate Account VUL-2
Notes to Financial Statements (Continued)
December 31, 1996
3. SALES AND ADMINISTRATIVE CHARGES
Certain jurisdictions require that deductions be made from premium payments
for taxes. The amount of such deductions varies and may be up to 5% of the
premium. With respect to the EquiBuilder III Policies, American Franklin
makes a sales expense deduction equal to 5% of each premium paid during any
policy year up to a "target premium", which is based on the annual premium
for a fixed whole life insurance policy on the life of the insured person
(no sales expense deduction is made for premiums in excess of the target
premium paid during that policy year). The balance remaining after any such
deduction, the net premium, is placed by American Franklin in a Policy
Account established for each policyowner. Each month American Franklin makes
a charge against each Policy Account for: administrative expenses (currently
$6 per month plus an additional charge of $24 per month for each of the
first 12 months a policy is in effect); cost of insurance, which is based on
the insured person's age, sex, risk class, amount of insurance, and
additional benefits, if any. In addition, American Franklin will make
charges for the following: a partial withdrawal of net cash surrender value
(currently $25 or 2% of the amount withdrawn, whichever is less); an
increase in the face amount of insurance (currently a $1.50 administrative
charge for each $1,000 increase up to a maximum charge of $300); and a
transfer between investment divisions in any policy year in which four
transfers have already been made (up to $25 for each additional transfer in
a given policy year). Charges may also be made for providing more than one
illustration of policy benefits to a given policyholder. American Franklin
assumes mortality and expense risks related to the operations of the Account
and deducts a charge from the assets of the Account at an effective annual
rate of .75% of the Account's net assets to cover these risks. The total
charges paid by the Account to American Franklin were $12,166,000 in 1996.
During the first ten years a Policy is in effect, a surrender charge may be
deducted from a Policy Account by American Franklin if: the Policy is
surrendered for its net cash surrender value, the face amount of the Policy
is reduced or the Policy is permitted to lapse. The maximum total surrender
charge applicable to a particular Policy is specified in the Policy and is
equal to 50% of one target premium. This maximum will not vary based on the
amount of premiums paid or when they are paid. At the end of the sixth
policy year and at the end of each of the four succeeding policy years, the
maximum surrender charge is reduced by an amount equal to 20% of the initial
maximum surrender charge until, after the end of the tenth policy year,
there is no surrender charge. Subject to the maximum surrender charge, the
surrender charge with respect to the EquiBuilder II Policies will equal 30%
of actual premiums paid during the first policy year up to one target
premium, plus 9% of all other premiums actually paid during the first ten
policy years, and the surrender charge with respect to the EquiBuilder III
Policies will equal 25% of actual premiums paid during the first policy year
up to one target premium, plus 9% of all other premiums actually paid during
the first ten policy years.
F-10
<PAGE>
The American Franklin Life Insurance Company
Separate Account VUL-2
Notes to Financial Statements (Continued)
December 31, 1996
4. SUMMARY OF UNIT VALUES AND CHANGES IN OUTSTANDING UNITS
Unit value information and a summary of changes in outstanding units is
shown below:
For the Year Ended December 31, 1996
<TABLE>
<CAPTION>
Money Market Equity- High
Division Income Growth Overseas Income
Division Division Division Division
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year $ 115.39 $ 204.85 $ 193.51 $137.53 $125.33
===============================================================
Unit value, end of year $ 120.68 $ 236.34 $ 223.47 $152.96 $141.63
===============================================================
Number of units outstanding,
beginning of year 16,857 62,130 103,278 35,749 3,511
Net contract purchase payments 119,189 38,276 55,708 16,835 3,958
Transfers for policy related
transactions (6,315) (15,932) (23,903) (7,415) (1,439)
Transfers between Separate Account
VUL-2's Divisions, Net (103,582) 16,339 19,153 (1,087) 2,646
---------------------------------------------------------------
Number of units outstanding, end of year 26,149 100,813 154,236 44,082 8,676
===============================================================
<CAPTION>
Investment Asset
Grade Asset Index Manager: Contra-
Bond Manager 500 Growth fund
Division Division Division Division Division
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year $131.55 $ 148.96 $142.98 $113.51 $119.19
==============================================================
Unit value, end of year $135.81 $ 171.77 $178.33 $137.89 $145.66
==============================================================
Number of units outstanding,
beginning of year 10,054 108,073 7,362 2,121 7,135
Net contract purchase payments 3,721 34,874 16,773 5,194 17,720
Transfers for policy related transactions (2,118) (19,791) (4,606) (1,375) (4,631)
Transfers between Separate Account
VUL-2's Divisions, Net 811 (3,178) 16,601 3,473 13,897
--------------------------------------------------------------
Number of units outstanding, end of year 12,468 119,978 36,130 9,413 34,121
==============================================================
</TABLE>
F-11
<PAGE>
The American Franklin Life Insurance Company
Separate Account VUL-2
Notes fo Financial Statements (Continued)
December 31, 1996
5. REMUNERATION OF MANAGEMENT
The Account incurs no liability for remuneration to directors, members of
advisory boards, officers or any other person who might provide a service
for the Account, except as described in Note 3.
F-12
<PAGE>
REPORT OF INDEPENDENT AUDITORS
------------------------------
Board of Directors
and Shareholder
The American Franklin Life Insurance Company
We have audited the accompanying balance sheets of The American Franklin Life
Insurance Company (the Company), a wholly-owned subsidiary of The Franklin Life
Insurance Company, which is an indirect wholly-owned subsidiary of American
General Corporation, as of December 31, 1996 and 1995, and the related
statements of operations, shareholder's equity and cash flows for the year ended
December 31, 1996, the eleven months ended December 31, 1995, and the one month
ended January 31, 1995. 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 financial position of The American Franklin Life
Insurance Company at December 31, 1996 and 1995 and the results of its
operations and its cash flows for the year ended December 31, 1996, the eleven
months ended December 31, 1995, and the one month ended January 31, 1995, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young
ERNST & YOUNG LLP
Chicago, Illinois
February 14, 1997
F-13
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
----------------------------------
To the Board of Directors
and Shareholder of
The American Franklin Life Insurance Company
We have audited the accompanying statements of operations, shareholder's equity
and cash flows of The American Franklin Life Insurance Company (a wholly-owned
subsidiary of The Franklin Life Insurance Company) for the year ended December
31, 1994. 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 audit.
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. 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 results of operations and cash flows of The American
Franklin Life Insurance Company for the year ended December 31, 1994 in
conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
203 North LaSalle Street
Chicago, Illinois 60601
February 1, 1995
F-14
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
BALANCE SHEET
(In thousands)
December 31
----------------------
ASSETS 1996 1995
----------------------
Investments
Fixed maturity securities (amortized cost:
$31,359; $24,333) $ 32,599 $ 26,578
Policy loans 4,378 2,427
----------------------
36,977 29,005
Cash and cash equivalents 2,408 6,921
Accrued investment income 672 493
Amounts recoverable from reinsurers 6,139 5,308
Deferred policy acquisition costs 13,781 4,101
Cost of insurance purchased 12,212 13,621
Insurance premiums in course of settlement 238 505
Other assets 551 1,331
Assets held in Separate Accounts 119,850 72,202
----------------------
Total assets $192,828 $133,487
======================
See Notes to Financial Statements.
F-15
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
BALANCE SHEET
(In thousands, except share data)
December 31
-------------------------
LIABILITIES 1996 1995
-------------------------
Insurance liabilities
Policy reserves, contract claims and
other policyholders' funds $ 7,390 $ 6,604
Universal life contracts 30,347 27,842
Unearned revenue 3,972 1,913
Income taxes
Current 185 (461)
Deferred (2,458) (1,172)
Accrued expenses and other liabilities 6,676 8,911
Liabilities related to separate accounts 119,850 72,202
-------------------------
Total liabilities 165,962 115,839
SHAREHOLDER'S EQUITY
Common stock ($5 par value; 500,000
shares authorized, issued and outstanding) 2,500 2,500
Paid-in capital 25,373 15,373
Net unrealized gains on securities 391 727
Retained - earnings deficit (1,398) (952)
-------------------------
Total shareholder's equity 26,866 17,648
-------------------------
Total liabilities and shareholder's equity $ 192,828 $ 133,487
=========================
See Notes to Financial Statements.
F-16
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
Predecessor Basis
------------------------
Eleven Months One Month
Year Ended Ended Ended Year Ended
December 31 December 31 January 31 December 31
-----------------------------------------------------
1996 1995 1995 1994
-----------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Premiums and other considerations $ 16,346 $ 9,472 $ 676 $ 8,074
Net investment income 2,641 2,129 160 2,142
Realized investment gains (losses) 90 (6) -- (4)
Other income (expense) (623) 465 842 (26)
-----------------------------------------------------
Total revenues 18,454 12,060 1,678 10,186
Benefits and expenses
Benefits paid or provided 2,767 2,597 330 1,415
Change in policy reserves 843 458 1,027 (194)
Commissions and allowances 14,843 9,323 706 9,246
Change in deferred policy acquisition costs
and cost of insurance purchased (7,866) (4,558) (298) (5,161)
Taxes, licenses and fees 1,369 988 96 974
General insurance expenses 7,177 4,713 312 3,676
-----------------------------------------------------
Total benefits and expenses 19,133 13,521 2,173 9,956
-----------------------------------------------------
Income (loss) before income taxes (679) (1,461) (495) 230
Income tax expense (benefit)
Current 873 452 34 604
Deferred (1,104) (961) (217) (534)
-----------------------------------------------------
Total income tax expense (benefit) (231) (509) (183) 70
-----------------------------------------------------
Net income (loss) $ (446) $ (952) $ (312) $ 160
=====================================================
</TABLE>
See Notes to Financial Statements.
F-17
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
STATEMENT OF SHAREHOLDER'S EQUITY
(In thousands)
<TABLE>
<CAPTION>
Predecessor Basis
------------------------
Eleven Months One Month
Year Ended Ended Ended Year Ended
December 31 December 31 January 31 December 31
-----------------------------------------------------
1996 1995 1995 1994
-----------------------------------------------------
<S> <C> <C> <C> <C>
Common stock $ 2,500 $ 2,500 $ 2,500 $ 2,500
-----------------------------------------------------
Paid-in capital
Balance at beginning of period 15,373 15,373 12,500 12,500
Capital contribution 10,000 -- -- --
Adjustment for the acquisition -- -- 2,873 --
-----------------------------------------------------
Balance at end of period 25,373 15,373 15,373 12,500
-----------------------------------------------------
Net unrealized gains (losses) on
securities
Balance at beginning of period 727 -- (9) 164
Change during the period (516) 1,118 (3) (270)
Amounts applicable to deferred federal
income taxes 180 (391) 1 97
Adjustment for the acquisition -- -- 11 --
-----------------------------------------------------
Balance at end of period 391 727 -- (9)
-----------------------------------------------------
Retained earnings (deficit)
Balance at beginning of period (952) -- 2,876 2,716
Net income (loss) (446) (952) (312) 160
Adjustment for the acquisition -- -- (2,564) --
-----------------------------------------------------
Balance at end of period (1,398) (952) -- 2,876
-----------------------------------------------------
Total shareholder's equity
at end of period $ 26,866 $ 17,648 $ 17,873 $ 17,867
=====================================================
</TABLE>
See Notes to Financial Statements.
F-18
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Predecessor Basis
------------------------
Eleven Months One Month
Year Ended Ended Ended Year Ended
December 31 December 31 January 31 December 31
-----------------------------------------------------
1996 1995 1995 1994
-----------------------------------------------------
<S> <C> <C> <C> <C>
Operating activities
Net Income (loss) $ (446) $ (952) $ (312) $ 160
Reconciling adjustments to net cash used
for operating activities
Policy reserves, claims and other policyholders'
funds 12,609 10,786 1,439 6,017
Realized investment (gains) losses (90) 6 -- 4
Deferred policy acquisition costs and cost of
insurance purchased (7,866) (4,558) (298) (5,161)
Charges on universal life contracts, net of
interest credited (11,602) (8,166) (1,248) (5,930)
Change in other assets and liabilities (2,660) 2,806 (471) (443)
-----------------------------------------------------
Net cash used for operating activities (10,055) (78) (890) (5,353)
-----------------------------------------------------
Investing activities
Investment purchases
Available-for-sale (32,704) (5,859) (41) (532)
Held-to-maturity -- -- -- (968)
Other (2,107) -- -- --
Investment calls, maturities and sales
Available-for-sale 26,096 4,426 -- --
Held-to-maturity -- -- 12 2,293
-----------------------------------------------------
Net cash provided by (used for) investing
activities (8,715) (1,433) (29) 793
-----------------------------------------------------
Financing activities
Universal life contract deposits 43,912 27,956 1,957 25,014
Universal life contract withdrawals (39,565) (21,750) (1,305) (19,933)
Proceeds from intercompany borrowings 4,742 1,425 -- --
Repayments of intercompany borrowings (4,832) (1,335) -- --
Capital contribution 10,000 -- -- --
-----------------------------------------------------
Net cash provided by financing
activities 14,257 6,296 652 5,081
-----------------------------------------------------
Net increase (decrease) in cash and cash equivalents
(4,513) 4,785 (267) 521
Cash and cash equivalents at beginning of period 6,921 2,136 2,403 1,882
-----------------------------------------------------
Cash and cash equivalents at end of period $ 2,408 $ 6,921 $ 2,136 $ 2,403
=====================================================
</TABLE>
See Notes to Financial Statements.
F-19
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
1.1 Nature of Operations
The American Franklin Life Insurance Company (AMFLIC or the Company),
which is headquartered in Springfield, Illinois, sells and services
variable universal life and universal life insurance products to the
middle income market, primarily in the Midwest.
1.2 Preparation of Financial Statements
The financial statements have been prepared in accordance with generally
accepted accounting principles (GAAP) and include the accounts of AMFLIC,
a wholly-owned subsidiary of The Franklin Life Insurance Company (FLIC).
The preparation of financial statements requires management to make
estimates and assumptions that affect (1) the reported amounts of assets
and liabilities, (2) disclosures of contingent assets and liabilities, and
(3) the reported amounts of revenues and expenses during the reporting
periods. Ultimate results could differ from those estimates.
1.3 Acquisition
On January 31, 1995, AGC Life Insurance Company (AGCL), a subsidiary of
American General Corporation (AGC), acquired FLIC for $1.17 billion. The
purchase price consisted of $920 million cash and a $250 million
extraordinary cash dividend paid by FLIC to its former parent prior to
closing. The portion of the purchase price allocated to AMFLIC was $17.9
million.
The acquisition was accounted for using the purchase method of accounting
in accordance with the provisions of Accounting Principles Board Opinion
16, "Business Combinations", and other existing accounting literature
pertaining to purchase accounting. Under purchase accounting, the total
purchase cost was allocated to the assets and liabilities acquired based
on a determination of their fair value. AMFLIC's balance sheets at
December 31, 1996 and 1995, and its statements of operations,
shareholder's equity and cash flows for the year ended December 31, 1996,
and the eleven months ended December 31, 1995, are reported under the
purchase method of accounting and, accordingly, are not consistent with
the basis of presentation of the "Predecessor Basis" statements of
operations, shareholder's equity and cash flows for the month ended
January 31, 1995, and the year ended December 31, 1994.
F-20
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1.4 Investments
Fixed Maturity Securities. All fixed maturity securities are 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 shareholder's 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.
Policy Loans. Policy loans are reported at unpaid principal balance.
Investment Income. Interest on fixed maturity securities is recorded as
income when earned and is adjusted for any amortization of premium or
discount.
Realized Investment Gains (Losses). Realized investment gains (losses) are
recognized using the specific identification method and include declines
in the fair value of investments below cost that are considered other than
temporary.
1.5 Cash and Cash Equivalents
Highly liquid investments with an original maturity of three months or
less are included in cash and cash equivalents. The carrying amount
approximates fair value.
1.6 Deferred Policy Acquisition Costs (DPAC)
Certain costs of writing an insurance policy, including agents'
commissions and underwriting and marketing expenses, are deferred and
included in the DPAC asset.
DPAC associated with interest-sensitive life insurance contracts is
charged to expense in relation to the estimated gross profits of those
contracts. DPAC associated with all other insurance contracts is charged
to expense over the premium-paying period or as the premiums are earned
over the life of the contract.
DPAC is adjusted for the impact on estimated future gross profits as if
net unrealized gains (losses) on securities had been realized at the
balance sheet date. The impact of this adjustment is also included in net
unrealized gains (losses) on securities within shareholder's equity.
AMFLIC reviews the carrying amount of DPAC on at least an annual basis. In
determining whether the carrying amount is recoverable, AMFLIC considers
estimated future gross profits, or future premiums, as applicable for the
type of contract. In all cases, AMFLIC considers expected mortality,
interest earned and credited rates, persistency, and expenses.
F-21
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1.7 Cost of Insurance Purchased (CIP)
The cost assigned to insurance contracts in force at January 31, 1995 is
reported as CIP. CIP is charged to expense using the same assumptions as
DPAC. Interest is accreted on the unamortized balance of CIP at rates of 6
to 8.5%. CIP is also adjusted for the impact of net unrealized gains
(losses) on securities in the same manner as DPAC. AMFLIC reviews the
carrying amount of CIP on at least an annual basis using the same methods
used to evaluate DPAC.
1.8 Separate Accounts
Separate Accounts are assets and liabilities associated with certain
contracts for which the investment risk lies solely with the holder of the
contract rather than AMFLIC. Consequently, the insurer'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 statements
of operations and cash flows. Assets held in Separate Accounts are carried
at fair value.
1.9 Insurance Liabilities
Substantially all of AMFLIC's insurance 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 AMFLIC during the contract period.
For interest-sensitive life insurance policies, reserves include the
policyholder account balances and deferred revenue charges. Reserves for
other types of long-duration contracts are based on estimates 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, or payment of an
endowment. Reserves are determined using the net level premium method.
Interest assumptions used to compute reserves ranged from 4% to 9% at
December 31, 1996.
1.10 Premium Recognition
Receipts for interest-sensitive life insurance policies are classified as
deposits instead of revenues. Revenues for these contracts consist of the
mortality, expense, and surrender charges assessed against the account
balance. Policy charges that are designed to compensate AMFLIC for future
services are deferred and recognized in income over the period earned,
using the same assumptions used to amortize DPAC. For all other
long-duration contracts, premiums are recognized when due.
F-22
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1.11 Income Taxes
Deferred tax assets and liabilities are established for temporary
differences between the financial reporting basis and the tax basis of
assets and liabilities, at the enacted tax rates expected to be in effect
when the temporary differences reverse. The effect of a tax rate change is
recognized in income in the period of enactment. State income taxes are
included in income tax expense.
A change in deferred taxes related to fluctuations in fair value of
available-for-sale securities is included in net unrealized gains (losses)
on securities in shareholder's equity.
1.12 Reclassifications
Certain reclassifications have been made to the 1995 financial statements
to conform to the presentation used in the current year.
F-23
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. Investments
2.1 Investment Income
Income by type of investment was as follows:
<TABLE>
<CAPTION>
Eleven Months One Month
Year Ended Ended Ended Year Ended
December 31 December 31 January 31 December 31
-----------------------------------------------------
In thousands 1996 1995 1995 1994
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities $2,141 $2,097 $168 $2,166
Policy loans 175 68 8 44
Other investments 369 -- -- 1
-----------------------------------------------------
Gross investment income 2,685 2,165 176 2,211
Investment expense 44 36 16 69
=====================================================
Net investment income $2,641 $2,129 $160 $2,142
=====================================================
</TABLE>
2.2 Investment Gains (Losses)
Investment gains (losses) (all related to fixed maturity securities) were
as follows:
<TABLE>
<CAPTION>
Eleven Months One Month
Year Ended Ended Ended Year Ended
December 31 December 31 January 31 December 31
-----------------------------------------------------
In thousands 1996 1995 1995 1994
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities
Gross gains $ 183 $ 153 $ -- $ 30
Gross losses (10) 171 -- 34
-----------------------------------------------------
Total 173 (18) -- (4)
-----------------------------------------------------
Other (83) 12 -- --
-----------------------------------------------------
Realized investment gains (losses) $ 90 $ (6) $ -- $ (4)
=====================================================
</TABLE>
Voluntary sales of investments resulted in the following realized gains
(losses):
Realized
In thousands Category Proceeds Gains Losses
- --------------------------------------------------------------------------------
Year Ended Available-for-sale $ 12,264 $ 183 $ 10
December 31, 1996
================================================================================
Eleven Months Ended Available-for-sale $ 1,517 $ -- $ 72
December 31, 1995
F-24
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2.3 Fixed Maturity Securities
Valuation. Amortized cost and fair value of fixed maturity securities were
as follows:
December 31, 1996
-------------------------------------------
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
In thousands Cost Gains Losses Value
- --------------------------------------------------------------------------------
Corporate bonds
Investment grade $16,860 $ 786 $ -- $17,646
Below investment grade 955 25 -- 980
Public utilities 3,326 244 -- 3,570
Mortgage-backed 1,877 121 -- 1,998
U.S. government 8,137 149 98 8,188
States/political subdivisions 204 13 -- 217
-------------------------------------------
Total fixed maturity securities $31,359 $1,338 $ 98 $32,599
===========================================
F-25
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2.3 Fixed Maturity Securities (continued)
December 31, 1995
-------------------------------------------
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
In thousands Cost Gains Losses Value
- --------------------------------------------------------------------------------
Corporate bonds
Investment grade $10,026 $1,106 $ -- $11,132
Below investment grade 798 66 -- 864
Public utilities 4,317 542 -- 4,859
Mortgage-backed 1,850 190 -- 2,040
U.S. government 7,138 327 -- 7,465
States/political subdivisions 204 14 -- 218
-------------------------------------------
Total fixed maturity securities $24,333 $2,245 $ -- $26,578
===========================================
F-26
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2.3 Fixed Maturity Securities (continued)
Maturities. The contractual maturities of fixed maturity securities at
December 31, 1996 were as follows:
DECEMBER 31, 1996
---------------------
Amortized Fair
In thousands Cost Value
- --------------------------------------------------------------------------------
Fixed maturity securities, excluding
mortgage-backed securities
Due in one year or less $ 638 $ 645
Due after one year through five years 3,000 3,125
Due after five years through ten years 24,027 24,832
Due after ten years 1,817 1,999
Mortgage-backed securities 1,877 1,998
---------------------
Total fixed maturity securities $31,359 $32,599
=====================
Actual maturities may differ from contractual maturities since borrowers
may have the right to call or prepay obligations. Investment strategies
may result in the sale of investments before maturity.
F-27
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2.4 Net Unrealized Gains on Securities
Net unrealized gains on fixed maturity securities included in
shareholder's equity at December 31 were as follows:
In thousands 1996 1995
--------------------------------------------------------------------
Gross unrealized gains $ 1,338 $ 2,245
Gross unrealized losses (98) --
DPAC fair value adjustment (33) (228)
CIP fair value adjustment (606) (899)
Deferred federal income taxes (210) (391)
-------------------------
Net unrealized gains on securities $ 391 $ 727
=========================
2.5 Investments on Deposit
At December 31, 1996 and 1995, fixed maturity securities carried at
$6,879,000 and $6,873,000, respectively, were on deposit with regulatory
authorities to comply with state insurance laws.
2.6 Investment Restrictions
AMFLIC is restricted by the insurance laws of its domiciliary state as to
the amount which it can invest in any entity. At December 31, 1996 and
1995, AMFLIC's largest investment in any one entity other than U.S.
government obligations was $1,000,000 and $450,000, respectively.
F-28
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. Fair Value of Financial Instruments
Carrying amounts and fair values for certain of the Company's financial
instruments at December 31 are presented below. 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.
December 31
-----------------------------------------------
1996 1995
-----------------------------------------------
Carrying Fair Carrying Fair
In thousands Amount Value Amount Value
--------------------------------------------------------------------------
Fixed maturity securities $ 32,599 $ 32,599 $ 26,578 $ 26,578
The methods and assumptions used to estimate fair value were as follows:
Fixed Maturity Securities. Fair values of fixed maturity 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 the average life of the
investments.
Policy Loans. Policy loans have no stated maturity dates and are an
integral part of the related insurance contract. Accordingly, it is not
practicable to estimate a fair value. The weighted average interest
rate charged on policy loan balances during 1996 and 1995 was 7.17% and
7.82%, respectively.
F-29
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. Deferred Policy Acquisition Costs (DPAC)
An analysis of the changes in the DPAC asset is as follows:
<TABLE>
<CAPTION>
Eleven Months One Month
Year Ended Ended Ended Year Ended
December 31 December 31 January 31 December 31
-----------------------------------------------------
In thousands 1996 1995 1995 1994
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning of period balance $ 4,101 $ -- $ 16,540 $ 11,379
Capitalization 9,861 4,328 445 6,349
Amortization (343) -- (147) (1,188)
Effect of unrealized gains
on securities 195 (228) -- --
Effect of realized investment
(gains) losses (33) 1 -- --
Adjustment for the
acquisition (a) -- -- (16,838) --
-----------------------------------------------------
End of period balance $ 13,781 $ 4,101 $ -- $ 16,540
=====================================================
</TABLE>
(a) Represents the necessary elimination of the historical DPAC asset
required by purchase accounting.
F-30
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. Cost of Insurance Purchased (CIP)
An analysis of the changes in the CIP asset is as follows:
<TABLE>
<CAPTION>
Year Ended Eleven Months One Month
December Ended Ended
31 December 31 January 31
----------------------------------------------------
In thousands 1996 1995 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning of period balance $ 13,621 $ 14,279 $ --
Interest accretion 1,400 1,073 --
Additions -- 1,844 --
Amortization (3,052) (2,687) --
Effect of unrealized gains on securities 293 (899) --
Effect of realized investment (gains) losses (50) 11 --
Adjustment for the acquisition (a) -- -- 14,279
----------------------------------------------------
End of period balance $ 12,212 $ 13,621 $ 14,279
====================================================
</TABLE>
a) Represents the amount necessary to recognize the new CIP asset
attributable to the January 31, 1995 acquisition.
CIP amortization, net of accretion, expected to be recorded in each of the
next five years is $1,564,000, $1,367,000, $1,201,000, $1,054,000, and
$927,000.
F-31
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
6. Separate Account
AMFLIC administers two Separate Accounts in connection with the issuance
of its Variable Universal Life products.
7. Income Taxes
AMFLIC is subject to the life insurance company provisions of the federal
tax law and is part of a life/life consolidated return which also includes
FLIC.
7.1 Deferred Taxes
Components of deferred tax liabilities and assets at December 31, were as
follows:
In thousands 1996 1995
- --------------------------------------------------------------------------------
Deferred tax liabilities, applicable to:
Basis differential of investments $ 292 $ 605
DPAC and CIP 5,483 3,773
Other 949 383
-----------------------
Total deferred tax liabilities 6,724 4,761
-----------------------
Deferred tax assets, applicable to:
Policy reserves (8,329) (5,592)
Other (853) (341)
-----------------------
Total deferred tax assets (9,182) (5,933)
-----------------------
Net deferred tax assets $(2,458) $(1,172)
=======================
AMFLIC expects adequate future taxable income to realize the net deferred
tax assets. Accordingly, no valuation allowance is considered necessary.
F-32
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7.2 Tax Expense
A reconciliation between the federal income tax rate and the effective
income tax rate follows:
<TABLE>
<CAPTION>
Eleven Months One Month
Year Ended Ended Ended Year Ended
December 31 December 31 January 31 December 31
--------------------------------------------------------------------------
1996 1995 1995 1994
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal income tax rate 35.0 % 35.0 % 35.0 % 35.0 %
State taxes, net (0.3) (0.4) 0.4 (6.5)
Invested asset items 0.1 0.2 - (1.7)
Other - - 1.6 3.6
--------------------------------------------------------------------------
Effective tax rate 34.8 % 34.8 % 37.0 % 30.4 %
==========================================================================
</TABLE>
7.3 Taxes Paid
Federal income taxes paid during the year ended December 31, 1996, the
eleven months ended December 31, 1995, and the year ended December 31,
1994 were $228,000, $1,031,000, and $745,000, respectively. State income
taxes paid (received) during the year ended December 31, 1996, the eleven
months ended December 31, 1995, and the year ended December 31,1994, were
$0, $1,000, and $(14,000), respectively. There were no federal or state
income taxes paid during January 1995.
F-33
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. Statutory Accounting
State insurance laws prescribe accounting practices for calculating
statutory net income and equity. In addition, state regulators may allow
permitted statutory accounting practices that differ from prescribed
practices.
No significant permitted practices are used to prepare AMFLIC's statutory
financial statements.
At December 31, 1996 and 1995, AMFLIC had statutory stockholder's equity
of $18,055,000, and $9,912,000, respectively. AMFLIC's statutory net loss
was $1,949,000, $4,704,000, and $4,576,000 for the years ended December
31, 1996, December 31, 1995 and December 31, 1994, respectively.
Generally, AMFLIC is restricted by the insurance laws of its domiciliary
state as to amounts that can be transferred in the form of dividends,
loans or advances without the approval of the Illinois Insurance
Department. Currently, under these restrictions, no dividends may be paid
out and, loans and advances in excess of $4,514,000 may not be transferred
without the approval of the Illinois Insurance Department.
F-34
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. Statement of Cash Flows
In addition to the cash activities shown in the statements of cash flows,
the following transactions, occurred:
<TABLE>
<CAPTION>
Eleven Months One Month
Year Ended Ended Ended Year Ended
December 31 December 31 January 31 December 31
--------------------------------------------------------------
In thousands 1996 1995 1995 1994
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest added to universal
life contracts $ 1,267 $ 1,126 $ 111 $ 1,216
==============================================================
</TABLE>
10. Related Party Transactions
AMFLIC has no full-time employees or office facilities. General and
administrative expenses are allocated to AMFLIC from FLIC, based upon
hours worked by administrative personnel. Allocated expenses for the year
ended December 31, 1996, the eleven months ended December 31, 1995, the
one month ended January 31, 1995, and the year ended December 31, 1994
amounted to approximately $3,868,000, $3,277,000, $204,000, and
$1,655,000, respectively.
AMFLIC participates in a program of short-term borrowing with AGC to
maintain its long-term investment commitments. During 1996, AMFLIC
borrowed $4,742,000 and repaid $4,832,000 (relating to 1996 and 1995
borrowings). Interest is paid on the outstanding balance based on the
Federal Reserve Board's monthly average H.15 rate for 30-day commercial
paper.
11. Reinsurance
AMFLIC is routinely involved in reinsurance transactions. Ceded
reinsurance becomes a liability of the reinsurer that assumes the risk. If
the reinsurer could not meet its obligations, AMFLIC would reassume the
liability. The likelihood of a material reinsurance liability being
reassumed by AMFLIC is considered to be remote. AMFLIC diversifies the
risk of exposure to reinsurance loss by using a number of life reinsurers
that have strong claims-paying ability ratings. The maximum retention on
one life for individual life insurance is $50,000.
Amounts paid or deemed to have been paid in connection with ceded
reinsurance contracts are recorded as reinsurance receivables. The cost of
reinsurance related to long-duration contracts is recognized over the life
of the underlying reinsured policies using assumptions consistent with
those used to account for the underlying policies.
F-35
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. Reinsurance (continued)
Under the provisions of an assumed reinsurance agreement, AMFLIC
recognized the following:
<TABLE>
<CAPTION>
Eleven Months One Month
Year Ended Ended Ended Year Ended
December 31 December 31 January 31 December 31
-------------------------------------------------------------------------------
In thousands 1996 1995 1995 1994
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums and other
considerations $ 1,433 $ 361 $ 43 $ 523
Other income 1,196 972 8 152
Benefits 1,810 1,166 145 303
Commission expense (9) 54 6 72
Premium taxes (6) 6 6 30
</TABLE>
Under the provisions of a modified coinsurance agreement covering their
Variable Universal Life product, AMFLIC ceded the following:
<TABLE>
<CAPTION>
Eleven Months One Month
Year Ended Ended Ended Year Ended
December 31 December 31 January 31 December 31
-------------------------------------------------------------------------------
In thousands 1996 1995 1995 1994
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums and other
considerations $ 4,014 $ 2,648 $ 125 $ 1,834
Expense allowances 4,394 2,463 186 2,246
Other (561) 579 (6) (134)
</TABLE>
AMFLIC also carries reinsurance for policy risks that exceed its retention
limit of $50,000. AMFLIC ceded the following amounts:
<TABLE>
<CAPTION>
Eleven Months One Month
Year Ended Ended Ended Year Ended
December 31 December 31 January 31 December 31
-------------------------------------------------------------------------------
In thousands 1996 1995 1995 1994
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums and other
considerations $ 5,909 $ 4,129 $ 258 $ 3,051
Change in policy reserves 5,924 4,155 3,347 3,228
</TABLE>
F-36
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. State Guaranty Associations
State guaranty fund expense included in operating costs and expenses was
$31,000, $37,000, $18,000, and $57,000 for the year ended December 31,
1996, the eleven months ended December 31, 1995, the one month ended
January 31, 1995, and the year ended December 31, 1994, respectively.
Amounts assessed AMFLIC by state life and health insurance guaranty funds
resulting from past industry insolvencies were $31,000, $37,000, $18,000,
and $57,000 for the year ended December 31, 1996, the eleven months ended
December 31, 1995, the one month ended January 31, 1995, and the year
ended December 31, 1994, respectively. These assessments are expected to
be partially recovered through credits against the payment of future
premium taxes.
There was no liability accrued at December 31, 1996, or in prior periods
as these amounts were determined to be immaterial.
F-37
<PAGE>
================================================================================
Flexible Premium Variable Life Insurance Policy
EQUIBUILDER III(TM)
Issued by
The American Franklin Life Insurance Company
#1 Franklin Square
Springfield, Illinois 62713-0001
800-528-2011
EquiBuilder III is a trademark of The American Franklin Life Insurance Company
- --------------------------------------------------------------------------------
<PAGE>
Part II
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities Exchange
Act of 1934, the undersigned registrant hereby undertakes to file with the
Securities and Exchange Commission such supplementary and periodic information,
documents, and reports as may be prescribed by any rule or regulation of the
Commission heretofore or hereafter duly adopted pursuant to authority conferred
in that section.
UNDERTAKING PURSUANT TO RULE 484(b)(1)
UNDER THE SECURITIES ACT OF 1933
American Franklin's By-Laws provide, in Article X, as follows:
"Section 1. The Company shall indemnify and hold harmless each person who
shall serve at any time hereafter as a director, officer or employee of
the Company, or who shall serve any other company or organization in any
capacity at the request of the Company, from and against any and all
claims and liabilities to which such person shall become subject by reason
of having heretofore or hereafter been a director, officer or employee of
the Company, or by reason of any action alleged to have been heretofore or
hereafter taken or omitted by such person as a director, officer or
employee, and shall reimburse each such person for all legal and other
expenses reasonably incurred in connection with any such claim or
liability; provided, however, that no such person shall be indemnified
against, or be reimbursed for, any expense incurred in connection with any
claim or liability arising out of such person's own wilful misconduct."
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
American Franklin hereby represents that the fees and charges deducted under the
flexible premium variable life insurance policies described in this registration
statement, in the aggregate, are reasonable in relation to the services
rendered, the expenses expected to be incurred, and the risks assumed by
American Franklin.
II-1
<PAGE>
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement comprises the following papers and documents:
The facing sheet.
Reconciliation and tie.
The Prospectus.
Undertaking to file reports.
Undertaking pursuant to Rule 484 under the Securities Act of 1933.
The signatures.
Written Consents of the following persons:
Sutherland, Asbill & Brennan, L.L.P.
Robert M. Beuerlein, Executive Vice President and Actuary
Ernst & Young LLP
Coopers & Lybrand L.L.P.
The following exhibits required by Article IX(A) of Form N-8B-2:
*1-A(1) Certified resolutions regarding organization of Separate
Account VUL-2.
1-A(2) Inapplicable.
****1-A(3)(a) Sales Agreement between Franklin Financial Services
Corporation ("Franklin Financial") and Separate Account VUL-2
of The American Franklin Life Insurance Company, dated as of
January 31, 1995.
*1-A(3)(b)(i) Specimen Regional Manager Registered Representative Agreement
between Franklin Financial and registered representatives of
Franklin Financial distributing EquiBuilder III policies.
*1-A(3)(b)(ii) Specimen Registered Representative Agreement between Franklin
Financial and registered representatives of Franklin Financial
distributing EquiBuilder III policies.
**1-A(3)(c) Schedule of Sales Commissions.
**1-A(4) Agreement between The American Franklin Life Insurance Company
("American Franklin") and Franklin Financial, dated March 31,
l994, regarding supervision of agents.
**1-A(5)(a) EquiBuilder III Flexible Premium Life Insurance Policy.
*1-A(5)(b) Accidental Death Benefit Rider.
*1-A(5)(c) Term Insurance Rider.
*1-A(5)(d) Children's Term Insurance Rider.
*1-A(5)(e) Disability Rider - Waiver of Monthly Deductions.
**1-A(5)(f) Endorsement to EquiBuilder III Flexible Premium Life Insurance
policy when issued to a Policy Owner in the State of Texas.
*****1-A(6)(a) Articles of Incorporation of American Franklin.
1-A(6)(b) By-Laws of American Franklin are incorporated herein by
reference to Exhibit 1-A(6)(b) to Post-Effective Amendment No.
3 on Form S-6 of Separate Account VUL-2 of The American
Franklin Life Insurance Company, filed February 28, 1997 (Reg.
No. 33- 77470).
1-A(7) Inapplicable.
*1-A(8)(a)(1) Participation Agreement among American Franklin, Variable
Insurance Products Fund ("VIPF") and Fidelity Distributors
Corporation ("FDC"), dated July 18, 1991.
II-2
<PAGE>
***1-A(8)(a)(2) Amendment No. 1 to Participation Agreement among American
Franklin, VIPF and FDC, effective as of November 1, 1991.
*1-A(8)(a)(3) Participation Agreement among American Franklin, Variable
Insurance Products Fund II ("VIPF II") and FDC, dated July 18,
1991.
***1-A(8)(a)(4) Amendment No. 1 to Participation Agreement among American
Franklin, VIPF II and FDC, effective as of November 1, 1991.
*1-A(8)(a)(5) Sub-License Agreement between FDC and American Franklin dated
July 18, 1991.
****1-A(8)(a)(6) Amendment No. 2 to Participation Agreement among American
Franklin, VIPF and FDC, dated January 18, 1995.
****1-A(8)(a)(7) Amendment No. 2 to Participation Agreement among American
Franklin, VIPF II and FDC, dated January 18, 1995.
1-A(8)(a)(8) Amendment No. 3 to Participation Agreement among American
Franklin, VIPF and FDC, dated July 1, 1996, is hereby
incorporated herein by reference to Exhibit 8(a)(4) to the
Registration Statement on Form N-4 (Reg. No. 333-10489) of
Separate Account VA-1 of American Franklin, filed August 20,
1996.
1-A(8)(a)(9) Amendment No. 3 to Participation Agreement among American
Franklin, VIPF II and FDC, dated July 1, 1996, is hereby
incorporated herein by reference to Exhibit 8(b)(4) to the
Registration Statement on Form N-4 (Reg. No. 333-10489) of
Separate Account VA-1 of American Franklin, filed August 20,
1996.
1-A(8)(a)(10) Amendment No. 4 to Participation Agreement among American
Franklin, VIPF and FDC, dated November, 1996, is hereby
incorporated herein by reference to Exhibit 8(a)(5) to
Pre-Effective Amendment No. 1 to Registration Statement on
Form N-4 (Reg. No. 333-10489) of Separate Account VA-1 of
American Franklin, filed November 26, 1996.
1-A(8)(a)(11) Amendment No. 4 to Participation Agreement among American
Franklin, VIPF II and FDC, dated November, 1996, is hereby
incorporated herein by reference to Exhibit 8(b)(5) to
Pre-Effective Amendment No. 1 to Registration Statement on
Form N-4 (Reg. No. 333-10489) of Separate Account VA-1 of
American Franklin, filed November 26, 1996.
*1-A(8)(c) Modified Coinsurance Agreement between American Franklin and
Integrity, dated March 10, 1989.
*1-A(8)(c)(1) Amendment No. 1 to Modified Coinsurance Agreement between
American Franklin and Integrity.
1-A(8)(c)(2) Amendment No. 2 to Modified Coinsurance Agreement between
American Franklin and Integrity is incorporated herein by
reference to similarly designated exhibit to Post- Effective
Amendment No. 3 on Form S-6 of Separate Account VUL-2 of The
American Franklin Life Insurance Company, filed February 28,
1997 (Reg. No. 33-77470).
1-A(8)(c)(3) Amendment No. 3 to Modified Coinsurance Agreement between
American Franklin and Integrity effective April 1, 1989 is
incorporated herein by reference to similarly designated
exhibit to Post-Effective Amendment No. 3 on Form S-6 of
Separate Account VUL-2 of The American Franklin Life Insurance
Company, filed February 28, 1997 (Reg. No. 33-77470).
1-A(8)(c)(4) Amendment No. 3 to Modified Coinsurance Agreement between
American Franklin, Integrity, and Phoenix Home Life Mutual
Insurance Company, assignee of Integrity effective January 1,
1997 is incorporated herein by reference to similarly
designated exhibit to Post-Effective Amendment No. 3 on Form
S-6 of Separate Account VUL-2 of The American Franklin Life
Insurance Company, filed February 28, 1997 (Reg. No. 33-
77470).
*1-A(8)(d) Reinsurance Agreement between American Franklin and The
Franklin Life Insurance Company ("The Franklin"), effective as
of January 1, 1988.
*1-A(8)(d)(1) Amendment No. 1 effective as of January 1, 1990 to Reinsurance
Agreement between American Franklin and The Franklin.
*1-A(8)(d)(2) Amendment No. 2 effective as of January 1, 1990 to Reinsurance
Agreement between American Franklin and The Franklin.
II-3
<PAGE>
*1-A(9) Administrative Service Agreement between The Franklin and
American Franklin, dated May 16, l988.
1-A(10) Application for EquiBuilder III Policy is incorporated herein
by reference to similarly designated exhibit to Post-Effective
Amendment No. 3 on Form S-6 of Separate Account VUL-2 of The
American Franklin Life Insurance Company, filed February 28,
1997 (Reg. No. 33-77470).
Other Exhibits:
2 See Exhibit 1-A(5)(a) above.
**3(a) Opinion and Consent of Stephen P. Horvat, Jr., Esq., Senior
Vice President, General Counsel and Secretary of American
Franklin.
3(b) Opinion and Consent of Robert M. Beuerlein, Executive Vice
President and Actuary of American Franklin.
4 Inapplicable.
5 Inapplicable.
6(a) Consent of Ernst & Young LLP.
6(b) Consent of Coopers & Lybrand L. L. P.
6(c) Consent of Sutherland, Asbill & Brennan, L.L.P.
7 Power of Attorney is incorporated herein by reference to
Exhibit 7 to Form S-6 of Separate Account VUL-2 of The
American Franklin Life Insurance Company, filed February 28,
1997 (Reg. No. 33-77470).
8 Description of American Franklin's Issuance, Transfer and
Redemption Procedures for EquiBuilder III Policies pursuant to
Rule 6e-3(T)(b)(12)(iii) under the Investment Company Act of
1940.
**9 Notice of Cancellation Right Pursuant to Rule
6e-3(T)(b)(13)(viii) under the Investment Company Act of 1940.
**10 Representations, description and undertaking pursuant to Rule
6e-3(T)(b)(13)(iii)(F) under the Investment Company Act of
1940.
**11(a) Guaranty of Obligations of Principal Underwriter pursuant to
Rule 6e-3(T)(b)(13)(vi) of the Investment Company Act of 1940,
dated March 31, 1994.
27 Financial Data Schedule meeting the requirements of Rule 483.
- --------------------------------------------------------------------------------
* Incorporated herein by reference to similarly designated exhibit to Form
S-6 of Separate Account VUL-2 of The American Franklin Life Insurance
Company, filed July 24, 1991 (Reg. No. 33-41838).
** Filed with original filing of the Registration Statement on Form S-6,
filed April 7, 1994 (Reg. No. 33-77470).
*** Incorporated herein by reference to similarly designated exhibit to
Post-Effective Amendment No. 3 on Form S-6 of Separate Account VUL-2 of
The American Franklin Life Insurance Company, filed February 26, 1993
(Reg. No. 33-41838).
**** Incorporated herein by reference to similarly designated exhibit to
Post-Effective Amendment No. 1 on Form S-6 of Separate Account VUL-2 of
The American Franklin Life Insurance Company, filed March 2, 1995 (Reg.
No. 33-77470).
***** Incorporated herein by reference to similarly designated exhibit to
Post-Effective Amendment No. 2 on Form S-6 of Separate Account VUL-2 of
The American Franklin Life Insurance Company, filed April 30, 1996 (Reg.
No. 33-77470).
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant, Separate Account VUL-2 of The American Franklin Life Insurance
Company certifies that it meets the requirements of the Securities Act of
1933 Rule 485(b) for effectiveness of this Registration Statement and has
duly caused this Post-Effective Amendment No. 4 to the Registration Statement
on Form S-6 to be signed on its behalf by the undersigned, thereunto duly
authorized, and its seal to be hereunto affixed and attested, all in the City
of Springfield, and State of Illinois on the 24th of April, 1997.
SEPARATE ACCOUNT VUL-2 OF
THE AMERICAN FRANKLIN LIFE
INSURANCE COMPANY
By: THE AMERICAN FRANKLIN
LIFE INSURANCE COMPANY,
Depositor
[SEAL]
By: /s/ Ross D. Friend
---------------------------------
Ross D. Friend,
Senior Vice President,
General Counsel and
Secretary
Attest:
/s/ Elizabeth E. Arthur
- ---------------------------------
Elizabeth E. Arthur
Assistant Secretary
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, The
American Franklin Life Insurance Company certifies that it meets the
requirements of the Securities Act of 1933 Rule 485(b) for effectiveness of
this Registration Statement and has duly caused this Post-Effective Amendment
to the Registration Statement on Form S-6 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Springfield, and State
of Illinois on the 24th day of April, 1997.
THE AMERICAN FRANKLIN
LIFE INSURANCE COMPANY
By: /s/ Ross D. Friend
----------------------------------
Ross D. Friend,
Senior Vice President,
General Counsel and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement on Form S-6 has been
signed by the following persons in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ Earl W. Baucom* Senior Vice President, Chief April 24, 1997
- --------------------------- Financial Officer (principal
Earl W. Baucom financial officer and principal
accounting officer) and Director
/s/ Robert M. Beuerlein* Director April 24, 1997
- ---------------------------
Robert M. Beuerlein
/s/ Brady W. Creel* Director April 24, 1997
- ---------------------------
Brady W. Creel
Director ________, 1997
- ---------------------------
Robert M. Devlin
/s/ Ross D. Friend* Director and Secretary April 24, 1997
- ---------------------------
Ross D. Friend
/s/ Robert J. Gibbons* Director and President April 24, 1997
- --------------------------- (principal executive officer)
Robert J. Gibbons
Director ________, 1997
- ---------------------------
Harold S. Hook
Director ________, 1997
- ---------------------------
Jon P. Newton
/s/ Gary D. Reddick* Director April 24, 1997
- ---------------------------
Gary D. Reddick
Director ________, 1997
- ---------------------------
Peter V. Tuters
- ---------------------------
*By Elizabeth E. Arthur, Attorney-in-Fact
II-6
<PAGE>
EXHIBIT INDEX
Page No.
*1-A(1) Certified resolutions regarding organization of
Separate Account VUL-2.
1-A(2) Inapplicable.
****1-A(3)(a) Sales Agreement between Franklin Financial Services
Corporation ("Franklin Financial") and Separate
Account VUL-2 of The American Franklin Life
Insurance Company, dated as of January 31, 1995.
*1-A(3)(b)(i) Specimen Regional Manager Registered Representative
Agreement between Franklin Financial and registered
representatives of Franklin Financial distributing
EquiBuilder III policies.
*1-A(3)(b)(ii) Specimen Registered Representative Agreement between
Franklin Financial and registered representatives of
Franklin Financial distributing EquiBuilder III
policies.
**1-A(3)(c) Schedule of Sales Commissions.
**1-A(4) Agreement between The American Franklin Life
Insurance Company ("American Franklin") and Franklin
Financial, dated March 31, l994, regarding
supervision of agents.
**1-A(5)(a) EquiBuilder III Flexible Premium Life Insurance
Policy.
*1-A(5)(b) Accidental Death Benefit Rider.
*1-A(5)(c) Term Insurance Rider.
*1-A(5)(d) Children's Term Insurance Rider.
*1-A(5)(e) Disability Rider - Waiver of Monthly Deductions.
**1-A(5)(f) Endorsement to EquiBuilder III Flexible Premium Life
Insurance policy when issued to a Policy Owner in
the State of Texas.
*****1-A(6)(a) Articles of Incorporation of American Franklin.
1-A(6)(b) By-Laws of American Franklin are incorporated herein
by reference to Exhibit 1-A(6)(b) to Post-Effective
Amendment No. 3 on Form S-6 of Separate Account
VUL-2 of The American Franklin Life Insurance
Company, filed February 28, 1997 (Reg. No.
33-77470).
1-A(7) Inapplicable.
*1-A(8)(a)(1) Participation Agreement among American Franklin,
Variable Insurance Products Fund ("VIPF") and
Fidelity Distributors Corporation ("FDC"), dated
July 18, 1991.
***1-A(8)(a)(2) Amendment No. 1 to Participation Agreement among
American Franklin, VIPF and FDC, effective as of
November 1, 1991.
*1-A(8)(a)(3) Participation Agreement among American Franklin,
Variable Insurance Products Fund II ("VIPF II") and
FDC, dated July 18, 1991.
***1-A(8)(a)(4) Amendment No. 1 to Participation Agreement among
American Franklin, VIPF II and FDC, effective as of
November 1, 1991.
*1-A(8)(a)(5) Sub-License Agreement between FDC and American
Franklin dated July 18, 1991.
****1-A(8)(a)(6) Amendment No. 2 to Participation Agreement among
American Franklin, VIPF and FDC, dated January 18,
1995.
****1-A(8)(a)(7) Amendment No. 2 to Participation Agreement among
American Franklin, VIPF II and FDC, dated January
18, 1995.
1-A(8)(a)(8) Amendment No. 3 to Participation Agreement among
American Franklin, VIPF and FDC, dated July 1, 1996,
is hereby incorporated herein by reference to
Exhibit 8(a)(4) to the Registration Statement on
Form N-4 (Reg. No. 333-10489) of Separate Account
VA-1 of American Franklin, filed August 20, 1996.
<PAGE>
EXHIBIT INDEX
Page No.
1-A(8)(a)(9) Amendment No. 3 to Participation Agreement among
American Franklin, VIPF II and FDC, dated July 1,
1996, is hereby incorporated herein by reference to
Exhibit 8(b)(4) to the Registration Statement on
Form N-4 (Reg. No. 333-10489) of Separate Account
VA-1 of American Franklin, filed August 20, 1996.
1-A(8)(a)(10) Amendment No. 4 to Participation Agreement among
American Franklin, VIPF and FDC, dated November,
1996, is hereby incorporated herein by reference to
Exhibit 8(a)(5) to Pre-Effective Amendment No. 1 to
Registration Statement on Form N-4 (Reg. No.
333-10489) of Separate Account VA-1 of American
Franklin, filed November 26, 1996.
1-A(8)(a)(11) Amendment No. 4 to Participation Agreement among
American Franklin, VIPF II and FDC, dated November,
1996, is hereby incorporated herein by reference to
Exhibit 8(b)(5) to Pre-Effective Amendment No. 1 to
Registration Statement on Form N-4 (Reg. No.
333-10489) of Separate Account VA-1 of American
Franklin, filed November 26, 1996.
*1-A(8)(c) Modified Coinsurance Agreement between American
Franklin and Integrity, dated March 10, 1989.
*1-A(8)(c)(1) Amendment No. 1 to Modified Coinsurance Agreement
between American Franklin and Integrity.
1-A(8)(c)(2) Amendment No. 2 to Modified Coinsurance Agreement
between American Franklin and Integrity is
incorporated herein by reference to similarly
designated exhibit to Post-Effective Amendment No. 3
on Form S-6 of Separate Account VUL-2 of The
American Franklin Life Insurance Company, filed
February 28, 1997 (Reg. No. 33-77470).
1-A(8)(c)(3) Amendment No. 3 to Modified Coinsurance Agreement
between American Frankin, and Integrity effective
January 1, 1997 is incorporated herein by reference
to similarly designated exhibit to Post-Effective
Amendment No. 3 on Form S-6 of Separate Account
VUL-2 of The American Franklin Life Insurance
Company, filed February 28, 1997 (Reg. No.
33-77470).
1-A(8)(c)(4) Amendment No. 3 to Modified Coinsurance Agreement
between American Franklin, Integrity, and Phoenix
Home Life Mutual Insurance Company, assignee of
Integrity is incorporated herein by reference to
similarly designated exhibit to Post-Effective
Amendment No. 3 on Form S-6 of Separate Account
VUL-2 of The American Franklin Life Insurance
Company, filed February 28, 1997 (Reg. No.
33-77470).
*1-A(8)(d) Reinsurance Agreement between American Franklin and
The Franklin Life Insurance Company ("The
Franklin"), effective as of January 1, 1988.
*1-A(8)(d)(1) Amendment No. 1 effective as of January 1, 1990 to
Reinsurance Agreement between American Franklin and
The Franklin.
*1-A(8)(d)(2) Amendment No. 2 effective as of January 1, 1990 to
Reinsurance Agreement between American Franklin and
The Franklin.
*1-A(9) Administrative Service Agreement between The
Franklin and American Franklin, dated May 16, l988.
1-A(10) Application for EquiBuilder III Policy is
incorporated herein by reference to similarly
designated exhibit to Post-Effective Amendment No. 3
on Form S-6 of Separate Account VUL-2 of The
American Franklin Life Insurance Company, filed
February 28, 1997 (Reg. No. 33-77470).
Other Exhibits:
2 See Exhibit 1-A(5)(a) above.
**3(a) Opinion and Consent of Stephen P. Horvat, Jr., Esq.,
Senior Vice President, General Counsel and Secretary
of American Franklin.
3(b) Opinion and Consent of Robert M. Beuerlein,
Executive Vice President and Actuary of American
Franklin.
<PAGE>
EXHIBIT INDEX
Page No.
4 Inapplicable.
5 Inapplicable.
6(a) Consent of Ernst & Young LLP
6(b) Consent of Coopers & Lybrand L. L. P
6(c) Consent of Sutherland, Asbill & Brennan, L.L.P.
7 Power of Attorney is incorporated herein by
reference to Exhibit 7 to Form S-6 of Separate
Account VUL-2 of The American Franklin Life
Insurance Company, filed February 28, 1997 (Reg. No.
33-77470).
8 Description of American Franklin's Issuance,
Transfer and Redemption Procedures for EquiBuilder
III Policies pursuant to Rule 6e-3(T)(b)(12)(iii)
under the Investment Company Act of 1940.
**9 Notice of Cancellation Right Pursuant to Rule
6e-3(T)(b)(13)(viii) under the Investment Company
Act of 1940.
**10 Representations, description and undertaking
pursuant to Rule 6e-3(T)(b)(13)(iii)(F) under the
Investment Company Act of 1940.
** 11(a) Guaranty of Obligations of Principal
Underwriter pursuant to Rule 6e-3(T)(b)(13)(vi) of
the Investment Company Act of 1940, dated March 31,
1994.
27 Financial Data Schedule meeting the requirements of
Rule 483.
- --------
* Incorporated herein by reference to similarly designated exhibit
to Form S-6 of Separate Account VUL-2 of The American Franklin
Life Insurance Company, filed July 24, 1991 (Reg. No. 33-41838).
** Filed with original filing of the Registration Statement on Form
S-6, filed April 7, 1994 (Reg. No. 33-77470).
*** Incorporated herein by reference to similarly designated exhibit
to Post-Effective Amendment No. 3 on Form S-6 of Separate
Account VUL-2 of The American Franklin Life Insurance Company,
filed February 26, 1993 (Reg. No. 33-41838).
**** Incorporated herein by reference to similarly designated exhibit
to Post-Effective Amendment No. 1 on Form S-6 of Separate
Account VUL-2 of The American Franklin Life Insurance Company,
filed March 2, 1995 (Reg. No. 33-77470).
<PAGE>
EXHIBIT 3(b)
April 23, 1997
The American Franklin Life
Insurance Company
#1 Franklin Square
Springfield, Illinois 62713
Gentlemen:
This opinion is furnished in connection with the filing of Post-Effective
Amendment No. 4 to the Registration Statement on Form S-6 (Reg. No. 33-77470) by
Separate Account VUL-2 of The American Franklin Life Insurance Company (the
"Separate Account") and The American Franklin Life Insurance Company ("American
Franklin") covering an indefinite number of units of interests in the Separate
Account. Net premiums received under American Franklin's EquiBuilder III
individual flexible premium variable life insurance policies (the "Policies") to
be offered by American Franklin may be allocated by American Franklin to the
Separate Account as described in the Prospectus forming a part of the
Registration Statement.
I participated in the preparation of the Policies and I am familiar with
their provisions. I am also familiar with the description contained in the
Prospectus. In my opinion:
1. The illustrations for the Policies set forth under "Illustrations of
Death Benefits, Policy Account and Cash Surrender Values and
Accumulated Premiums" in the Prospectus, based on the assumptions
stated in the illustrations, are consistent with the provisions of
the Policies. The rate structure of the Policies has not been
designed so as to make the relationship between planned premiums and
benefits, as shown in the illustrations, appear to be
correspondingly more favorable to a prospective purchaser of
Policies for males age 40 than to prospective purchasers of Policies
for a male at other ages or for a female.
2. The table of cost of insurance rates, set forth under "Deductions
and Charges - Charges Against the Policy Account - Cost of Insurance
Charge" in the Prospectus, contains both the current and guaranteed
rates to be used for these Policies for males of illustrative ages.
These rates have not been designed so as to make the relationship
between current and guaranteed rates more favorable for males of the
ages illustrated than for a male at other ages or a female.
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of my name under the caption "Experts" in
the Prospectus forming a part of the Registration Statement.
Very truly yours,
/s/ Robert M. Beuerlein
ROBERT M. BEUERLEIN
EXECUTIVE VICE PRESIDENT AND
ACTUARY
<PAGE>
EXHIBIT 6(a)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 7, 1997, with respect to the financial
statements of Separate Account VUL-2 of The American Franklin Life Insurance
Company as of December 31, 1996 and for the periods noted in the report, and our
report dated February 14, 1997 with respect to the balance sheets of The
American Franklin Life Insurance Company as of December 31, 1996 and 1995 and
the related statements of operations, shareholder's equity and cash flows for
the year ended December 31, 1996, the eleven months ended December 31, 1995 and
the one month ended January 31, 1995 in this Post-Effective Amendment to the
Registration Statement on Form S-6 (No. 33-77470) under the Securities Act of
1933 of Securities of Unit Investment Trusts Registered on Form N-8B-2 and
related Prospectus of Separate Account VUL-2 of The American Franklin Life
Insurance Company.
/s/ Ernst &Young LLP
ERNST & YOUNG LLP
Chicago, Illinois
April 28, 1997
<PAGE>
EXHIBIT 6(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Post-Effective Amendment No. 4 to the
Registration Statement on Form S-6 (Reg. No. 33-77470) of Separate Account VUL-2
of The American Franklin Life Insurance Company and of The American Franklin
Life Insurance Company, as depositor, of our report dated February 1, 1995, on
our audit of the statements of operations, shareholder's equity and cash flows
of The American Franklin Life Insurance Company for the year ended December 31,
1994.
We also consent to the reference to our firm under the caption "Experts"
in the Prospectus constituting a part of this Post-Effective Amendment No. 4 to
the Registration Statement on Form S-6 (Reg. No. 33-77470) of Separate Account
VUL-2 of The American Franklin Life Insurance Company.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
April 28, 1997
<PAGE>
EXHIBIT 6(c)
CONSENT OF COUNSEL
We consent to the reference to our firm under the caption "Legal Matters"
in the Prospectus constituting a part of this Post-Effective Amendment No. 4 to
the Registration Statement under the Securities Act of 1933. In giving this
consent, we do not admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act of 1933.
/s/ Sutherland, Asbill & Brennan, L.L.P.
SUTHERLAND, ASBILL & BRENNAN, L.L.P.
Washington, D.C.
April 23, 1997
<PAGE>
Exhibit 8
Description of The American Franklin Life Insurance
Company's Issuance, Transfer
and Redemption Procedures for EquiBuilder III Policies
Pursuant to Rule 6e-3(T)(b)(12)(iii)
under the Investment Company Act of 1940
Set forth below is the information called for under Rule
6e-3(T)(b)(12)(iii) under the Investment Company Act of 1940 ("1940 Act"). That
rule provides an exemption for separate accounts, their investment advisers,
principal underwriters and sponsoring insurance companies from Sections 22(c),
22(d), 22(e), and 27(c)(1) of the 1940 Act, and Rule 22(c)-1 promulgated
thereunder, for issuance, transfer and redemption procedures under flexible
premium variable life insurance policies to the extent necessary to comply with
Rule 6e-3(T), state administrative law or established administrative procedures
of the life insurance company. In order to qualify for the exemption, procedures
must be reasonable, fair and not discriminatory and they must be disclosed in
the registration statement filed by the separate account.
Net premiums received by The American Franklin Life Insurance Company
("American Franklin") under its EquiBuilder III(TM) flexible premium variable
life insurance policies (the "Policies") are invested in Separate Account VUL-2
(the "Account") of American Franklin. The Account is registered under the 1940
Act. Within the Account are investment divisions, which are as of April, 1997
the Money Market division, the High Income division, the Equity-Income division,
the Growth division, the Overseas division, the Investment Grade Bond division,
the Asset Manager division, the Index 500 division, the Contrafund division and
the Asset Manager: Growth division (the "investment divisions"). New investment
divisions may be added. Procedures apply equally to each investment division and
for purposes of this description are defined in terms of the Account, except
where a discussion of both the Account and its investment divisions is
necessary. Each current investment division invests in shares of a corresponding
portfolio of the Variable Insurance Products Fund or of the Variable Insurance
Products Fund II (individually, a "Fund," and collectively, the "Funds"), each a
"series" type of mutual fund registered under the 1940 Act. The investment
experience of the current investment divisions of the Account depends upon the
market performance of the corresponding Fund portfolios. Although the Policies
may also provide for fixed benefits supported by American Franklin's General
Account, except as otherwise explicitly stated herein, this description assumes
that net premiums are allocated exclusively to the Account and that all
transactions involve only the investment divisions of the Account.
American Franklin believes its procedures meet the requirements of Rule
6e-3(T)(b)(12)(iii) and states the following:
1. Because of the insurance nature of the Policies and due to the
requirements of state insurance laws, the procedures necessarily differ in
significant respects from procedures for mutual funds and contractual plans for
which the 1940 Act was designed.
<PAGE>
2. In structuring its procedures to comply with Rule 6e-3(T) and state
insurance laws, American Franklin has attempted to comply with the intent of the
1940 Act, to the extent deemed feasible.
3. In general, state insurance laws require that American Franklin's
procedures be reasonable, fair and not discriminatory.
4. Because of the nature of the insurance product, it is often difficult
to determine precisely when American Franklin's procedures deviate from those
required under Sections 22(c), 22(d), 22(e) or 27(c)(1) of the 1940 Act or Rule
22c-1 thereunder. Accordingly, set out below is a summary of the principal
policy provisions and procedures which may be deemed to constitute, either
directly or indirectly, such a deviation. The summary, while comprehensive, does
not attempt to treat each and every procedure or variation which might occur and
does include certain procedural steps which do not constitute deviations from
the above-cited sections or rule.
I. "Redemption Procedures":
Surrender and Related Transactions
This section will outline those procedures which differ in certain
significant respects from redemption procedures for mutual funds and contractual
plans. American Franklin's Policies provide for the payment of monies to a
policy owner or beneficiary upon presentation of a Policy. Generally, except for
the payment of death benefits, the imposition of cost of insurance,
administrative and transaction charges and the effects of the surrender charge,
the payee will receive a pro rata or proportionate share of the Account's assets
within the meaning of the 1940 Act in any transaction involving "redemption
procedures." The amount received by the payee will depend upon the particular
benefit for which the Policy is presented, including, for example, the cash
surrender value or death benefit. There are also certain Policy provisions --
such as partial withdrawals and the loan privilege -- under which the Policy
will not be presented to American Franklin but which will affect the policy
owner's benefits and may involve a transfer of the assets supporting the policy
reserve out of the Account. Any combined transactions on the same day which
counteract the effect of each other will be allowed. American Franklin will
assume the policy owner is aware of the conflicting nature of these transactions
and desires their combined result. In addition, if a transaction is requested
which American Franklin will not allow (for example, a request for a decrease in
face amount which lowers the face amount below American Franklin's minimum)
American Franklin will reject the whole request and not just the portion which
causes the disallowance. Policy owners will be informed of the rejection and
will have an opportunity to give new instructions. Finally, state insurance laws
may require that certain requirements be met before American Franklin is
permitted to make payments to the payee.
2
<PAGE>
a. Surrender for Cash Values
American Franklin will pay the net cash surrender value within seven days
after receipt, at its Administrative Office, of the Policy and a signed request
for surrender. Computations with respect to the investment experience of each
investment division will be made at the close of trading on the composite tape
on each business day. This will enable American Franklin to pay a net cash value
on surrender as of the date a request for surrender and the Policy are received
based on the next computed value after a request is received. The surrender is
effective on the date American Franklin receives the request at its
Administrative Office and insurance coverage ends on that day.
The Policy Account (which is equal to the cash surrender value plus any
applicable surrender charge) may increase or decrease from day to day depending
on the investment experience of the Account. Calculation of the Policy Account
for any given day will reflect the actual premiums paid, expenses charged and
deductions taken.
American Franklin will deduct from each premium payment a charge for
applicable taxes (which will vary from jurisdiction to jurisdiction). The charge
for applicable taxes covers the tax American Franklin must pay to states and
other jurisdictions based on premiums received. American Franklin will also
deduct from each premium payment a sales expense deduction equal to 5% of each
premium paid in each policy year until one "target premium" has been paid.
Premiums paid in any policy year in excess of a "target premium" will not be
subject to a sales expense deduction. The balance (net premium) is put into the
Policy Account. Target premiums are based on the age and sex of the insured
person and the initial face amount of the policy and are never more than 72% of
the applicable guideline level premium for the Policy determined in accordance
with Section 7702 of the Internal Revenue Code. The sales expense deduction is
intended to recover some of the expenses of distributing the policies.
Each month, American Franklin makes charges against the Policy Account to
cover the cost of insurance and administrative expenses for the next month.
During the first 12 policy months, American Franklin will make an additional
administrative charge, currently $24 per month, designed to recover the expenses
incurred in issuing a new Policy. Other possible charges against the Policy
Account (which will occur on a case-specific basis) include a charge for
additional benefits which are added by rider, a charge for partial withdrawals,
a charge for increases in face amount and a charge for certain transfers.
A contingent deferred sales load (the "surrender charge") (equal to 25% of
first year premiums paid up to the level of a target premium plus 9% of all
other premiums paid with a maximum charge of 50% of one target premium) will be
deducted from the Policy Account if the Policy is surrendered during the first
ten policy years. If the face amount of the Policy is reduced below the initial
face amount, a pro-rata portion of the surrender charge may be deducted from the
Policy Account. The maximum surrender charge begins to decline after the first
six policy years and is reduced to zero after ten policy years. No minimum
amount of cash surrender value is guaranteed.
3
<PAGE>
If a Policy is totally surrendered American Franklin will pay the policy
owner an amount equal to the net cash surrender value of the policy. The net
cash surrender value of a Policy is equal to the cash surrender value of the
Policy less the amount of any outstanding policy loan and accrued interest. The
cash surrender value of a Policy will equal the amount of the Policy Account
less the surrender charge. American Franklin will make the payment of net cash
surrender value out of its General Account and, at the same time, transfer
assets from the Account to the General Account in an amount equal to the policy
reserves in the Account for the surrendered policy, or the portion of the face
amount that was reduced.
In lieu of payment of the net cash surrender value in a single sum upon
surrender of a Policy, an election may be made to apply all or a portion of the
proceeds under one of the fixed benefit payment options described in the
Policies. The election may be made by the policy owner during the insured
person's lifetime, or, if no election is in effect at the insured person's
death, by the beneficiary. An option in effect at death may not be changed to
another form of benefit after death. An option is currently available only if
the proceeds to be applied are $1,000 or more and would result in periodic
payments of at least $20. The settlement options are subject to the restrictions
and limitations set forth in the Policies.
The Policy contains a partial withdrawal feature after the first policy
year, subject to a minimum withdrawal amount and other conditions. Any request
for a partial withdrawal must be in writing to American Franklin's
Administrative Office, and will take effect as of the day it is received. A
partial withdrawal will reduce the death benefit, Policy Account and cash
surrender value associated with the Policy by the amount of the withdrawal plus
a charge for administrative expenses associated with it. The Policy after such a
withdrawal must meet minimum face amount requirements and must continue to
qualify as life insurance under applicable tax law.
b. Death Claims
American Franklin will pay a death benefit to the beneficiary within seven
days after receipt, at its Administrative Office, of the Policy, due proof of
death of the insured, and all other requirements necessary(1) to make payment.
The death benefit payable will depend on the option in effect at the time
of death. Under Option A, the death benefit is the greater of the face amount of
insurance and a percentage multiple (see below) of the amount in the Policy
Account. Under Option B, the death benefit is the greater of the face amount of
insurance plus the amount in the Policy Account and a percentage multiple (see
below) of the amount in the Policy Account. The percentage referred to is the
applicable percentage from the following table for the insured person's age (as
of his or her nearest birthday) at the beginning of the policy year of
determination.
- ----------
(1) State insurance laws impose various requirements, such as receipt of a tax
waiver, before payment of the death benefit may be made. In addition,
payment of the death benefit is subject to the provisions of the Policies
regarding suicide and incontestability.
4
<PAGE>
TABLE OF
APPLICABLE PERCENTAGES
For ages not shown, the applicable percentages will decrease by a ratable
portion for each full year.
Insured Insured
Person's Age Percentage Person's Age Percentage
- ------------ ---------- ------------ ----------
40 and under 250% 65 120%
45 215 70 115
50 185 75 thru 90 105
55 150 95 100
60 130
The proceeds payable to the beneficiary will be adjusted to reflect any
outstanding indebtedness and any overdue monthly charges if death occurs during
the grace period described below under "Default and Options on Lapse." The
proceeds payable on death also reflect interest from the date of death to the
date of payment.
American Franklin will make payment of the death benefit out of its
General Account, and will transfer assets from the Account to the General
Account in an amount equal to the reserve for that policy in the Account. The
excess, if any, of the death benefit over the amount transferred will be paid
out of the General Account reserve maintained for that purpose.
In lieu of payment of the death benefit in a single sum, a settlement
option may be selected as described immediately above with respect to cash
surrender values.
c. Exchange of Policy
The Policies allow the policy owner, in lieu of a conversion privilege, to
transfer all the amount in the investment divisions of the Account to the
Guaranteed Interest Division (which is part of American Franklin's General
Account and pays interest at a declared guaranteed rate) without charge.
d. Default and Options on Lapse
The duration of insurance coverage depends upon the net cash surrender
value of a Policy being sufficient to cover the monthly charges. If the net cash
surrender value at the beginning of a month is less than the charges for that
month, a grace period of 61 days will begin. Written notice will be sent to the
policy owner and any assignee on American Franklin's records
5
<PAGE>
stating that such a grace period has begun and giving the approximate amount of
premium payment necessary to cover three monthly deductions. If this amount is
not received during the grace period, any amount in the Policy Account will be
withdrawn and applied to applicable charges and the Policy will end without
value. If the insured should die during the grace period, an amount sufficient
to cover the overdue monthly charges and other charges will be deducted from the
death benefit.
e. Policy Loan
American Franklin's Policies provide that a policy owner may take a loan
of up to 90% of the cash surrender value upon assignment to American Franklin of
the Policy as sole security. The cash surrender value for this purpose will be
that next computed after receipt, at American Franklin's Administrative Office,
of a signed loan request. Payment of the loan out of American Franklin's General
Account will be made to the policy owner within seven days after such receipt.
Interest on a loan accrues daily at an effective annual interest rate
which is adjusted annually. A rate will be determined as of the beginning of
each policy year and will apply to a new or outstanding loan during that policy
year. The annual loan interest rate for a policy year will be the greater of
5-1/2% and the monthly Average Corporates yield published by Moody's Investors
Service, Inc., for the month ending two months before the beginning of the
policy year. The loan interest rate for a policy year after the first will be
the same as it was for the immediately preceding policy year if the formula
above would produce a change of less than 1/2 of 1% from the rate for the
preceding year.
The amount of any outstanding loan plus accrued interest is called an
"indebtedness". A new loan will not be permitted unless it is at least $500 more
than the existing indebtedness, if any. Outstanding indebtedness will be added
to the amount of any new loan request and the old loan amount will be cancelled.
When a loan is made, the portion of the assets in the Account (which is a
portion of the cash surrender value and which also constitutes a portion of the
reserves for the death benefit) equal to the indebtedness created thereby is
transferred by American Franklin from the Account to the Guaranteed Interest
Division, which is part of American Franklin's General Account. Allocation of
the loan among investment divisions will be according to the policy owner's
request. If this allocation is not specified or not possible, the loan will be
allocated according to the monthly deduction percentages then in effect. If the
loan cannot be allocated based on these percentages, it will be allocated based
on the proportion the values in each investment division of the Account bear to
the total unloaned value in the Policy Account. American Franklin credits the
loaned portion of a Policy with a rate of interest which is up to 2% below the
interest rate charged on the loan, minus any charges for taxes or reserves for
taxes. Interest credited on loaned amounts in the Guaranteed Interest Division
is allocated to the unloaned portion of the Guaranteed Interest Division.
Because of the transfer, a portion of the policy is not variable during the loan
period (except in accordance with adjustments in the loan interest rate
described above) and, therefore, the death benefit and the cash surrender value
are permanently affected by any indebtedness, whether or not repaid in whole or
in part.
6
<PAGE>
Loan interest is due on each policy anniversary. If not paid when due, it
is added to the existing indebtedness and bears interest at the loan rate.
Failure to repay a loan will not necessarily terminate the Policy. If the net
cash surrender value of the Policy is not sufficient to cover the monthly
charges for the cost of insurance and administrative expenses, the Policy will
go into a 61-day grace period, as described above.
f. Transfers Among Divisions
Amounts may be transferred, upon request, at any time from any investment
division of the Account to one or more other divisions of the Account. The
minimum amount allowed for a transfer is the lesser of the minimum amount shown
in a Policy (usually $500) and the total value in the investment division. The
first four transfers in any policy year are free of charge; however, American
Franklin will make a charge for additional transfers in a policy year of up to
$25.
Transfer charges, if any, will be subtracted equally among the divisions
from which transfers are made.
Transfers from an investment division of the Account will take effect as
of the receipt of a request at American Franklin's Administrative Office.
g. Right of Withdrawal Procedures
The Policy provides that the policy owner may cancel it by returning the
Policy along with a written request for cancellation to American Franklin's
Administrative Office by the latest of 1) 45 days after Part I of the
application was signed, 2) 10 days after the policy owner receives the Policy,
and 3) 10 days after American Franklin mails a written Notice of Withdrawal
Right.(2) The policy owner will receive a refund equal to the premium payments
made under the Policy.
- ----------
(2) In accordance with Rules 27f-1(c) and 6e-3(T)(b)(13)(ix), the postmark date
on the envelope containing the policy will determine whether a policy has
been surrendered within American Franklin's withdrawal period.
7
<PAGE>
II. "Public Offering Price": Purchase and Related Transactions -- Section
22(d) and Rule 22c-1
This section outlines those principal Policy provisions and administrative
procedures which might be deemed to constitute, either directly or indirectly, a
"purchase" transaction. Because of the insurance nature of the Policies, the
procedures involved necessarily differ in certain significant respects from the
purchase procedures for mutual funds and contractual plans. The chief
differences revolve around the structure of the cost of insurance charges and
the insurance underwriting (i.e., evaluation of risk) process. There are also
certain Policy provisions -- such as reinstatement and loan repayment -- which
do not result in the issuance of a Policy but which require certain payments by
the policy owner and involve a transfer of assets supporting the policy reserve
into the Account.
a. Insurance Charges and Underwriting Standards
Cost of insurance charges for American Franklin's Policies will not be the
same for all policy owners. The chief reason is that the principle of pooling
and distribution of mortality risks is based upon the assumption that each
policy owner pays a cost of insurance charge commensurate with the insured's
mortality risk which is actuarially determined based upon factors such as age,
sex and risk class of the insured and the face amount size band of the Policy.
In the context of life insurance, a uniform mortality charge (the "cost of
insurance charge") for all insureds would discriminate unfairly in favor of
those insureds representing greater mortality risks to the disadvantage of those
representing lesser risks. Accordingly, although there will be a uniform "public
offering price" for all policy owners, because premiums are flexible and amounts
allocated to the Account will be subject to the same charges as described
above), there will be a different "price" for each actuarial category of policy
owners because different cost of insurance rates will apply. The "price" will
also vary based on net amount at risk. The Policies will be offered and sold
pursuant to this cost of insurance schedule and American Franklin's underwriting
standards and in accordance with state insurance laws. Such laws prohibit unfair
discrimination among insureds, but recognize that premiums must be based upon
factors such as age, sex, health and occupation. A table showing the maximum
cost of insurance charges will be delivered as part of the Policy.
b. Application and Initial Premium Processing
Upon receipt of a completed application from a prospective policy owner,
American Franklin will follow certain insurance underwriting (i.e., evaluation
of risks) procedures designed to determine whether the proposed insured is
insurable. This process may involve such verification procedures as medical
examinations and may require that further information be provided by the
proposed policy owner before a determination can be made. A policy cannot be
issued, i.e., physically issued through American Franklin's computerized issue
system, until this underwriting procedure has been completed.
The date as of which the insurance coverage of the proposed insured is
determined is referred to as the "register date". The register date is the
earlier of the date a Policy is actually
8
<PAGE>
issued ("issue date") and the day American Franklin receives the full initial
premium. The register date represents the first day of the policy year and
therefore determines the policy anniversary. It marks the commencement of the
variability of benefits, except as noted below. The initial net premium is
allocated to the Account as of the later of the register date and the date
American Franklin receives the premium payment. The initial net premium is
allocated to the Money Market division until the first business day 15 days
after the issue date, regardless of the policy owner's premium allocation
instructions. The issue date represents the commencement of the suicide and
contestability periods for purposes of the Policies.
American Franklin will require that the Policy is delivered within a
specific delivery period to protect itself against anti-selection by the
prospective policy owner resulting from a determination of the health of the
proposed insured. Generally, the period will not exceed the shorter of 30 days
from the date the Policy is issued and 75 days from the date of Part 2 of the
Application.
c. Anniversary and Premium Processing
At each monthly anniversary, American Franklin will credit the unloaned
portion of the Guaranteed Interest Division of the Policy Account with any
interest accrued on loan amounts during the previous policy month. Charges
against the Policy Account for administrative expenses, additional benefits and
cost of insurance charges will also be made. These deductions cover the cost of
the Policy for the next month.
"Net premiums" are credited to the Policy Account as of the date the
premium payments are received by American Franklin. The initial net premium is
allocated to the Money Market division until 15 days after the issue date,
regardless of the policy owner's premium allocation instructions. Net premiums
are equal to the gross premiums minus deductions for applicable state and local
taxes and sales expenses.
Premium payments may be made at any time and for any amount, within
certain limits. Premium payments must be at least $100 (some states may have
lower limits) and may not be more than those allowed under the Internal Revenue
Code for the Policy to continue to qualify as life insurance. American Franklin
makes deductions from each premium for sales expenses (5% of each premium paid
during any policy year until total premiums for that policy year equal the
target premium for the particular Policy) and for any applicable premium tax,
the amount of which varies from jurisdiction to jurisdiction.
d. Reinstatement
If the Policy has lapsed, it may be reinstated while the insured person is
alive if the policy owner 1) requests reinstatement within 3 years from the end
of the grace period, 2) provides satisfactory evidence of insurability and 3)
makes a premium payment sufficient to keep the Policy in force for at least 3
months after reinstatement. The effective date of the reinstated Policy will be
the beginning of the policy month which coincides with or next follows the date
American Franklin approves the reinstatement application. Upon reinstatement,
the maximum surrender charge for the policy will be reduced by the amount of all
surrender charges previously imposed on the policy, and for purposes of
determining any future surrender charges on the policy, the policy will be
deemed to have been in effect since the original register date. No previous
indebtedness will be reinstated.
9
<PAGE>
e. Repayment of Loan
A loan made under the Policy may be repaid with an amount equal to the
original loan plus loan interest.
When a loan is made, American Franklin will transfer from each investment
division of the Account to the General Account an amount of that division's cash
surrender value equal to the loan amount from that division. Since American
Franklin will credit these assets with interest at a rate which is up to 2%
below the interest rate on the loan (minus any charges for taxes or reserves for
taxes). American Franklin will retain the difference between these rates and the
loan rates in order to cover certain expenses and contingencies. Upon repayment
of indebtedness, American Franklin will reduce its General Account policy loan
assets and transfer assets supporting corresponding reserves to the divisions
according to the policy owner's instruction or the premium payment allocation
percentages then in effect.
f. Correction of Misstatement of Age or Sex
If American Franklin discovers that the age or sex of the insured has been
misstated, the death benefit and any rider benefits will be those which would be
purchased by the most recent deduction for the cost of insurance and the cost of
rider benefits at the correct age and sex.
g. Contestability
The Policy is contestable for two years, measured from the issue date,
during the lifetime of the insured for material misstatements made in the
initial application for the Policy. Policy changes may be contested for two
years after the effective date of the change, and a reinstatement for two years
after the effective date of the reinstatement. No statement will be used to
contest a Policy unless it is contained in an application. American Franklin may
not be restricted by the foregoing time limitations in the event of fraud.
h. Reduction in Cost of Insurance Rate Classification
By administrative practice, American Franklin will reduce the cost of
insurance rate classification for an outstanding Policy if new evidence of
insurability demonstrates that the policy owner qualifies for a lower
classification. After the reduced rating is determined, the policy owner will
pay a lower monthly cost of insurance charge each month.
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S
FINANCIAL STATEMENTS FOR THE YEAR ENDING 12-31-96 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 88,650,024
<INVESTMENTS-AT-VALUE> 104,704,526
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 271,117
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 104,433,409
<DIVIDEND-INCOME> 3,670,939
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 568,418
<NET-INVESTMENT-INCOME> 3,102,521
<REALIZED-GAINS-CURRENT> 707,548
<APPREC-INCREASE-CURRENT> 7,755,204
<NET-CHANGE-FROM-OPS> 11,565,273
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 312,248
<NUMBER-OF-SHARES-REDEEMED> 87,525
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
