<PAGE>
1933 Act Registration No.33-41838
- --------------------------------------------------------------------------------
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. 8
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 II flexible premium variable life policies.
Pursuant to Rule 24f-2 of the Investment Company Act of 1940, the Registrant has
registered an indefinite number units of interest in Separate Account VUL-2
under flexible premium variable life insurance policies. Registrant filed a Form
24F-2 for the 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. 8
<TABLE>
<CAPTION>
Reconciliation and Tie
----------------------
Registration Item
of Form N-8B-2 Location in Prospectus
- -------------- ----------------------
<S> <C>
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 II 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 II 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 II
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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Registration Item
of Form N-8B-2 Location in Prospectus
- -------------- ----------------------
<S> <C>
10(g)(3), 10(g)(4), 10(h)(3), 10(h)(4)............................... Inapplicable.
10(i)................................................................ The Features of EquiBuilder II Policies - Changes
in EquiBuilder II Policies, - Flexible Premium
Payments, - Additional Benefits; Separate Account
Investment Choices; Policy Account Value; Tax
Effects; Payment Options; Payment of Proceeds.
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 II
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 II Policies - Policy
Issuance Information; Limitations on American
Franklin's Rights to Challenge a Policy;
Distribution of the Policies - Applications.
15................................................................... The Features of EquiBuilder II 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 II Policies - Policy Periods,
Anniversaries, Dates and Ages.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Registration Item
of Form N-8B-2 Location in Prospectus
- -------------- ----------------------
<S> <C>
17(a), 17(b), 17(c).................................................. The Features of EquiBuilder II Policies - Death
Benefits, - Maturity Benefit, - Changing the Face
Amount of Insurance, - Changes in EquiBuilder II
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 II 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.
18(c)................................................................ Summary - Investment Choices of EquiBuilder II
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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Registration Item
of Form N-8B-2 Location in Prospectus
- -------------- ----------------------
<S> <C>
22................................................................... Limits on American Franklin's Right To Challenge a
Policy.
23................................................................... Inapplicable.
24................................................................... The Features of EquiBuilder II 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.
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 II Policies - Death
Benefits, - Maturity Benefit, - Changes in
EquiBuilder II 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
II Policies - Right To Examine the Policy, - Policy
Periods, Anniversaries, Dates and Ages; Payment of
Proceeds.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Registration Item
of Form N-8B-2 Location in Prospectus
- -------------- ----------------------
<S> <C>
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 II Policies - Death
Benefits, - Maturity Benefit, - Changes in
EquiBuilder II 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
II Policies - Right To Examine the Policy, - Policy
Periods, Anniversaries, Dates and Ages; Tax
Effects; Payment of Proceeds.
44(c)................................................................ The Features of EquiBuilder II Policies - Death
Benefits, - Maturity Benefit, - Changes in
EquiBuilder II 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 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
II Policies - Right To Examine the Policy, - Policy
Periods, Anniversaries, Dates and Ages; Tax
Effects; Payment of Proceeds.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Registration Item
of Form N-8B-2 Location in Prospectus
- -------------- ----------------------
<S> <C>
45................................................................... Inapplicable.
46(a)................................................................ The Features of EquiBuilder II Policies - Death
Benefits, - Maturity Benefit, - Changes in
EquiBuilder II 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
II 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 II Policies; Additional
Information.
52(a)................................................................ Separate Account Investment Choices - The Funds, -
Right to Change Operations.
Registration Item
of Form N-8B-2 Location in Prospectus
- -------------- ----------------------
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.
</TABLE>
<PAGE>
================================================================================
Flexible Premium Variable Life Insurance Policy
EQUIBUILDER II(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 II is a trademark of The American Franklin Life Insurance Company
- --------------------------------------------------------------------------------
<PAGE>
EquiBuilder II(TM)
Flexible Premium Variable Life Insurance Policy
Issued by
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
This Prospectus describes EquiBuilder II, individual flexible premium
variable life insurance policies issued by The American Franklin Life Insurance
Company ("American Franklin"). EquiBuilder II 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 II is a trademark of
American Franklin.
EquiBuilder II 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.
After certain deductions have been made from each premium, 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 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
<PAGE>
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 II 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.
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 II Policies.........................................1
Investment Choices of EquiBuilder II Policies...............................2
Deductions and Charges......................................................3
Policy Accounts.............................................................4
Additional Information About EquiBuilder II Policies........................5
Detailed Information About American Franklin and EquiBuilder II Policies
The American Franklin Life Insurance Company................................6
The Features of EquiBuilder II Policies.....................................7
How EquiBuilder II Policies Differ from Whole Life Insurance.............7
Death Benefits...........................................................7
Policy Issuance Information..............................................8
Maturity Benefit.........................................................8
Changes in EquiBuilder II 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.....................................................10
Disability Waiver Benefit.............................................11
Accidental Death Benefit..............................................11
Children's Term Insurance.............................................11
Term Insurance on an Additional Insured Person.............................11
The Separate Account and Its Investment Divisions.......................11
The Funds...............................................................11
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.....................................................14
Deductions from Premiums................................................15
Charges Against the Policy Account......................................15
Administrative Charge.................................................15
Cost of Insurance Charge..............................................15
Charges for Additional Benefits.......................................16
Changes in Monthly Charges............................................16
Charges Against The Separate Account....................................16
Mortality and Expense Risks...........................................16
Charges Against the Funds.............................................16
Tax Reserve...........................................................16
Surrender Charge........................................................17
Other Transaction Charges...............................................18
Partial Withdrawal of Net Cash Surrender Value........................18
Increase in the Face Amount of Insurance..............................18
Transfers.............................................................18
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.........................................20
Determination of the Unit Value.........................................21
Policy Account Transactions................................................21
Changing Premium and Deduction Allocation Percentages...................21
Transfers of Policy Account Value Among Investment Divisions............22
Borrowing from the Policy Account.......................................22
Loan Requests...........................................................22
Policy Loan Interest....................................................23
When Interest is Due....................................................23
Repaying the Loan.......................................................23
The Effects of a Policy Loan on the Policy Account......................23
Lapse of the Policy.....................................................24
Withdrawing Money from the Policy Account...............................24
Withdrawal Charges......................................................24
The Effects of a Partial Withdrawal.....................................25
Surrendering the Policy for Its Net Cash Surrender Value................25
The Guaranteed Interest Division...........................................25
Amounts in the Guaranteed Interest Division.............................25
Interest on Amounts in the Guaranteed Interest Division.................26
Transfers from the Guaranteed Interest Division.........................26
Additional Information About EquiBuilder II Policies.......................26
Right to Examine the Policy.............................................26
Lapse of the Policy.....................................................27
Reinstatement of the Policy.............................................27
Policy Periods, Anniversaries, Dates and Ages...........................28
Federal Tax Considerations.................................................28
Introduction............................................................28
Tax Status of the Policy................................................28
Tax Treatment of Policy Benefits........................................29
American Franklin's Income Taxes........................................31
Income Tax Withholding..................................................31
Illustrations of Death Benefits, Policy Account and Cash Surrender Values,
and Accumulated Premiums...................................................31
Additional Information.....................................................37
Voting Rights of a Policy Owner............................................37
Voting Rights of the Funds..............................................37
Determination of Voting Shares..........................................37
How Shares of the Funds Are Voted.......................................37
Voting Privileges of Participants in Other Separate Accounts............38
Separate Account Voting Rights..........................................38
Reports to Policy Owners...................................................38
Limits on American Franklin's Right to Challenge a Policy..................38
Payment Options............................................................39
The Beneficiary............................................................40
Assignment of a Policy.....................................................40
Employee Benefit Plans.....................................................40
Payment of Proceeds........................................................41
ii
<PAGE>
TABLE OF CONTENTS (Continued)
Page
----
Dividends..................................................................41
Distribution of the Policies...............................................41
Applications............................................................42
Reinsurance Agreement with Integrity Life Insurance Company................42
State Regulation...........................................................42
Legal Matters..............................................................43
Legal Proceedings..........................................................43
Experts....................................................................43
Registration Statement.....................................................43
Other Policies and Contracts...............................................43
Management.................................................................43
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 II 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.
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.
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.
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Definitions (Continued)
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 II policy for a person of the same age and
sex as the Insured Person. The Target Premium for each EquiBuilder II policy is
shown on the Policy Information page of the policy.
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Summary
This Prospectus describes the regular EquiBuilder II(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 II(TM) is a trademark of American Franklin.
Features of EquiBuilder II(TM) Policies
Insurance Benefit Options
EquiBuilder II 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 II policy with a Face
Amount of less than $50,000.
See "The Features Of EquiBuilder II 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 II
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 II Policies-Changes In EquiBuilder II 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 II 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 II
Policies-Additional Benefits," below.
Investment Choices of EquiBuilder II 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 Fund or of the Variable Insurance Products
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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. 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"). 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%. After such deduction, the balance (the "net premium") is placed in the
Policy Account. See "Deductions and Charges-Deductions from Premiums," 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.
In addition, charges will be made upon each of the following:
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<PAGE>
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 30% 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.
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."
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
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<PAGE>
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 II 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 II 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 II Policies-Right to Examine the
Policy," below.
Federal Tax Considerations of EquiBuilder II 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 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.
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<PAGE>
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 II 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 II 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 II 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, 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.
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The Features of EquiBuilder II Policies
How EquiBuilder II Policies Differ from Whole Life Insurance
EquiBuilder II policies are designed to provide life insurance coverage
with flexibility in death benefits, premium payments and investment choices.
EquiBuilder II 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 II
policies also provide for two different types of death benefit options and the
Policy Owner may change options. Another feature of EquiBuilder II 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).
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
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<PAGE>
deductions. (See "Additional Information about EquiBuilder II 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 II 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 II Policies
EquiBuilder II 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
II 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 II
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
II Policies-Changing the Face Amount of 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 II Policies-Flexible Premium Payments," below.
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<PAGE>
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 II 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 based (see "Deductions and
Charges-Charges Against the Policy Account-Cost of Insurance Charge," below).
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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 II 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.
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
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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 II policies. The Separate Account also issues interests under
EquiBuilder III variable life insurance policies, which have policy features
that are similar to those of EquiBuilder II policies but which have a different
sales charge structure.
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
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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 Portfolios' 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 II 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 the 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.
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.
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The policies and objectives of the portfolios of the Variable Insurance
Products Fund II corresponding to the divisions currently available for
investment under EquiBuilder II 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 Johnson family may be deemed under
the Investment Company Act of 1940 to form a controlling group with respect to
FMR Corp.
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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 II policies, other 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 II 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 II 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 any time (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.
Deductions and Charges
For information regarding other charges see also "Policy Account
Transactions," below.
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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 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.
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 II
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 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 II
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 II 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.
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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
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 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 II 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.
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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 "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 "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 II 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.
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 30% 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
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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 $749 $2,280 $684 $1,140 $342
2 3,000 1,019 2,280 889 3,420 650
3 3,000 1,140 2,280 1,094 2,280 855
4 3,000 1,140 2,280 1,140 2,280 1,060
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.
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 II Policies-Changes in
EquiBuilder II 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,
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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:
Total Annual
Portfolio Management Fee Other Expenses Expenses
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)
Contrafund Portfolio 0.61% 0.13% 0.74%(1)
Asset Manager: Growth Portfolio 0.65% 0.22% 0.87%(1)
(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.
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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).
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 II 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
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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);
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 II Policies-Changes in EquiBuilder II
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.
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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 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
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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.
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.
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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 II
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;
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.
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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 II 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.
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.
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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 II-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.
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 II 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.
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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.
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.
27
<PAGE>
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
II 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 "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
28
<PAGE>
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 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
29
<PAGE>
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.
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.
30
<PAGE>
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 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.
31
<PAGE>
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 1995 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 assume an applicable tax rate based on premiums of 2%. 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.
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 33
Age 40, Option A-Guaranteed Charges $3,000 33
Age 40, Option B-Current Charges $3,000 34
Age 40, Option B-Guaranteed Charges $3,000 34
Initial Face Amount $100,000 Male Non-Tobacco
Premium Page
Age 40, Option A-Current Charges $1,500 35
Age 40, Option A-Guaranteed Charges $1,500 35
Age 40, Option B-Current Charges $1,500 36
Age 40, Option B-Guaranteed Charges $1,500 36
32
<PAGE>
EquiBuilder II Flexible Premium Variable Life Insurance
The American Franklin Life Insurance Company
INITIAL FACE AMOUNT $200,000 MALE AGE 40 NON-TOBACCO PLANNED PREMIUM $3,000
DEATH BENEFIT OPTION A ASSUMING CURRENT CHARGES
<TABLE>
<CAPTION>
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 $ 3,150 $200,000 $200,000 $200,000 $200,000 $ 2,261 $ 2,365 $ 2,469 $ 2,573 $ 1,512 $ 1,616 $ 1,720 $ 1,824
2 6,458 200,000 200,000 200,000 200,000 4,755 5,061 5,377 5,700 3,736 4,042 4,358 4,682
3 9,930 200,000 200,000 200,000 200,000 7,192 7,806 8,455 9,138 6,052 6,666 7,315 7,998
4 13,577 200,000 200,000 200,000 200,000 9,574 10,602 11,716 12,920 8,434 9,462 10,576 11,780
5 17,406 200,000 200,000 200,000 200,000 11,901 13,449 15,172 17,084 10,761 12,309 14,032 15,944
6 21,426 200,000 200,000 200,000 200,000 14,176 16,352 18,838 21,673 13,036 15,212 17,698 20,533
7 25,647 200,000 200,000 200,000 200,000 16,370 19,282 22,700 26,704 15,458 18,370 21,788 25,792
8 30,080 200,000 200,000 200,000 200,000 18,488 22,245 26,777 32,232 17,804 21,561 26,093 31,548
9 34,734 200,000 200,000 200,000 200,000 20,533 25,244 31,084 38,313 20,077 24,788 30,628 37,857
10 39,620 200,000 200,000 200,000 200,000 22,503 28,278 35,639 45,010 22,275 28,050 35,411 44,782
11 44,751 200,000 200,000 200,000 200,000 24,401 31,351 40,462 52,393 24,401 31,351 40,462 52,393
12 50,139 200,000 200,000 200,000 200,000 26,255 34,492 45,597 60,566 26,255 34,492 45,597 60,566
13 55,796 200,000 200,000 200,000 200,000 28,034 37,671 51,040 69,592 28,034 37,671 51,040 69,592
14 61,736 200,000 200,000 200,000 200,000 29,740 40,894 56,817 79,570 29,740 40,894 56,817 79,570
15 67,972 200,000 200,000 200,000 200,000 31,375 44,162 62,954 90,614 31,375 44,162 62,954 90,614
16 74,521 200,000 200,000 200,000 200,000 32,933 47,473 69,474 102,843 32,933 47,473 69,474 102,843
17 81,397 200,000 200,000 200,000 200,000 34,378 50,796 76,381 116,379 34,378 50,796 76,381 116,379
18 88,617 200,000 200,000 200,000 200,000 35,695 54,118 83,697 131,376 35,695 54,118 83,697 131,376
19 96,198 200,000 200,000 200,000 204,275 36,906 57,462 91,475 148,028 36,906 57,462 91,475 148,028
20 104,158 200,000 200,000 200,000 223,035 37,993 60,814 99,747 166,444 37,993 60,814 99,747 166,444
25 (Age 65) 150,340 200,000 200,000 200,000 355,050 40,926 77,282 150,051 291,025 40,926 77,282 150,051 291,025
</TABLE>
EquiBuilder II Flexible Premium Variable Life Insurance
The American Franklin Life Insurance Company
INITIAL FACE AMOUNT $200,000 MALE AGE 40 NON-TOBACCO PLANNED PREMIUM $3,000
DEATH BENEFIT OPTION A ASSUMING GUARANTEED
CHARGES CHARGES CHARGES
<TABLE>
<CAPTION>
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 $ 3,150 $200,000 $200,000 $200,000 $200,000 $ 2,261 $ 2,365 $ 2,469 $ 2,573 $ 1,512 $ 1,616 $ 1,720 $ 1,824
2 6,458 200,000 200,000 200,000 200,000 4,348 4,646 4,953 5,268 3,329 3,627 3,934 4,250
3 9,930 200,000 200,000 200,000 200,000 6,358 6,939 7,553 8,202 5,218 5,799 6,413 7,062
4 13,577 200,000 200,000 200,000 200,000 8,288 9,240 10,274 11,396 7,148 8,100 9,134 10,256
5 17,406 200,000 200,000 200,000 200,000 10,138 11,548 13,123 14,880 8,998 10,408 11,983 13,740
6 21,426 200,000 200,000 200,000 200,000 11,902 13,858 16,104 18,679 10,762 12,718 14,964 17,539
7 25,647 200,000 200,000 200,000 200,000 13,581 16,170 19,227 22,830 12,669 15,258 18,315 21,918
8 30,080 200,000 200,000 200,000 200,000 15,172 18,480 22,498 27,369 14,488 17,796 21,814 26,685
9 34,734 200,000 200,000 200,000 200,000 16,670 20,784 25,926 32,340 16,214 20,328 25,470 31,884
10 39,620 200,000 200,000 200,000 200,000 18,071 23,077 29,517 37,787 17,843 22,849 29,289 37,559
11 44,751 200,000 200,000 200,000 200,000 19,371 25,355 33,282 43,765 19,371 25,355 33,282 43,765
12 50,139 200,000 200,000 200,000 200,000 20,557 27,605 37,222 50,326 20,557 27,605 37,222 50,326
13 55,796 200,000 200,000 200,000 200,000 21,617 29,815 41,342 57,532 21,617 29,815 41,342 57,532
14 61,736 200,000 200,000 200,000 200,000 22,538 31,972 45,647 65,455 22,538 31,972 45,647 65,455
15 67,972 200,000 200,000 200,000 200,000 23,304 34,059 50,142 74,177 23,304 34,059 50,142 74,177
16 74,521 200,000 200,000 200,000 200,000 23,906 36,068 54,840 83,799 23,906 36,068 54,840 83,799
17 81,397 200,000 200,000 200,000 200,000 24,332 37,987 59,752 94,435 24,332 37,987 59,752 94,435
18 88,617 200,000 200,000 200,000 200,000 24,576 39,808 64,902 106,225 24,576 39,808 64,902 106,225
19 96,198 200,000 200,000 200,000 200,000 24,625 41,521 70,307 119,326 24,625 41,521 70,307 119,326
20 104,158 200,000 200,000 200,000 200,000 24,468 43,112 75,993 133,921 24,468 43,112 75,993 133,921
25( Age 65) 150,340 200,000 200,000 200,000 286,084 19,526 48,272 109,424 234,495 19,526 48,272 109,424 234,495
</TABLE>
(1) Assumes net interest of 5% compunded 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.
33
<PAGE>
EquiBuilder II Flexible Premium Variable Life Insurance
The American Franklin Life Insurance Company
INITIAL FACE AMOUNT $200,000 MALE AGE 40 NON-TOBACCO PLANNED PREMIUM $3,000
DEATH BENEFIT OPTION B ASSUMING CURRENT CHARGES
<TABLE>
<CAPTION>
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 $ 3,150 $202,257 $202,361 $202,465 $202,569 $ 2,257 $ 2,361 $ 2,465 $ 2,569 $ 1,509 $ 1,612 $ 1,716 $ 1,820
2 6,458 204,743 205,049 205,364 205,687 4,743 5,049 5,364 5,687 3,724 4,030 4,345 4,668
3 9,930 207,168 207,780 208,426 209,107 7,168 7,780 8,426 9,107 6,028 6,640 7,286 7,967
4 13,577 209,533 210,556 211,664 212,862 9,533 10,556 11,664 12,862 8,393 9,416 10,524 11,722
5 17,406 211,836 213,375 215,086 216,985 11,836 13,375 15,086 16,985 10,696 12,235 13,946 15,845
6 21,426 214,082 216,241 218,706 221,518 14,082 16,241 18,706 21,518 12,942 15,101 17,566 20,378
7 25,647 216,238 219,122 222,506 226,469 16,238 19,122 22,506 26,469 15,326 18,210 21,594 25,557
8 30,080 218,308 222,021 226,497 231,885 18,308 22,021 26,497 31,885 17,624 21,337 25,813 31,201
9 34,734 220,294 224,938 230,694 237,816 20,294 24,938 30,694 37,816 19,838 24,482 30,238 37,360
10 39,620 222,194 227,872 235,107 244,313 22,194 27,872 35,107 44,313 21,966 27,644 34,879 44,085
11 44,751 224,009 230,823 239,751 251,438 24,009 30,823 39,751 51,438 24,009 30,823 39,751 51,438
12 50,139 225,771 233,822 244,671 259,287 25,771 33,822 44,671 59,287 25,771 33,822 44,671 59,287
13 55,796 227,443 236,832 249,848 267,898 27,443 36,832 49,848 67,898 27,443 36,832 49,848 67,898
14 61,736 229,028 239,855 255,300 277,352 29,028 39,855 55,300 77,352 29,028 39,855 55,300 77,352
15 67,972 230,525 242,890 261,043 287,739 30,525 42,890 61,043 87,739 30,525 42,890 61,043 87,739
16 74,521 231,927 245,928 267,087 299,147 31,927 45,928 67,087 99,147 31,927 45,928 67,087 99,147
17 81,397 233,191 248,923 273,406 311,637 33,191 48,923 73,406 111,637 33,191 48,923 73,406 111,637
18 88,617 234,295 251,851 279,994 325,299 34,295 51,851 79,994 125,299 34,295 51,851 79,994 125,299
19 96,198 235,266 254,734 286,892 340,281 35,266 54,734 86,892 140,281 35,266 54,734 86,892 140,281
20 104,158 236,081 257,547 294,097 356,683 36,081 57,547 94,097 156,683 36,081 57,547 94,097 156,683
25 (Age 65) 150,340 236,994 269,529 334,450 461,071 36,994 69,529 134,450 261,071 36,994 69,529 134,450 261,071
</TABLE>
EquiBuilder II Flexible Premium Variable Life Insurance
The American Franklin Life Insurance Company
INITIAL FACE AMOUNT $200,000 MALE AGE 40 NON-TOBACCO PLANNED PREMIUM $3,000
DEATH BENEFIT OPTION B ASSUMING GUARANTEED CHARGES
<TABLE>
<CAPTION>
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 $ 3,150 $202,257 $202,361 $202,465 $202,569 $ 2,257 $ 2,361 $ 2,465 $ 2,569 $ 1,509 $41,612 $ 1,716 $ 1,820
2 6,458 204,328 204,625 204,931 205,245 4,328 4,625 4,931 5,245 3,310 3,606 3,912 4,226
3 9,930 206,314 206,891 207,501 208,145 6,314 6,891 7,501 8,145 5,174 5,751 6,361 7,005
4 13,577 208,211 209,153 210,177 211,287 8,211 9,153 10,177 11,287 7,071 8,013 9,037 10,147
5 17,406 210,017 211,408 212,962 214,694 10,017 11,408 12,962 14,694 8,877 10,268 11,822 13,554
6 21,426 211,727 213,649 215,857 218,386 11,727 13,649 15,857 18,386 10,587 12,509 14,717 17,246
7 25,647 213,339 215,873 218,866 222,391 13,339 15,873 18,866 22,391 12,427 14,961 17,954 21,479
8 30,080 214,848 218,073 221,990 226,735 14,848 18,073 21,990 26,735 14,164 17,389 21,306 26,051
9 34,734 216,251 220,244 225,231 231,448 16,251 20,244 25,231 31,448 15,795 19,788 24,775 30,992
10 39,620 217,541 222,375 228,588 236,562 17,541 22,375 28,588 36,562 17,313 22,147 28,360 36,334
11 44,751 218,714 224,459 232,063 242,111 18,714 24,459 32,063 42,111 18,714 24,459 32,063 42,111
12 50,139 219,753 226,479 235,645 248,123 19,753 26,479 35,645 48,123 19,753 26,479 35,645 48,123
13 55,796 220,644 228,414 239,324 254,630 20,644 28,414 39,324 54,630 20,644 28,414 39,324 54,630
14 61,736 221,374 230,248 243,091 261,668 21,374 30,248 43,091 61,668 21,374 30,248 43,091 61,668
15 67,972 221,923 231,955 246,927 269,269 21,923 31,955 46,927 69,269 21,923 31,955 46,927 69,269
16 74,521 222,282 233,519 250,826 277,481 22,282 33,519 50,826 77,481 22,282 33,519 50,826 77,481
17 81,397 222,437 234,921 254,775 286,351 22,437 34,921 54,775 86,351 22,437 34,921 54,775 86,351
18 88,617 222,384 236,149 258,768 295,941 22,384 36,149 58,768 95,941 22,384 36,149 58,768 95,941
19 96,198 222,109 237,181 262,793 306,310 22,109 37,181 62,793 106,310 22,109 37,181 62,793 106,310
20 104,158 221,601 237,998 266,837 317,526 21,601 37,998 66,837 117,526 21,601 37,998 66,837 117,526
25 (Age 65) 150,340 214,577 237,483 286,127 387,833 14,577 37,483 86,127 187,833 14,577 37,483 86,127 187,833
</TABLE>
(1) Assumes net interest of 5% compunded 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 II Flexible Premium Variable Life Insurance
The American Franklin Life Insurance Company
INITIAL FACE AMOUNT $100,000 MALE AGE 40 NON-TOBACCO PLANNED PREMIUM $1,500
DEATH BENEFIT OPTION A ASSUMING CURRENT CHARGES
<TABLE>
<CAPTION>
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 $ 940 $ 988 $ 1,036 $ 1,084 $ 566 $ 613 $ 661 $ 709
2 3,229 100,000 100,000 100,000 100,000 2,139 2,279 2,424 2,572 1,629 1,770 1,914 2,063
3 4,965 100,000 100,000 100,000 100,000 3,308 3,592 3,891 4,206 2,738 3,022 3,321 3,636
4 6,788 100,000 100,000 100,000 100,000 4,448 4,925 5,441 6,000 3,878 4,355 4,871 5,430
5 8,703 100,000 100,000 100,000 100,000 5,560 6,281 7,082 7,972 4,990 5,711 6,512 7,402
6 10,713 100,000 100,000 100,000 100,000 6,642 7,659 8,819 10,142 6,072 7,089 8,249 9,572
7 12,824 100,000 100,000 100,000 100,000 7,682 9,046 10,645 12,517 7,226 8,590 10,189 12,061
8 15,040 100,000 100,000 100,000 100,000 8,679 10,441 12,565 15,120 8,337 10,099 12,223 14,778
9 17,367 100,000 100,000 100,000 100,000 9,635 11,847 14,588 17,977 9,407 11,619 14,360 17,749
10 19,810 100,000 100,000 100,000 100,000 10,547 13,262 16,720 21,117 10,433 13,148 16,606 21,003
11 22,376 100,000 100,000 100,000 100,000 11,421 14,690 18,971 24,575 11,421 14,690 18,971 24,575
12 25,069 100,000 100,000 100,000 100,000 12,267 16,142 21,364 28,398 12,267 16,142 21,364 28,398
13 27,898 100,000 100,000 100,000 100,000 13,073 17,607 23,895 32,616 13,073 17,607 23,895 32,616
14 30,868 100,000 100,000 100,000 100,000 13,834 19,081 26,572 37,273 13,834 19,081 26,572 37,273
15 33,986 100,000 100,000 100,000 100,000 14,555 20,570 29,412 42,426 14,555 20,570 29,412 42,426
16 37,261 100,000 100,000 100,000 100,000 15,233 22,070 32,423 48,130 15,233 22,070 32,423 48,130
17 40,699 100,000 100,000 100,000 100,000 15,846 23,564 35,605 54,439 15,846 23,564 35,605 54,439
18 44,309 100,000 100,000 100,000 100,000 16,384 25,042 38,963 61,424 16,384 25,042 38,963 61,424
19 48,099 100,000 100,000 100,000 100,000 16,862 26,516 42,527 69,182 16,862 26,516 42,527 69,182
20 52,079 100,000 100,000 100,000 104,255 17,266 27,980 46,309 77,802 17,266 27,980 46,309 77,802
25 (Age 65) 75,170 100,000 100,000 100,000 166,044 17,790 34,809 69,139 136,102 17,790 34,809 69,139 136,102
</TABLE>
EquiBuilder II Flexible Premium Variable Life Insurance
The American Franklin Life Insurance Company
INITIAL FACE AMOUNT $100,000 MALE AGE 40 NON-TOBACCO PLANNED PREMIUM $1,500
DEATH BENEFIT OPTION A ASSUMING GUARANTEED CHARGES
<TABLE>
<CAPTION>
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 $ 940 $ 988 $ 1,036 $$1,084 $ 566 $ 613 $ 661 $ 709
2 3,229 100,000 100,000 100,000 100,000 1,914 2,049 2,189 2,333 1,404 1,540 1,680 1,824
3 4,965 100,000 100,000 100,000 100,000 2,850 3,115 3,395 3,691 2,280 2,545 2,825 3,121
4 6,788 100,000 100,000 100,000 100,000 3,747 4,181 4,654 5,166 3,177 3,611 4,084 4,596
5 8,703 100,000 100,000 100,000 100,000 4,604 5,249 5,970 6,773 4,034 4,679 5,400 6,203
6 10,713 100,000 100,000 100,000 100,000 5,419 6,315 7,344 8,522 4,849 5,745 6,774 7,952
7 12,824 100,000 100,000 100,000 100,000 6,192 7,379 8,780 10,430 5,736 6,923 8,324 9,974
8 15,040 100,000 100,000 100,000 100,000 6,921 8,438 10,281 12,514 6,579 8,096 9,939 12,172
9 17,367 100,000 100,000 100,000 100,000 7,604 9,492 11,850 14,791 7,376 9,264 11,622 14,563
10 19,810 100,000 100,000 100,000 100,000 8,239 10,536 13,490 17,283 8,125 10,422 13,376 17,169
11 22,376 100,000 100,000 100,000 100,000 8,823 11,569 15,205 20,013 8,823 11,569 15,205 20,013
12 25,069 100,000 100,000 100,000 100,000 9,350 12,584 16,995 23,004 9,350 12,584 16,995 23,004
13 27,898 100,000 100,000 100,000 100,000 9,814 13,573 18,859 26,283 9,814 13,573 18,859 26,283
14 30,868 100,000 100,000 100,000 100,000 10,208 14,532 20,801 29,882 10,208 14,532 20,801 29,882
15 33,986 100,000 100,000 100,000 100,000 10,524 15,451 22,819 33,834 10,524 15,451 22,819 33,834
16 37,271 100,000 100,000 100,000 100,000 10,758 16,324 24,919 38,186 10,758 16,324 24,919 38,186
17 40,699 100,000 100,000 100,000 100,000 10,902 17,145 27,105 42,987 10,902 17,145 27,105 42,987
18 44,309 100,000 100,000 100,000 100,000 10,954 17,910 29,385 48,298 10,954 17,910 29,385 48,298
19 48,099 100,000 100,000 100,000 100,000 10,908 18,613 31,766 54,189 10,908 18,613 31,766 54,189
20 52,079 100,000 100,000 100,000 100,000 10,757 19,247 34,256 60,740 10,757 19,247 34,256 60,740
25 (Age 65) 75,170 100,000 100,000 100,000 100,000 7,880 20,837 48,588 106,353 7,880 20,837 48,588 106,353
</TABLE>
(1) Assumes net interest of 5% compunded 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 II Flexible Premium Variable Life Insurance
The American Franklin Life Insurance Company
INITIAL FACE AMOUNT $100,000 MALE AGE 40 NON-TOBACCO PLANNED PREMIUM $1,500
DEATH BENEFIT OPTION B ASSUMING CURRENT CHARGES
<TABLE>
<CAPTION>
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 $100,938 $100,986 $101,034 $101,082 $ 938 $ 986 $ 1,034 $ 1,082 $ 564 $ 611 $ 659 $ 707
2 3,229 102,133 102,273 102,417 102,565 2,133 2,273 2,417 2,565 1,624 1,764 1,908 2,056
3 4,965 103,296 103,578 103,876 104,190 3,296 3,578 3,876 4,190 2,726 3,008 3,306 3,620
4 6,788 104,427 104,901 105,415 105,970 4,427 4,901 5,415 5,970 3,857 4,331 4,845 5,400
5 8,703 105,526 106,242 107,038 107,921 5,526 6,242 7,038 7,921 4,956 5,672 6,468 7,351
6 10,713 106,593 107,601 108,751 110,061 6,593 7,601 8,751 10,061 6,023 7,031 8,181 9,491
7 12,824 107,613 108,962 110,544 112,394 7,613 8,962 10,544 12,394 7,157 8,506 10,088 11,938
8 15,040 108,584 110,323 112,418 114,938 8,584 10,323 12,418 14,938 8,242 9,981 12,076 14,596
9 17,367 109,508 111,686 114,382 117,715 9,508 11,686 14,382 17,715 9,280 11,458 14,154 17,487
10 19,810 110,383 113,046 116,437 120,748 10,383 13,046 16,437 20,748 10,269 12,932 16,323 20,634
11 22,376 111,211 114,408 118,592 124,066 11,211 14,408 18,592 24,066 11,211 14,408 18,592 24,066
12 25,069 112,007 115,783 120,867 127,713 12,007 15,783 20,867 27,713 12,007 15,783 20,867 27,713
13 27,898 112,754 117,155 123,254 131,706 12,754 17,155 23,254 31,706 12,754 17,155 23,254 31,706
14 30,868 113,448 118,519 125,752 136,076 13,448 18,519 25,752 36,076 13,448 18,519 25,752 36,076
15 33,986 114,094 119,879 128,375 140,868 14,094 19,879 28,375 40,868 14,094 19,879 28,375 40,868
16 37,261 114,686 121,230 131,126 146,122 14,686 21,230 31,126 46,122 14,686 21,230 31,126 46,122
17 40,699 115,200 122,544 133,984 151,856 15,200 22,544 33,984 51,856 15,200 22,544 33,984 51,856
18 44,309 115,622 123,805 136,942 158,108 15,622 23,805 36,942 58,108 15,622 23,805 36,942 58,108
19 48,099 115,969 125,029 140,023 164,948 15,969 25,029 40,023 64,948 15,969 25,029 40,023 64,948
20 52,079 116,227 126,197 143,219 172,423 16,227 26,197 43,219 72,423 16,227 26,197 43,219 72,423
25 (Age 65) 75,170 115,683 130,602 160,600 219,689 15,683 30,602 60,600 119,689 15,683 30,602 60,600 119,689
</TABLE>
EquiBuilder II Flexible Premium Variable Life Insurance
The American Franklin Life Insurance Company
INITIAL FACE AMOUNT $100,000 MALE AGE 40 NON-TOBACCO PLANNED PREMIUM $1,500
DEATH BENEFIT OPTION B ASSUMING GUARANTEED CHARGES
<TABLE>
<CAPTION>
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 $ 1,575 100,938 100,986 101,034 101,082 938 986 1,034 1,082 564 611 659 707
2 3,229 101,905 102,040 102,179 102,322 1,905 2,040 2,179 2,322 1,395 1,530 1,670 1,813
3 4,965 102,830 103,093 103,371 103,664 2,830 3,093 3,371 3,664 2,260 2,523 2,801 3,094
4 6,788 103,712 104,142 104,609 105,116 3,712 4,142 4,609 5,116 3,142 3,572 4,039 4,546
5 8,703 104,549 105,185 105,896 106,688 4,549 5,185 5,896 6,688 3,979 4,615 5,326 6,118
6 10,713 105,339 106,219 107,230 108,388 5,339 6,219 7,230 8,388 4,769 5,649 6,660 7,818
7 12,924 106,080 107,242 108,614 110,229 6,080 7,242 8,614 10,229 5,624 6,786 8,158 9,773
8 15,040 106,772 108,251 110,047 112,222 6,772 8,251 10,047 12,222 6,430 7,909 9,705 11,880
9 17,367 107,411 109,243 111,531 114,382 7,411 9,243 11,531 14,382 7,183 9,015 11,303 14,154
10 19,810 107,995 110,213 113,063 116,720 7,995 10,213 13,063 16,720 7,881 10,099 12,949 16,606
11 22,376 108,521 111,157 114,645 119,253 8,521 11,157 14,645 19,253 8,521 11,157 14,645 19,253
12 25,069 108,981 112,066 116,270 121,992 8,981 12,066 16,270 21,992 8,981 12,066 16,270 21,992
13 27,898 109,368 112,930 117,933 124,951 9,368 12,930 17,933 24,951 9,368 12,930 17,933 24,951
14 30,868 109,675 113,741 119,628 128,143 9,675 13,741 19,628 28,143 9,675 13,741 19,628 28,143
15 33,986 109,892 114,486 121,345 131,583 9,892 14,486 21,345 31,583 9,892 14,486 21,345 31,583
16 37,261 110,015 115,156 123,080 135,289 10,015 15,156 23,080 35,289 10,015 15,156 23,080 35,289
17 40,699 110,037 115,743 124,826 139,283 10,037 15,743 24,826 39,283 10,037 15,743 24,826 39,283
18 44,309 109,955 116,239 126,580 143,590 9,955 16,239 26,580 43,590 9,955 16,239 26,580 43,590
19 48,099 109,764 116,634 128,333 148,234 9,764 16,634 28,333 48,234 9,764 16,634 28,333 48,234
20 52,079 109,457 116,919 130,078 153,245 9,457 16,919 30,078 53,245 9,457 16,919 30,078 53,245
25 (Age 65) 75,170 105,689 115,994 138,043 184,620 5,689 15,994 38,043 84,620 5,689 15,994 38,043 84,620
</TABLE>
(1) Assumes net interest of 5% compunded 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>
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
37
<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 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
38
<PAGE>
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.
39
<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 II policies in connection with an employment-related insurance or
benefit plan. The United States Supreme Court held, in a 1983
40
<PAGE>
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 II 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 II 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 III
variable life insurance policies under which interests in the Separate Account
are issued. The EquiBuilder III policies have policy features that are similar
to those of the EquiBuilder II policies but have a different sales charge
structure.
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
41
<PAGE>
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. 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.
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 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 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 II 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 II 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 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.
42
<PAGE>
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 III variable life insurance policies, which have policy
features that are similar to those of EquiBuilder II policies but which have a
different sales charge structure.
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.
43
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations During Past Position Held With American
Name 5 Years Franklin and Franklin Financial
---- --------------------------------- -------------------------------
<S> <C> <C>
Wayne A. Barnard** Vice President and Chief Actuary, American Vice President, American
General Life Insurance Company, Houston, Texas. Franklin.
Earl W. Baucom Senior Vice President and Chief Financial Director, Senior Vice President and Chief
Officer, The Franklin, since June 10, 1996; Financial Officer, American Franklin.
Director, The Franklin, since August 21,
1996; Chief Financial Officer, Providian
Direct Insurance, from October, 1993 to
December, 1995; Controller, Providian
Corporation, prior to October, 1993.
Robert M. Beuerlein Senior Vice President-Actuarial and Director, Director, Executive Vice President and
The Franklin; Vice President, The Franklin, from Actuary, American Franklin; Director, Franklin
April, 1991 to January, 1993; Executive Vice Financial.
President and Actuary, American Franklin; Vice
President and Actuary, American Franklin, prior
to January, 1992.
Brady W. Creel Senior Vice President, Chief Marketing Officer Director, Senior Vice President and Chief
and Director, The Franklin since September 3, Marketing Officer, American Franklin.
1996; Regional Manager, The Franklin, prior to
September, 1996.
Robert M. Devlin* Chairman of the Board, The Franklin, since Chairman of the Board, American Franklin.
August 21, 1996; Director, The Franklin,
since 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.
Barbara Fossum Vice President, The Franklin; prior to June, Vice President, American Franklin.
1995, Vice President, American General Life
Insurance Company, Houston, Texas.
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations During Past Position Held With American
Name 5 Years Franklin and Franklin Financial
---- --------------------------------- -------------------------------
<S> <C> <C>
Ross D. Friend Senior Vice President, General Counsel and Director, Senior Vice President, General
Secretary, The Franklin, since September 3, 1996; Counsel and Secretary, American Franklin;
Attorney-In-Charge, Prudential Life Insurance Director, Vice President and Secretary,
Company, Jacksonville, Florida, from July, 1995 Franklin Financial.
to September, 1996; Chief Legal Officer,
Confederation Life Insurance Company, Atlanta,
Georgia, prior to July, 1995.
Robert J. Gibbons Director, President and Chief Executive Officer, President and Director, American Franklin;
The Franklin; President and Chief Executive Chairman of the Board and Chief Executive
Officer, American General Life Insurance Company Officer, Franklin Financial.
of New York, Syracuse, New York, prior to
February, 1995; Senior Vice 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 Financial Officer, Vice President, American Franklin.
American 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 General Senior Chairman and Director, American
Corporation, Houston, Texas; Chief Executive Franklin.
Officer, American General Corporation, prior to
October, 1996.
Simon J. Leech** Vice President, American General Life Insurance Vice President and Administrative Officer,
Company, Houston, Texas. American Franklin.
Thomas K. McCracken Vice President, The Franklin. Vice President, American Franklin.
Mark R. McGuire Vice President, The Franklin, since January 6, Vice President and Administrative Officer,
1997; Consultant/Manager, American General Life American Franklin.
Insurance Company, Houston, Texas, prior to
January, 1997.
Jon P. Newton* Director and Vice Chairman, The Franklin, since Director and Vice Chairman, American
January 31, 1996; Vice Chairman and General Franklin.
Counsel, American General Corporation,
Houston, Texas since October 26, 1995;
Senior Vice President and General Counsel,
American General Corporation, prior thereto.
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations During Past Position Held With American
Name 5 Years Franklin and Franklin Financial
---- --------------------------------- -------------------------------
<S> <C> <C>
Gary D. Reddick Director and Executive Vice President, The Executive Vice President-Administration and
Franklin, since February, 1995; Senior Vice Director, American Franklin; Director and
President, American General Corporation, Houston, Executive Vice President, Franklin Financial.
Texas prior to February, 1995; Senior Vice
President, American General Life Insurance
Company, Houston, Texas, prior to October, 1994.
T. Clayton Spires Director, Corporate Tax, The Franklin, since Director, Corporate Tax, American Franklin.
February 3, 1997; Assistant Vice President and Tax
Manager, First Colony Life, Lynchburg, Virginia,
prior to February, 1997.
Timothy W. Still** Vice President, American General Life Insurance Vice President and Administrative Officer,
Company, Houston, Texas, since October of 1995; American Franklin.
Vice President, The Continuum Company, Kansas
City, Missouri, prior to August of 1995.
Peter V. Tuters* Vice President, Chief Investment Officer and Vice President, Chief Investment Officer and
Director, The Franklin, since February, 1995; Director, American Franklin.
Senior Vice President, since 1992, and Chief
Investment 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 Secretary, The Franklin. Vice President and Agency Secretary,
American Franklin; Vice President and
Assistant Secretary, Franklin Financial.
Diane S. Workman Vice President-Administration, American Franklin; Vice President-Administration, American
Assistant Vice President, American Franklin, prior Franklin.
to April, 1992.
</TABLE>
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.
46
<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 Asset Contra-
Income Grade Bond Manager 500 Manager: fund
Division Division Division Division Growth Division Division
--------------------------------------------------------------------------------------
<S> <C> <C> <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 $ 1,301,826 $ 4,982,856
--------------------------------------------------------------------------------------
Due (to) from General Account (2,579) 2,595 (10,236) (50,458) (3,795) (12,799)
--------------------------------------------------------------------------------------
Net Assets (Note 1) $ 1,228,781 $ 1,693,263 $ 20,608,379 $ 6,442,961 $ 1,298,031 $ 4,970,057
======================================================================================
Unit Value, at December 31, 1996 (Note 4) $ 141.63 $ 135.81 $ 171.77 $ 178.33 $ 137.89 $ 145.66
======================================================================================
Units Outstanding, at December 31, 1996 8,676 12,468 119,978 36,130 9,413 34,121
======================================================================================
</TABLE>
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 Asset Contra-
Income Grade Bond Manager 500 Manager: fund
Division Division Division Division Growth Division Division
-----------------------------------------------------------------------------
<S> <C> <C> <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 $ 60,282 $ 10,025
Expenses (Note 3)
Mortality and expense risk charge 5,331 10,936 133,141 20,338 4,120 16,235
-----------------------------------------------------------------------------
Net Investment Income 39,298 56,393 950,642 33,984 56,162 (6,210)
Net Realized and Unrealized Gain (Loss) on
Investments (Note 2)
Net realized gain 8,967 3,089 212,679 55,003 3,633 14,914
Net unrealized appreciation (depreciation)
Beginning of year 34,035 97,417 1,504,898 108,871 (5,088) 3,252
End of year 73,140 90,495 2,931,994 862,708 78,770 583,917
-----------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) during the year 39,105 (6,922) 1,427,096 753,837 83,858 580,665
-----------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on
Investments 48,072 (3,833) 1,639,775 808,840 87,491 595,579
-----------------------------------------------------------------------------
Net Increase in Net Assets Resulting From
Operations $ 87,370 $ 52,560 $2,590,417 $ 842,824 $ 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
==================================================
For the Year Ended December 31, 1995 Money Equity-
Market Income Growth Overseas
Division Division Division Division
------------------------------------------------------
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 Asset Contra-
Income Grade Bond Manager 500 Manager: fund
For the Year Ended December 31, 1996 Division Division Division Division Growth Division Division
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Change in Net Assets
From Operations:
Net investment income $ 39,298 $ 56,393 $ 950,642 $ 33,984 $ 56,162 $ (6,210)
Net realized gain on investments 8,967 3,089 212,679 55,003 3,633 14,914
Net change in unrealized appreciation
(depreciation) on investments 39,105 (6,922) 1,427,096 753,837 83,858 580,665
-----------------------------------------------------------------------------
Net increase in net assets from operations 87,370 52,560 2,590,417 842,824 143,653 589,369
From Policy Related Transactions:
Net contract purchase payments 533,704 486,742 5,498,237 2,673,909 654,319 2,330,711
Transfers for policy related transactions (192,712) (275,951) (3,080,444) (790,840) (178,249) (624,350)
Transfers between Separate Account VUL-2's
Divisions, net 360,417 107,298 (498,477) 2,664,359 437,562 1,823,964
-----------------------------------------------------------------------------
Net increase in net assets from policy related
transactions 701,409 318,089 1,919,316 4,547,428 913,632 3,530,325
-----------------------------------------------------------------------------
Increase in Net Assets 788,779 370,649 4,509,733 5,390,252 1,057,285 4,119,694
Net Assets, Beginning of Year 440,002 1,322,614 16,098,646 1,052,709 240,746 850,363
-----------------------------------------------------------------------------
Net Assets, End of Year $1,228,781 $1,693,263 $20,608,379 $6,442,961 $1,298,031 $4,970,057
=============================================================================
For the Year Ended December 31, 1995 High Investment Asset Index Asset Contra-
Income Grade Bond Manager 500 Manager: fund
Division Division Division Division Growth Division* Division*
-----------------------------------------------------------------------------
Change in Net Assets
From Operations:
Net investment income $ 9,157 $ 22,030 $ 116,822 $ (49) $ 9,993 $ 9,511
Net realized gain on investments 1,720 6,701 46,591 5,233 850 3,999
Net change in unrealized appreciation
(depreciation) on investments 35,612 127,405 1,835,083 108,269 (5,088) 3,252
-----------------------------------------------------------------------------
Net increase in net assets from operations 46,489 156,136 1,998,496 113,453 5,755 16,762
From Policy Related Transactions:
Net contract purchase payments 147,592 357,309 5,308,184 387,804 91,291 362,528
Transfers for policy related transactions (67,407) (189,702) (2,682,494) (102,537) (10,306) (51,008)
Transfers between Separate Account VUL-2's
Divisions, net 175,345 135,745 1,269,576 525,783 154,006 522,081
-----------------------------------------------------------------------------
Net increase in net assets from policy related
transactions 255,530 303,352 3,895,266 811,050 234,991 833,601
-----------------------------------------------------------------------------
Increase in Net Assets 302,019 459,488 5,893,762 924,503 240,746 850,363
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 $ 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 Equity- High
Market Income Growth Overseas Income
Division 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
========================================================
Investment Asset
Grade Asset Index Manager: Contra-
Bond Manager 500 Growth fund
Division Division Division Division Division
--------------------------------------------------------
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 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 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 LLP
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.
Chicago, Illinois
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
costsand 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:
<TABLE>
<CAPTION>
December 31, 1996
--------------------------------------------
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
In thousands Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
============================================
</TABLE>
F-25
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2.3 Fixed Maturity Securities (continued)
<TABLE>
<CAPTION>
December 31, 1995
--------------------------------------------
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
In thousands Cost Gains Losses Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
============================================
</TABLE>
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:
Eleven Months One Month
Year Ended Ended Ended
December 31 December 31 January 31
--------------------------------------
In thousands 1996 1995 1995
- --------------------------------------------------------------------------------
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
======================================
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
---------------------------------------------------
In thousands 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:
Eleven Months One Month
Year Ended Ended Ended Year Ended
December 31 December 31 January 31 December 31
------------------------------------------------------
In thousands 1996 1995 1995 1994
- --------------------------------------------------------------------------------
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
Under the provisions of a modified coinsurance agreement covering their
Variable Universal Life product, AMFLIC ceded the following:
Eleven Months One Month
Year Ended Ended Ended Year Ended
December 31 December 31 January 31 December 31
------------------------------------------------------
In thousands 1996 1995 1995 1994
- --------------------------------------------------------------------------------
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)
AMFLIC also carries reinsurance for policy risks that exceed its retention
limit of $50,000. AMFLIC ceded the following amounts:
Eleven Months One Month
Year Ended Ended Ended Year Ended
December 31 December 31 January 31 December 31
------------------------------------------------------
In thousands 1996 1995 1995 1994
- --------------------------------------------------------------------------------
Premiums and other
considerations $ 5,909 $ 4,129 $ 258 $ 3,051
Change in policy reserves 5,924 4,155 3,347 3,228
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 II(TM)
Issued by
The American Franklin Life Insurance Company
#1 Franklin Square
Springfield, Illinois 62713-0001
800-528-2011
EquiBuilder II 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 II policies.
*1-A(3)(b)(ii) Specimen Registered Representative Agreement between Franklin
Financial and registered representatives of Franklin Financial
distributing EquiBuilder II 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 July 15,
l991, regarding supervision of agents.
*1-A(5)(a) EquiBuilder II 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 II 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. 7
on Form S-6 of Separate Account VUL-2 of The American Franklin
Life Insurance Company, filed February 28, 1997 (Reg. No.
33-41838).
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. 7 on Form S-6 of Separate Account VUL-2 of The
American Franklin Life Insurance Company, filed February 28,
1997 (Reg. No. 33-41838).
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. 7 on Form S-6 of Separate
Account VUL-2 of The American Franklin Life Insurance Company,
filed February 28, 1997 (Reg. No. 33-41838).
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. 7 on Form S-6 of
Separate Account VUL-2 of The American Franklin Life Insurance
Company, filed February 28, 1997 (Reg. No. 33-41838).
*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 II Policy is incorporated herein by
reference to similarly designated exhibit to Post-Effective
Amendment No. 7 on Form S-6 of Separate Account VUL-2 of The
American Franklin Life Insurance Company, filed February 28,
1997 (Reg. No. 33-41838).
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.
33-41838).
8 Description of American Franklin's Issuance, Transfer and
Redemption Procedures for 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 July 15, 1991.
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).
** Incorporated herein by reference to similarly designated exhibit to
Post-Effective Amendment No. 5 on Form S-6 of Separate Account VUL-2 of
The American Franklin Life Insurance Company, filed March 2, 1995.
*** Incorporated herein by reference to similarly designated exhibit to
Post-Effective Amendment No. 6 on Form S-6 of Separate Account VUL-2 of
The American Franklin Life Insurance Company, filed April 30, 1996 (Reg.
No. 33-41838).
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. 8 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
- --------------------------- (principal executive officer)
Robert J. Gibbons
April 24, 1997
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
/s/ Elizabeth E. Arthur
- ---------------------------
* 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 II policies.
*1-A(3)(b)(ii) Specimen Registered Representative Agreement between
Franklin Financial and registered representatives of
Franklin Financial distributing EquiBuilder II
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 July 15, l991, regarding supervision of agents.
*1-A(5)(a) EquiBuilder II 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 II 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. 7 on Form S-6 of Separate Account VUL-2
of The American Franklin Life Insurance Company, filed
February 28, 1997 (Reg. No. 33-41838).
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.
<PAGE>
EXHIBIT INDEX
Page No.
--------
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. 7
on Form S-6 of Separate Account VUL-2 of The American
Franklin Life Insurance Company, filed February 28,
1997 (Reg. No. 33-41838).
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. 7 on Form S-6 of Separate Account VUL-2
of The American Franklin Life Insurance Company, filed
February 28, 1997 (Reg. No. 33-41838).
1-A(8)(c)(4) Amendment No. 3 to Modified Coinsurance Agreement
between American Frankin, Integrity, and Phoenix Home
Life Mutual Insurance Company effective January 1,
1997 is incorporated herein by reference to similarly
designated exhibit to Post-Effective Amendment No. 7
on Form S-6 of Separate Account VUL-2 of The American
Franklin Life Insurance Company, filed February 28,
1997 (Reg. No. 33-41838).
*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 II Policy is incorporated
herein by reference to similarly designated exhibit to
Post-Effective Amendment No. 7 on Form S-6 of Separate
Account VUL-2 of The American Franklin Life Insurance
Company, filed February 28, 1997 (Reg. No. 33-41838).
<PAGE>
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 similarly designated exhibit to Post-Effective
Amendment No. 7 on Form S-6 of Separate Account VUL-2
of The American Franklin Life Insurance Company, filed
February 28, 1997 (Reg. No. 33-41838).
8 Description of American Franklin's Issuance, Transfer
and Redemption Procedures for 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 July 15, 1991.
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).
** Incorporated herein by reference to similarly designated exhibit to
Post-Effective Amendment No. 5 on Form S-6 of Separate Account VUL-2 of The
American Franklin Life Insurance Company, filed March 2, 1995.
*** Incorporated hereby by reference to similarly designated exhibit to
Post-Effective Amendment No. 6 on Form S-6 of Separate Account VUL-2 of The
American Franklin Life Insurance Company, filed April 30, 1996 (Reg. No.
33-41838).
<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. 8 to the Registration Statement on Form S-6 (Reg. No. 33-41838) 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 II
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. 33-41838) 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. 8 to the
Registration Statement on Form S-6 (Reg. No. 33-41838) 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. 8 to the
Registration Statement on Form S-6 (Reg. No. 33-41838) 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. 8 to
the Registration Statement under the Securities Act of 1933. In 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 II 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), and 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 II(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 on 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
<PAGE>
respects from procedures for mutual funds and contractual plans for which the
1940 Act was designed.
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 payments 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 results. 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
the 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 a charge for applicable taxes (which
will vary from jurisdiction to jurisdiction) from each premium payment. The
balance (net premium) is put into the Policy Account. The charge for applicable
taxes covers the tax American Franklin must pay to states and other
jurisdictions based on premiums received. 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.
In calculating the cash surrender value, a contingent deferred sales
load (the "surrender charge") (equal to 30% 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 during the first ten policy years. Target premiums are based on the age
and sex of the insured person and the initial face amount of the policy and are
generally equal to 75% of the applicable guideline annual premium for the Policy
determined in accordance with Section 7702 of the Internal Revenue Code. 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.
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 to an amount equal to the policy reserves in the
Account.
3
<PAGE>
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* 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.
- ----------
* 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 in that 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 amounts 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 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
5
<PAGE>
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 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.** The policy owner will receive a refund equal to the premium payments
made under the Policy.
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
- ----------
**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>
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. 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 issued ("issue date") and the date
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 contestable periods for purposes of the
Policies.
8
<PAGE>
American Franklin will require that the Policy be delivered within a
specific delivery period to protect itself against anti-selection by the
prospective policy owner resulting from a deterioration 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.
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 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 form 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 STATMENTS.
</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>
