<PAGE>
1933 Act Registration No.33-77470
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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. 5
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) Assistant 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 LLP
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
Title of Securities Being Registered: Units of Interest in Separate Account
VUL-2 issued under EquiBuilder III flexible premium variable life policies.
It is proposed that this filing will become effective (check appropriate box)
/ / immediately upon filing pursuant to paragraph (b)
/ / on April 30, 1998 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a) (i)
/X/ on April 30, 1998 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. 5
RECONCILIATION AND TIE
<TABLE>
<CAPTION>
Registration Item
of Form N-8B-2 Location in Prospectus
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<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 III
Policies - Death Benefits, -
Maturity Benefit, - Changing the
Face Amount of Insurance;
Separate Account Investment
Choices - Right to Change
Operations; Deductions and
Charges - Surrender Charge, -
Other Transaction Charges, -
Allocation of Policy Account
Charges; Policy Account
Transactions - Changing Premium
and Deduction Allocation
Percentages, - Transfers of
Policy Account Value Among
Investment Divisions, -
Borrowing from the Policy
Account, - Withdrawing Money
from the Policy Account, -
Surrendering the Policy for Its
Net Cash Surrender Value;
Additional Information About
EquiBuilder III Policies - Right
To Examine the Policy; Payment
of Proceeds; The Guaranteed
Interest Division - Transfers
from the Guaranteed Interest
Division.
10(e). . . . . . . . . . . . . . . . . . . . Additional Information About
EquiBuilder III Policies - Lapse
of the Policy, - Reinstatement
of the Policy.
10(f). . . . . . . . . . . . . . . . . . . . Separate Account Investment
Choices - The Funds, - Right to
Change Operations; Voting Rights
of a Policy Owner.
10(g)(1), 10(g)(2), 10(h)(1), 10(h)(2) . . . Separate Account Investment
Choices - The Funds, - Right to
Change Operations; Deductions
and Charges - Charges Against
the Policy Account - Changes in
Monthly Charges; Voting Rights
of a Policy Owner.
10(g)(3), 10(g)(4), 10(h)(3), 10(h)(4) . . . Inapplicable.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Registration Item
of Form N-8B-2 Location in Prospectus
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<S> <C>
10(i). . . . . . . . . . . . . . . . . . . . The Features of EquiBuilder III
Policies - Changes in
EquiBuilder III Policies, -
Flexible Premium Payments, -
Additional Benefits; Separate
Account Investment Choices;
Policy Account Value; Tax
Effects; Payment Options;
Payment of Proceeds.
11 . . . . . . . . . . . . . . . . . . . . . Separate Account Investment
Choices - The Funds, -
Investment Policies of the
Portfolios of the Funds, -
Ownership of the Assets of the
Separate Account.
12(a), 12(c), 12(d). . . . . . . . . . . . . Separate Account Investment
Choices - The Funds.
12(b), 12(e) . . . . . . . . . . . . . . . . Inapplicable.
13(a). . . . . . . . . . . . . . . . . . . . Summary - Investment Choices of
EquiBuilder III Policies, -
Deductions and Charges; Separate
Account Investment Choices - The
Investment Manager of the Funds;
Deductions and Charges.
13(b), 13(c), 13(d), 13(e), 13(g). . . . . . Inapplicable.
13(f). . . . . . . . . . . . . . . . . . . . Distribution of the Policies.
14 . . . . . . . . . . . . . . . . . . . . . The Features of EquiBuilder III
Policies - Policy Issuance
Information; Limitations on
American Franklin's Rights to
Challenge a Policy; Distribution
of the Policies - Applications.
15 . . . . . . . . . . . . . . . . . . . . . The Features of EquiBuilder III
Policies - Flexible Premium
Payments; Separate Account
Investment Choices
(Introduction); Deductions and
Charges - Deductions from
Premiums; Policy Account
Transactions - Changing Premium
and Deduction Allocation
Percentages.
16 . . . . . . . . . . . . . . . . . . . . . Separate Account Investment
Choices - (Introduction), - The
Separate Account and Its
Investment Divisions, - The
Funds; Policy Account Value -
Amounts in the Separate Account;
Policy Account Transactions -
Changing Premium and Deduction
Allocation Percentages, -
Transfers of Policy Account
Value Among Investment
Divisions, - Loan Requests, -
Repaying the Loan; The
Guaranteed Interest Division -
Transfers from the Guaranteed
Interest Division; Additional
Information About EquiBuilder
III Policies - Policy Periods,
Anniversaries, Dates and Ages.
17(a), 17(b), 17(c). . . . . . . . . . . . . The Features of EquiBuilder III
Policies - Death Benefits, -
Maturity Benefit, - Changing the
Face Amount of Insurance, -
Changes in EquiBuilder III
Policies, - Flexible Premium
Payments, - Additional Benefits;
Separate Account Investment
Choices - Right to Change
Operations; Policy Account
Value; Policy Account
Transactions - Changing Premium
and Deduction Allocation
Percentages, - Transfers of
Policy Account Value Among
Investment Divisions, -
Borrowing from the Policy
Account, - Withdrawing Money
from the Policy Account, -
Surrendering the
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Registration Item
of Form N-8B-2 Location in Prospectus
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<S> <C>
. . . . . . . . . . . . . . . . . . . . . . Policy for Its Net Cash
Surrender Value; The Guaranteed
Interest Division - Transfers
from the Guaranteed Interest
Division; Additional Information
About EquiBuilder III Policies -
Right To Examine the Policy, -
Lapse of Policy, - Reinstatement
of the Policy; Tax Effects;
Payment Options; Payment of
Proceeds.
18(a). . . . . . . . . . . . . . . . . . . . Policy Account Value -
Determination of the Unit Value.
18(b), 18(d) . . . . . . . . . . . . . . . . Inapplicable.
18(c). . . . . . . . . . . . . . . . . . . . Summary - Investment Choices of
EquiBuilder III Policies, -
Deductions and Charges; Separate
Account Investment Choices -
Ownership of the Assets of the
Separate Account; Deductions and
Charges - Charges Against the
Separate Account - Tax Reserve;
The Guaranteed Interest Division
(Introduction); Tax Effects.
19 . . . . . . . . . . . . . . . . . . . . . Reports to Policy Owners;
Distribution of the Policies;
Voting Rights of a Policy Owner.
20(a). . . . . . . . . . . . . . . . . . . . Separate Account Investment
Choices - The Funds, - Right to
Change Operations; Deductions
and Charges - Charges Against
the Policy Account - Changes in
Monthly Charges; Voting Rights
of a Policy Owner.
20(b). . . . . . . . . . . . . . . . . . . . Separate Account Investment
Choices - The Separate Account
and Its Investment Divisions.
20(c), 20(d), 20(e), 20(f) . . . . . . . . . Inapplicable.
21(a). . . . . . . . . . . . . . . . . . . . Policy Account Transactions -
Borrowing from the Policy
Account, - Loan Requests, -
Policy Loan Interest, - When
Interest is Due, - Repaying the
Loan, - The Effects of a Policy
Loan on the Policy Account; Tax
Effects - Policy Proceeds.
21(b), 21(c) . . . . . . . . . . . . . . . . Inapplicable.
22 . . . . . . . . . . . . . . . . . . . . . Limits on American Franklin's
Right To Challenge a Policy.
23 . . . . . . . . . . . . . . . . . . . . . Inapplicable.
24 . . . . . . . . . . . . . . . . . . . . . The Features of EquiBuilder III
Policies; Additional
Information.
25 . . . . . . . . . . . . . . . . . . . . . The American Franklin Life
Insurance Company.
26 . . . . . . . . . . . . . . . . . . . . . Inapplicable.
27 . . . . . . . . . . . . . . . . . . . . . The American Franklin Life
Insurance Company; Other
Policies and Contracts.
28 . . . . . . . . . . . . . . . . . . . . . The American Franklin Life
Insurance Company; Management.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Registration Item
of Form N-8B-2 Location in Prospectus
- -------------- ----------------------
<S> <C>
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 III
Policies - Death Benefits, -
Maturity Benefit, - Changes in
EquiBuilder III Policies;
Separate Account Investment
Choices - (Introduction), - The
Separate Account and Its
Investment Divisions, - The
Funds, - Right to Change
Operations; Deductions and
Charges; Policy Account Value;
Policy Account Transactions -
Changing Premium and Deduction
Allocation Percentages, -
Transfers of Policy Account
Value Among Investment
Divisions, - Borrowing from the
Policy Account, - Loan Requests,
- Repaying the Loan, -
Withdrawing Money from the
Policy Account, - Surrendering
the Policy for Its Net Cash
Surrender Value; The Guaranteed
Interest Division - Transfers
from the Guaranteed Interest
Division; Additional Information
About EquiBuilder III Policies -
Right To Examine the Policy, -
Policy Periods, Anniversaries,
Dates and Ages; Payment of
Proceeds.
44(a)(4) . . . . . . . . . . . . . . . . . . Deductions and Charges - Charges
Against the Separate Account -
Tax Reserve; Tax Effects.
44(a)(5) . . . . . . . . . . . . . . . . . . Deductions And Charges -
Deductions From Premiums.
44(a)(6) . . . . . . . . . . . . . . . . . . Deductions And Charges -
Deductions From Premiums, -
Charges Against the Policy
Account, - Charges Against the
Separate Account, - Surrender
Charge; Policy Account Value -
Amounts In the Separate Account,
- Determination of the Unit
Value.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Registration Item
of Form N-8B-2 Location in Prospectus
- -------------- ----------------------
<S> <C>
44(b). . . . . . . . . . . . . . . . . . . . The Features of EquiBuilder III
Policies - Death Benefits, -
Maturity Benefit, - Changes in
EquiBuilder III Policies;
Separate Account Investment
Choices (Introduction), - The
Separate Account and Its
Investment Divisions, - The
Funds, - Right to Change About
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
InformationEquiBuilder III
Policies - Right To Examine the
Policy, - Policy Periods,
Anniversaries, Dates and Ages;
Tax Effects; Payment of
Proceeds.
44(c). . . . . . . . . . . . . . . . . . . . The Features of EquiBuilder III
Policies - Death Benefits, -
Maturity Benefit, - Changes in
EquiBuilder III Policies, -
Flexible Premium Payments;
Separate Account Investment
Choices - (Introduction), - The
Separate Account and Its
Investment Divisions, - The
Funds; Deductions and Charges;
Policy Account Value; Policy
Account Transactions - Changing
Premium and Deduction Allocation
Percentages, - Transfers of
Policy Account Value Among
Investment Divisions, -
Borrowing from the Policy
Account, - Loan Requests, -
Repaying the Loan, - Withdrawing
Money from the Policy Account, -
Surrendering the Policy for Its
Net Cash Surrender Value; The
Guaranteed Interest Division -
Transfers from the Guaranteed
Interest Division; Additional
Information About EquiBuilder
III Policies - Right To Examine
the Policy, - Policy Periods,
Anniversaries, Dates and Ages;
Tax Effects; Payment of
Proceeds.
45 . . . . . . . . . . . . . . . . . . . . . Inapplicable.
46(a). . . . . . . . . . . . . . . . . . . . The Features of EquiBuilder III
Policies - Death Benefits, -
Maturity Benefit, - Changes in
EquiBuilder III Policies;
Separate Account Investment
Choices - (Introduction), - The
Separate Account and Its
Investment Divisions, - the
Funds, - Right to Change
Operations; Deductions and
Charges; Policy Account Value;
Policy Account Transactions -
Changing Premium and Deduction
Allocation Percentages, -
Transfers of Policy Account
Value Among Investment
Divisions, - Borrowing from the
Policy Account, - Loan Requests,
- Repaying the Loan, -
Withdrawing Money from the
Policy Account, - Surrendering
the Policy for Its Net Cash
Surrender Value; The Guaranteed
Interest Division - Transfers
from the Guaranteed Interest
Division; Additional Information
About EquiBuilder III Policies -
Right To Examine the Policy, -
Policy Periods, Anniversaries,
Dates and Ages; Tax Effects;
Payment of Proceeds.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Registration Item
of Form N-8B-2 Location in Prospectus
- -------------- ----------------------
<S> <C>
46(b), 47, 48, 49, 50. . . . . . . . . . . . Inapplicable.
51(a) - (j). . . . . . . . . . . . . . . . . Summary; Detailed Information
About American Franklin and
EquiBuilder III Policies;
Additional Information.
52(a). . . . . . . . . . . . . . . . . . . . Separate Account Investment
Choices - The Funds, - Right to
Change Operations.
52(b), 52(d) . . . . . . . . . . . . . . . . Inapplicable.
52(c). . . . . . . . . . . . . . . . . . . . Separate Account Investment
Choices - The Funds, - Right to
Change Operations; Deductions
and Charges - Charges Against
the Policy Account - Changes in
Monthly Charges; Voting Rights
of a Policy Owner.
53(a). . . . . . . . . . . . . . . . . . . . Tax Effects; Payment Options;
Assignment of a Policy; Employee
Benefit Plans.
53(b), 54, 55, 56, 57, 58. . . . . . . . . . Inapplicable.
59 . . . . . . . . . . . . . . . . . . . . . Financial Statements.
</TABLE>
<PAGE>
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Flexible Premium Variable Life Insurance Policy
EQUIBUILDER III-TM-
ISSUED BY
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
Prospectus Dated April 30, 1998
FIDELITY INVESTMENTS: Principal Office of both Fidelity
Funds located at:
VARIABLE INSURANCE PRODUCTS FUND AND 82 Devonshire Street
VARIABLE INSURANCE PRODUCTS FUND II Boston, Massachusetts 02109
Prospectus Dated April 30, 1998
MFS INVESTMENT MANAGEMENT: Principal Office located at:
MFS VARIABLE INSURANCE TRUST 500 Boylston Street
Boston, Massachusetts 02116
Prospectus Dated May 1, 1998
THESE SECURITIES HAVE NOT BEEN APPROVED
OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE
COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
EquiBuilder III is a trademark of The American Franklin Life Insurance Company
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<PAGE>
EQUIBUILDER III-TM-
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
Issued by
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
THIS PROSPECTUS DESCRIBES EQUIBUILDER III, INDIVIDUAL FLEXIBLE PREMIUM
VARIABLE LIFE INSURANCE POLICIES ISSUED BY THE AMERICAN FRANKLIN LIFE
INSURANCE COMPANY ("AMERICAN FRANKLIN"). EQUIBUILDER III POLICIES PROVIDE
LIFE INSURANCE COVERAGE WITH FLEXIBILITY IN DEATH BENEFITS, PREMIUM PAYMENTS
AND INVESTMENT CHOICES. CAPITALIZED TERMS NOT OTHERWISE DEFINED ON THIS COVER
PAGE HAVE THE MEANINGS DESIGNATED WITHIN THIS PROSPECTUS. EQUIBUILDER III IS
A TRADEMARK OF AMERICAN FRANKLIN.
EQUIBUILDER III PAYS A DEATH BENEFIT TO A BENEFICIARY DESIGNATED BY THE
POLICY OWNER WHEN THE INSURED PERSON DIES IF THE POLICY IS STILL IN EFFECT.
THE POLICY OWNER MAY CHOOSE OPTION A, A FIXED DEATH BENEFIT THAT EQUALS THE
FACE AMOUNT OF THE POLICY, OR OPTION B, A VARIABLE DEATH BENEFIT THAT EQUALS
THE FACE AMOUNT OF THE POLICY PLUS THE VALUE OF THE POLICY ACCOUNT
ESTABLISHED FOR THE POLICY AS DESCRIBED IN THE NEXT PARAGRAPH. UNDER EITHER
OPTION, A DEATH BENEFIT EQUAL TO A PERCENTAGE OF THE POLICY ACCOUNT ON THE
DAY THE INSURED PERSON DIES WILL BE PAID IF THAT BENEFIT WOULD BE GREATER.
AMERICAN FRANKLIN MAKES A DEDUCTION FROM EACH PREMIUM FOR SALES EXPENSES
(SUBJECT TO AN ANNUAL MAXIMUM DEDUCTION) AND FOR ANY APPLICABLE PREMIUM
TAXES. THE NET PREMIUM IS PUT IN THE POLICY ACCOUNT ESTABLISHED FOR EACH
POLICY. THE POLICY OWNER MAY INSTRUCT AMERICAN FRANKLIN TO ALLOCATE AMOUNTS
IN THE POLICY ACCOUNT TO AMERICAN FRANKLIN'S GUARANTEED INTEREST DIVISION
(WHICH IS PART OF AMERICAN FRANKLIN'S GENERAL ACCOUNT AND PAYS INTEREST AT A
DECLARED GUARANTEED RATE) OR TO ONE OR MORE OF THE INVESTMENT DIVISIONS OF
AMERICAN FRANKLIN'S SEPARATE ACCOUNT VUL-2 (THE "SEPARATE ACCOUNT"), OR BOTH.
HOWEVER, UNTIL THE FIRST BUSINESS DAY FIFTEEN DAYS AFTER THE ISSUE DATE OF
THE POLICY, THE POLICY ACCOUNT WILL BE INVESTED IN THE MONEY MARKET DIVISION.
MONEY MARKET, HIGH INCOME, EQUITY-INCOME, GROWTH, OVERSEAS, INVESTMENT GRADE
BOND, ASSET MANAGER, INDEX 500, ASSET MANAGER: GROWTH, CONTRAFUND, MFS
EMERGING GROWTH, MFS RESEARCH, MFS GROWTH WITH INCOME, MFS TOTAL RETURN, MFS
UTILITIES AND MFS VALUE 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, THE VARIABLE INSURANCE PRODUCTS FUND II OR THE MFS
VARIABLE INSURANCE TRUST (INDIVIDUALLY, A "FUND," AND COLLECTIVELY, THE
"FUNDS"), EACH OF WHICH IS A MUTUAL FUND. THE PROSPECTUSES OF THE FUNDS,
ATTACHED TO THIS PROSPECTUS, DESCRIBE THE INVESTMENT OBJECTIVES, POLICIES AND
RISKS OF EACH OF THE PORTFOLIOS OF THE FUNDS. SIXTEEN 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, CONTRAFUND, MFS EMERGING GROWTH, MFS RESEARCH, MFS GROWTH WITH INCOME,
MFS TOTAL RETURN, MFS UTILITIES AND MFS VALUE. SEE "SEPARATE ACCOUNT INVESTMENT
CHOICES - THE FUNDS," BELOW.
<PAGE>
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 THE INSURANCE PROVIDED BY THE POLICY AND FOR
EXPENSES. A SURRENDER CHARGE MAY BE IMPOSED IF A POLICY IS SURRENDERED OR
LAPSES OR IF THE POLICY OWNER REDUCES THE POLICY'S FACE AMOUNT.
AFTER THE FIRST PREMIUM, THE POLICY OWNER MAY DECIDE, WITHIN LIMITS, THE
AMOUNT AND FREQUENCY OF PREMIUM PAYMENTS. THE POLICY OWNER MAY ALSO INCREASE
OR DECREASE THE AMOUNT OF INSURANCE PROTECTION, WITHIN LIMITS.
AMERICAN FRANKLIN'S HOME OFFICE AND PRINCIPAL EXECUTIVE OFFICE IS #1
FRANKLIN SQUARE, SPRINGFIELD, ILLINOIS 62713, TELEPHONE (800) 528-2011.
INQUIRIES AND NOTICES SHOULD BE ADDRESSED TO AMERICAN FRANKLIN'S
ADMINISTRATIVE OFFICE AT THAT ADDRESS.
THE POLICY OWNER HAS THE RIGHT TO EXAMINE THE POLICY OFFERED HEREBY AND
RETURN IT TO AMERICAN FRANKLIN FOR A REFUND. SEE "ADDITIONAL INFORMATION
ABOUT EQUIBUILDER III POLICIES - RIGHT TO EXAMINE THE POLICY," BELOW, FOR
INFORMATION ABOUT THE MANNER IN WHICH THIS RIGHT MAY BE EXERCISED AND ABOUT
LIMITATIONS ON THAT RIGHT.
THE POLICIES DESCRIBED HEREIN ARE NOT INTENDED FOR USE IN CONNECTION
WITH QUALIFIED PLANS OR TRUSTS UNDER THE INTERNAL REVENUE CODE.
THIS PROSPECTUS SHOULD BE READ CAREFULLY FOR DETAILS ON THE POLICY BEING
OFFERED AND KEPT FOR FUTURE REFERENCE. THIS PROSPECTUS IS NOT VALID UNLESS
IT IS ATTACHED TO THE CURRENT PROSPECTUS FOR THE FUNDS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
BECAUSE OF THE DEDUCTIONS AND CHARGES APPLICABLE TO THE PURCHASE OF NEW
INSURANCE OFFERED HEREBY, IT MAY NOT BE TO A PURCHASER'S ADVANTAGE TO REPLACE
EXISTING INSURANCE OR, IF A PURCHASER ALREADY OWNS A FLEXIBLE PREMIUM
INSURANCE POLICY, TO ACQUIRE ADDITIONAL INSURANCE THROUGH THE PURCHASE OF A
POLICY DESCRIBED IN THIS PROSPECTUS.
THE PURCHASE OF THE POLICY INVOLVES CERTAIN RISKS. BECAUSE IT IS A
VARIABLE LIFE INSURANCE POLICY, THE VALUE OF THE POLICY REFLECTS THE INVESTMENT
PERFORMANCE OF THE SELECTED INVESTMENT DIVISIONS. INVESTMENT RESULTS CAN VARY
BOTH UP AND DOWN AND CAN EVEN DECREASE THE VALUE OF THE PREMIUM PAYMENTS.
THEREFORE, POLICY OWNERS COULD
<PAGE>
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 MAY BE SUBJECT TO TAX,
AND BEFORE THE POLICY OWNER ATTAINS AGE 59 1/2, MAY ALSO BE SUBJECT TO A
10% FEDERAL PENALTY TAX IF THE POLICY BECOMES A "MODIFIED ENDOWMENT
CONTRACT". LOANS MAY BE TAXABLE IF THE POLICY BECOMES A MODIFIED ENDOWMENT
CONTRACT.
THE DATE OF THIS PROSPECTUS IS APRIL 30, 1998
Copyright 1998 The American Franklin Life Insurance Company.
All rights reserved.
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TABLE OF CONTENTS
PAGE
----
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv
SUMMARY
Features of EquiBuilder III Policies. . . . . . . . . . . . . . . . . . . . 1
Investment Choices of EquiBuilder III Policies. . . . . . . . . . . . . . . 2
Deductions and Charges. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Policy Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Additional Information About EquiBuilder III Policies . . . . . . . . . . . 5
DETAILED INFORMATION ABOUT AMERICAN FRANKLIN AND EQUIBUILDER III POLICIES
The American Franklin Life Insurance Company. . . . . . . . . . . . . . . . 6
The Features of EquiBuilder III Policies. . . . . . . . . . . . . . . . . . 7
How EquiBuilder III Policies Differ from Whole Life Insurance. . . . . . 7
Death Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Policy Issuance Information. . . . . . . . . . . . . . . . . . . . . . . 8
Maturity Benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Changes in EquiBuilder III Policies. . . . . . . . . . . . . . . . . . . 8
Changing the Face Amount of Insurance. . . . . . . . . . . . . . . . . . 9
Changing Death Benefit Options . . . . . . . . . . . . . . . . . . . . . 9
When Policy Changes Go into Effect . . . . . . . . . . . . . . . . . . . 10
Flexible Premium Payments. . . . . . . . . . . . . . . . . . . . . . . . 10
Additional Benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Disability Waiver Benefit. . . . . . . . . . . . . . . . . . . . . . . 11
Accidental Death Benefit . . . . . . . . . . . . . . . . . . . . . . . 11
Children's Term Insurance. . . . . . . . . . . . . . . . . . . . . . . 11
Term Insurance on an Additional Insured Person . . . . . . . . . . . . 11
Accelerated Benefit Settlement Option Rider. . . . . . . . . . . . . . 11
Separate Account Investment Choices . . . . . . . . . . . . . . . . . . . . 11
The Separate Account and Its Investment Divisions. . . . . . . . . . . . 12
The Funds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Investment Policies of the Portfolios of the Funds . . . . . . . . . . . 12
Ownership of the Assets of the Separate Account. . . . . . . . . . . . . 14
Right to Change Operations . . . . . . . . . . . . . . . . . . . . . . . 14
Deductions and Charges. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Deductions from Premiums . . . . . . . . . . . . . . . . . . . . . . . . 15
Charges Against the Policy Account . . . . . . . . . . . . . . . . . . . 16
Administrative Charge. . . . . . . . . . . . . . . . . . . . . . . . . 16
Cost of Insurance Charge . . . . . . . . . . . . . . . . . . . . . . . 16
Charges for Additional Benefits. . . . . . . . . . . . . . . . . . . . 17
Changes in Monthly Charges . . . . . . . . . . . . . . . . . . . . . . 17
Charges Against the Separate Account . . . . . . . . . . . . . . . . . . 17
Mortality and Expense Risks. . . . . . . . . . . . . . . . . . . . . . 17
Charges Against the Funds. . . . . . . . . . . . . . . . . . . . . . . 17
Tax Reserve. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Surrender Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Other Transaction Charges. . . . . . . . . . . . . . . . . . . . . . . . 21
Partial Withdrawal of Net Cash Surrender Value . . . . . . . . . . . . 21
Increase in the Face Amount of Insurance . . . . . . . . . . . . . . . 21
Transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
i
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TABLE OF CONTENTS (CONTINUED)
PAGE
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Illustrations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Allocation of Policy Account Charges . . . . . . . . . . . . . . . . . . 21
Policy Account Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Amounts in the Separate Account. . . . . . . . . . . . . . . . . . . . . 22
Determination of the Unit Value. . . . . . . . . . . . . . . . . . . . . 22
Policy Account Transactions . . . . . . . . . . . . . . . . . . . . . . . . 23
Changing Premium and Deduction Allocation Percentages. . . . . . . . . . 23
Transfers of Policy Account Value Among Investment Divisions . . . . . . 23
Borrowing from the Policy Account. . . . . . . . . . . . . . . . . . . . 23
Loan Requests. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Policy Loan Interest . . . . . . . . . . . . . . . . . . . . . . . . . . 24
When Interest is Due . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Repaying the Loan. . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
The Effects of a Policy Loan on the Policy Account . . . . . . . . . . . 25
Lapse of the Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Withdrawing Money from the Policy Account. . . . . . . . . . . . . . . . 26
Withdrawal Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
The Effects of a Partial Withdrawal. . . . . . . . . . . . . . . . . . . 26
Surrendering the Policy for Its Net Cash Surrender Value . . . . . . . . 27
The Guaranteed Interest Division. . . . . . . . . . . . . . . . . . . . . . 27
Amounts in the Guaranteed Interest Division. . . . . . . . . . . . . . . 27
Interest on Amounts in the Guaranteed Interest Division. . . . . . . . . 27
Transfers from the Guaranteed Interest Division. . . . . . . . . . . . . 28
Additional Information About EquiBuilder III Policies . . . . . . . . . . . 28
Right to Examine the Policy. . . . . . . . . . . . . . . . . . . . . . . 28
Lapse of the Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Reinstatement of the Policy. . . . . . . . . . . . . . . . . . . . . . . 29
Policy Periods, Anniversaries, Dates and Ages. . . . . . . . . . . . . . 29
Federal Tax Considerations. . . . . . . . . . . . . . . . . . . . . . . . . 30
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Tax Status of the Policy . . . . . . . . . . . . . . . . . . . . . . . . 30
Tax Treatment of Policy Benefits . . . . . . . . . . . . . . . . . . . . 31
American Franklin's Income Taxes . . . . . . . . . . . . . . . . . . . . 33
Income Tax Withholding . . . . . . . . . . . . . . . . . . . . . . . . . 33
ILLUSTRATIONS OF DEATH BENEFITS, POLICY ACCOUNT AND CASH SURRENDER VALUES,
AND ACCUMULATED PREMIUMS. . . . . . . . . . . . . . . . . . . . . . . . . . 33
ADDITIONAL INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Voting Rights of a Policy Owner . . . . . . . . . . . . . . . . . . . . . . 39
Voting Rights of the Funds . . . . . . . . . . . . . . . . . . . . . . . 39
Determination of Voting Shares . . . . . . . . . . . . . . . . . . . . . 39
How Shares of the Funds Are Voted. . . . . . . . . . . . . . . . . . . . 39
Voting Privileges of Participants in Other Separate Accounts . . . . . . 40
Separate Account Voting Rights . . . . . . . . . . . . . . . . . . . . . 40
Reports to Policy Owners. . . . . . . . . . . . . . . . . . . . . . . . . . 40
Limits on American Franklin's Right to Challenge a Policy . . . . . . . . . 40
Payment Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
The Beneficiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Assignment of a Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Employee Benefit Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Payment of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
ii
<PAGE>
TABLE OF CONTENTS (CONTINUED)
PAGE
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Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Distribution of the Policies. . . . . . . . . . . . . . . . . . . . . . . . 43
Applications. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Reinsurance Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Administrative Services . . . . . . . . . . . . . . . . . . . . . . . . . . 45
State Regulation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Year 2000 Transition. . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Registration Statement. . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Other Policies and Contracts. . . . . . . . . . . . . . . . . . . . . . . . 46
Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . .F-1
THE POLICY IS NOT AVAILABLE IN ALL STATES. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE. AMERICAN FRANKLIN DOES NOT AUTHORIZE ANY INFORMATION OR
REPRESENTATIONS REGARDING THE OFFERING DESCRIBED IN THIS PROSPECTUS OTHER
THAN AS CONTAINED IN THIS PROSPECTUS OR ANY ATTACHED SUPPLEMENT THERETO OR IN
ANY SUPPLEMENTAL SALES MATERIAL AUTHORIZED BY AMERICAN FRANKLIN.
iii
<PAGE>
DEFINITIONS
Set forth below is a glossary of certain terms used in this Prospectus.
ADMINISTRATIVE OFFICE-The address of the Administrative Office of American
Franklin is #1 Franklin Square, Springfield, Illinois 62713-0001.
AGE-The age of the Insured Person on his or her birthday nearest the date on
which a determination of the Insured Person's age is made.
AMERICAN FRANKLIN-The American Franklin Life Insurance Company, an Illinois
stock life insurance company and the issuer of the EquiBuilder III individual
flexible premium variable life insurance policies described in this
Prospectus.
AMOUNT AT RISK-The difference between the amount of the Policy Account and the
current death benefit of a policy at any time.
CASH SURRENDER VALUE-The amount of the Policy Account less any applicable
surrender charges.
CODE-The Internal Revenue Code of 1986, as amended.
DATE OF PAYMENT-Normally, the day of receipt by American Franklin at its
Administrative Office of a check for the full initial premium of a policy.
FACE AMOUNT-The face amount of insurance shown on the Policy Information page
of a policy. The Face Amount is the minimum death benefit payable under a
policy while the policy remains in effect. The death benefit proceeds will be
reduced by any outstanding loan and loan interest on the policy and any due
and unpaid charges.
FINAL POLICY DATE-The policy anniversary nearest the Insured Person's 95th
birthday. American Franklin will pay to the Policy Owner the amount of the
Policy Account, net of any outstanding loan and loan interest on the policy,
if the Insured Person is still living on the Final Policy Date.
FUND(S)-Each of Variable Insurance Products Fund, a "series" type mutual fund,
five portfolios of which are available for investment of amounts allocated to
the investment divisions of the Separate Account, Variable Insurance Products
Fund II, 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 MFS Variable Insurance Trust, a "series" type mutual fund, six
portfolios of which are available for investment of amounts allocated to the
investment divisions of the Separate Account, is referred to as a Fund. All
three are referred to collectively as the Funds.
GUARANTEED INTEREST DIVISION-A part of American Franklin's General Account in
which amounts in a Policy Account other than those allocated to the Separate
Account earn interest at a rate stipulated in advance and guaranteed by
American Franklin.
INSURED PERSON-The person whose life is insured under a policy.
ISSUE DATE-The date that American Franklin actually issues a policy.
NET CASH SURRENDER VALUE-Cash Surrender Value less any outstanding loan and loan
interest on the policy.
NET PREMIUM-The amount of any premium paid by the Policy Owner less the
amount of applicable state and local premium taxes, if any, and less a sales
expense deduction equal to 5% of each premium paid during any policy year
until total premiums for that policy year equal the Target Premium.
POLICY ACCOUNT-The sum of amounts allocated to the investment divisions of
the Separate Account and American Franklin's Guaranteed Interest Division for
a particular policy.
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<PAGE>
DEFINITIONS (CONTINUED)
POLICY ANNIVERSARY-An anniversary of the Register Date of a policy while the
policy is in effect.
POLICY MONTH-A month-long period beginning on the Register Date and on the
same day in each subsequent calendar month while a policy is in effect.
POLICY OWNER-The person designated as such on the Policy Information page of a
policy.
POLICY YEAR-An annual period beginning on the Register Date and on each
anniversary of the Register Date while the policy is in effect.
REGISTER DATE-The earlier of the Issue Date or the Date of Payment.
SEPARATE ACCOUNT-Separate Account VUL-2, a segregated investment account of
American Franklin established under the Insurance Law of the State of
Illinois in which amounts in a Policy Account other than those in the
Guaranteed Interest Division are held for investment in one of the portfolios
of the Funds. The value of amounts in the Separate Account will fluctuate in
accordance with the performance of the corresponding portfolios of the Funds.
TARGET PREMIUM-A hypothetical premium equal to the annual premium necessary to
maintain a fixed-benefit whole life policy with a face amount equal to the
initial Face Amount of an EquiBuilder III policy for a person of the same age
and sex as the Insured Person. The Target Premium for each EquiBuilder III
policy is shown on the Policy Information page of the policy.
v
<PAGE>
SUMMARY
This Prospectus describes the regular EquiBuilder III-TM- policy. There
may be differences between a particular policy and the description contained
herein because of requirements of the state in which a policy is issued. These
differences will be reflected in the policy. Also American Franklin reserves
the right to make modifications in light of particular circumstances.
Unless indicated otherwise, the discussion of the terms of a representative
policy contained in this Prospectus assumes that there is no policy loan
outstanding, that the policy is not in a grace period and that state variations
will be covered by a supplement or a policy endorsement, as appropriate.
The policies described herein are not intended for use in connection with
qualified plans or trusts under the Code.
The purpose of the policy offered hereby is to provide insurance protection
for a policy's beneficiary. The policy is not similar to or comparable to a
mutual fund's systematic investment plan.
The following Summary of this Prospectus should be read in conjunction with
the detailed information appearing elsewhere herein.
EquiBuilder III-TM- is a trademark of American Franklin.
FEATURES OF EQUIBUILDER III-TM- POLICIES
INSURANCE BENEFIT OPTIONS
EquiBuilder III policies offer insurance on the life of the Insured Person.
American Franklin will pay a death benefit when the Insured Person dies.
American Franklin will pay a maturity benefit in lieu of a death benefit if the
Insured Person is still living on the policy anniversary nearest his or her 95th
birthday. Two death benefit options are available.
Option A provides a death benefit equal to the Face Amount of the policy;
and
Option B provides a death benefit equal to the Face Amount of the policy,
plus the value of the Policy Account.
Option B entails a higher cost of insurance charge and will cause the value
of the Policy Account to be less than if Option A were chosen.
Under either option, a death benefit equal to a percentage multiple of the
Policy Account on the day the Insured Person dies will be paid if that death
benefit would be greater than the death benefit payable under the option
selected. Any outstanding loans or unpaid charges will be deducted before any
death benefits are paid. Proceeds may be paid in a lump sum or under a variety
of payment plans.
A policy will remain in force only so long as an amount remains in the
Policy Account sufficient to cover cost of insurance and other expense
deductions and any surrender charge that would then be due.
American Franklin will not issue an EquiBuilder III policy with a Face
Amount of less than $50,000.
See "The Features Of EquiBuilder III Policies-Death Benefits" and "Payment
Options" below.
POLICY ACCOUNTS
An account (the "Policy Account") is established by American Franklin in
its records for each policy at the time of issue. After deduction of certain
charges from premiums, the balance of each premium is credited to the Policy
Account. A Policy Owner may allocate his or her Policy Account for investment
to the Guaranteed Interest Division, which pays a declared interest rate, or to
one or more of the investment divisions of the Separate Account, or both. See
"Separate Account Investment Choices," below. Until the first business day 15
days following the Issue Date of a policy, the initial net premium and all other
net premiums received during such period will be allocated to the Money Market
division of
1
<PAGE>
the Separate Account. See "Additional Information About EquiBuilder III
Policies - Policy Periods, Anniversaries, Dates and Ages."
The value of the Policy Account reflects the amount and frequency of
premium payments, deductions and charges for the cost of insurance and expenses,
the investment experience of amounts allocated to the Separate Account, interest
earned on amounts allocated to the Guaranteed Interest Division, loans and
partial withdrawals. There is no minimum guaranteed Policy Account value with
respect to any amounts allocated to the investment divisions of the Separate
Account and, if the investment performance of the portfolios corresponding to
the investment divisions of the Separate Account is adverse, the value of a
Policy Account can decline. See "Policy Account Value," below.
POLICY CHANGES
At any time after the first policy year while a policy is in force, the
Policy Owner may change the death benefit option chosen and may also increase or
decrease the Face Amount of the policy, within limits. See "The Features Of
EquiBuilder III Policies-Changes In EquiBuilder III Policies," "-Changing the
Face Amount of Insurance," and "-Changing Death Benefit Options," below.
Certain policy changes, such as a decrease in the Face Amount of a policy, may
have adverse federal tax consequences. See "Federal Tax Considerations," below.
FLEXIBLE PREMIUM PAYMENTS
The frequency and the amount of premium payments are determined by the
Policy Owner, within certain limits. An initial minimum premium is required
based on the age, sex and risk class of the Insured Person and the Face Amount
of the policy. A Policy Owner may stipulate a planned periodic premium as a
guideline for future premiums, but if the planned premiums are not paid
insurance coverage will continue so long as the policy has sufficient Net Cash
Surrender Value to cover monthly charges. The Policy Owner need not pay
premiums of any set amount (except that the minimum premium is $100) or
according to any set schedule, but may have to make additional premium payments
to keep the policy in force if the policy's Net Cash Surrender Value is
insufficient to cover monthly charges. Payment of stipulated planned periodic
premiums may not always provide sufficient Net Cash Surrender Value to cover
monthly charges. See "The Features of EquiBuilder III Policies-Flexible Premium
Payments," below.
ADDITIONAL BENEFITS MAY BE AVAILABLE
Additional benefits to the policy may be added by rider. These benefits
may include an accidental death benefit, life insurance for additional insured
persons, life insurance for children and a disability waiver benefit to waive
the cost of monthly deductions. The cost of any additional benefits will be
deducted monthly from the Policy Account. See "The Features of EquiBuilder III
Policies-Additional Benefits," below.
INVESTMENT CHOICES OF EQUIBUILDER III POLICIES
A Policy Owner may allocate amounts in his or her Policy Account for
investment to either the Guaranteed Interest Division, which pays interest at a
declared rate, or to any one or more of the investment divisions of the Separate
Account, or both. The current investment divisions are:
Money Market
High Income
Equity-Income
Growth
Overseas
Investment Grade Bond
Asset Manager
Index 500
Asset Manager: Growth
Contrafund
MFS Emerging Growth
MFS Research
MFS Growth With Income
2
<PAGE>
MFS Total Return
MFS Utilities
MFS Value
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, the Variable Insurance Products Fund II or the MFS Variable
Insurance Trust (individually, a "Fund," and collectively, the "Funds"), each of
which is a "series" type mutual fund. The portfolios of the Funds have
different investment objectives, policies and risks. See "Separate Account
Investment Choices - The Funds," below.
In order to effect allocations to the investment divisions of the Separate
Account, American Franklin will purchase and redeem shares of the corresponding
portfolios of the Funds according to the Policy Owner's premium and deduction
allocation percentages, respectively. The shares of the Funds are sold
exclusively to separate accounts of insurance companies. Purchase and
redemption of shares will be made at net asset value through Fidelity
Distributors Corporation ("FDC") acting as distributor for Variable Insurance
Products Fund and Variable Insurance Products Fund II and through MFS Fund
Distributors, Inc. acting as distributor for MFS Variable Insurance Trust.
Subject to the approval and supervision of the Boards of Trustees, Fidelity
Management & Research Company ("Fidelity Management") manages the day-to-day
investment operations of the Variable Insurance Products Fund and the Variable
Insurance Products Fund II and exercises overall responsibility for the
investment and reinvestment of their assets. See the Prospectus of the Variable
Insurance Products Fund and the Variable Insurance Products Fund II for a
description of the experience and qualifications of Fidelity Management. For
managing each portfolio's investments and business affairs, each portfolio of
the Variable Insurance Products Fund and the Variable Insurance Products Fund II
pays Fidelity Management a monthly fee. See "Deductions and Charges - Charges
Against the Funds", below, for a description of the way in which this fee is
calculated.
Massachusetts Financial Services Company ("MFS") provides the portfolios of
the MFS Variable Insurance Trust with overall investment advisory and
administrative services, as well as general office facilities. Subject to such
policies as the Board of Trustees may determine, MFS makes investment decisions
for each portfolio of the MFS Variable Insurance Trust. See the Prospectus of
the MFS Variable Insurance Trust for a description of the experience and
qualifications of MFS. For its services and facilities, MFS receives a monthly
management fee. See "Deductions and Charges - Charges Against the Funds",
below, for a description of the way in which this fee is calculated.
For a full description of the Funds, see the Prospectuses of the Funds,
which are attached to this Prospectus, and the Statements of Additional
Information of the Funds referred to therein. Certain portfolios described in
the Prospectuses of the Funds are NOT available under the policy. See also
"Separate Account Investment Choices" and "The Guaranteed Interest Division,"
below.
DEDUCTIONS AND CHARGES
DEDUCTIONS FROM PREMIUMS
A deduction for any applicable taxes is made from premium payments. The
amount of tax will vary from one jurisdiction to another. Taxes currently range
up to 5%. In addition, American Franklin makes a sales expense deduction equal
to 5% of each premium paid during any policy year until total premiums for the
policy year equal the Target Premium. This deduction is designed to recover
some expenses of distributing policies. A contingent deferred sales charge may
also be imposed during the first ten policy years if a policy is surrendered or
lapses or the Face Amount is reduced. After such deduction, the balance (the
"net premium") is placed in the Policy Account. See "Deductions and
Charges-Deductions from Premiums" and "Deductions and Charges-Surrender Charge,"
below.
CHARGES AGAINST THE POLICY ACCOUNT
Certain amounts are charged against every Policy Account by American
Franklin at the beginning of each policy month. These are:
3
<PAGE>
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:
a partial withdrawal of Net Cash Surrender Value (currently $25 or 2%
of the amount withdrawn, whichever is less);
an increase in the Face Amount of insurance (currently a $1.50
administrative charge for each $1,000 increase, up to a maximum charge of
$300); or
a transfer between investment divisions in any policy year in which
four transfers have already been made (up to $25 for each additional
transfer).
The Policy Owner generally may specify the manner in which charges against
the Policy Account are to be allocated. See "Deductions and Charges-Charges
Against the Policy Account" and "Deductions and Charges-Other Transaction
Charges," below.
CHARGES AGAINST THE SEPARATE ACCOUNT
American Franklin imposes a daily charge at an effective annual rate of
.75% of the value of the assets in the investment divisions of the Separate
Account for certain mortality and expense risks that American Franklin assumes.
In addition, the value of the assets in the investment divisions of the Separate
Account will be effected by investment management fees and other direct expenses
of the Funds. See "Deductions and Charges-Charges Against the Separate
Account," below.
SURRENDER CHARGE
During the first ten policy years, a surrender charge will be deducted from
the Policy Account if:
the policy is surrendered for its Net Cash Surrender Value; or
the policy is permitted to lapse at the end of a grace period.
Any request for a reduction of the Face Amount of a policy during the first
ten policy years will be considered a partial surrender and a pro rata portion
of the surrender charge will be deducted. The maximum total surrender charge
applicable to a particular policy is specified in the policy and is
approximately equivalent to 50% of one "target" premium, which is based on the
annual premium for a fixed whole life insurance policy on the life of the
Insured Person. At the end of the sixth policy year and at the end of each of
the four succeeding policy years, the maximum surrender charge is reduced by an
amount equal to 20% of the initial maximum surrender charge until, after the end
of the tenth policy year, there is no surrender charge. Subject to the maximum
surrender charge, the surrender charge will equal 25% of actual premiums paid
during the first policy year up to one target premium plus 9% of all other
premiums actually paid. The surrender charge is a contingent deferred sales
charge designed to recover some expenses of distributing policies which are
surrendered in their early years. See "Deductions and Charges-Surrender
Charge," below. The expenses of distributing policies are also recovered
through a sales expense deduction in the amount of 5% of each premium paid
during any policy year until total premiums for that policy year equal the
Target Premium. See "Deductions and Charges-Deductions from Premiums," below.
4
<PAGE>
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 Divisions" and "The Guaranteed Interest Division-Transfers from
the Guaranteed Interest Division," below.
BORROWING AGAINST THE POLICY ACCOUNT
The Policy Owner may borrow a total amount up to 90% of the Cash Surrender
Value of his policy using the policy as security for the loan. A minimum loan
amount, usually $500, will be stated in the policy. Policy loan interest
accrues daily at a rate adjusted annually. For more information see "Policy
Account Transactions-Borrowing from the Policy Account," below. Loans are
deducted from the amount payable on surrender of the Policy and are also
deducted from any death benefit payable. Loan interest accrues daily and, if it
is not repaid each year, it is capitalized. Depending upon investment
performance of the investment divisions and the amounts borrowed, loans may
cause a Policy to lapse. If the Policy is not a modified endowment contract,
lapse of the Policy with loans outstanding may result in adverse tax
consequences. (See "Federal Tax Considerations.")
WITHDRAWING CASH FROM THE POLICY ACCOUNT
After a policy has been in effect for a year, the Policy Owner may make a
partial withdrawal of Net Cash Surrender Value from the Policy Account. The
current minimum withdrawal is $500, and each withdrawal is subject to certain
other requirements. A charge (currently $25 or 2% of the amount withdrawn,
whichever is less) will be deducted from the Policy Account for each withdrawal.
See "Policy Account Transactions-Withdrawing Money from the Policy Account,"
below.
SURRENDERING THE POLICY FOR CASH
Each EquiBuilder III policy has a Cash Surrender Value, which is the
difference between the value of the Policy Account and any surrender charge
which applies during the first ten policy years. If the policy is surrendered
for cash, the Policy Owner will receive the Net Cash Surrender Value, which is
the Cash Surrender Value less any outstanding loan and loan interest due. See
"Policy Account Transactions-Surrendering the Policy for Its Net Cash Surrender
Value," below. During the initial policy years, the applicable surrender charge
may represent a substantial portion of the premiums paid. See "Illustrations of
Death Benefits, Policy Account and Cash Surrender Values, and Accumulated
Premiums," below.
ADDITIONAL INFORMATION ABOUT EQUIBUILDER III POLICIES
RIGHT TO EXAMINE THE POLICY
The Policy Owner has the right to examine the policy and to return it to
American Franklin for a refund. A refund request must be postmarked by the
latest of:
10 days after the Policy Owner receives the policy;
10 days after American Franklin mails the Policy Owner a notice of this
right; or
45 days after the Policy Owner signed the application for the policy.
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<PAGE>
See "Additional Information About EquiBuilder III Policies-Right to Examine the
Policy," below.
FEDERAL TAX CONSIDERATIONS OF EQUIBUILDER III POLICIES
Generally, the death benefit paid to the beneficiary of a policy is not
subject to federal income tax. In addition, under current federal tax law, the
Policy Owner does not have to pay income tax on any earnings in the Policy
Account as long as they remain in the Policy Account. The federal tax treatment
of distributions from a policy (including loans, assignments, pledges, partial
withdrawals and distributions on maturity, lapse or surrender) may depend on
whether the policy is treated as a "modified endowment contract." A policy will
be treated as a modified endowment contract if, in general, the cumulative
amount of premiums paid during specified periods exceeds certain levels relating
to death benefits provided under the policy. See "Federal Tax Considerations,"
below.
LAPSE OF THE POLICY
A policy can lapse if the Net Cash Surrender Value is insufficient to pay
monthly charges. This situation can result even while a Policy Account has
positive value if potential surrender charges and policy loans are large enough
so that there is not enough left to cover monthly charges. Payment of planned
premiums does not guarantee the continuation of the policy. Also, failure to
pay premiums will not automatically cause the policy to terminate. However,
additional premium payments will be needed if the Net Cash Surrender Value is
not sufficient to pay monthly charges. American Franklin will give the Policy
Owner notice that additional premiums are required before a policy is
terminated. See "Additional Information About EquiBuilder III Policies-Lapse of
the Policy," below.
INQUIRIES AND NOTICES
All inquiries and notices regarding the policies should be directed to
American Franklin at its Administrative Office at #1 Franklin Square,
Springfield, Illinois 62713-0001. Currently, certain transactions under the
policies may be effected by telephone. American Franklin reserves the right to
suspend telephone transaction privileges at any time. American Franklin will
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine, and if these procedures are followed, will not be liable
for any losses due to unauthorized or fraudulent instructions. Procedures
followed for telephone transactions may involve requiring some form of personal
identification, providing written confirmation of the transaction, and recording
telephone instructions.
DETAILED INFORMATION ABOUT AMERICAN FRANKLIN AND EQUIBUILDER III POLICIES
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
The American Franklin Life Insurance Company ("American Franklin") is a
legal reserve stock life, accident and health insurance company organized under
the laws of the State of Illinois in 1981. It is engaged in the writing of
variable universal life insurance and variable annuities. American Franklin has
another separate account (Separate Account VUL) which issues interests in
variable insurance policies having policy features that are similar to those of
EquiBuilder III policies but the assets of which are invested in a different
open-end management investment company. American Franklin no longer offers new
policies having an interest in Separate Account VUL. American Franklin also has
a separate account which issues interests in variable annuities. American
Franklin is presently authorized to write insurance in forty-six states, the
District of Columbia and Puerto Rico. American Franklin's home office is
located at #1 Franklin Square, Springfield, Illinois 62713.
American Franklin is a wholly-owned subsidiary of The Franklin Life
Insurance Company ("The Franklin"). The Franklin is a legal reserve stock life
insurance company organized under the laws of the State of Illinois in 1884.
The Franklin issues individual life insurance, annuity and accident and health
insurance policies, group annuities and group life and health insurance and
offers a variety of whole life, life, retirement income and level and decreasing
term insurance plans. Its home office is located at #1 Franklin Square,
Springfield, Illinois 62713. The Franklin is not the issuer of the policies
offered by this Prospectus, however, it has certain indirect obligations in
respect to those policies arising from The Franklin's undertakings to the
issuer, American Franklin, as a reinsurer of portions of the death benefits
provided under the policies.
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<PAGE>
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___________, 1998.
THE FEATURES OF EQUIBUILDER III POLICIES
HOW EQUIBUILDER III POLICIES DIFFER FROM WHOLE LIFE INSURANCE
EquiBuilder III policies are designed to provide life insurance coverage
with flexibility in death benefits, premium payments and investment choices.
EquiBuilder III policies are different from traditional whole life insurance in
that the Policy Owner is not required to pay scheduled premiums and may, within
limits, choose the amount and frequency of premium payments. EquiBuilder III
policies also provide for two different types of death benefit options and the
Policy Owner may change options. Another feature of EquiBuilder III policies
which is not available under traditional whole life insurance is that the Policy
Owner generally has the ability to increase or decrease the Face Amount without
purchasing a new policy. However, evidence of insurability may be required. In
addition, the Policy Owner may direct the investment of net premiums, which will
determine, in part, the value of the Policy Account.
DEATH BENEFITS
American Franklin will pay a death benefit (net of any policy loan and loan
interest and any overdue charges) to the beneficiary of a policy when the
Insured Person dies. The Policy Owner may choose from two death benefit
options: Option A and Option B. Option A provides a benefit that equals the
Face Amount of the policy. Except as described below, the Option A benefit is
fixed. Option B provides a benefit that equals the Face Amount of the policy
plus the amount in the Policy Account on the day the Insured Person dies. Under
Option B, the value of the benefit is variable and fluctuates with the amount in
the Policy Account. Option B entails a higher monthly cost of insurance charge
than Option A and will cause the value of the Policy Account, and hence the Net
Cash Surrender Value of the policy, to be less than if Option A were chosen, all
other things being equal.
Under both options, an alternate death benefit based on provisions of the
federal income tax law applies if it would provide a greater benefit (before
deductions for any outstanding policy loan and loan interest) than the option
selected. This benefit is a percentage multiple of the amount in the Policy
Account. The percentage declines as the Insured Person gets older. The benefit
will be the amount in the Policy Account on the day the Insured Person dies
multiplied by the percentage for the Insured Person's age (as of his or her
nearest birthday) at the beginning of the policy year of the Insured Person's
death. For ages that are not shown on the table set forth below, the applicable
percentages will decrease by a ratable portion for each full year.
<TABLE>
<CAPTION>
Table of Death Benefits
Based On Policy Account Values
- --------------------------------------------------------------------------------
MINIMUM DEATH BENEFIT AS PERCENTAGE
INSURED PERSON'S AGE OF THE POLICY ACCOUNT
- --------------------------------------------------------------------------------
<S> <C>
40 or under 250%
45 215
50 185
55 150
60 130
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Table of Death Benefits
Based On Policy Account Values
- --------------------------------------------------------------------------------
MINIMUM DEATH BENEFIT AS PERCENTAGE
INSURED PERSON'S AGE OF THE POLICY ACCOUNT
- --------------------------------------------------------------------------------
<S> <C>
65 120
70 115
75 to 90 105
95 100
</TABLE>
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 deductions. (See "Additional Information about
EquiBuilder III Policies-Lapse of the Policy," below.) The investment experience
(which may be either positive or negative) of any amounts in the investment
divisions of the Separate Account and the interest earned in the Guaranteed
Interest Division will affect the amount in the Policy Account. As a result,
the returns from these divisions will affect the length of time a policy remains
in force. See "Policy Account Value," below.
Policy Owners who prefer to have insurance coverage that varies with the
investment experience of their Policy Account should choose Option B. In no
event will the death benefit under Option B be less than the greater of the Face
Amount of the policy or the alternate death benefit described above (in either
case, less any outstanding policy loan and loan interest). Policy Owners who
prefer to have insurance coverage that does not vary in amount and that has
lower cost of insurance charges should choose Option A.
POLICY ISSUANCE INFORMATION
American Franklin will not issue a new policy having a Face Amount that is
less than $50,000 nor will it issue a policy in respect of an Insured Person who
is older than 75.
No insurance under a policy will take effect: (a) until a policy is
delivered and the full initial premium is paid while the person proposed to be
insured is living and (b) unless the information in the application continues to
be true and complete, without material change, as of the time the premium is
paid.
See "The Features of EquiBuilder III Policies-Flexible Premium Payments"
and "Distribution of the Policies-Applications," below for additional
information concerning procedures for obtaining a policy.
MATURITY BENEFIT
If the Insured Person is still living on the policy anniversary nearest his
or her 95th birthday, American Franklin will pay the Policy Owner the amount in
the Policy Account net of any outstanding loan and loan interest. The policy
will then end.
CHANGES IN EQUIBUILDER III POLICIES
EquiBuilder III policies provide the Policy Owner flexibility to choose
from a variety of strategies, described in the sections that follow, which
enable the Policy Owner to increase or decrease his or her insurance protection.
A reduction in Face Amount lessens emphasis on the policy's insurance
coverage by reducing both the death benefit and the amount at risk (the
difference between the current death benefit under the
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<PAGE>
policy and the amount of the Policy Account). The reduced amount at risk
results in lower cost of insurance charges against the Policy Account. See "The
Features of EquiBuilder III Policies-Changing the Face Amount of Insurance,"
below. A partial withdrawal of Net Cash Surrender Value reduces the Policy
Account and death benefit while providing a cash payment, but does not reduce
the amount at risk or the cost of insurance charges. See "Policy Account
Transactions-Withdrawing Money from the Policy Account," below. Choosing not to
make premium payments may have the effect of reducing the Policy Account.
Reducing the Policy Account will, under Option A, increase the amount at risk
(and thereby increase cost of insurance charges) while leaving the death benefit
unchanged; under Option B, it will decrease the death benefit while leaving the
amount at risk and the cost of insurance charge unchanged. See "The Features of
EquiBuilder III Policies-Flexible Premium Payments," below.
Increases in the Face Amount emphasize insurance coverage by increasing
both the death benefit and the amount at risk. See "The Features of EquiBuilder
III Policies-Changing the Face Amount of Insurance," below. Additional premium
payments may increase the Policy Account, which has the effect, under Option A,
of reducing the amount at risk and cost of insurance charge while leaving the
death benefit unchanged, or, under Option B, of increasing the death benefit
while leaving the amount at risk and cost of insurance charge unchanged. See
"The Features of EquiBuilder III Policies-Flexible Premium Payments," below.
CHANGING THE FACE AMOUNT OF INSURANCE
Any time after the first policy year while a policy is in force, the Policy
Owner may change the policy's Face Amount. This may be done by sending a
written request to American Franklin's Administrative Office. Any change will
be subject to American Franklin's approval and the following conditions:
If the Face Amount is to be increased, satisfactory evidence that the
Insured Person is still insurable must be provided. American Franklin's
current procedure if the Insured Person has become a more expensive risk is
to ask the Policy Owner to confirm that he or she wishes to pay higher cost
of insurance charges on the amount of the increase.
Any increase in the Face Amount must be at least $10,000. Monthly
deductions from the Policy Account for the cost of insurance will increase,
beginning on the date the increase in the Face Amount takes effect. In
addition, a one-time administrative charge for each increase will be made
against the Policy Account. This charge is currently $1.50 for each
additional $1,000 of insurance up to a maximum charge of $300. An increase
in the Face Amount will not increase the maximum surrender charge.
The Face Amount may not be reduced below the minimum American Franklin
requires to issue a policy at the time of the reduction. Monthly charges
against the Policy Account for the cost of insurance will decrease if the
Face Amount is reduced. If the Face Amount is reduced during the first ten
policy years, a pro rata share of the applicable surrender charge will be
made against the Policy Account. See "Deductions and Charges-Surrender
Charge," below.
American Franklin's current procedure is to disapprove a requested decrease
in the Face Amount if it would cause the alternate death benefit to apply.
Instead, the Policy Owner will be requested to make a partial withdrawal of Net
Cash Surrender Value from the Policy Account and then a decrease in the Face
Amount. See "The Features of EquiBuilder III Policies-Death Benefits," below.
American Franklin's current procedure, if the Policy Owner requests a Face
Amount decrease when there has been a previous increase in the Face Amount, is
to apply the decrease first against the most recent increase in the Face Amount.
Decreases will then be applied to prior increases in the Face Amount in the
reverse order in which such increases took place, and then to the original Face
Amount.
Policy changes that result in a reduction of the death benefit, such as a
decrease in the Face Amount, may cause a policy to become a "modified endowment
contract." See "Federal Tax Considerations," below.
CHANGING DEATH BENEFIT OPTIONS
At any time after the first policy year while a policy is in force, the
Policy Owner may change the death benefit option by sending a written request to
American Franklin's Administrative Office. If the
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<PAGE>
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).
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.
10
<PAGE>
If the Policy Owner stops paying premiums temporarily or permanently, the
policy will continue in effect until the Net Cash Surrender Value can no longer
cover the monthly charges against the Policy Account for the benefits selected.
In addition, it should be noted that planned premiums may not be sufficient to
maintain a policy because of investment experience, policy changes or other
factors.
The tables set forth below under "Illustrations of Death Benefits, Policy
Account and Cash Surrender Values, and Accumulated Premiums" illustrate how the
key financial elements of EquiBuilder III policies work. The tables show death
benefits and Policy Account and Cash Surrender Values with Face Amounts and
planned annual premiums of different amounts for Insured Persons of different
ages.
ADDITIONAL BENEFITS
A policy may include additional benefits. A charge will be made against
the Policy Account monthly for each additional benefit. These benefits may be
cancelled at any time. More details will be included in the policy if any of
these benefits are selected. The following additional benefits are currently
available:
DISABILITY WAIVER BENEFIT. With this benefit, monthly charges from
the Policy Account are waived if the Insured Person becomes totally
disabled on or after the Insured Person's fifth birthday and the disability
continues for six months. If the disability starts before the policy
anniversary nearest the Insured Person's 60th birthday, American Franklin
will waive monthly charges for life as long as the disability continues.
If the disability starts after that, the charges will be waived only up to
the policy anniversary nearest the Insured Person's 65th birthday (as long
as the disability continues).
ACCIDENTAL DEATH BENEFIT. American Franklin will pay an additional
benefit if the Insured Person dies from bodily injury that results from an
accident, provided the Insured Person dies before the policy anniversary
nearest his or her 70th birthday.
CHILDREN'S TERM INSURANCE. This benefit provides term life insurance
on the lives of the Insured Person's children, including natural children,
stepchildren and legally adopted children, who have not yet reached their
eighteenth birthdays. The charge for this benefit covers all children
under eighteen. They are covered only until the Insured Person reaches age
65 or the child reaches age 25, whichever first occurs.
TERM INSURANCE ON AN ADDITIONAL INSURED PERSON. Term insurance may
be obtained for another person, such as the Insured Person's spouse, under
a policy. A separate charge will be deducted for each additional insured
person.
ACCELERATED BENEFIT SETTLEMENT OPTION RIDER. This rider allows the
Policy Owner to receive payment of an accelerated benefit under the policy
in the event of terminal illness or confinement to a nursing facility, as
those terms are defined in the rider. In determining the accelerated
benefit, the death benefit will be adjusted to reflect the payment option
selected by the Policy Owner, the Insured Person's sex and age, the length
of time the policy has been in force, American Franklin's current
assumptions as to the Insured Person's life expectancy, interest rates,
cost of insurance rates, and administrative charges, and a processing
charge of not over $200. This rider will be automatically issued with all
EquiBuilder III policies issued on or after April 30, 1998 in those states
where the rider has been approved. Information concerning whether this
rider is approved in a particular state may be obtained from American
Franklin's Administrative Office or from a registered representative
authorized to sell the policies. There is no premium charge for this
rider, and the rider may not be added after a policy has been issued.
Receipt of an accelerated benefit may be subject to income tax; a Policy
Owner should seek assistance from his or her personal tax advisor before
electing a payment option under this rider.
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
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<PAGE>
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 a number of investment divisions, each of which
invests in shares of a corresponding portfolio of the Variable Insurance
Products Fund, the Variable Insurance Products Fund II or the MFS Variable
Insurance Trust (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,
Contrafund, MFS Emerging Growth, MFS Research, MFS Growth With Income, MFS Total
Return, MFS Utilities and MFS Value divisions are available for investment under
EquiBuilder III policies. The Separate Account also issues interests under
EquiBuilder II variable life insurance policies, which have policy features that
are similar to those of EquiBuilder III policies but which have a different
sales charge structure.
THE FUNDS
Each of the Funds is a diversified open-end management investment company,
more commonly called a mutual fund. As "series" type mutual funds, they issue
several different "series" of stock, each of which relates to a different Fund
portfolio. Currently an aggregate of sixteen portfolios, each of which has
different investment objectives, policies and risks, are available for
investment of amounts allocated to the Separate Account.
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 and the Funds.
The Bank of New York, 110 Washington Street, New York, New York, is custodian of
Money Market, High Income and Investment Grade Bond Portfolio's assets; The
Chase Manhattan Bank N.A., 1211 Avenue of the Americas, New York, New York
10036, is custodian of Equity-Income, Overseas, Asset Manager and Asset Manager:
Growth Portfolios' assets; Brown Brothers Harriman & Co., 40 Water Street,
Boston, Massachusetts, is custodian of Growth, Index 500 and Contrafund
Portfolios' assets; and _________________________, is custodian of the assets of
the MFS Variable Insurance Trust portfolios. 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
Prospectuses, which are attached to this Prospectus, and in their Statements of
Additional Information referred to therein. See "Deductions and Charges -
Charges Against 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
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portfolios of the Funds are described in detail in the Prospectuses for the
Funds, which are attached to this Prospectus, and in the Funds' Statements of
Additional Information. The policies and objectives of the portfolios of the
Variable Insurance Products Fund corresponding to the divisions currently
available for investment under EquiBuilder III policies may be summarized as
follows:
MONEY MARKET PORTFOLIO seeks to obtain as high a level of current
income as is consistent with preserving capital and providing liquidity.
The portfolio will invest only in high-quality U.S. dollar denominated
money market securities of domestic and foreign issuers.
HIGH INCOME PORTFOLIO seeks to obtain a high level of current income
by investing primarily in high yielding, lower rated, fixed-income
securities, while also considering growth of capital. The portfolio may
purchase lower-quality bonds which provide poor protection for payment of
principal and interest (commonly referred to as "junk bonds"). For a
discussion of the risks of investment in these securities, please see the
Prospectus for the Funds, which is attached to this Prospectus.
EQUITY-INCOME PORTFOLIO seeks reasonable income by investing primarily
in income-producing equity securities. In choosing these securities, the
portfolio will also consider the potential for capital appreciation. The
portfolio's goal is to achieve a yield which exceeds the composite yield on
the securities comprising the Standard & Poor's 500 Composite Stock Price
Index.
GROWTH PORTFOLIO seeks to achieve capital appreciation. The portfolio
normally purchases common stocks, although its investments are not
restricted to any one type of security. Capital appreciation may also be
found in other types of securities including bonds and preferred stocks.
OVERSEAS PORTFOLIO seeks long-term growth of capital primarily through
investments in foreign securities. Overseas Portfolio provides a means for
investors to diversify their own portfolios by participating in companies
and economies outside of the United States.
The policies and objectives of the portfolios of the Variable Insurance
Products Fund II corresponding to the divisions currently available for
investment under EquiBuilder III policies may be summarized as follows:
INVESTMENT GRADE BOND PORTFOLIO seeks as high a level of current
income as is consistent with the preservation of capital by investing in a
broad range of investment-grade fixed-income securities. The portfolio
will maintain dollar-weighted average portfolio maturity of ten years or
less.
ASSET MANAGER PORTFOLIO seeks a high total return with reduced risk
over the long-term by allocating its assets among domestic and foreign
stocks, bonds and short-term fixed-income instruments.
INDEX 500 PORTFOLIO seeks investment results that correspond to the
total return (i.e., the combination of capital changes and income) of
common stocks publicly traded in the United States, as represented by
Standard & Poor's 500 Composite Stock Price Index, while keeping
transaction costs and other expenses low.
ASSET MANAGER: GROWTH PORTFOLIO seeks to maximize total return over
the long term through investments in stocks, bonds and short-term
instruments.
CONTRAFUND PORTFOLIO seeks to increase the value of investments over
the long term by investing in securities of companies that are undervalued
or out-of-favor.
The policies and objectives of the portfolios of the MFS Variable
Insurance Trust corresponding to the divisions currently available for
investment under EquiBuilder III policies may be summarized as follows:
MFS EMERGING GROWTH PORTFOLIO seeks to provide long-term growth of
capital.
MFS RESEARCH PORTFOLIO seeks to provide long-term growth of capital
and future income.
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<PAGE>
MFS GROWTH WITH INCOME PORTFOLIO seeks to provide reasonable current
income and long-term growth of capital and income.
MFS TOTAL RETURN PORTFOLIO seeks primarily to provide above-average
income (compared to a portfolio invested entirely in equity securities)
consistent with the prudent employment of capital, and secondarily to
provide a reasonable opportunity for growth of capital and income.
MFS UTILITIES PORTFOLIO seeks capital growth and current income
(income above that available from a portfolio invested entirely in equity
securities).
MFS VALUE PORTFOLIO seeks capital appreciation.
Except for the Money Market, Investment Grade Bond, Index 500 and MFS
Growth With Income 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
Prospectuses for the Funds, which are attached to this Prospectus.
There is no guarantee that any portfolio of the Funds will achieve its
objective. In addition, the Funds' Prospectuses advise that no single portfolio
constitutes a balanced investment plan.
BEFORE SELECTING ANY DIVISION, the Policy Owner should carefully read the
Prospectuses for the Funds, which include more complete information about each
portfolio, including investment objectives and policies, charges and expenses.
A Policy Owner may obtain additional copies of the Prospectuses of the Funds by
contacting American Franklin's Administrative Office.
American Franklin may enter into agreements with affiliates of the Funds
that provide for reimbursement of American Franklin for certain costs incurred
in connection with administering the Funds as variable funding options for the
EquiBuilder III policies. Currently, American Franklin and MFS have entered
into an arrangement whereby American Franklin receives a fee equal, on an
annualized basis, to a percentage of the aggregate net assets of each of the
portfolios of the MFS Variable Insurance Trust attributable to the EquiBuilder
III policies and certain other variable contracts issued by American Franklin
and its affiliates. This fee will not be paid by the portfolios, their
shareholders or the Policy Owners.
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 EquiBuilder III policies and certain other
variable contracts issued by American Franklin and its affiliates.
OWNERSHIP OF THE ASSETS OF THE SEPARATE ACCOUNT
Under Illinois law, American Franklin owns the assets of the Separate
Account and uses them to support EquiBuilder III policies, other existing
variable life policies and other variable life policies it may issue in the
future. The portion of the Separate Account's assets supporting these policies
may not be used to satisfy liabilities arising out of any other business of
American Franklin. Under certain unlikely circumstances, one investment
division of the Separate Account may be liable for claims relating to the
operations of another division. In addition to premiums from EquiBuilder III
policies, American Franklin may allocate premiums from other policies to the
Separate Account. These policy owners will participate in the Separate Account
in proportion to the amounts in the Separate Account relating to their policies.
American Franklin may also permit charges owed to it to stay in the Separate
Account. Thus, American Franklin may also participate proportionately in the
Separate Account. These accumulated amounts belong to American Franklin and
American Franklin may transfer them from the Separate Account to its General
Account at any time.
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<PAGE>
RIGHT TO CHANGE OPERATIONS
American Franklin reserves the right to change or add investment companies
in which Policy Accounts will be invested and to modify how it or the Separate
Account operates. American Franklin intends to comply with applicable law in
making any changes and, if necessary, will seek Policy Owner approval. American
Franklin has the right to:
add investment divisions to, or remove investment divisions from, the
Separate Account, combine two or more divisions within the Separate
Account, or withdraw assets relating to EquiBuilder III policies from one
investment division and put them into another;
register or end the registration of the Separate Account under the
Investment Company Act of 1940;
operate the Separate Account under the direction of a committee or
discharge such a committee at anytime (the committee may be composed
entirely of persons who are "interested persons" of American Franklin
within the meaning of the Investment Company Act of 1940);
restrict or eliminate any voting rights of Policy Owners or other
people who have voting rights that affect the Separate Account;
operate the Separate Account or one or more of its investment
divisions in any other form the law allows, including a form that allows
the Separate Account to make direct investments. The Separate Account may
be charged an advisory fee if its investments are made directly, rather
than through an investment company. American Franklin may invest the
assets of the Separate Account in any legal investments. In choosing these
investments American Franklin will rely on its own or outside counsel for
advice. In addition, American Franklin may disapprove any change in
investment advisers or in investment policy unless a law or regulation
provides differently; and
modify the provisions of the policies to assure qualification under
the pertinent provisions of the Code or to comply with other applicable
federal or state laws.
If any changes are made that result in a material change in the underlying
investments of an investment division, Policy Owners will be notified as
required by law. American Franklin may, for example, cause an investment
division to invest in a mutual fund other than or in addition to the Funds. If,
as a result of any such material change, a Policy Owner then wishes to transfer
the amount of his or her Policy Account invested in one investment division to
another division of the Separate Account or to the Guaranteed Interest Division,
he or she may do so without charge, by giving written instructions to American
Franklin at its Administrative Office. At the same time, the manner in which
net premiums and deductions are allocated may be changed.
DEDUCTIONS AND CHARGES
For information regarding other charges see also "Policy Account
Transactions," below.
DEDUCTIONS FROM PREMIUMS
Any payment received by American Franklin before the Final Policy Date is
treated as a premium, unless a policy loan is outstanding and the payment is
accompanied by written instructions that it is to be applied to repayment of the
policy loan. (See "Policy Account Transactions - Repaying the Loan," below.)
The Final Policy Date is the policy anniversary nearest the Insured Person's
95th birthday. Applicable taxes and a sales expense deduction (subject to an
annual maximum deduction) are deducted from all premiums. The balance of each
premium (the net premium) is placed in the Policy Account.
All states and certain other jurisdictions (cities, counties,
municipalities) tax premium payments and some levy other charges. Taxes
currently range up to 5%. American Franklin deducts the applicable tax from
each premium payment. This is a tax to American Franklin, so the Policy Owner
cannot deduct it on his or her income tax return. The amount of the tax will
vary depending on the jurisdiction in which
15
<PAGE>
the Policy Owner resides. Since the tax is a percentage of the premium, the
amount of the tax will also vary with the amount of the premium. This deduction
for taxes will be increased or decreased to reflect any changes in the
applicable tax based on premiums. In addition, if a Policy Owner changes his or
her place of residence, the deduction will be changed to the tax rate of the new
jurisdiction. The Policy Owner should notify American Franklin if he or she
changes residence.
American Franklin makes a sales expense deduction equal to 5% of each
premium paid during any policy year until the total premiums for the policy year
equal the Target Premium. (See "Definitions," above, and "Deductions and
Charges-Surrender Charge," below, for more information concerning the Target
Premium). No sales expense deduction is made for premiums in excess of a Target
Premium paid during that policy year. During the next policy year, American
Franklin will again make a sales expense deduction equal to 5% of each premium
until total premiums paid during that policy year equal the Target Premium. A
Policy Owner can reduce aggregate sales expense deductions by concentrating
premium payments in a few policy years so that the premiums paid in each of
those years exceed a target premium. However, concentration of premium payments
during a policy's early policy years, and in particular during the first policy
year, may increase the contingent deferred sales charge that will be imposed if
the policy is surrendered or, in some instances, if the Face Amount of the
policy is reduced or the policy is permitted to lapse during the first ten
policy years. See "Deductions and Charges - Surrender Charge," below. In
addition, concentration of premium payments during the first seven policy years
can increase the likelihood that a policy will be considered a modified
endowment contract. See "Federal Tax Considerations - Policy Proceeds," below.
Sales expense deductions are made to help recover some expenses of
distributing the EquiBuilder III policies. These expenses include agents'
commissions and the printing of the EquiBuilder III prospectus and sales
literature. Sales expenses are also recovered through a contingent deferred
sales charge, which will be imposed if the policy is surrendered or, in some
instances, if the Face Amount of the policy is reduced or the policy is
permitted to lapse during the first ten policy years. The amount of sales
expense deductions and contingent deferred sales charges in any policy year is
not necessarily related to actual sales expenses in that year. See "Deductions
and Charges-Surrender Charge," and "Distribution of the Policies," below.
CHARGES AGAINST THE POLICY ACCOUNT
At the beginning of each policy month, the following charges are made
against each Policy Account. Additional charges against amounts in the Separate
Account are described under "Deductions and Charges-Charges Against the Separate
Account," below.
ADMINISTRATIVE CHARGE. The current charge is $6 per month. This charge is
designed to cover the continuing costs of maintaining the EquiBuilder III
policies, such as premium billing and collection, claim processing, policy
transactions, record keeping, communications with Policy Owners and other
expenses and overhead. This charge may be raised to reflect higher costs, but
American Franklin guarantees it will never be more than $12 per month. At the
beginning of each of the first twelve policy months that a policy is in effect,
an additional administrative charge of $24 per month will be deducted. This
charge permits American Franklin to recover the costs of issuance and placement
of the policy such as application processing, medical examinations,
establishment of policy records and underwriting costs (determining insurability
and assigning the Insured Person to a risk class).
COST OF INSURANCE CHARGE. The monthly cost of insurance is American
Franklin's current monthly cost of insurance rate multiplied by the amount at
risk at the beginning of the policy month divided by $1,000. The amount at risk
is the difference between the current death benefit and the amount in the Policy
Account. If the current death benefit for the month is increased due to the
requirements of federal tax law (see "The Features of EquiBuilder III
Policies-Death Benefits," above), the amount at risk for the month will also
increase. For this purpose the amount of each Policy Account is determined
before deduction of the cost of insurance charge but after all other charges due
on that date. The amount of the cost of insurance charge will vary from month
to month with changes in the amount at risk and with increasing age of the
Insured Person.
The cost of insurance rate is based on the sex, age and risk class of the
Insured Person and the Face Amount size band of the policy at the time of the
charge. American Franklin may change these rates from time to time, but they
will never be more than the guaranteed maximum rates set forth in a
16
<PAGE>
particular policy. The maximum charges are based on the Commissioner's 1980
Standard Ordinary Male and Female Mortality Tables. The table below shows the
current and guaranteed maximum monthly cost of insurance rates per $1,000 of
amount at risk for a male non-tobacco user at various ages. In Montana and
Massachusetts there will be no distinctions based on sex. Congress and the
legislatures of various states have from time to time considered legislation
that would require insurance rates to be the same for males and females of the
same age and risk class. In addition, employers and Employee Organizations
should consider the impact of Title VII of the Civil Rights Act of 1964 on the
purchase of an EquiBuilder III policy in connection with an employment related
insurance or benefit plan. See "Employee Benefit Plans," below. Where
required, American Franklin will provide cost of insurance charges that do not
distinguish between males and females.
ILLUSTRATIVE TABLE OF MONTHLY COST OF INSURANCE RATES FOR
MALE NON-TOBACCO (ROUNDED) PER $1,000 OF AMOUNT AT RISK
--------------------------------------------------------
<TABLE>
<CAPTION>
$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
--- ------------ ---- ------------ ----
<S> <C> <C> <C> <C>
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 .48 .88 .42
65 2.14 1.16 2.14 1.05
</TABLE>
For a male non-tobacco user, age 35, with a $100,000 Face Amount Option A
policy, an initial premium of $1,000, and a 2% premium tax, the cost of
insurance for the first month will be $10.90. This example reflects deduction
of a 5% sales expense deduction and the current administrative charges ($6 per
month plus the additional charge of $24 per month that applies for the first 12
policy months) and uses the current cost of insurance rate ($.11 per $1,000).
CHARGES FOR ADDITIONAL BENEFITS. The cost of any additional benefits will
be deducted monthly. These charges may be changed, but each policy contains
tables showing the guaranteed maximum rates for all of these insurance costs.
CHANGES IN MONTHLY CHARGES. Any changes in the cost of insurance, charges
for additional benefits or administrative charges will be by class of Insured
Person and will be based on changes in future expectations about such things as
investment earnings, mortality, the length of time policies will remain in
effect, expenses and taxes.
CHARGES AGAINST THE SEPARATE ACCOUNT
The amount in the Policy Account which is allocated to the investment
divisions of the Separate Account will be reduced proportionately by the
following fees and charges, which are allocated to the investment divisions of
the Separate Account. These fees and charges will not be made against amounts
allocated to the Guaranteed Interest Division.
MORTALITY AND EXPENSE RISKS. American Franklin makes a charge for assuming
mortality and expense risks. American Franklin guarantees that monthly
administrative and cost of insurance deductions from the Policy Account will
never be greater than the maximum amounts shown in the policy. The mortality
risk assumed is that insured persons will live for shorter periods than
estimated. When this happens, American Franklin has to pay a greater amount of
death benefit than expected in relation to the cost of insurance charges it
received. The expense risk assumed is that the cost of issuing and
administering policies will be greater than expected. American Franklin makes a
daily charge for mortality and expense risks at an effective annual rate of .75%
of the value of the assets in the Separate Account attributable to EquiBuilder
III policies. This charge is reflected in the unit values for the investment
divisions of the Separate Account. See "Policy Account Value-Determination of
Unit Value", below. If the money collected from this charge is not needed, it
will be to American Franklin's gain and may be used to cover policy distribution
expenses.
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<PAGE>
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.
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.
For managing each portfolio's investments and business affairs, each
portfolio pays Fidelity Management or MFS a monthly fee. See the Prospectuses
and Statements of Additional Information of the Funds for a description of the
way in which these fees are calculated. 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 1997 by each
portfolio, expressed as a percentage of average net assets of each portfolio:
MANAGEMENT FEES OTHER EXPENSES AFTER
AFTER EXPENSE EXPENSE TOTAL ANNUAL
REIMBURSEMENT REIMBURSEMENT EXPENSES
---------------------------------------------------------
Money Market
High Income
Investment Grade Bond
Equity-Income
Growth
Overseas
Asset Manager
Index 500
Contrafund
Asset Manager: Growth
MFS Emerging Growth
MFS Research
MFS Growth With Income
MFS Total Return
MFS Utilities
MFS Value
(1) A portion of the brokerage commissions the Fidelity portfolios paid
was used to reduce their expenses. In addition, the Fidelity portfolios 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: ____%; for Growth Portfolio: ____%,
for Overseas Portfolio: ____%; for Asset Manager Portfolio: ____%; and for
Contrafund Portfolio: ____%.
(2) Certain expenses were voluntarily reduced by the investment adviser.
Absent reimbursement, management fees, other expenses and total operating
expenses would have been ___%, ___% and ___%, respectively, for Index 500
Portfolio.
(3) Each MFS portfolio has an expense offset arrangement which reduces the
portfolios' custodian fee based upon the amount of cash maintained by the
portfolio with its custodian and dividend disbursing agent, and may enter into
other such arrangements and directed brokerage arrangements (which would also
have the effect of reducing the portfolios' expenses). Any such fee reductions
are not reflected under "Other Expenses."
(4) The investment adviser has agreed to bear expenses for each MFS
portfolio, subject to reimbursement by each portfolio, such that each
portfolio's "Other Expenses" shall not exceed 0.25% of the average daily net
assets of the portfolio during the current fiscal year. Otherwise, "Other
Expenses" and "Total Portfolio Operating Expenses" for each MFS portfolio would
be:
18
<PAGE>
TOTAL PORTFOLIO OPERATING
OTHER EXPENSES EXPENSES
MFS Emerging Growth
MFS Research
MFS Growth With Income
MFS Total Return
MFS Utilities
MFS Value
See the Prospectuses and the Statements of Additional Information of the
Funds for more information about the services provided by and the fees paid to
Fidelity Management, MFS and affiliated companies.
SURRENDER CHARGE
If a policy is totally surrendered, or, in some instances, if the Face
Amount of the policy is reduced or the policy is permitted to lapse during the
first ten policy years, a surrender charge is imposed as a means to recover
sales expenses. See "Deductions and Charges-Deductions from Premiums," above,
and "Distribution of the Policies," below. The amount of the surrender charge
will vary depending on the policy year in which the redemption occurs and the
amount of premium paid. No surrender charge will be applicable after the tenth
policy year. If during the first ten policy years a policy is not surrendered
or permitted to lapse and the Face Amount is not reduced, no surrender charge
will be incurred.
The surrender charge is a contingent deferred sales load. It is a
contingent load because it is imposed only if the Policy Owner surrenders his or
her policy (or reduces its Face Amount or lets it lapse) during the first ten
policy years. It is a deferred load because it is not deducted from premiums.
The amount of the load in a policy year is not necessarily related to actual
sales expense in that year. See "Deductions and Charges-Deductions from
Premiums," above, and "Distribution of the Policies," below.
The surrender charge is the difference between the amount in a particular
Policy Account and the Cash Surrender Value of the related policy during the
first ten policy years.
In the first ten policy years, a surrender charge will be imposed if the
Policy Owner:
totally surrenders his or her policy for its Net Cash Surrender Value;
reduces the Face Amount of his or her policy; or
lets his or her policy lapse.
Surrender charges are based on "Target" Premiums. Target Premiums are not
based on the "planned" premium the Policy Owner determines. See "The Features
Of EquiBuilder III Policies - Flexible Premium Payments." Target Premiums are
based on the age and sex of the Insured Person and the initial Face Amount of
the policy. In general, a Target Premium would equal the amount of annual
premium necessary to maintain a fixed-benefit whole life policy for the same
face amount on the life of the Insured Person.
The maximum surrender charge for a policy will be shown on the Policy
Information page of a policy and will equal 50% of one Target Premium. This
maximum will not vary based on the amount of premiums paid or when they are
paid. At the end of the sixth policy year, and at the end of each of the four
succeeding policy years, the maximum surrender charge is reduced by an amount
equal to 20% of the initial maximum surrender charge. After the end of the
tenth policy year, there is no surrender charge.
Subject to the maximum surrender charge, the surrender charge is calculated
based on actual premium payments. The surrender charge equals 25% of premium
payments made during the first policy year up to the amount of one Target
Premium and 9% of any additional premiums paid during the first ten policy
years, but not more than 50% of one Target Premium.
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<PAGE>
Paying less than one Target Premium in the first policy year will reduce
the surrender charge only if not more than approximately five Target Premiums
are paid before surrender or lapse (i.e., only if the maximum surrender charge
is not reached). However, structuring payments in this manner will increase the
risk that a policy will lapse (and that a surrender charge will be incurred that
would not have been incurred if the policy had remained in force). If payments
are structured in this manner, the amounts in the Policy Account would need to
receive favorable investment performance for the policy not to lapse. In
addition, paying less premiums may increase cost of insurance charges (which are
based on amount at risk). Attempting to structure the timing and amount of
premium payments to reduce the potential surrender charge below the maximum is
not recommended.
EXAMPLE: Assume the purchase of a $200,000 initial Face Amount policy for a
male age 40. This policy would have a Target Premium of $2,280 and a maximum
surrender charge of $1,140 ($2,280 x 50%). Also, assume that all premium
payments are made at the beginning of each policy year. The following table
shows the surrender charge which would apply under different premium payment
assumptions if surrender of the policy were to occur during the indicated policy
year:
<TABLE>
<CAPTION>
DURING YEAR PREMIUM CHARGE PREMIUM CHARGE PREMIUM CHARGE
<S> <C> <C> <C> <C> <C> <C>
1 $3,000 $ 635 $2,280 $ 570 $1,140 $ 285
2 3,000 905 2,280 775 3,420 593
3 3,000 1,140 2,280 980 2,280 790
4 3,000 1,140 2,280 1,140 2,280 1,003
5 3,000 1,140 2,280 1,140 2,280 1,140
6 3,000 1,140 2,280 1,140 2,280 1,140
7 3,000 912 2,280 912 2,280 912
8 3,000 684 2,280 684 2,280 684
9 3,000 456 2,280 456 2,280 456
10 3,000 228 2,280 228 2,280 228
</TABLE>
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 DIVIDED BY $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.
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<PAGE>
OTHER TRANSACTION CHARGES
In addition to the deductions and charges described above, fees for certain
policy transactions are charged against the Policy Account:
PARTIAL WITHDRAWAL OF NET CASH SURRENDER VALUE. There is an
administrative charge that is currently $25 or 2% of the amount withdrawn,
whichever is less, each time a partial withdrawal is made. See "Policy
Account Transactions-Withdrawing Money from the Policy Account," below.
INCREASE IN THE FACE AMOUNT OF INSURANCE. There is an administrative
charge that is currently $1.50 for each $1,000 of increase up to a maximum
charge of $300. See "The Features of EquiBuilder III Policies-Changes in
EquiBuilder III Policies," above.
TRANSFERS. If more than four transfers of Policy Account value are
made in a policy year among investment divisions, a charge of up to a
maximum of $25 for each additional transfer in that policy year may be
made. However, if all of the assets are transferred to the Guaranteed
Interest Division, no transfer charge will be imposed. See "Policy Account
Transactions-Transfers of Policy Account Value Among Investment Divisions,"
below. A request for transfer involving the simultaneous transfer of funds
from or to more than one investment division will be considered one
transfer.
ILLUSTRATIONS. If, after a policy is issued, a Policy Owner requests
more than one illustration of projected death benefits and Policy Account
and Cash Surrender Values in a policy year, a fee may be charged. See
"Illustrations of Death Benefits, Policy Account and Cash Surrender Values
and Accumulated Premiums," below.
The fees for partial withdrawals, increases in face amount and transfers are
guaranteed never to exceed the amounts stated above. See also "Deductions and
Charges-Surrender Charge," above.
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
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guaranteed minimum cash value. The value of amounts in a Policy Account
allocated to the Guaranteed Interest Division is guaranteed. See "The
Guaranteed Interest Division," below.
AMOUNTS IN THE SEPARATE ACCOUNT
Amounts allocated, transferred or added to the investment divisions of the
Separate Account are used to purchase units representing undivided interests in
the various divisions. The amount in each division is represented by the value
of the units credited to the Policy Account for that division. The number of
units purchased or redeemed in an investment division of the Separate Account is
calculated by dividing the dollar amount of the transaction by the division's
unit value next calculated at the close of business on the date of the
transaction (see "Additional Information About EquiBuilder III Policies-Policy
Periods, Anniversaries, Dates and Ages," below, regarding the date that the net
amount of the initial premium is credited to the Policy Account and interim
allocation of the initial net premium and any other net premium received prior
to the time that 15 days have elapsed after the Issue Date, and see "Policy
Account Transactions" and "The Guaranteed Interest Division-Transfers from the
Guaranteed Interest Division," below, regarding the effective dates of Policy
Account transactions). The number of units for an investment division at any
time is the number of units purchased less the number of units redeemed. The
value of units fluctuates with the investment performance of the corresponding
portfolio of a Fund, which reflects the investment income and realized and
unrealized capital gains and losses of the portfolio and the Fund's expenses.
The unit values also reflect charges American Franklin makes against the
Separate Account. The number of units credited to a Policy Account, however,
will not vary because of changes in unit values. On any given day, the value a
Policy Account has in an investment division of the Separate Account is the unit
value times the number of units credited to the Policy Account in that division.
The units of each investment division of the Separate Account have different
unit values.
Units of an investment division are purchased when the Policy Owner
allocates premiums, repays loans or transfers amounts to that division. Units
are redeemed or sold when the Policy Owner makes withdrawals or transfers
amounts from an investment division of the Separate Account (including transfers
for loans) and to pay the death benefit when the Insured Person dies. American
Franklin also redeems units for monthly charges or other charges from the
Separate Account.
DETERMINATION OF THE UNIT VALUE
American Franklin determines unit values for each investment division of
the Separate Account at the end of each business day. Generally, a business day
is any day American Franklin is open and the New York Stock Exchange is open for
trading. American Franklin will not process any policy transactions as of any
day that is not a business day other than to issue a policy anniversary report,
make monthly charge deductions and pay the death benefit under a policy. For
purposes of receiving Policy Owner requests, American Franklin is open from 8:00
a.m. to 3:00 p.m., Springfield, Illinois time. 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
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.00002063, which is an effective annual rate of .75%. This charge is for
mortality and expense risks assumed by American Franklin under the policy;
Finally, any daily charge for taxes or amounts set aside as a reserve
for taxes is subtracted.
Generally, this means that unit values are adjusted to reflect what happens
to the Funds, and also for the mortality and expense risk charge and any charge
for taxes.
POLICY ACCOUNT TRANSACTIONS
The transactions described below may have different effects on the Policy
Account, death benefit, Face Amount or cost of insurance. The Policy Owner
should consider the net effects before combining Policy Account transactions.
See "The Features of EquiBuilder III Policies-Changes in EquiBuilder III
Policies," above. Certain transactions also entail charges. For information
regarding other charges, see "Deductions And Charges," above.
CHANGING PREMIUM AND DEDUCTION ALLOCATION PERCENTAGES
A Policy Owner may change the allocation percentages of his or her net
premiums or of his or her monthly deductions by giving instructions to American
Franklin at its Administrative Office. These changes will go into effect as of
the date American Franklin receives the request at its Administrative Office and
will affect transactions on and after that date.
TRANSFERS OF POLICY ACCOUNT VALUE AMONG INVESTMENT DIVISIONS
A Policy Owner may transfer amounts from any investment division of the
Separate Account to any other investment division of the Separate Account or to
the Guaranteed Interest Division. A Policy Owner may make up to four transfers
of Policy Account value among investment divisions of the Separate Account in
each policy year without charge. Depending on the overall cost of performing
these transactions, American Franklin may charge up to a current maximum of $25
for each additional transfer, except that no charge will be imposed for a
transfer of all amounts in the investment divisions of the Separate Account to
the Guaranteed Interest Division. If all amounts are in the Guaranteed Interest
Division, the policy will not vary for investment experience. To make a
transfer, the Policy Owner should give instructions to American Franklin at its
Administrative Office.
If a charge is imposed for making a transfer, American Franklin will
allocate the charge as described under "Deductions And Charges-Allocation of
Policy Account Charges," above. All simultaneous transfers included in one
transfer request count as one transfer for purposes of any fee.
A transfer from an investment division of the Separate Account will take
effect as of the date American Franklin receives instructions to make the
transfer. The minimum amount American Franklin will transfer on any date will
be shown on the Policy Information page in each policy and is usually $500.
This minimum need not come from any one investment division or be transferred to
any one investment division as long as the total amount transferred that day
equals or exceeds the minimum. However, American Franklin will transfer the
entire amount in any investment division of the Separate Account even if it is
less than the minimum specified in a policy. Policy Owners should note that
future premiums will continue to be allocated to investment divisions of the
Separate Account or the Guaranteed Interest Division in accordance with existing
allocations unless instructions are also given with respect to changing them.
Special rules apply to transfers from the Guaranteed Interest Division.
See "The Guaranteed Interest Division-Transfers From The Guaranteed Interest
Division," below.
BORROWING FROM THE POLICY ACCOUNT
At any time that a policy has a Net Cash Surrender Value, the Policy Owner
may borrow money from American Franklin using only his or her policy as security
for the loan. The maximum aggregate amount that will be loaned is equal to 90%
of the Cash Surrender Value of the policy on the date the request for 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.
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Any amount that secures a loan remains part of the Policy Account but is
assigned to the Guaranteed Interest Division. This loaned amount earns
interest at a rate that American Franklin expects will be different from the
interest rate for unloaned amounts in the Guaranteed Interest Division. See
"Federal Tax Considerations-Policy Proceeds," below, with respect to the
federal income tax consequences of a loan.
LOAN REQUESTS
Requests for loans should be made to American Franklin at its
Administrative Office. The Policy Owner may specify how much of the loan should
be taken from the unloaned amount, if any, of his or her Policy Account
allocated to the Guaranteed Interest Division and how much should be taken from
the amounts allocated to the investment divisions of the Separate Account. If a
loan is requested from an investment division of the Separate Account, American
Franklin will redeem units sufficient to cover that part of the loan and
transfer the amount to the loaned portion of the Guaranteed Interest Division.
The amounts in each division will be determined as of the day American Franklin
receives the request for a loan at its Administrative Office.
If the Policy Owner does not specify how to allocate a loan, the loan will
be allocated according to the Policy Owner's deduction allocation percentages.
If the loan cannot be allocated based on these percentages, American Franklin
will allocate it based on the proportions of the unloaned amount, if any, of the
Policy Owner's Policy Account allocated to the Guaranteed Interest Division and
the respective amounts allocated to each investment division of the Separate
Account to the unloaned value of the Policy Account.
POLICY LOAN INTEREST
Interest on a policy loan accrues daily at an adjustable interest rate.
American Franklin determines the rate at the beginning of each policy year. The
same rate applies to any outstanding policy loans and any new amounts borrowed
during the year. American Franklin will notify the Policy Owner of the current
rate when a loan is requested. American Franklin determines loan rates as
follows. The maximum rate is the greater of:
5-1/2% ; or
the "Published Monthly Average" for the calendar month that ends two
months before the interest rate is set. The "Published Monthly Average" is
the Monthly Average Corporates yield shown in Moody's Corporate Bond Yield
Averages published by Moody's Investor Services, Inc.
If this average is no longer published, American Franklin will use any
successor or the average established by the insurance supervisory official of
the jurisdiction in which the policy is delivered. American Franklin will not
charge more than the maximum rate permitted by applicable law. American
Franklin may also set a rate lower than the maximum.
Any change in the rate from one year to the next will be at least 1/2 of
1%. The current loan interest rate will only change, therefore, if the
Published Monthly Average differs from the previous loan interest rate by at
least 1/2 of 1%. American Franklin will give advance notice of any increase in
the interest rate on any loans outstanding.
WHEN INTEREST IS DUE
Interest is due on each policy anniversary. If interest is not paid when
it is due, it will be added to the outstanding loan and allocated based on the
deduction allocation percentages for the Policy Account then in effect. This
means American Franklin makes an additional loan to pay the interest and
transfers amounts from the investment divisions of the Separate Account and the
unloaned portion of the Guaranteed Interest Division to make the loan. If
American Franklin cannot allocate the interest based on these percentages, it
will allocate it as described above for allocating the loan.
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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, provided that any loan repayment
currently must be at least $100 (unless the amount of the outstanding loan and
loan interest is less than $100). While a policy loan is outstanding, American
Franklin will apply all amounts it receives in respect of that policy as a
premium unless the payment is accompanied by written instructions that it is to
be applied to repayment of the policy loan.
American Franklin will first allocate loan repayments to the Guaranteed
Interest Division until the amount of any loans originally allocated to that
division is repaid. For example, if a Policy Owner borrowed $500 from the
Guaranteed Interest Division and $500 from the Equity-Income Division, no
repayments may be allocated to the Equity-Income Division until the $500
borrowed from the Guaranteed Interest Division is repaid. After this amount has
been repaid, the Policy Owner may specify how subsequent repayments should be
allocated. If the Policy Owner does not give instructions, American Franklin
will allocate repayments based on current premium allocation percentages at the
time repayment is made.
THE EFFECTS OF A POLICY LOAN ON THE POLICY ACCOUNT
A loan against a policy will have a permanent effect on the value of the
Policy Account and, therefore, on benefits under the policy, even if the loan is
repaid. When a loan is made against a policy, the amount of the loan is set
aside in the Guaranteed Interest Division where it earns a declared rate for
loaned amounts. The loan amount will not be available for investment in the
investment divisions of the Separate Account or in the unloaned portion of the
Guaranteed Interest Division.
The interest rate credited to 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. The interest rate for loaned
amounts in all years in the Guaranteed Interest Division will never be less
than 4-1/2%. Currently, (1) for the first ten policy years, it will be 2%
less than the interest rate charged on the loan, minus any charge for taxes
or reserves for taxes, and (2) after the tenth policy year, (a) the interest
rate applied to Preferred Loan amounts (as defined in the following
paragraph) in the Guaranteed Interest Division will be equal to the interest
rate charged on the loan, minus any charge for taxes or reserves for taxes
and (b) the interest rate for other loaned amounts in the Guaranteed Interest
Division will be as set forth in clause (1) above. Each month, this interest
is added to unloaned amounts of the Policy Account in the Guaranteed Interest
Division.
"Preferred Loans" are policy loans made after the tenth policy year
which do not exceed a specified percentage of the Cash Surrender Value. The
following table shows the maximum amount eligible for Preferred Loans for the
applicable policy year:
Policy Year Maximum Amount Eligible for Preferred Loans as a
Percentage of the Cash Surrender Value
11 10%
12 20%
13 30%
14 40%
15 50%
16 60%
17 70%
18 80%
19 and thereafter 90%
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
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affected by any increases or decreases in the value of units in the Money Market
Division. However, the $1,000 earns interest at a declared interest rate.
LAPSE OF THE POLICY
A policy loan may also affect the amount of time that the insurance
provided by a policy remains in force. For example, a policy may lapse more
quickly when a loan is outstanding because the loaned amount cannot be used to
cover the monthly charges that are made against the Policy Account. If these
charges exceed the Net Cash Surrender Value of the policy, then the lapse
provisions of the policy will apply. Since the policy permits loans up to 90%
of the Cash Surrender Value, additional premium payments may be required to keep
the policy in force if the maximum amount is borrowed. For more information
about these provisions, see "Additional Information About EquiBuilder III
Policies-Lapse of the Policy," below.
WITHDRAWING MONEY FROM THE POLICY ACCOUNT
After a policy has been in effect for a year, the Policy Owner may request
a partial withdrawal of the Net Cash Surrender Value by making a written request
to American Franklin at its Administrative Office. Any withdrawal is subject to
certain conditions. It must:
be at least $500;
not cause the death benefit to fall below the minimum for which
American Franklin would issue the policy at the time (see "Policy Account
Transactions-The Effects of a Partial Withdrawal," below); and
not cause the policy to fail to qualify as life insurance under
applicable tax law.
The Policy Owner may specify how much of the withdrawal he or she
wants taken from each investment division. If no instructions are given,
American Franklin will make the withdrawal on the basis of the then current
deduction allocation percentages. If American Franklin cannot withdraw the
amount based on the Policy Owner's directions or on the deduction
allocation percentages, American Franklin will withdraw the amount based on
the proportions of the unloaned amount, if any, of the Policy Account
allocated to the Guaranteed Interest Division and the respective amounts
allocated to the investment divisions of the Separate Account to the total
unloaned value of the Policy Account. For example, if 50% of a Policy
Account is in the Guaranteed Interest Division and 50% is in the Money
Market Division and the Policy Owner wants to withdraw $1,000, American
Franklin would take $500 from each division.
WITHDRAWAL CHARGES
When a partial withdrawal of Net Cash Surrender Value is made, a current
expense charge of $25 or 2% of the amount withdrawn, whichever is less, will be
charged against the Policy Account. This charge will be allocated equally among
the divisions from which the withdrawal was made. If the charge cannot be
allocated in this manner, it will be allocated as described under "Deductions
And Charges-Allocation of Policy Account Charges," above.
THE EFFECTS OF A PARTIAL WITHDRAWAL
A partial withdrawal of Net Cash Surrender Value reduces the amount in the
Policy Account. It also reduces the Cash Surrender Value and the death benefit
on a dollar-for-dollar basis. If the death benefit based on a percentage
multiple applies, the reduction in death benefit can be greater. See "The
Features of EquiBuilder III Policies-Death Benefits," above. If death benefit
Option A is selected, the Face Amount of the policy will also be reduced so
there will be no change in the amount at risk. No pro rata surrender charge
will be deducted in connection with a reduction in Face Amount made in
connection with a partial withdrawal of Net Cash Surrender Value. An
endorsement will be sent to the Policy Owner to reflect this change. The Policy
Owner may be asked to return the policy to American Franklin's Administrative
Office to make a change. A partial withdrawal will not affect the Face Amount
of the policy if death benefit Option B is in effect. The withdrawal and these
reductions will be effective as of the date American Franklin receives the
request at its Administrative Office. See "Federal Tax
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Considerations-Tax Treatment of Policy Benefits," 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. See "Federal Tax
Considerations - Tax Treatment of Policy Benefits," below, for the tax
consequences of a surrender.
THE GUARANTEED INTEREST DIVISION
A Policy Owner may allocate some or all of a Policy Account to the
Guaranteed Interest Division, which is part of American Franklin's General
Account and pays interest at a declared rate guaranteed by American Franklin for
each policy year. The principal, after charges, is also guaranteed by American
Franklin. The General Account supports American Franklin's insurance and
annuity obligations. Because of applicable exemptive and exclusionary
provisions, interests in the Guaranteed Interest Division have not been
registered under the Securities Act of 1933, and neither the Guaranteed Interest
Division nor the General Account has been registered as an investment company
under the Investment Company Act of 1940. Accordingly, neither the General
Account, the Guaranteed Interest Division nor any interests therein are
generally subject to regulation under the 1933 Act or the 1940 Act. American
Franklin has been advised that the staff of the Securities and Exchange
Commission has not made a review of the disclosures which are included in this
Prospectus which relate to the General Account and the Guaranteed Interest
Division. These disclosures, however, may be subject to certain generally
applicable provisions of the federal securities law relating to the accuracy and
completeness of statements made in a prospectus.
AMOUNTS IN THE GUARANTEED INTEREST DIVISION
A Policy Owner may accumulate amounts in the Guaranteed Interest Division
by:
allocating net premiums and loan repayments;
transferring amounts from the investment divisions of the Separate
Account; or
earning interest on amounts already allocated to the Guaranteed
Interest Division.
The amount allocated to the Guaranteed Interest Division at any time is the
sum of all net premiums and loan repayments allocated to that division and all
transfers and earned interest, and includes amounts securing any policy loan
outstanding. This amount is reduced by amounts transferred or withdrawn from
and charges allocated to this division.
INTEREST ON AMOUNTS IN THE GUARANTEED INTEREST DIVISION
American Franklin pays a declared interest rate on all amounts in the
Guaranteed Interest Division. At policy issuance and prior to each policy
anniversary, American Franklin declares the rates that will apply to amounts in
the Guaranteed Interest Division for the following policy year. Different rates
are paid on unloaned and loaned amounts in the Guaranteed Interest Division.
These annual interest rates will never be less than the minimum guaranteed
interest rate of 4-1/2%. Interest is compounded daily at an effective annual
rate that equals the declared rate for each policy year.
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At the end of each policy month, American Franklin will credit interest to
amounts in the Guaranteed Interest Division in the following way:
amounts in the Guaranteed Interest Division during the entire policy
month are credited with interest from the beginning to the end of the
month;
amounts added to the Guaranteed Interest Division during the month
from net premiums or loan repayments are credited with interest from the
date American Franklin receives them. The only exception to this rule
applies to the initial net premium payment. American Franklin will
allocate the initial net premium to the Money Market division until 15 days
after the Issue Date (any other net premium received during this period
will be allocated in the same way), and will then allocate the amounts in
the Policy Account to the Guaranteed Interest Division and the investment
divisions of the Separate Account in accordance with the Policy Owner's
premium allocation percentages. See "Additional Information About
EquiBuilder III-Policy Periods, Anniversaries, Dates and Ages," below;
amounts transferred to the Guaranteed Interest Division are credited
with interest from the date of the transfer to the end of the month; and
amounts charged against or withdrawn from the Guaranteed Interest
Division are credited with interest from the beginning of the policy month
to the date of the charge or withdrawal.
Interest credited to any loaned amounts in the Guaranteed Interest Division
is allocated to the unloaned portion of the Guaranteed Interest Division.
TRANSFERS FROM THE GUARANTEED INTEREST DIVISION
A Policy Owner may request a transfer of unloaned amounts in the Guaranteed
Interest Division to one or more of the investment divisions of the Separate
Account. American Franklin will make the transfer as of the date a written
request for transfer is received, provided that the request is received within
30 days after a policy anniversary. The maximum amount that may be transferred
is the greater of 25% of the unloaned value in the Guaranteed Interest Division
on the date the transfer takes effect or the minimum transfer amount shown in
the policy when it is issued. The smallest amount that may be transferred is
the lesser of the unloaned value in the Guaranteed Interest Division on the date
the transfer takes effect or the minimum transfer amount shown in the policy.
ADDITIONAL INFORMATION ABOUT EQUIBUILDER III POLICIES
RIGHT TO EXAMINE THE POLICY
Each Policy Owner has a right to examine the policy. If for any reason the
Policy Owner is not satisfied with it, he or she may cancel the policy within
the time limits described below. The Policy Owner may cancel the policy by
sending it with a written request to cancel to American Franklin's
Administrative Office.
A request to cancel the policy must be postmarked no later than the
latest of the following three dates:
10 days after the Policy Owner receives his or her policy;
10 days after American Franklin mails the Policy Owner a written
notice disclosing the right to cancel (Notice of Withdrawal Right); or
45 days after the Policy Owner signs Part 1 of the policy application.
If the Policy Owner cancels the policy, American Franklin will, within
seven days of receipt of the policy and a duly executed, timely notice of
cancellation, refund an amount equal to the premiums paid.
Insurance coverage ends when a Policy Owner sends a request for
cancellation.
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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.
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 3:00 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
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the policy are first made as of the Register Date. See "The Features of
EquiBuilder III Policies-Death Benefits," above, regarding the commencement of
insurance coverage.
The Final Policy Date is the policy anniversary nearest the Insured
Person's 95th birthday. The policy ends on that date if the Insured Person is
still alive and the maturity benefit is paid.
Generally, references in this Prospectus to the age of the Insured Person
refer to his or her age on the birthday nearest to that particular date.
FEDERAL TAX CONSIDERATIONS
INTRODUCTION
The following summary provides a general description of the federal income
tax considerations associated with your purchase of the Policy and does not
purport to be complete or to cover all situations. American Franklin advises
that counsel or other competent tax advisors should be consulted for more
complete information. This discussion is based upon American Franklin's
understanding of the present federal income tax laws as they are currently
interpreted by the Internal Revenue Service (the "Service"). No representation
is made as to the likelihood of continuation of the present federal income tax
laws or of the current interpretations by the Service.
TAX STATUS OF THE POLICY
Code section 7702 sets forth the definition of a life insurance contract
for federal tax purposes. The Secretary of the Treasury (the "Treasury") is
authorized to prescribe regulations implementing section 7702. While proposed
regulations and other interim guidance has been issued, final regulations have
not been adopted. In short, guidance as to how section 7702 is to be adopted is
limited. If a Policy were determined not to be a life insurance contract for
purposes of section 7702, such Policy would not qualify for the favorable tax
treatment normally provided to a life insurance policy.
With respect to a Policy issued on the basis of a standard rate class,
American Franklin believes (largely in reliance on IRS Notice 88-128 and the
proposed regulations under section 7702, issued on July 5, 1991) that such a
Policy should meet the section 7702 definition of a "life insurance contract."
With respect to a policy that is issued on a substandard basis (i.e., a premium
class involving higher than standard mortality risk), there is less guidance, in
particular as to how the mortality and other expense requirements of section
7702 should be applied in determining whether such a policy meets the section
7702 definition of a life insurance contract. If it is subsequently determined
that a policy does not satisfy section 7702, American Franklin may take whatever
steps are appropriate and necessary to attempt to cause such a Policy to comply
with section 7702. For these reasons, American Franklin reserves the right to
restrict Policy transactions as necessary to attempt to continue its
qualification as a life insurance contract under section 7702.
In addition to the definitional test described above, section 817(h)
mandates that the investments of the Separate Account must be "adequately
diversified" in accordance with Treasury regulations in order for the Policy to
qualify as a life insurance contract under section 7702 of the Code. The
Separate Account, through the Funds, intends to comply with the diversification
requirements prescribed in Treas. Reg. Section 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 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
30
<PAGE>
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. Moreover, in recent years, Congress has adopted new rules relating
to corporate owned life insurance. Any business contemplating the purchase of a
new life insurance contract or a change in an existing contract should consult a
tax advisor.
The following discussion assumes that the policy will qualify as a life
insurance contract for federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
IN GENERAL. American Franklin believes that the proceeds and cash value
increases of a Policy should be treated in a manner consistent with a
flexible-benefit life insurance policy for federal income tax purposes. Thus,
the Death Benefit under the Policy should be excludable from the gross income of
the Beneficiary under Code section 101(a)(1).
Depending on the circumstances, the exchange of a Policy, a change in the
Policy's death benefit option (i.e., a change from option A to option B or vice
versa), a policy loan, a withdrawal, a surrender, or an assignment of the Policy
may have federal income tax consequences. In addition, federal, state and local
transfer, and other tax consequences of ownership or receipt of Policy proceeds
depend on the circumstances of each Policy Owner or Beneficiary.
Generally, the Policy Owner will not be deemed to be in constructive
receipt of the Policy Account, including increments thereof, until there is a
distribution. The tax consequences of distributions from, and loans taken from
or secured by a Policy, depend on whether the Policy is classified as a
"Modified Endowment Contract." Whether a Policy is or is not a modified
endowment contract, upon a complete surrender or lapse of a Policy, or when
benefits are paid at such a Policy's maturity, if the amounts received plus the
amount of indebtedness exceeds the total investment in the Policy the excess
will generally be treated as ordinary income subject to tax.
MODIFIED ENDOWMENT CONTRACTS. Code section 7702A establishes a class of life
insurance contracts designated as "Modified Endowment Contracts," which applies
to Policies entered into or materially changed after June 20, 1988.
Due to the Policy's flexibility, classification as a Modified Endowment
Contract will depend on the individual circumstances of each Policy. In
general, a Policy will be a Modified Endowment Contract if the accumulated
premiums paid at any time during the first seven policy years exceeds the sum of
the net level premiums which would have been paid on or before such time if the
Policy provided for paid-up future benefits after the payment of seven level
annual premiums. The determination of whether a policy will be a Modified
Endowment Contract after a material change generally depends upon the
relationship of the death benefit and Policy Account at the time of such change
and the additional
31
<PAGE>
premiums paid in the seven years following the material change. A reduction in
a policy's death benefit may also cause a policy to be treated as a Modified
Endowment Contract.
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 cause 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.
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).
32
<PAGE>
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.
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 (___% of aggregate average daily net assets is assumed) and direct
expenses of the Funds (estimated at ___% 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 ____%, on 4% it would be ___%, on 8% it would be ___%
and on 12% it would be _____%. Management fees and direct expenses of the
Funds vary by portfolio and may vary from year to year. During 1997 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
33
<PAGE>
a portion of the brokerage commissions paid by certain portfolios to reduce
their total expenses. Each MFS portfolio has an expense offset arrangement
which reduces the portfolios' custodian fee, and the investment adviser has
agreed to bear expenses for each MFS portfolio such that certain expenses shall
not exceed a specified percentage of average net assets. Such arrangements,
which may be terminated at any time without notice, will increase a portfolio's
yield.
The tables reflect a deduction from each premium for taxes (a 2% deduction
is assumed) and a sales expense deduction in the amount of 5% of each premium
paid during any policy year until total premiums for that policy year equal the
Target Premium. There are tables for both Death Benefit Option A and Death
Benefit Option B and each option is illustrated using current and guaranteed
policy cost factors. The current cost tables assume that the monthly
administrative charge remains constant at $6. The guaranteed tables assume that
the monthly administrative charge is $6 in the first year and $12 thereafter.
In each case, deduction of the current additional monthly administrative charge
of $24 per month to cover costs of establishing a policy is assumed in each of
the first 12 policy months. The tables reflect the fact that no deduction is
currently made for federal or state income taxes. If a charge is made for those
taxes in the future, it will take a higher rate of return to produce after-tax
returns of 0%, 4%, 8% or 12%. All illustrations assume that no transfers,
withdrawals, policy loans, or changes in Face Amount or Death Benefit Option
will be made and that no additional benefits are added to the policy.
The second column of each table shows what would happen if an amount equal
to the gross premiums were invested to earn interest, after taxes, of 5%
compounded annually. These tables show that if a policy is surrendered in its
very early years for payment of its Cash Surrender Value, that Cash Surrender
Value will be low in comparison to the amount of the premiums accumulated with
interest. Thus, the cost of owning a policy for a relatively short time will be
high.
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
<TABLE>
<CAPTION>
INITIAL FACE AMOUNT $200,000 MALE NON-TOBACCO
PREMIUM PAGE
<S> <C> <C>
Age 40, Option A-Current Charges $3,000 35
Age 40, Option A-Guaranteed Charges $3,000 35
Age 40, Option B-Current Charges $3,000 36
Age 40, Option B-Guaranteed Charges $3,000 36
INITIAL FACE AMOUNT $100,000 MALE NON-TOBACCO
PREMIUM PAGE
Age 40, Option A-Current Charges $1,500 37
Age 40, Option A-Guaranteed Charges $1,500 37
Age 40, Option B-Current Charges $1,500 38
Age 40, Option B-Guaranteed Charges $1,500 38
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
EquiBuilder III -TM- 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
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
2 6,458
3 9,930
4 13,577
5 17,406
6 21,426
7 25,647
8 30,080
9 34,734
10 39,620
11 44,751
12 50,139
13 55,796
14 61,736
15 67,972
16 74,521
17 81,397
18 88,617
19 96,198
20 104,158
25(Age 65) 150,340
</TABLE>
<TABLE>
<CAPTION>
EquiBuilder III 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
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
2 6,458
3 9,930
4 13,577
5 17,406
6 21,426
7 25,647
8 30,080
9 34,734
10 39,620
11 44,751
12 50,139
13 55,796
14 61,736
15 67,972
16 74,521
17 81,397
18 88,617
19 96,198
20 104,158
25(Age 65) 150,340
</TABLE>
(1) Assumes net interest of 5% compounded annually.
(2) Assumes no policy loan has been made.
The death benefits and Policy Account and Cash Surrender Values will differ if
premiums are paid in different amounts or frequencies.
It is emphasized that the hypothetical investment results are illustrative only
and should not be deemed a representation of past or future investment results.
Actual investment results may be more or less than those shown. The death
benefits and Policy Account and Cash Surrender Values for a policy would be
different from those shown if actual rates of investment return applicable to
the policy averaged 0%, 4%, 8% or 12% over a period of years, but also
fluctuated above or below that average for individual policy years. The death
benefits and Policy Account and Cash Surrender Values for a policy would also be
different from those shown, depending on the investment allocations made to the
investment divisions of the Separate Account and the different rates of return
of the Funds' portfolios, if the actual rates of investment return applicable to
the policy averaged 0%, 4%, 8% and 12%, but varied above or below that average
for individual divisions. No representations can be made that these
hypothetical rates of return can be achieved for any one year or sustained over
any period of time.
35
<PAGE>
EquiBuilder III -TM- Flexible Premium Variable Life Insurance
The American Franklin Life Insurance Company
<TABLE>
<CAPTION>
INITIAL FACE AMOUNT $200,000 MALE AGE 40 NON-TOBACCO PLANNED PREMIUM $3,000
DEATH BENEFIT OPTION B ASSUMING CURRENT CHARGES
Insurance Benefit(2) Policy Account(2) Cash Surrender Value (2)
Last Day Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross
of Annual Investment Return of Annual Investment Return of Annual Investment Return of
Policy Accumulated
Year Premiums (1) 0% 4% 8% 12% 0% 4% 8% 12% 0% 4% 8% 12%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 3,150
3 9,930
4 13,577
5 17,406
6 21,426
7 25,647
8 30,080
9 34,734
10 39,620
11 44,751
12 50,139
13 55,796
14 61,736
15 67,972
16 74,521
17 81,397
18 88,617
19 96,198
20 104,158
25(Age 65) 150,340
</TABLE>
<TABLE>
<CAPTION>
EquiBuilder III -TM-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
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
2 6,458
3 9,930
4 13,577
5 17,406
6 21,426
7 25,647
8 30,080
9 34,734
10 39,620
11 44,751
12 50,139
13 55,796
14 61,736
15 67,972
16 74,521
17 81,397
18 88,617
19 96,198
20 104,158
25(Age 65) 150,340
</TABLE>
(1) Assumes net interest of 5% compounded annually.
(2) Assumes no policy loan has been made.
The death benefits and Policy Account and Cash Surrender Values will differ if
premiums are paid in different amounts or frequencies.
It is emphasized that the hypothetical investment results are illustrative only
and should not be deemed a representation of past or future investment results.
Actual investment results may be more or less than those shown. The death
benefits and Policy Account and Cash Surrender Values for a policy would be
different from those shown if actual rates of investment return applicable to
the policy averaged 0%, 4%, 8% or 12% over a period of years, but also
fluctuated above or below that average for individual policy years. The death
benefits and Policy Account and Cash Surrender Values for a policy would also be
different from those shown, depending on the investment allocations made to the
investment divisions of the Separate Account and the different rates of return
of the Funds' portfolios, if the actual rates of investment return applicable to
the policy averaged 0%, 4%, 8% and 12%, but varied above or below that average
for individual divisions. No representations can be made that these
hypothetical rates of return can be achieved for any one year or sustained over
any period of time.
36
<PAGE>
<TABLE>
<CAPTION>
EquiBuilder III-TM-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
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
2 3,229
3 4,965
4 6,788
5 8,703
6 10,713
7 12,824
8 15,040
9 17,367
10 19,810
11 22,376
12 25,069
13 27,898
14 30,868
15 33,986
16 37,261
17 40,699
18 44,309
19 48,099
20 52,079
25(Age 65) 75,170
</TABLE>
<TABLE>
<CAPTION>
EquiBuilder III -TM-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 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
2 3,229
3 4,965
4 6,788
5 8,703
6 10,713
7 12,824
8 15,040
9 17,367
10 19,810
11 22,376
12 25,069
13 27,898
14 30,868
15 33,986
16 37,261
17 40,699
18 44,309
19 48,099
20 52,079
25(Age 65) 75,170
</TABLE>
(1) Assumes net interest of 5% compounded annually.
(2) Assumes no policy loan has been made.
The death benefits and Policy Account and Cash Surrender Values will differ if
premiums are paid in different amounts or frequencies.
It is emphasized that the hypothetical investment results are illustrative only
and should not be deemed a representation of past or future investment results.
Actual investment results may be more or less than those shown. The death
benefits and Policy Account and Cash Surrender Values for a policy would be
different from those shown if actual rates of investment return applicable to
the policy averaged 0%, 4%, 8% or 12% over a period of years, but also
fluctuated above or below that average for individual policy years. The death
benefits and Policy Account and Cash Surrender Values for a policy would also be
different from those shown, depending on the investment allocations made to the
investment divisions of the Separate Account and the different rates of return
of the Funds' portfolios, if the actual rates of investment return applicable to
the policy averaged 0%, 4%, 8% and 12%, but varied above or below that average
for individual divisions. No representations can be made that these
hypothetical rates of return can be achieved for any one year or sustained over
any period of time.
37
<PAGE>
<TABLE>
<CAPTION>
EquiBuilder III-TM- 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
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
2 3,229
3 4,965
4 6,788
5 8,703
6 10,713
7 12,824
8 15,040
9 17,367
10 19,810
11 22,376
12 25,069
13 27,898
14 30,868
15 33,986
16 37,261
17 40,699
18 44,309
19 48,099
20 52,079
25(Age 65) 75,170
</TABLE>
<TABLE>
<CAPTION>
EquiBuilder III -TM-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
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
2 3,229
3 4,965
4 6,788
5 8,703
6 10,713
7 12,824
8 15,040
9 17,367
10 19,810
11 22,376
12 25,069
13 27,898
14 30,868
15 33,986
16 37,261
17 40,699
18 44,309
19 48,099
20 52,079
25(Age 65) 75,170
</TABLE>
(1) Assumes net interest of 5% compounded annually.
(2) Assumes no policy loan has been made.
The death benefits and Policy Account and Cash Surrender Values will differ if
premiums are paid in different amounts or frequencies.
It is emphasized that the hypothetical investment results are illustrative only
and should not be deemed a representation of past or future investment results.
Actual investment results may be more or less than those shown. The death
benefits and Policy Account and Cash Surrender Values for a policy would be
different from those shown if actual rates of investment return applicable to
the policy averaged 0%, 4%, 8% or 12% over a period of years, but also
fluctuated above or below that average for individual policy years. The death
benefits and Policy Account and Cash Surrender Values for a policy would also be
different from those shown, depending on the investment allocations made to the
investment divisions of the Separate Account and the different rates of return
of the Funds' portfolios, if the actual rates of investment return applicable to
the policy averaged 0%, 4%, 8% and 12%, but varied above or below that average
for individual divisions. No representations can be made that these
hypothetical rates of return can be achieved for any one year or sustained over
any period of time.
38
<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
39
<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
40
<PAGE>
in the application for the change) if it appears that the Insured Person is not
actually covered by the policy under American Franklin's rules. However, there
are some limits on how and when American Franklin can challenge the policy.
Except on the basis of fraud, American Franklin cannot challenge the policy
after it has been in effect, during the Insured Person's lifetime, for two years
from the date the policy was issued or reinstated. (Some states may require
this time to be measured in some other way.)
Except on the basis of fraud, American Franklin cannot challenge any policy
change that requires evidence of insurability (such as an increase in Face
Amount) after the change has been in effect for two years during the Insured
Person's lifetime.
American Franklin can challenge at any time (and require proof of
continuing disability) an additional benefit that provides benefits to the
Insured Person in the event that the Insured Person becomes totally disabled.
If the Insured Person dies within the time that the validity of the policy
may be challenged, American Franklin may delay payment until it decides whether
to challenge the policy.
If the Insured Person's age or sex is misstated on any application, the
death benefit and any additional benefits provided will be those which would
have been purchased by the most recent deduction for the cost of insurance and
the cost of any additional benefits at the Insured Person's correct age and sex.
If the Insured Person commits suicide within two years after the date on
which the policy was issued or reinstated, the death benefit will be limited to
the total of all premiums that have been paid to the time of death minus the
amount of any outstanding policy loan and loan interest and minus any partial
withdrawals of Net Cash Surrender Value. If the Insured Person commits suicide
within two years after the effective date of an increase in death benefit that
the Policy Owner requested, American Franklin will pay the death benefit which
was in effect before the increase, plus the monthly cost of insurance deductions
for the increase (including the expense charge). (Some states require this time
to be measured by some other date.)
PAYMENT OPTIONS
Policy benefits or other payments such as the Net Cash Surrender Value or
death benefit may be paid immediately in one sum or another form of payment
described below may be designated for all or part of the proceeds. Payments
under these options are not affected by the investment experience of any
investment division of the Separate Account. Instead, interest accrues pursuant
to the options chosen (such interest will be appropriately includable in federal
gross income of the beneficiary). If the Policy Owner does not arrange for a
specific form of payment before the Insured Person dies, the beneficiary will
have his choice. However, if the Policy Owner makes an arrangement for payment
of the money, the beneficiary cannot change that choice after the Insured Person
dies. Payment Options will also be subject to American Franklin's rules at the
time of selection. Currently, these alternate payment options are only
available if the proceeds applied are $1,000 or more and any periodic payment
will be at least $20.
The following payment options are generally available:
INCOME PAYMENTS FOR A FIXED PERIOD: American Franklin will pay the
amount applied in equal installments (including applicable interest) for a
specific number of years, for up to 30 years.
LIFE INCOME WITH PAYMENTS GUARANTEED FOR A FIXED TERM OF YEARS:
American Franklin will pay the money at agreed intervals as a definite
number of equal payments and as long thereafter as the payee lives. The
Policy Owner (or beneficiary in some cases) may choose any one of four
definite periods: 5, 10, 15 or 20 years.
PROCEEDS AT INTEREST: The money will stay on deposit with American
Franklin while the payee is alive. Interest will accrue on the money at a
declared interest rate, and interest will be paid at agreed upon intervals.
41
<PAGE>
FIXED AMOUNT: American Franklin will pay the sum in installments in a
specified amount. Installments will be paid until the original amount,
together with any interest, has been exhausted.
American Franklin guarantees interest under the foregoing options at the
rate of 3% a year.
American Franklin may also pay or credit excess interest on the options
from time to time. The rate and manner of payment or crediting will be
determined by American Franklin. Under the second option no excess interest
will be paid on the part of the proceeds used to provide payments beyond the
fixed term of years.
The beneficiary or any other person who is entitled to receive payment may
name a successor to receive any amount that would otherwise be paid to that
person's estate if that person died. No successor may be named if a payment
option chosen is contingent on the life of a beneficiary. The person who is
entitled to receive payment may change the successor at any time.
American Franklin must approve any arrangements that involve more than one
of the payment options, or a payee who is not a natural person (for example, a
corporation), or a payee who is a fiduciary. Also, the details of all
arrangements will be subject to American Franklin's rules at the time the
arrangements take effect. This includes rules on the minimum amount payable
under an option, minimum amounts for installment payments, withdrawal or
commutation rights (rights to cancel an arrangement involving payments over time
in return for a lump sum payment), the naming of people who are entitled to
receive payment and their successors and the ways of proving age and survival.
A Policy Owner may change his or her choice of a payment option (and may
make later changes) and that change will take effect in the same way as it would
if a beneficiary were being changed. (See "The Beneficiary," below). Any
amounts paid under the payment options will not be subject to the claims of
creditors or to legal process, to the extent that the law provides.
THE BENEFICIARY
An applicant for a policy must name a beneficiary when he or she applies
for a policy. The beneficiary is entitled to the insurance benefits of the
policy. The Policy Owner may change the beneficiary during the Insured Person's
lifetime by written notice satisfactory to American Franklin at its
Administrative Office. The change will take effect on the date the notice is
signed. However, the change will be subject to all payments made and actions
taken by American Franklin under the Policy before American Franklin receives
the notice at its Administrative Office. If the beneficiary is changed, any
previous arrangement made as to a payment option for benefits is canceled. A
payment option for the new beneficiary may be chosen.
At the time of the Insured Person's death, the benefit will be paid equally
to the primary beneficiaries, or, if no primary beneficiaries are living, the
first contingent beneficiaries (if any), or, if no primary or first contingent
beneficiaries are living, the second contingent beneficiaries (if any). If no
beneficiary is living when the Insured Person dies, the death benefit will be
paid to the Policy Owner, or to the executors or administrators of the Policy
Owner.
ASSIGNMENT OF A POLICY
The Policy Owner may assign (transfer) his or her rights in a policy to
someone else as collateral for a loan or for some other reason. In order to do
so the Policy Owner must send a copy of the assignment to American Franklin's
Administrative Office. American Franklin is not responsible for any payment
made or any action taken before it has received notice of the assignment (or of
termination of the assignment) or for the validity of the assignment. An
absolute assignment is a change of ownership. The federal income tax treatment
of a policy that has been assigned for valuable consideration may be different
from the federal income tax treatment described herein.
EMPLOYEE BENEFIT PLANS
Employers and employee organizations should consider, in consultation with
counsel, the impact of Title VII of the Civil Rights Act of 1964 on the purchase
of EquiBuilder III policies in connection with an
42
<PAGE>
employment-related insurance or benefit plan. The United States Supreme Court
held, in a 1983 decision, that, under Title VII, optional annuity benefits under
a deferred compensation plan could not vary on the basis of sex.
The policies described herein are not intended for use in connection with
qualified plans or trusts under the Code.
PAYMENT OF PROCEEDS
American Franklin will pay any death benefits, Net Cash Surrender Value or
loan proceeds within seven days after it receives the required form or request
(and other documents that may be required) at its Administrative Office. Death
benefits are determined as of the date of death of the Insured Person and will
not be affected by subsequent changes in the unit values of the investment
divisions of the Separate Account. Interest will be paid in respect of the
period from the date of death to the date of payment.
American Franklin may, however, delay payment for one or more of the
following reasons:
American Franklin contests the policy or is deciding whether or not to
contest the policy;
American Franklin cannot determine the amount of the payment because
the New York Stock Exchange is closed, because trading in securities has
been restricted by the Securities and Exchange Commission, or because the
Securities and Exchange Commission has declared that an emergency exists;
or
The Securities and Exchange Commission by order permits American
Franklin to delay payment to protect the Policy Owners.
American Franklin may defer payment of any Net Cash Surrender Value or
loan amount from the Guaranteed Interest Division for up to six months
after receipt of a request. American Franklin will pay interest of at
least 3% a year from the date a request for withdrawal of Net Cash
Surrender Value is received if payment from the Guaranteed Interest
Division is delayed more than 30 days.
DIVIDENDS
No dividends are paid on the policies offered by this Prospectus.
DISTRIBUTION OF THE POLICIES
Franklin Financial Services Corporation ("Franklin Financial"), a Delaware
corporation and a wholly-owned subsidiary of The Franklin Life Insurance
Company, is the principal underwriter, as defined by the Investment Company Act
of 1940, of the EquiBuilder III policies for the Separate Account under a Sales
Agreement between Franklin Financial and the Separate Account. Franklin
Financial's principal executive office is at #1 Franklin Square, Springfield,
Illinois 62713.
Franklin Financial is registered with the Securities and Exchange
Commission as a broker-dealer under the Securities and Exchange Act of 1934 and
is a member of the National Association of Securities Dealers, Inc. Franklin
Financial also acts as principal underwriter for Franklin Life Variable Annuity
Funds A and B and Franklin Life Money Market Variable Annuity Fund C, which are
separate accounts of The Franklin Life Insurance Company and registered
investment companies issuing interests in variable annuity contracts. Franklin
Financial also acts as principal underwriter for Separate Account VUL of
American Franklin, which is a registered investment company issuing interests in
variable life insurance contracts having policy features that are similar to
those of EquiBuilder III policies but the assets of which are invested in a
different open-end management investment company. American Franklin no longer
offers new policies having an interest in that separate account. Franklin
Financial is the principal underwriter of American Franklin's EquiBuilder II
variable life insurance policies under which interests in the Separate Account
are issued. The EquiBuilder II policies have policy features that are similar
to those of the EquiBuilder III policies but have a different sales charge
structure.
43
<PAGE>
Policies are sold primarily by persons who are insurance agents or brokers
for American Franklin authorized by applicable law to sell life and other forms
of personal insurance, including variable life insurance. Pursuant to an
agreement between American Franklin and Franklin Financial, Franklin Financial
has agreed to employ and supervise agents chosen by American Franklin to sell
the policies and to use its best efforts to qualify such persons as registered
representatives of Franklin Financial.
Franklin Financial incurs certain sales expenses, such as sales literature
preparation and related costs, in connection with the sale of the policies
pursuant to a Sales Agreement with American Franklin. Sales expense deductions
made from each premium and surrender charges imposed in connection with the
surrender of a policy and certain reductions of Face Amount are paid to Franklin
Financial as a means to recover sales expenses. Such sales expense deductions
and surrender charges are not necessarily related to Franklin Financial's actual
sales expenses in any particular year. To the extent sales expenses are not
covered by sales expense deductions and surrender charges, Franklin Financial
will cover them from other assets.
Commissions earned by registered representatives of Franklin Financial on
the sale of the policies range up to 90% of premiums paid during the first
policy year. For policies issued on or after October 8, 1997, annual trail
commissions are earned at an annual rate of 0.25% on the amount in the Policy
Account that is in the Separate Account. Pursuant to an Agreement between
American Franklin and Franklin Financial, American Franklin has agreed to pay
such commissions and Franklin Financial has agreed to remit to American Franklin
the excess of all sales expense deductions and surrender charges paid to
Franklin Financial over the sales and promotional expenses incurred by Franklin
Financial to the extent necessary to reimburse American Franklin for commissions
or other remuneration paid in connection with sales of the policies. Such
Agreement also provides that the amount of such commissions and other
remuneration not so reimbursed shall be deemed to have been contributed by
American Franklin to the capital of Franklin Financial. Commissions and other
remuneration will be paid by American Franklin from other sources, including
mortality and expense risk charges or other charges in connection with the
EquiBuilder III policies, or from its General Account to the extent it does not
receive reimbursement from Franklin Financial.
Franklin Financial also may enter into agreements with American Franklin
and each such agent with respect to the supervision of such agent. The policies
also may be sold by persons who are registered representatives of other
registered broker-dealers who are members of the National Association of
Securities Dealers, Inc., and with whom Franklin Financial may enter into a
selling agreement.
Registration as a broker-dealer does not mean that the Securities and
Exchange Commission has in any way passed upon the financial standing, fitness
or conduct of any broker or dealer, upon the merits of any securities offering
or upon any other matter relating to the business of any broker or dealer.
Salesmen and employees selling policies, where required, are also licensed as
securities salesmen under state law.
APPLICATIONS
When an application for a policy is completed, it is submitted to American
Franklin. American Franklin makes the decision to issue a policy based on the
information in the application and its standards for issuing insurance and
classifying risks. If it decides not to issue a policy, any premium paid will
be refunded.
REINSURANCE AGREEMENTS
American Franklin has entered into a reinsurance agreement with Integrity
Life Insurance Company ("Integrity") in respect of the EquiBuilder III policies.
This agreement was terminated as to policies sold on or after January 1, 1997
but will continue as to business in force prior to that date.
Integrity is a subsidiary of ARM Financial Group, Inc., a financial
services company controlled by Morgan Stanley & Co. Incorporated, an investment
banking firm headquartered in New York, New York.
American Franklin has also entered into a modified coinsurance agreement
effective January 1, 1997 with The Franklin, under which The Franklin reinsures
on a modified coinsurance basis a portion of the risk under EquiBuilder III
policies issued after January 1, 1997.
44
<PAGE>
ADMINISTRATIVE SERVICES
While American Franklin has primary responsibility for all administration
of the Policies, American General Life Insurance Company ("AGL") has agreed
pursuant to a services agreement among American General Corporation and almost
all of its subsidiaries to provide the following administrative services in
connection with the Policies: (1) the purchase and redemption of shares of the
portfolios of the Funds and (2) the determination of unit values for each
investment division of the Separate Account. American Franklin and AGL, as
wholly-owned subsidiaries of American General Corporation, are parties to the
services agreement. Pursuant to such agreement, American Franklin reimburses
AGL for the costs and expenses which AGL incurs in providing such administrative
services in connection with the Policies, but neither American Franklin nor AGL
incurs a loss or realizes a profit by reason thereof. AGL is a stock life
insurance company organized under the laws of Texas and is also engaged in the
writing and sale of life insurance and annuity contracts.
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.
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.
YEAR 2000 TRANSITION
Like all financial services providers, American Franklin utilizes systems
that may be affected by Year 2000 transition issues and it relies on service
providers, including banks, custodians, and investment managers, that also may
be affected. American Franklin and its affiliates have developed, and are in
the process of implementing, a Year 2000 transition plan, and are confirming
that their service providers are also so engaged. The resources that are being
devoted to this effort are substantial. It is difficult to predict with
precision whether the amount of resources ultimately devoted, or the outcome of
these efforts, will have any negative impact on American Franklin. However, as
of the date of this prospectus, it is not anticipated that Policy Owners will
experience negative effects on their investment, or on the services provided in
connection therewith, as a result of Year 2000 transition implementation.
American Franklin currently anticipates that its systems will be Year 2000
compliant on or about December 31, 1998, but there can be no assurance that
American Franklin will be successful, or that interaction with other service
providers will not impair American Franklin's services at that time.
LEGAL MATTERS
Sutherland, Asbill & Brennan LLP 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, 1997 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
45
<PAGE>
December 31, 1997 and 1996 and the statements of operations, shareholder's
equity and cash flows of American Franklin for the years ended December 31, 1997
and 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. Such financial
statements referred to above are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
Actuarial matters in this Prospectus have been examined by Robert M.
Beuerlein, who is Executive Vice President and Actuary of American Franklin.
His opinion on actuarial matters is filed as an exhibit to the Registration
Statement relating to the policies filed with the SEC.
REGISTRATION STATEMENT
A Registration Statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, with respect to the
policies offered hereby. This Prospectus does not contain all the information
set forth in the Registration Statement and amendments thereto and exhibits
filed as a part thereof, to all of which reference is hereby made for further
information concerning American Franklin, the Separate Account and the policies
offered hereby. Statements contained in this Prospectus as to the content of
policies and other legal instruments are summaries. For a complete statement of
the terms thereof, reference is made to such instruments as filed.
OTHER POLICIES AND CONTRACTS
American Franklin may offer, under other prospectuses, other variable life
policies or variable annuity contracts having interests in the Separate Account
and containing terms and conditions different from those of the policies offered
hereby. Interests in the Separate Account are also issued under American
Franklin's EquiBuilder II variable life insurance policies, which have policy
features that are similar to those of EquiBuilder III policies but which have a
different sales charge structure.
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.
<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATIONS DURING PAST POSITION HELD WITH AMERICAN
---- --------------------------------- ---------------------------
5 YEARS FRANKLIN AND FRANKLIN FINANCIAL
------- -------------------------------
<S> <C> <C>
Wayne A. Barnard** Vice President and Chief Actuary, Vice President, American
American General Life Insurance Franklin.
Company, Houston, Texas.
Earl W. Baucom Treasurer; The Franklin, since June Director, Senior Vice President,
30, 1997; Senior Vice President and Chief Financial Officer and
Chief Financial Officer, The Franklin, Treasurer, American Franklin.
since June 10, 1996; 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.
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATIONS DURING PAST POSITION HELD WITH AMERICAN
---- --------------------------------- ---------------------------
5 YEARS FRANKLIN AND FRANKLIN FINANCIAL
------- -------------------------------
<S> <C> <C>
Robert M. Beuerlein Senior Vice President-Actuarial and Director, Executive Vice President
Director, The Franklin; Vice and Actuary, American Franklin.
President, The Franklin, from April,
1991 to January, 1993.
Brady W. Creel Senior Vice President, Chief Director, Senior Vice President and
Marketing Officer and Director, The Chief Marketing Officer, American
Franklin since September 3, 1996; Franklin.
Regional Manager, The Franklin,
prior to September, 1996.
James S. D'Agostino Vice Chairman, The Franklin, since Vice Chairman and Director,
May 27, 1997; Director, The Franklin, American Franklin.
since May 27, 1997;
American General Corporation,
Houston, Texas, since ___________.
Robert M. Devlin* Senior Chairman, The Franklin, since Senior Chairman, American
September 5, 1997; Chairman of the Franklin.
Board, The Franklin, from August 21,
1996 to September 5, 1997; 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;
Chairman of the Board, American
General Corporation, since
____________, 1997; 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 Vice President, American Franklin.
June, 1995, Vice President, American
General Life Insurance Company,
Houston, Texas.
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATIONS DURING PAST POSITION HELD WITH AMERICAN
---- --------------------------------- ---------------------------
5 YEARS FRANKLIN AND FRANKLIN FINANCIAL
------- -------------------------------
<S> <C> <C>
Ross D. Friend Senior Vice President and General Senior Vice President, General
Counsel, The Franklin, since Counsel and Assistant Secretary,
September 3, 1996; Assistant American Franklin; Director, Vice
Secretary, The Franklin, since President and Secretary, Franklin
November 13, 1997; Secretary, The Financial.
Franklin from September 3, 1996 to
November 13, 1997; Attorney-In-
Charge, Prudential Life Insurance
Company, Jacksonville, Florida, from
July, 1995 to September, 1996; Chief
Legal Officer, Confederation Life
Insurance Company, Atlanta,
Georgia, prior to July, 1995.
Robert F. Herbert ** Senior Vice President and Chief Vice President, American Franklin.
Financial Officer, American General
Life Insurance Company, Houston,
Texas, since May of 1996; Controller,
American General Life Insurance
Company, prior to May of 1996.
Simon J. Leech** Vice President, American General Life Vice President and Administrative
Insurance Company, Houston, Texas. Officer, American Franklin.
Thomas K. McCracken Vice President, The Franklin. Vice President, American Franklin.
Mark R. McGuire Vice President, The Franklin, since Vice President and Administrative
January 6, 1997; Consultant/Manager, Officer, American Franklin.
American General Life Insurance
Company, Houston, Texas, prior to
January, 1997.
Jon P. Newton* Director and Vice Chairman, The Director and Vice Chairman,
Franklin, since January 31, 1996; Vice American Franklin.
Chairman and General Counsel,
American General Corporation,
Houston, Texas, since October 26,
1995; Senior Vice President and
General Counsel, American General
Corporation, prior thereto.
Gary D. Reddick Director, The Franklin, since February, Vice Chairman and Director,
1995; Vice Chairman, The Franklin, American Franklin; Director and
since July 1, 1997; Executive Vice Vice Chairman, Franklin Financial.
President, The Franklin, from
February, 1995 to July 1, 1997; Senior
Vice President, American General
Corporation, Houston, Texas prior to
February, 1995; Senior Vice President,
American General Life Insurance
Company, Houston, Texas, prior to
October, 1994.
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
NAME PRINCIPAL OCCUPATIONS DURING PAST POSITION HELD WITH AMERICAN
---- --------------------------------- ---------------------------
5 YEARS FRANKLIN AND FRANKLIN FINANCIAL
------- -------------------------------
<S> <C> <C>
William A. Simpson Chairman, Chief Executive Officer and Chairman and President.
President, The Franklin, since
September 5, 1997; President and
Chief Executive Officer, The Old Line
Life Insurance Company of America,
Milwaukee, Wisconsin, from May 1,
1990 to September 8, 1997; President-
Life Insurance Division, USLIFE
Corporation, New York, New York,
from February, 1996 to May, 1996;
President and Chief Executive Officer,
USLIFE Corporation from January,
1995 to February, 1996; Vice
Chairman and Chief Executive Officer,
All American Life Insurance Company,
Chicago, Illinois from October 25,
1994 to May 1, 1995; President and
Chief Executive Officer, All American
Life Insurance Company, from April
16, 1990 to October 25, 1994.
T. Clayton Spires Director, Corporate Tax, The Franklin, Director, Corporate Tax, American
since February 3, 1997; Assistant Vice Franklin.
President and Tax Manager, First
Colony Life, Lynchburg, Virginia, prior
to February, 1997.
Timothy W. Still** Vice President, American General Life Vice President and Administrative
Insurance Company, Houston, Texas, Officer, American Franklin.
since October of 1995; Vice President,
The Continuum Company, Kansas
City, Missouri, prior to August of 1995.
Peter V. Tuters* Vice President, Chief Investment Vice President, Chief Investment
Officer and Director, The Franklin, Officer and Director, American
since February, 1995; Senior Vice Franklin.
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, Vice President and Agency
The Franklin. Secretary, American Franklin.
Diane S. Workman Vice President-Administration, Vice President-Administration,
American Franklin. American Franklin.
</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.
49
<PAGE>
- --------------------------------------------------------------------------------
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
EQUIBUILDER III-TM-
ISSUED BY
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
#1 FRANKLIN SQUARE
SPRINGFIELD, ILLINOIS 62713-0001
800-528-2011
EQUIBUILDER III IS A TRADEMARK OF THE AMERICAN FRANKLIN
LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
<PAGE>
Part II
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned registrant hereby undertakes to file
with the Securities and Exchange Commission such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant
to authority conferred in that section.
UNDERTAKING PURSUANT TO RULE 484(b)(1)
UNDER THE SECURITIES ACT OF 1933
American Franklin's By-Laws provide, in Article X, as follows:
"Section 1. The Company shall indemnify and hold harmless each person
who shall serve at any time hereafter as a director, officer or
employee of the Company, or who shall serve any other company or
organization in any capacity at the request of the Company, from and
against any and all claims and liabilities to which such person shall
become subject by reason of having heretofore or hereafter been a
director, officer or employee of the Company, or by reason of any
action alleged to have been heretofore or hereafter taken or omitted
by such person as a director, officer or employee, and shall reimburse
each such person for all legal and other expenses reasonably incurred
in connection with any such claim or liability; provided, however,
that no such person shall be indemnified against, or be reimbursed
for, any expense incurred in connection with any claim or liability
arising out of such person's own wilful misconduct."
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
REPRESENTATION PURSUANT TO SECTION 26(e)
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 LLP (To be filed by amendment.)
Robert M. Beuerlein, Executive Vice President and Actuary (To be filed
by amendment.)
Ernst & Young LLP (To be filed by amendment.)
The following exhibits required by Article IX(A) of Form N-8B-2:
* 1-A(1) Certified resolutions regarding organization of
Separate Account VUL-2.
1-A(2) Inapplicable.
****1-A(3)(a) Sales Agreement between Franklin Financial Services
Corporation ("Franklin Financial") and Separate
Account VUL-2 of The American Franklin Life Insurance
Company, dated as of January 31, 1995.
* 1-A(3)(b)(i) Specimen Regional Manager Registered Representative
Agreement between Franklin Financial and registered
representatives of Franklin Financial distributing
EquiBuilder III policies.
* 1-A(3)(b)(ii) Specimen Registered Representative Agreement between
Franklin Financial and registered representatives of
Franklin Financial distributing EquiBuilder III
policies.
1-A(3)(c) Schedule of Sales Commissions. (To be filed by
amendment.)
** 1-A(4) Agreement between The American Franklin Life Insurance
Company ("American Franklin") and Franklin Financial,
dated March 31, l994, regarding supervision of agents.
** 1-A(5)(a) EquiBuilder III Flexible Premium Life Insurance Policy
.
* 1-A(5)(b) Accidental Death Benefit Rider.
* 1-A(5)(c) Term Insurance Rider.
* 1-A(5)(d) Children's Term Insurance Rider.
* 1-A(5)(e) Disability Rider - Waiver of Monthly Deductions.
** 1-A(5)(f) Endorsement to EquiBuilder III Flexible Premium Life
Insurance policy when issued to a Policy Owner in the
State of Texas.
1-A(5)(g) Accelerated Benefit Settlement Option Rider.
*****1-A(6)(a) Articles of Incorporation of American Franklin.
1-A(6)(b) By-Laws of American Franklin are incorporated herein by
reference to Exhibit 1-A(6)(b) to Post-Effective
Amendment No. 3 on Form S-6 of Separate Account VUL-2
of The American Franklin Life Insurance Company, filed
February 28, 1997 (Reg. No. 33-77470).
1-A(7) Inapplicable.
* 1-A(8)(a)(1) Participation Agreement among American Franklin,
Variable Insurance Products Fund ("VIPF") and
Fidelity Distributors Corporation ("FDC"), dated July
18, 1991.
II-2
<PAGE>
*** 1-A(8)(a)(2) Amendment No. 1 to Participation Agreement among
American Franklin, VIPF and FDC, effective as of
November 1, 1991.
* 1-A(8)(a)(3) Participation Agreement among American Franklin,
Variable Insurance Products Fund II ("VIPF II") and
FDC, dated July 18, 1991.
*** 1-A(8)(a)(4) Amendment No. 1 to Participation Agreement among
American Franklin, VIPF II and FDC, effective as of
November 1, 1991.
* 1-A(8)(a)(5) Sub-License Agreement between FDC and American Franklin
dated July 18, 1991.
****1-A(8)(a)(6) Amendment No. 2 to Participation Agreement among
American Franklin, VIPF and FDC, dated January 18,
1995.
****1-A(8)(a)(7) Amendment No. 2 to Participation Agreement among
American Franklin, VIPF II and FDC, dated January 18,
1995.
1-A(8)(a)(8) Amendment No. 3 to Participation Agreement among
American Franklin, VIPF and FDC, dated July 1, 1996, is
hereby incorporated herein by reference to Exhibit
8(a)(4) to the Registration Statement on Form N-4 (Reg.
No. 333-10489) of Separate Account VA-1 of American
Franklin, filed August 20, 1996.
1-A(8)(a)(9) Amendment No. 3 to Participation Agreement among
American Franklin, VIPF II and FDC, dated July 1, 1996,
is hereby incorporated herein by reference to Exhibit
8(b)(4) to the Registration Statement on Form N-4 (Reg.
No. 333-10489) of Separate Account VA-1 of American
Franklin, filed August 20, 1996.
1-A(8)(a)(10) Amendment No. 4 to Participation Agreement among
American Franklin, VIPF and FDC, dated November, 1996,
is hereby incorporated herein by reference to Exhibit
8(a)(5) to Pre-Effective Amendment No. 1 to
Registration Statement on Form N-4 (Reg. No. 333-10489)
of Separate Account VA-1 of American Franklin, filed
November 26, 1996.
1-A(8)(a)(11) Amendment No. 4 to Participation Agreement among
American Franklin, VIPF II and FDC, dated November,
1996, is hereby incorporated herein by reference to
Exhibit 8(b)(5) to Pre-Effective Amendment No. 1 to
Registration Statement on Form N-4 (Reg. No. 333-10489)
of Separate Account VA-1 of American Franklin, filed
November 26, 1996.
1-A(8)(b)(1) Participation Agreement among MFS Variable Insurance
Trust, American Franklin and Massachusetts Financial
Services Company ("MFS"), dated July 30, 1996 is
incorporated herein by reference to Exhibit 8(d)(1) to
Form N-4 of Separate Account VA-1 of The American
Franklin Life Insurance Company, filed August 20, 1996
(Reg. No. 333-10489).
1-A(8)(b)(2) Indemnification Agreement between American Franklin and
MFS dated July 30, 1996 is incorporated herein by
reference to Exhibit 8(d)(2) to Form N-4 of Separate
Account VA-1 of The American Franklin Life Insurance
Company, filed August 20, 1996 (Reg. No. 333-10489).
1-A(8)(b)(3) Form of Amendment No. 1 dated November, 1996 to
Participation Agreement among MFS Variable Insurance
Trust, American Franklin and MFS is incorporated herein
by reference to Exhibit (8)(d)(3) to Form N-4 of
Separate Account VA-1 of The American Franklin Life
Insurance Company, filed November 26, 1996 (Reg. No.
333-10489).
1-A(8)(b)(4) Amendment No. 2 to Participation Agreement among
American Franklin, MFS Variable Insurance Trust and
MFS, dated November, 1997. (To be filed by amendment.)
* 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-
II-3
<PAGE>
Effective Amendment No. 3 on Form S-6 of Separate
Account VUL-2 of The American Franklin Life Insurance
Company, filed February 28, 1997 (Reg. No. 33-77470).
1-A(8)(c)(3) Amendment No. 3 to Modified Coinsurance Agreement
between American Franklin and Integrity effective April
1, 1989 is incorporated herein by reference to
similarly designated exhibit to Post-Effective
Amendment No. 3 on Form S-6 of Separate Account VUL-2
of The American Franklin Life Insurance Company, filed
February 28, 1997 (Reg. No. 33-77470).
1-A(8)(c)(4) Amendment No. 3 to Modified Coinsurance Agreement
between American Franklin, Integrity, and Phoenix Home
Life Mutual Insurance Company, assignee of Integrity
effective January 1, 1997 is incorporated herein by
reference to similarly designated exhibit to
Post-Effective Amendment No. 3 on Form S-6 of Separate
Account VUL-2 of The American Franklin Life Insurance
Company, filed February 28, 1997 (Reg. No. 33-77470).
* 1-A(8)(d) Reinsurance Agreement between American Franklin and The
Franklin Life Insurance Company ("The Franklin"),
effective as of January 1, 1988.
* 1-A(8)(d)(1) Amendment No. 1 effective as of January 1, 1990 to
Reinsurance Agreement between American Franklin and The
Franklin.
* 1-A(8)(d)(2) Amendment No. 2 effective as of January 1, 1990 to
Reinsurance Agreement between American Franklin and The
Franklin.
1-A(8)(e) Modified Coinsurance Agreement effective as of January
1, 1997 between American Franklin and The Franklin.
1-A(8)(e)(1) Amendment No. 1 effective September 1, 1997 to Modified
Coinsurance Agreement between American Franklin and The
Franklin.
*1-A(9) Administrative Service Agreement between The Franklin
and American Franklin, dated May 16, l988.
1-A(10) Application for EquiBuilder III Policy.
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. (To be
filed by amendment.)
4 Inapplicable.
5 Inapplicable.
6(a) Consent of Ernst & Young LLP. (To be filed by
amendment.)
6(b) Consent of Sutherland, Asbill & Brennan LLP (To be
filed by amendment).
7 Power of Attorney.
8 Description of American Franklin's Issuance, Transfer
and Redemption Procedures for EquiBuilder III Policies
pursuant to Rule 6e-3(T)(b)(12)(iii) under the
Investment Company Act of 1940 is incorporated herein
by reference to Exhibit 8 to Form S-6 of Separate
Account VUL-2 of The American Franklin Life Insurance
Company, filed April 30, 1997 (Reg. No. 33-77470).
** 9 Notice of Cancellation Right Pursuant to Rule
6e-3(T)(b)(13)(viii) under the Investment Company Act
of 1940.
- --------------------------------------------------------------------------------
* Incorporated herein by reference to similarly designated exhibit to
Form S-6 of Separate Account VUL-2 of The American Franklin Life
Insurance Company, filed July 24, 1991 (Reg. No. 33-41838).
** Filed with original filing of the Registration Statement on Form S-6,
filed April 7, 1994 (Reg. No. 33-77470).
*** Incorporated herein by reference to similarly designated exhibit to
Post-Effective Amendment No. 3 on Form S-6 of Separate Account VUL-2
of The American Franklin Life Insurance Company, filed February 26,
1993 (Reg. No. 33-41838).
II-4
<PAGE>
**** Incorporated herein by reference to similarly designated exhibit to
Post-Effective Amendment No. 1 on Form S-6 of Separate Account VUL-2
of The American Franklin Life Insurance Company, filed March 2, 1995
(Reg. No. 33-77470).
*****Incorporated herein by reference to similarly designated exhibit to
Post-Effective Amendment No. 2 on Form S-6 of Separate Account VUL-2
of The American Franklin Life Insurance Company, filed April 30, 1996
(Reg. No. 33-77470).
II-5
<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 has duly
caused this Post-Effective Amendment No. 5 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 23rd of February, 1998.
SEPARATE ACCOUNT VUL-2 OF
THE AMERICAN FRANKLIN LIFE
INSURANCE COMPANY
By: THE AMERICAN FRANKLIN
LIFE INSURANCE COMPANY,
Depositor
[SEAL]
By: /s/ William A. Simpson
-------------------------------
William A. Simpson
Chairman and President
Attest:
/s/ Elizabeth E. Arthur
- -------------------------------------
Elizabeth E. Arthur
Assistant Secretary
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, The American
Franklin Life Insurance Company 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 23rd day of February, 1998.
THE AMERICAN FRANKLIN
LIFE INSURANCE COMPANY
By: /s/ William A. Simpson
-------------------------------
William A. Simpson
Chairman and President
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:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Earl W. Baucom* Senior Vice President, Chief February 23, 1998
- ---------------------------- Financial Officer, Treasurer (principal
Earl W. Baucom financial officer and principal
accounting officer) and Director
/s/ Robert M. Beuerlein* Director February 23, 1998
- ----------------------------
Robert M. Beuerlein
/s/ Brady W. Creel* Director February 23, 1998
- ----------------------------
Brady W. Creel
Director ___________, 1998
- ----------------------------
James S. D'Agostino
Director ___________, 1998
- ----------------------------
Robert M. Devlin
Director ___________, 1998
- ----------------------------
Rodney O. Martin, Jr.
Director ___________, 1998
- ----------------------------
Jon P. Newton
/s/ Gary D. Reddick* Director February 23, 1998
- ----------------------------
Gary D. Reddick
/s/ William A. Simpson* Director and President February 23, 1998
- ---------------------------- (principal executive officer)
William A. Simpson
/s/ Peter V. Tuters* Director February 23, 1998
- ----------------------------
Peter V. Tuters
/s/ Elizabeth E. Arthur
- ----------------------------
*By Elizabeth E. Arthur, Attorney-in-Fact
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
Page No.
* 1-A(1) Certified resolutions regarding organization of
Separate Account VUL-2.
1-A(2) Inapplicable.
**** 1-A(3)(a) Sales Agreement between Franklin Financial Services
Corporation ("Franklin Financial") and Separate
Account VUL-2 of The American Franklin Life Insurance
Company, dated as of January 31, 1995.
* 1-A(3)(b)(i) Specimen Regional Manager Registered Representative
Agreement between Franklin Financial and registered
representatives of Franklin Financial distributing
EquiBuilder III policies.
* 1-A(3)(b)(ii) Specimen Registered Representative Agreement between
Franklin Financial and registered representatives of
Franklin Financial distributing EquiBuilder III
policies.
1-A(3)(c) Schedule of Sales Commissions. (To be filed by
amendment.)
** 1-A(4) Agreement between The American Franklin Life Insurance
Company ("American Franklin") and Franklin Financial,
dated March 31, l994, regarding supervision of agents.
** 1-A(5)(a) EquiBuilder III Flexible Premium Life Insurance Policy.
* 1-A(5)(b) Accidental Death Benefit Rider.
* 1-A(5)(c) Term Insurance Rider.
* 1-A(5)(d) Children's Term Insurance Rider.
* 1-A(5)(e) Disability Rider - Waiver of Monthly Deductions.
** 1-A(5)(f) Endorsement to EquiBuilder III Flexible Premium Life
Insurance policy when issued to a Policy Owner in the
State of Texas.
1-A(5)(g) Accelerated Benefit Settlement Option Rider.
*****1-A(6)(a) Articles of Incorporation of American Franklin.
1-A(6)(b) By-Laws of American Franklin are incorporated herein by
reference to Exhibit 1-A(6)(b) to Post-Effective
Amendment No. 3 on Form S-6 of Separate Account VUL-2
of The American Franklin Life Insurance Company, filed
February 28, 1997 (Reg. No. 33-77470).
1-A(7) Inapplicable.
* 1-A(8)(a)(1) Participation Agreement among American Franklin,
Variable Insurance Products Fund ("VIPF") and Fidelity
Distributors Corporation ("FDC"), dated July 18, 1991.
*** 1-A(8)(a)(2) Amendment No. 1 to Participation Agreement among
American Franklin, VIPF and FDC, effective as of
November 1, 1991.
* 1-A(8)(a)(3) Participation Agreement among American Franklin,
Variable Insurance Products Fund II ("VIPF II") and
FDC, dated July 18, 1991.
*** 1-A(8)(a)(4) Amendment No. 1 to Participation Agreement among
American Franklin, VIPF II and FDC, effective as of
November 1, 1991.
* 1-A(8)(a)(5) Sub-License Agreement between FDC and American Franklin
dated July 18, 1991.
**** 1-A(8)(a)(6) Amendment No. 2 to Participation Agreement among
American Franklin, VIPF and FDC, dated January 18,
1995.
**** 1-A(8)(a)(7) Amendment No. 2 to Participation Agreement among
American Franklin, VIPF II and FDC, dated January 18,
1995.
1-A(8)(a)(8) Amendment No. 3 to Participation Agreement among
American Franklin, VIPF and FDC, dated July 1, 1996, is
hereby incorporated herein by reference to Exhibit
8(a)(4) to the Registration Statement on Form N-4 (Reg.
No. 333-10489) of Separate Account VA-1 of American
Franklin, filed August 20, 1996.
<PAGE>
EXHIBIT INDEX
Page No.
1-A(8)(a)(9) Amendment No. 3 to Participation Agreement among
American Franklin, VIPF II and FDC, dated July 1, 1996,
is hereby incorporated herein by reference to Exhibit
8(b)(4) to the Registration Statement on Form N-4 (Reg.
No. 333-10489) of Separate Account VA-1 of American
Franklin, filed August 20, 1996.
1-A(8)(a)(10) Amendment No. 4 to Participation Agreement among
American Franklin, VIPF and FDC, dated November, 1996,
is hereby incorporated herein by reference to Exhibit
8(a)(5) to Pre-Effective Amendment No. 1 to
Registration Statement on Form N-4 (Reg. No. 333-10489)
of Separate Account VA-1 of American Franklin, filed
November 26, 1996.
1-A(8)(a)(11) Amendment No. 4 to Participation Agreement among
American Franklin, VIPF II and FDC, dated November,
1996, is hereby incorporated herein by reference to
Exhibit 8(b)(5) to Pre-Effective Amendment No. 1 to
Registration Statement on Form N-4 (Reg. No. 333-10489)
of Separate Account VA-1 of American Franklin, filed
November 26, 1996.
1-A(8)(b)(1) Participation Agreement among MFS Variable Insurance
Trust, American Franklin and Massachusetts Financial
Services Company ("MFS"), dated July 30, 1996 is
incorporated herein by reference to Exhibit 8(d)(1) to
Form N-4 of Separate Account VA-1 of The American
Franklin Life Insurance Company, filed August 20, 1996
(Reg. No. 333-10489).
1-A(8)(b)(2) Indemnification Agreement between American Franklin and
MFS dated July 30, 1996 is incorporated herein by
reference to Exhibit 8(d)(2) to Form N-4 of Separate
Account VA-1 of The American Franklin Life Insurance
Company, filed August 20, 1996 (Reg. No. 333-10489).
1-A(8)(b)(3) Form of Amendment No. 1 dated November, 1996 to
Participation Agreement among MFS Variable Insurance
Trust, American Franklin and MFS is incorporated herein
by reference to Exhibit (8)(d)(3) to Form N-4 of
Separate Account VA-1 of The American Franklin Life
Insurance Company, filed November 26, 1996 (Reg. No.
333-10489).
1-A(8)(b)(4) Amendment No. 2 to Participation Agreement among
American Franklin, MFS Variable Insurance Trust and
MFS, dated November, 1997. (To be filed by amendment.)
* 1-A(8)(c) Modified Coinsurance Agreement between American
Franklin and Integrity, dated March 10, 1989.
* 1-A(8)(c)(1) Amendment No. 1 to Modified Coinsurance Agreement
between American Franklin and Integrity.
1-A(8)(c)(2) Amendment No. 2 to Modified Coinsurance Agreement
between American Franklin and Integrity is incorporated
herein by reference to similarly designated exhibit to
Post-Effective Amendment No. 3 on Form S-6 of Separate
Account VUL-2 of The American Franklin Life Insurance
Company, filed February 28, 1997 (Reg. No. 33-77470).
1-A(8)(c)(3) Amendment No. 3 to Modified Coinsurance Agreement
between American Frankin, and Integrity effective
January 1, 1997 is incorporated herein by reference to
similarly designated exhibit to Post-Effective
Amendment No. 3 on Form S-6 of Separate Account VUL-2
of The American Franklin Life Insurance Company, filed
February 28, 1997 (Reg. No. 33-77470).
1-A(8)(c)(4) Amendment No. 3 to Modified Coinsurance Agreement
between American Franklin, Integrity, and Phoenix Home
Life Mutual Insurance Company, assignee of Integrity is
incorporated herein by reference to similarly
designated exhibit to Post-Effective Amendment No. 3 on
Form S-6 of Separate Account VUL-2 of The American
Franklin Life Insurance Company, filed February 28,
1997 (Reg. No. 33-77470).
* 1-A(8)(d) Reinsurance Agreement between American Franklin and The
Franklin Life Insurance Company ("The Franklin"),
effective as of January 1, 1988.
* 1-A(8)(d)(1) Amendment No. 1 effective as of January 1, 1990 to
Reinsurance Agreement between American Franklin and The
Franklin.
<PAGE>
* 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(8)(e) Modified Coinsurance Agreement effective as of January
1, 1997 between American Franklin and The Franklin.
1-A(8)(e)(1) Amendment No. 1 effective September 1, 1997 to Modified
Coinsurance Agreement between American Franklin and The
Franklin.
* 1-A(9 Administrative Service Agreement between The Franklin
and American Franklin, dated May 16, l988.
1-A(10) Application for EquiBuilder III Policy.
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. (To
be filed by amendment.)
4 Inapplicable.
5 Inapplicable.
6(a) Consent of Ernst & Young LLP (To be filed by
amendment.)
6(b) Consent of Sutherland, Asbill & Brennan LLP (To be
filed by amendment.)
7 Power of Attorney.
8 Description of American Franklin's Issuance, Transfer
and Redemption Procedures for EquiBuilder III Policies
pursuant to Rule 6e-3(T)(b)(12)(iii) under the
Investment Company Act of 1940 is incorporated herein
by reference to Exhibit 8 to Form S-6 of Separate
Account VUL-2 of The American Franklin Life Insurance
Company, filed April 30, 1997 (Reg. No. 33-77470).
** 9 Notice of Cancellation Right Pursuant to Rule
6e-3(T)(b)(13)(viii) under the Investment Company Act
of 1940.
- -----------------------------------------------------------------
* Incorporated herein by reference to similarly designated exhibit to
Form S-6 of Separate Account VUL-2 of The American Franklin Life
Insurance Company, filed July 24, 1991 (Reg. No. 33-41838).
** Filed with original filing of the Registration Statement on Form S-6,
filed April 7, 1994 (Reg. No. 33-77470).
*** Incorporated herein by reference to similarly designated exhibit to
Post-Effective Amendment No. 3 on Form S-6 of Separate Account VUL-2
of The American Franklin Life Insurance Company, filed February 26,
1993 (Reg. No. 33-41838).
**** Incorporated herein by reference to similarly designated exhibit to
Post-Effective Amendment No. 1 on Form S-6 of Separate Account VUL-2
of The American Franklin Life Insurance Company, filed March 2, 1995
(Reg. No. 33-77470).
<PAGE>
Exhibit 1-A(5)(g)
ACCELERATED BENEFIT SETTLEMENT OPTION RIDER
This rider forms a part of the policy to which it is attached.
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY (herein referred to as "the
Company") will allow all or part of the Maximum Accelerated Benefit of this
policy to be applied under one of the Options described below, provided that the
conditions stated for that Option have been satisfied. Any such Option is
subject to the provisions of this rider and this policy.
Written request for such Option must be made by the Owner and agreed to by any
irrevocable Beneficiary. Such request must be made on or after the Rider
Effective Date and while:
(1) this rider is in force;
(2) this policy is in force; and
(3) there is no assignment of this policy other than for a policy loan.
DISCLOSURES:
(1) Receipt of accelerated benefits may be subject to income tax; the
Owner should seek assistance from his or her personal tax advisor
before electing an Option under this rider.
(2) Cash values, loan values and the death benefit will be reduced if an
accelerated benefit is received.
DEFINITIONS: The "Option Date" is the date on which an Option is elected under
this rider.
The "Rider Effective Date" is the date FIRST POLICY YEAR BEGINS, unless
otherwise shown on page 3 of this policy.
The "Maximum Accelerated Benefit" is the smaller of (1) or (2), reduced by any
indebtedness, where:
(1) is the death benefit of this policy; and
(2) is $250,000 less any death benefit previously settled as benefits
under this rider.
The "Selected Percentage" is that percentage of the death benefit chosen by the
Owner to determine benefits under this rider. The Selected Percentage
multiplied by the death benefit may not exceed the Maximum Accelerated Benefit.
The "Adjusted Accelerated Benefit" is the amount to be used in determining
payments under the Options described below. The Adjusted Accelerated Benefit is
the Selected Percentage of the death benefit, adjusted to reflect:
(1) the Option being applied for;
(2) the Insured's sex and age and the length of time this policy has been
in force;
(3) the Company's current assumptions on the Option Date as to:
(a) the Insured's life expectancy; and
(b) interest rates, cost of insurance rates, and administrative
charges;
and
(4) a processing charge, not to exceed $200.
The Adjusted Accelerated Benefit will be not less than the Selected Percentage
of: the Net Cash Surrender Value, less indebtedness, of this policy.
A "Nursing Facility" is a facility which is licensed as:
(1) a Skilled Nursing Facility;
(2) an Intermediate Nursing Facility; or
(3) a Custodial Care Facility;
Form AFA915 Page 1
<PAGE>
ACCELERATED BENEFIT SETTLEMENT OPTION RIDER (Continued)
by the jurisdiction in which it is located. However, none of the following is a
Nursing Facility:
(1) a hospital, except a special nursing unit of such;
(2) a place that primarily treats chemically dependent persons or
alcoholics;
(3) a home for the aged or mentally ill;
(4) a place that primarily provides domiciliary, residency or retirement
care; or
(5) a place owned or operated by a member of the Insured's Immediate
Family.
A "Skilled Nursing Facility" is a facility which:
(1) is under the supervision of a Physician;
(2) provides continuous Skilled Nursing Care 24 hours a day by or under
the supervision of a Registered Nurse (R.N.); and
(3) maintains a daily medical record of each patient.
"Skilled Nursing Care" is care furnished on a Physician's orders which requires
the skill of a Registered Nurse (R.N.). Skilled Nursing Care is provided either
directly by or under the supervision of such personnel.
An "Intermediate Nursing Facility" is a facility which:
(1) provides continuous Intermediate Nursing Care 24 hours a day by or
under the supervision of a Registered Nurse (R.N.) or a Licensed
Practical Nurse (L.P.N.); and
(2) maintains a daily medical record of each patient.
"Intermediate Nursing Care" is basic care, including physical, emotional, social
and other restorative services under periodic medical supervision. The
administration of Intermediate Nursing Care requires the skill of a Registered
Nurse (R.N.) or a Licensed Practical Nurse (L.P.N.). Such administration
includes observation and recording of reactions and symptoms, and supervision of
nursing care.
A "Custodial Care Facility" is a facility which:
(1) provides Custodial Care at the patient's expense under the supervision
of a Registered Nurse (R.N.); and
(2) can accommodate three or more persons at those persons' expense.
"Custodial Care" is care which can be given by persons without medical training.
Custodial Care is care rendered to the patient for his or her impairments to
help meet basic personal needs. Basic personal needs include feeding and
personal hygiene.
The Insured's "Immediate Family" consists of all the following persons:
(1) the Insured's spouse;
(2) the Insured's children, parents, grandparents, grandchildren, brothers
and sisters; and
(3) the spouses of the persons listed in item (2).
A "Physician" is a licensed practitioner who:
(1) is acting within the scope of the license;
(2) is not a member of the Insured's Immediate Family; and
(3) is licensed to prescribe and administer drugs or to perform surgery.
OPTION IN EVENT OF TERMINAL ILLNESS: This Option is available upon receipt of
evidence satisfactory to the Company that the Insured has a life expectancy of
12 months or less. Such evidence must include a certification by a Physician.
Page 2
<PAGE>
ACCELERATED BENEFIT SETTLEMENT OPTION RIDER (Continued)
Under this Option, the Owner may elect to receive one of the following:
(1) a single payment of the Adjusted Accelerated Benefit;
(2) equal monthly payments for 6 months during the Insured's lifetime; or
(3) equal monthly payments of a fixed amount during the Insured's
lifetime, until the Adjusted Accelerated Benefit (with interest
thereon) is exhausted.
The monthly payments, if elected to be payable for 6 months, will be not less
than $168.20 for each $1,000 of Adjusted Accelerated Benefit applied under this
Option. This amount is based on a guaranteed interest rate of 4.5% per year.
The fixed amount, if elected, will be as chosen by the Owner but may not exceed
the monthly payment which would be payable for 6 months.
OPTION IN EVENT OF CONFINEMENT TO NURSING FACILITY: This Option is available
upon receipt of evidence satisfactory to the Company that the Insured:
(1) has been continuously confined to a Nursing Facility for at least the
6 months immediately preceding the Option Date, and remains so
confined; and
(2) is expected to be so confined until death.
Such evidence must include a certification by a Physician.
Under this Option, the Owner may elect to receive one of the following:
(1) a single payment of the Adjusted Accelerated Benefit;
(2) equal monthly payments for a fixed period of years during the
Insured's lifetime; or
(3) equal monthly payments of a fixed amount during the Insured's
lifetime, until the Adjusted Accelerated Benefit (with interest
thereon) is exhausted.
The fixed period, if elected, will be as chosen by the Owner but may not be less
than that shown in the Table on the left below. The monthly payments for such
fixed period will be not less than the amounts shown in the Table on the right
below. Such amounts are based on a guaranteed interest rate of 4.5% per year.
<TABLE>
<CAPTION>
AMOUNT OF EACH MONTHLY PAYMENT
MINIMUM FIXED PERIOD PER $1,000 OF ADJUSTED ACCELERATED BENEFIT
- ----------------------------- ------------------------------------------
ATTAINED AGE NUMBER CHOSEN MINIMUM
OF INSURED OF FIXED PERIOD MONTHLY
ON OPTION DATE YEARS OF YEARS PAYMENT
- ----------------------------- ------------------------------------------
<S> <C> <C> <C>
64 and under 10 10 $10.28
65 - 67 8 9 11.19
68 - 70 7 8 12.34
71 - 73 6 7 13.81
74 - 77 5 6 15.77
78 - 81 4 5 18.53
82 - 86 3 4 22.68
87 and over 2 3 29.60
2 43.45
- ----------------------------- ------------------------------------------
</TABLE>
The fixed amount, if elected, will be as chosen by the Owner but may not exceed
the monthly payment which would be payable for the minimum fixed period shown in
the table above.
The Company reserves the right to require that the monthly payment under this
Option not exceed a maximum amount. Such maximum amount will be at least
$5,000. The Company further reserves the right to require that the single
payment under this Option not exceed that which the Owner could elect to receive
instead of such maximum amount of monthly payment.
Page 3
<PAGE>
ACCELERATED BENEFIT SETTLEMENT OPTION RIDER (Continued)
PAYMENT OF REMAINING VALUE: At the death of the Insured, the remaining value,
if any, of the Option elected will be paid in one sum to the Beneficiary. If
payments for 6 months or for a fixed period have been elected, the remaining
value is the present value of any unpaid payments for the balance of the period.
If payments of a fixed amount have been elected, the remaining value is the
balance of the Adjusted Accelerated Benefit, with accrued interest to the date
of death.
EFFECT ON POLICY BENEFITS, VALUES, LOAN AND CHARGES:
(1) Before either Option becomes effective, this policy must be returned
to the Company and, if applicable, exchanged for (a) or (b) or both:
(a) a supplementary contract, which will set forth the terms and
conditions of the Option elected, but only if monthly payments
were so elected;
(b) a changed policy, but only if the Selected Percentage is not 100%
or if this policy provides insurance on persons other than the
Insured.
(2) If the Selected Percentage is not 100%: (a) those benefits which
affect the Maximum Accelerated Benefit; (b) the values of such
benefits; and (c) the policy indebtedness; under the changed policy
will each be reduced by the Selected Percentage from those which apply
to this policy. Insurance which does not affect the Maximum
Accelerated Benefit will continued unchanged. Monthly charges for the
changed policy will be for the reduced benefit amounts.
(3) If the Selected Percentage is 100%, no further benefits on the life of
the Insured will be provided under this policy or the changed policy,
if any. Any insurance in force under this policy on the life of a
person other than the Insured will be administered as it would be in
the event of the Insured's death.
ADDITIONAL CONDITIONS: The Options granted by this rider are subject to the
following conditions.
(1) The Company reserves the right to require that the Selected Percentage
of the death benefit be at least a minimum amount. Such minimum
amount will not exceed $50,000.
(2) If the Selected Percentage is not 100%, the Face Amount of the changed
policy must be at least $50,000.
(3) Neither Option under this rider is available if such Option would be
required:
(a) by law to meet the claims of creditors; or
(b) by a government agency in order to apply for, obtain or keep a
government benefit or entitlement.
This is so that the Owner can not be forced to deprive the Beneficiary
of intended benefits.
(4) If the selected percentage is not 100%, the Company may allow a signed
request to suffice in lieu of requiring the return of this policy.
NONPARTICIPATING: The insurance provided by this rider will not share in the
surplus earnings of the Company.
TERMINATION: This rider will immediately cease at the earliest of the exchange,
termination, expiry or maturity of the policy. Upon written request by the
Owner of the policy, this rider may be terminated at any time. This policy must
be returned to the Company for adjustment.
Signed for the Company at Springfield, Illinois.
Secretary
Page 4
<PAGE>
Exhibit 1-A(8)(e)
MODIFIED COINSURANCE
AGREEMENT
BETWEEN
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
OF
SPRINGFIELD, ILLINOIS
AND
THE FRANKLIN LIFE INSURANCE COMPANY
OF
SPRINGFIELD, ILLINOIS
<PAGE>
TABLE OF CONTENTS
<TABLE>
SECTION ITEM PAGE
- ------- ---- ----
<S> <C> <C>
A Reinsurance Coverage 3
B Placing Reinsurance in Effect 4
C Payment by Reinsured 5
D Payments by Reinsurer 7
E Terms of Reinsurance 11
F Unusual Expenses and Adjustments 13
G Policy Changes 14
H Oversights 15
I Reductions 15
J Inspection of Records 15
K Arbitration 16
L Insolvency 17
M Parties to Agreement 18
N Effective Date 19
O Payments Upon Termination of Agreement 19
P Duration of Agreement 20
Q Entire Contract 20
R Execution 21
SCHEDULE
- --------
I Policies Subject to Reinsurance 22
II Amount of Reinsurance 23
III Periodic Report 24
IV Annual Reports 25
V Administration Charges 26
VI Expense Allowance 27
</TABLE>
2
<PAGE>
MODIFIED COINSURANCE AGREEMENT
between
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
of
Springfield, Illinois,
hereinafter referred to as "REINSURED," and
THE FRANKLIN LIFE INSURANCE COMPANY
of
Springfield, Illinois
hereinafter referred to as the "REINSURER."
A. REINSURANCE COVERAGE
1. The insurance policies issued by the REINSURED as listed in Schedule I shall
be reinsured with the REINSURER on a modified coinsurance basis.
2. The reinsurance shall cover the portion of the risk under the policies as
specified in Schedule II.
3. The liability of the REINSURER shall begin simultaneously with that of the
REINSURED, but in no event prior to the effective date of this Agreement.
Reinsurance with respect to any policy shall not be in force unless issuance
and delivery of the policy constituted the doing of business in a state of
the United States of America, the District of Columbia, or a country in
which the REINSURED was properly licensed.
3
<PAGE>
4. Reinsurance hereunder shall be on a calendar year basis, as follows:
a) with respect to a policy on any of the forms listed in Schedule I
(including policy forms hereafter added by mutual agreement)
which is issued by the REINSURED on or after the effective date
of this Agreement, the reinsurance with respect to such policy
shall cover the period commencing with the effective date of the
policy and ending at midnight at the end of the last day of the
calendar year in which such policy was issued;
b) all reinsurance hereunder shall automatically renew for each
succeeding calendar year annually as of midnight at the beginning
of January 1.
The reinsurance under this Agreement with respect to any policy shall be
maintained in force without reduction so long as the liability of the
REINSURED under such policy reinsured hereunder remains in force without
reduction, unless reinsurance is terminated or reduced as provided herein.
B. PLACING REINSURANCE IN EFFECT
Reinsurance with respect to policies issued after the effective date of this
Agreement shall become effective simultaneously with the liability of the
REINSURED, provided, however, that the REINSURED shall give notification of such
reinsurance to the REINSURER simultaneously with the quarterly reconciliation
prescribed in Section E, paragraph 5.
4
<PAGE>
C. PAYMENTS BY REINSURED
1. REINSURANCE PREMIUMS
The REINSURED shall pay the REINSURER each day, as reinsurance premiums,
the gross contributions or premiums the REINSURED receives after the
effective date of this Agreement with respect to the portions of policies
reinsured hereunder.
2. DISBURSEMENTS AND DEDUCTIONS FROM POLICYHOLDER ACCOUNT VALUES
The REINSURED shall pay the REINSURER each day with respect to the portions
of policies reinsured hereunder the following amounts:
a) Monthly deductions for the costs of insurance and rider and
benefit charges.
b) Any monthly administrative charges, including such charges made
only for the first policy year.
c) Charges instituted at policyholder request, e.g., for partial
withdrawals, increases and decreases in face amount and transfers
among investment options.
d) Surrender charges made upon surrender or decreases in face
amount.
e) Any deductions waived under a waiver of monthly deduction
benefit.
f) Any other amounts deducted from policyholder account values.
3. REDUCTION IN POLICYHOLDER ACCOUNT VALUES FOR BENEFITS PAID
The REINSURED shall pay the REINSURER each day with respect to the portions
of policies reinsured hereunder the amounts of policyholder cash values
paid as surrender
5
<PAGE>
benefits and partial withdrawal benefits and the amounts of account values
included in death benefits.
4. CHARGES FOR MORTALITY AND EXPENSE RISKS
The REINSURED shall pay the REINSURER each day with respect to the portions
of policies reinsured hereunder, the charge made against the Separate
Accounts of the REINSURED for mortality and expense risks under the
policies.
5. MISCELLANEOUS GAINS AND LOSSES
The REINSURED shall pay the REINSURER each day with respect to the portions
of the policies reinsured hereunder, the net gains (or "breakage") caused
by delays in moving funds to and from the Separate Account of the
REINSURED. If such amounts are net losses, then they shall be paid by the
REINSURER to the REINSURED.
6. MISCELLANEOUS INCOME
The REINSURED shall pay the REINSURER each day with respect to the portions
of the policies reinsured hereunder, the amounts of any miscellaneous
income not included elsewhere in this Agreement.
7. GROSS INVESTMENT INCOME AND NET REALIZED AND UNREALIZED CAPITAL GAINS AND
LOSSES
Gross investment income and net capital gains and losses, determined in
accordance with the REINSURED's investment year method (or such other
method as agreed upon by the REINSURED and REINSURER) used to allocate such
income and capital gains and losses derived from the assets of the
REINSURED held in relation to the reserves established in and other funds
held in the general account of the REINSURED on the portions of the
policies reinsured hereunder, shall be paid at the
6
<PAGE>
end of each year by the REINSURED to the REINSURER, as a part of the
consideration for the reinsurance hereunder. This payment shall be reduced
by the amounts of interest credited to the policyholder account values or
any items in the nature of interest paid under the policies on the portions
of the policies reinsured hereunder.
8. RESERVE ADJUSTMENT ALLOWANCE
The REINSURED shall provide an allowance to the REINSURER at the end of
each accounting period to reflect the change in surrender charges, if any,
used to calculate reserves on the portions of the policies reinsured
hereunder. Such allowance shall be ceded to the REINSURER, but will
continue to be settled on a cash basis.
9. MODIFICATION OF RESERVE BASIS
If the REINSURED shall modify the basis used in computing its reserve
liability with respect to the portion of any policy reinsured hereunder
after the effective date of this Agreement, reinsurance amounts paid to the
REINSURER under this section in the year of the modification shall be
adjusted by adding any increase or deducting any decrease in reserves due
to such modification.
D.PAYMENTS BY REINSURER
1. DISTRIBUTION ALLOWANCE
The REINSURER shall pay the REINSURED each day a distribution allowance equal to
5% of the reinsurance premiums plus 95% of such premiums which are for the first
policy year and which are not greater than the amounts defined as commissionable
"target"
7
<PAGE>
premiums by the REINSURED with regard to the portions of the policies reinsured
hereunder.
The REINSURER shall pay the REINSURED each day an additional distribution
allowance equal to any commissions paid by the REINSURED on increases in face
amount, with respect to the portions of policies reinsured hereunder.
2. CONTRIBUTIONS TO POLICYHOLDER ACCOUNT VALUES
The REINSURER shall pay the REINSURED each day the portion of contributions
or premiums which after deductions are deposited to the Policy Accounts
with respect to the portions of policies reinsured hereunder.
3. BENEFITS
The REINSURER shall pay the REINSURED each day with respect to the portions
of the policies reinsured hereunder:
a) the gross amounts of all death benefits paid by the REINSURED
(i.e., without deduction for reserves);
b) the cash surrender values and withdrawal benefits paid by the
REINSURED;
c) interest paid on claims;
d) monthly deductions waived by the REINSURED under a waiver of
monthly deduction benefit.
Benefits that may be paid in more than one sum or under another form of
payment (i.e., a settlement option), shall, for the purposes of the
reinsurance agreement, be deemed to be paid in one sum.
8
<PAGE>
4. ADMINISTRATION CHARGES
The REINSURER shall pay the REINSURED issue, underwriting and
administrative charges with respect to the portion of policies reinsured
hereunder in the amounts defined in Schedule V for each reinsured policy.
5. EXPENSE ALLOWANCE
The REINSURER shall pay the REINSURED, as an expense allowance a
reimbursement for certain fees for service paid by the REINSURED under the
Servicing Agreement with respect to the portions of policies reinsured
hereunder in the amounts defined in the Schedule VI for each reinsured
policy.
6. INVESTMENT EXPENSES AND FEDERAL INCOME TAXES
The REINSURER shall be obligated for and shall pay to the REINSURED the
investment expenses incurred in each accounting period in respect of the
gross investment income payable to the REINSURER in accordance with Section
C, paragraph 7. The REINSURER shall be obligated for and shall pay federal
income taxes imposed on the REINSURER.
7. STATE PREMIUM TAXES
When the REINSURER is not required to pay state premium taxes upon the
reinsurance premiums received from the REINSURED, the REINSURER shall pay the
REINSURED on a quarterly basis any such taxes the REINSURED may be required to
pay with respect
9
<PAGE>
to that part of the contributions or premiums received under the REINSURED's
original policies which are paid to the REINSURER as reinsurance premiums.
8. MISCELLANEOUS DISBURSEMENTS
The REINSURER shall pay the REINSURED each day with respect to the portions
of the policies reinsured hereunder the amounts of any miscellaneous
disbursements not included elsewhere in this agreement.
9. ANNUAL RESERVE ADJUSTMENTS - WAIVER
a) Annual reserve adjustments for disabled life reserves under waiver of
monthly deduction riders shall be computed by deducting (i) the total
amount of such reserves on the last day of the preceding accounting
period on the portions of the policies reinsured hereunder from (ii)
the total amount of such reserves on the last day of the current
accounting period on the portions of the policies reinsured hereunder
and then in force under this Agreement. Such reserves shall be
calculated on the same basis used by the REINSURED in computing its
reserve liability. With respect, however, to the accounting period
during which the effective date of this Agreement occurs, the
reference in (ii) above, to "the last day of the current accounting
period" shall refer to the day immediately prior to the terminal
accounting date.
b) For any accounting period in which "(ii)" exceeds "(i)" in (a), above,
the REINSURER shall pay the REINSURED such excess. For any accounting
period in which "(i)" exceeds "(ii)", the REINSURED shall pay the
REINSURER such excess.
10
<PAGE>
10. MISCELLANEOUS LIABILITIES AND ACCRUAL ITEMS
The REINSURER shall be responsible for miscellaneous reserves and accrual
items on the portions of the policies reinsured hereunder; e.g. unearned
premium reserves, incurred but unreported claims, etc., incurred by the
REINSURED at the end of each accounting period. Such liabilities shall be
ceded to the REINSURER, but such ceded amounts will continue to be settled
on a cash basis.
E. TERMS OF REINSURANCE
1. OWNERSHIP OF ASSETS
The REINSURED shall retain ownership of all of the assets held in relation
to the reserves on the portions of the policies reinsured hereunder, and
the REINSURER shall have no legal, equitable, or security interest in such
assets.
2. CAPITAL GAINS AND LOSSES
The REINSURER shall not participate in capital gains and losses of the
REINSURED except as specified in Section C, paragraph 7. No part of the
gains and losses of the REINSURED from, or considered as from, sales and
exchanges of capital assets shall be treated as gains and losses from sales
and exchanges of capital assets of the REINSURER.
3. AMOUNTS DUE REINSURER OR REINSURED
Except as otherwise specifically provided herein, all amounts, other than
those paid daily, due to be paid to either the REINSURER or the REINSURED
shall be
11
<PAGE>
determined or estimated on a net basis as of the last day of the month
preceding the end of each accounting period and shall be due and payable as
of such date. If such amounts cannot be determined at such later date on
an exact basis, such payments may be paid on an estimated basis and any
final adjustments are to be made within 3 months after the end of such
accounting period.
4. ACCOUNTING PERIOD
The accounting period for this Agreement shall be a calendar year, except
that the first accounting period hereunder shall run from the effective
date of this Agreement through December 31 of the calendar year in which
the effective date of this Agreement falls. The REINSURED and the
REINSURER, however, shall each reconcile the reinsurance transactions
hereunder as prescribed in Schedule III at the end of each calendar
quarter.
5. REPORTS
a) Annual Statement information as prescribed in Schedule IV,
paragraph A shall be provided by the REINSURED to the REINSURER
not later than 30 working days after the end of each accounting
period.
b) Periodic Reports as prescribed in Schedule III shall be provided
by the REINSURED to the REINSURER no later than 30 working days
after the end of each calendar quarter.
6. CLAIMS
The settlement made by the REINSURED for a death claim under a policy reinsured
under this agreement shall be binding on the REINSURER. However, the REINSURER
12
<PAGE>
shall be consulted before any admission of liability on the claim is made by the
REINSURED if the claim amount reinsured is equal to or greater than $200,000 or
when death occurs during the contestable period. The REINSURED shall furnish
the REINSURER with copies of the proofs of loss and any information the
REINSURER may request.
F. UNUSUAL EXPENSES AND ADJUSTMENTS
1. Any unusual expenses incurred by the REINSURED in defending or
investigating a claim for policy liability or rescinding a policy reinsured
hereunder shall be participated in by the REINSURER in the same proportion
as its reinsurance bears to the total insurance under such policy.
2. For purposes of this Agreement (but not as a limitation on the REINSURER's
liability under paragraph 1), it is agreed that penalties, attorney's fees,
and interest imposed automatically by statute against the REINSURED and
arising solely out of a judgment rendered against the REINSURED in a suit
for policy benefits reinsured hereunder shall be considered unusual
expenses.
3. In no event, however, shall the following categories of expenses or
liabilities be considered for purposes of this Agreement as "unusual
expenses":
a) routine investigative or administrative expenses;
b) expenses incurred in connection with a dispute or contest arising
out of conflicting claims of entitlement to policy proceeds or
benefits which the REINSURED admits are payable;
13
<PAGE>
c) expenses, fees, settlements, or judgments arising out of or in
connection with claims against the REINSURED for punitive or
exemplary damages; and
d) expenses, fees, settlements, or judgments arising out of or in
connection with claims made against the REINSURED and based on
alleged or actual bad faith, failures to exercise good faith, or
tortuous conduct.
4. In the event that the amount of liability provided by a policy or policies
reinsured hereunder is increased or reduced because of a misstatement of
age or sex, the reinsurance liability of the REINSURER shall increase or
reduce in the proportion that the reinsurance liability of the REINSURER
bore to the sum of the retained liability of the REINSURED and the
liability of other reinsurers immediately prior to the discovery of such
misstatement of age or sex.
G. POLICY CHANGES
1. If a change is made in the terms and conditions of a policy issued by the
REINSURED which affects the risk reinsured hereunder in respect of such
policy, and which is evidenced by the issuance of a new policy form, the
REINSURED shall notify the REINSURER promptly of such change.
2. For purposes of this Agreement, any such change shall be deemed to be the
issuance of a new policy form by the REINSURED. The REINSURER shall inform
the REINSURED whether the REINSURER will include such new policy form under
this Agreement, or will terminate or modify the reinsurance hereunder in
respect of such policy.
14
<PAGE>
H. OVERSIGHTS
It is understood and agreed that, if failure to comply with any terms of this
Agreement is shown to be unintentional and the result of misunderstanding or
oversight on the part of either the REINSURED or the REINSURER, both the
REINSURED and the REINSURER shall be restored to the positions they would have
occupied had no such misunderstanding or oversight occurred.
I. REDUCTIONS
If a portion of the insurance issued by the REINSURED on a life reinsured
hereunder is terminated, reinsurance on that life hereunder shall be reduced.
J. INSPECTION OF RECORDS
The REINSURER and the REINSURED each shall have the right at any reasonable time
to inspect, at the office of the other, all books and documents relating to the
reinsurance under this Agreement.
K. ARBITRATION
15
<PAGE>
1. It is the intention of the parties that customs and usages of the business
of reinsurance shall be given full effect in the interpretation of this
Agreement. The parties shall act in all things with the highest good
faith. A dispute or difference between the parties with respect to the
operation or interpretation of this Agreement on which an amicable
understanding cannot be reached shall be decided by arbitration. The
arbitrators are empowered to decide all questions or issues and shall be
free to reach their decision from the standpoint of equity and customary
practices of the insurance and reinsurance industry rather than from that
of the strict law.
2. The court of arbitration shall be held in the city where the Home Office of
the REINSURER is located and shall consist of three arbitrators who must be
officers of life insurance companies other than the parties to this
Agreement or their affiliates or subsidiaries. The REINSURED shall appoint
one arbitrator and the REINSURER the second. These two arbitrators shall
then select the third before arbitration begins. Should one of the parties
decline to appoint an arbitrator or should the two arbitrators be unable to
agree upon the choice of a third, such appointment shall be left to the
president of the American Council of Life Insurance or its successor
organization.
3. The arbitrators shall decide by a majority of votes and from their written
decision there can be no appeal. The cost of arbitration, including the
fees of the arbitrators, shall be borne by the losing party unless the
arbitrators decide otherwise.
L. INSOLVENCY
16
<PAGE>
1. In the event of the insolvency of the REINSURED, all reinsurance shall be
payable directly to the liquidator, receiver, or statutory successor of the
REINSURED, without diminution because of the insolvency of the REINSURED.
2. In the event of insolvency of the REINSURED, the liquidator, receiver, or
statutory successor shall give the REINSURER written notice of the pendency
of a claim on a policy reinsured within a reasonable time after such claim
is filed in the insolvency proceeding. During the pendency of any such
claim, the REINSURER may investigate such claim and interpose in the name
of the REINSURED (its liquidator, receiver, or statutory successor), but at
its own expense, in the proceeding where such claim is to be adjudicated
any defense or defenses which the REINSURER may deem available to the
REINSURED or its liquidator, receiver, or statutory successor.
3. The expense thus incurred by the REINSURER shall be chargeable, subject to
court approval, against the REINSURED as part of the expense of liquidation
to the extent of a proportionate share of the benefit which may accrue to
the REINSURED solely as a result of the defense undertaken by the
REINSURER. Where two or more reinsurers are participating in the same
claim and a majority in interest elect to interpose a defense or defenses
to any such claim, the expense shall be apportioned in accordance with the
terms of the reinsurance agreement as though such expenses had been
incurred by the REINSURED.
4. In the event that (a) the REINSURER shall execute and file articles of
dissolution or (b) the Illinois Insurance Department shall be directed to
rehabilitate or liquidate the REINSURER pursuant to an order of
rehabilitation or liquidation, reinsurance
17
<PAGE>
hereunder shall, at the option of the REINSURED, be terminated as of a date
concurrent with or subsequent to the filing of the articles of dissolution
or issuance of the order of liquidation, as selected by the REINSURED.
Written notification of such termination and date shall be given by the
REINSURED to the REINSURER. Termination under this paragraph shall be
subject to the provisions of the Illinois Insurance Code. The scope of
this paragraph and the option of the REINSURED to terminate pursuant hereto
shall not be limited or otherwise affected by any other provision of this
Agreement.
M. PARTIES TO AGREEMENT
This is an Agreement for indemnity reinsurance solely between the REINSURED and
the REINSURER. The acceptance of reinsurance hereunder shall not create any
right or legal relation whatever between the REINSURER and the insured or the
beneficiary under any policy reinsured hereunder, and the REINSURED shall be and
remain solely liable to such insured or beneficiary under any such policy.
N. EFFECTIVE DATE
The effective date of this Agreement is January 1, 1997.
18
<PAGE>
O. PAYMENTS UPON TERMINATION OF AGREEMENT
1. In the event that this Agreement is terminated pursuant to any provision
hereof, a terminal accounting and settlement shall take place.
2. The terminal accounting date for the termination shall be the effective
date of termination pursuant to any notice of termination given under this
Agreement or such other date as shall be mutually agreed to in writing.
3. The terminal accounting period shall be the period commencing on January 1
of the calendar year in which the termination is effective and ending on
the terminal accounting date.
4. The terminal accounting and settlement shall consist of a terminal reserve
adjustment by the REINSURED, as described in paragraph 5 below; and an
amount paid by the REINSURER, as described in paragraph 6 below.
5. The REINSURED shall pay to the REINSURER a terminal reserve adjustment in
an amount equal to the reserves established in the general account of the
REINSURED on the day immediately prior to the terminal accounting date on
the portions of the policies reinsured hereunder.
6. The REINSURER shall pay to the REINSURED an amount equal to the reserves
established in the general account of the REINSURED on the day immediately
prior to the terminal accounting date on the portions of the policies
reinsured hereunder.
19
<PAGE>
P. DURATION OF AGREEMENT
1. Except as otherwise provided herein, this Agreement shall be unlimited in
duration.
2. This Agreement may be terminated at any time by either party giving 90 days
written notice of termination.
3. During the 90 day period, this Agreement shall continue to operate in
accordance with its terms.
4. The REINSURER and the REINSURED shall remain liable after termination, in
accordance with the terms and conditions of this Agreement, with respect to
all reinsurance ceded to the REINSURER prior to termination of this
Agreement.
Q. ENTIRE CONTRACT
This agreement shall constitute the entire agreement between the parties with
respect to the business being reinsured thereunder and that there are no
understandings between the parties other than in this agreement.
Any changes or modifications to the agreement shall be null and void unless made
by amendment to the agreement and signed by both parties.
R. EXECUTION
IN WITNESS WHEREOF the said
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY OF Springfield, Illinois
and the said
20
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY OF Springfield, Illinois,
have by their respective officers executed this Agreement in duplicate on the
dates shown below.
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
By /s/ Robert J. Gibbons By /s/ Ross D. Friend
------------------------ ----------------------------
Title President TITLE Sr. V.P., Gen. Counsel &
-------------------- ------------------------------
Secretary
------------------------------
Date August 8, 1997 Date August 8, 1997
--------------------- -------------------------
By /s/ Barbara J. Fossum
------------------------
Title Vice President
--------------------
Date August 8, 1997
---------------------
THE FRANKLIN LIFE INSURANCE COMPANY
By /s/ Robert M. Beuerlein By /s/ Elizabeth E. Arthur
------------------------ -------------------------------------
Title Sr. V.P.-Actuarial TITLE V.P., Assoc. Gen. Counsel & Asst.
-------------------- ---------------------------------------
Secretary
---------------------------------------
Date August 8, 1997 Date August 8, 1997
--------------------- ----------------------------------
By /s/ Cheryl E. Morton
------------------------
Title V.P.-Actuarial
--------------------
Date August 8, 1997
---------------------
(Original SCHEDULE I replaced in Amendment I, 9-1-97)
SCHEDULE I
POLICIES SUBJECT TO REINSURANCE
21
<PAGE>
Policies on Policy Form T1735 sold by registered representatives of Franklin
Financial Services Corporation, are subject to reinsurance hereunder, except as
provided in Schedule II. Riders, by whomever sold, attached to such policies
are also subject to reinsurance hereunder.
As of January 1, 1997, only policies issued in the following states will be
included in this reinsurance agreement:
Alabama Arkansas
District of Columbia Hawaii
Idaho Illinois
Indiana Iowa
Kansas Kentucky
Maryland Minnesota
Mississippi Missouri
Montana Nebraska
Nevada New Mexico
Oklahoma North Dakota
Oregon South Carolina
South Dakota Tennessee
Utah Washington
Wisconsin Wyoming
22
<PAGE>
(Original SCHEDULE II replaced in Amendment I, 9-1-97)
SCHEDULE II
AMOUNT OF REINSURANCE
The portion of the risk reinsured under this Agreement shall be 30% on any
policy to the extent reinsured hereunder, as provided in Schedule I, in
accordance with the following rules:
1. There shall be no reinsurance on any benefit under this Agreement
where the REINSURED does not retain its normal retention of risk on a
policy hereunder.
2. There shall be no reinsurance on policies issued as term conversions
from or replacements of policies originally issued by The Franklin
Life Insurance Company, which were originally reinsured under other
reinsurance agreements.
3. There shall be no reinsurance on an automatic basis for any risk
offered on a facultative basis by the REINSURED to any company.
23
<PAGE>
SCHEDULE III
PERIODIC REPORT
Period Beginning:
Period Ending:
INDIVIDUAL INSURANCE
Reserves in the General Account
Beg. Of Period
End of Period
Receipts
Premiums
1st Yr.
Renewal
S/A Transfers
Others
Disbursements of Insurance Death Benefits
Death Benefit Payments
S/A Transfers
Premium Taxes
Policy Expense Allowances
Commissions
1st Yr.
Renewal
Allowance
Investment Expense Allowances
Other
Life Insurance Issued (Number and
Face Amount)
Life Insurance in Force (Number and
Face Amount)
Term Insurance Riders Inforce
(face amount)
ADB Inforce (face amount)
Waiver Benefit in Force
24
<PAGE>
SCHEDULE IV
ANNUAL REPORTS
A. ANNUAL STATEMENT
All the appropriate entries for the following parts of the REINSURER'S NAIC
blank shall be furnished to the REINSURER by the REINSURED:
Page 5 Analysis of operations by lines of business
Page 6 Analysis of increase in reserves during the year
Exhibit 1 Premiums and annuity considerations
Exhibit 6 Taxes, licenses and fees
Exhibit 11 Policy and contract claims
Page 15 Exhibit of Life Insurance
Schedule T Premiums and annuity considerations
B. TAX RETURN INFORMATION
All information used in preparing the REINSURED'S Federal Income Tax Return
(Form 1120L) and which is necessary for the REINSURER to complete each item
in its Federal Income Tax Return with respect to the reinsurance hereunder
shall be furnished to the REINSURER by the REINSURED on a timely basis.
25
<PAGE>
SCHEDULE V
ADMINISTRATION CHARGES
1. For each policy issued and reinsured during a calendar year, the REINSURER
shall pay the REINSURED $30.00 (30% of $100.00) to cover issue and
underwriting expenses incurred by the REINSURED.
However, if such policy is a term conversion from or a replacement of a
policy originally written by The Franklin Life Insurance Company, where
full evidence of insurability has not been secured, the REINSURER shall pay
the REINSURED a reduced amount of $15 (30% of $50.00).
2. The REINSURER shall pay the REINSURED each year an amount to cover
administrative expenses incurred by the REINSURED. This amount shall be
calculated by multiplying $3.00 (30% of $10.00) by .5 times the following:
b) the number of reinsured policies inforce at the end of the prior
calendar year, plus
c) the number of policies in force at the end of the current calendar
year, plus
d) the number of policies issued and reinsured during the current
calendar year.
The above unit charges will apply during the first year of this agreement
and will subsequently be redetermined to follow future experience.
26
<PAGE>
SCHEDULE VI
EXPENSE ALLOWANCE
1. For each policy issued and reinsured during a calendar year, the REINSURER
shall pay the REINSURED $54.00 (30% of $180.00) as an expense allowance to
cover service fees for issue and acquisition incurred by the REINSURED.
2. The REINSURER shall pay the REINSURED each year an expense allowance to
cover administrative service fees incurred by the REINSURED. This
allowance shall be calculated by multiplying $18.00 (30% of $60.00) by .5
times the following:
(a) the number of reinsured policies in force at the end of the prior
calendar year, plus
(b) the number of policies in force at the end of the current calendar
year, plus
(c) the number of policies issued and reinsured during the current
calendar year.
The above unit charges will apply during the first year of this agreement
and will subsequently be redetermined to follow future experience.
27
<PAGE>
Exhibit 1-A(8)(e)(1)
AMENDMENT NO. 1
TO THE MODIFIED COINSURANCE AGREEMENT
BETWEEN
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY OF SPRINGFIELD, ILLINOIS
AND
THE FRANKLIN LIFE INSURANCE COMPANY OF SPRINGFIELD, ILLINOIS
Except as hereinafter specified, all terms and conditions of the Modified
Coinsurance Agreement dated January 1, 1997, amendments and addenda attached
thereto shall apply, and this amendment is to be attached and made part of
aforesaid agreement.
This amendment is effective September 1, 1997.
I. SCHEDULE I
Replace SCHEDULE I with the attached SCHEDULE I (revised 9-1-97)
II. SCHEDULE II
Replace SCHEDULE II with the attached SCHEDULE II (revised 9-1-97)
In Witness Whereof the REINSURED (The American Franklin Life Insurance Company)
and the REINSURER (The Franklin Life Insurance Company) have signed, duly
attested and dated hereunder by their respective authorized officers:
THE AMERICAN FRANKLIN THE FRANKLIN LIFE
LIFE INSURANCE COMPANY LIFE INSURANCE COMPANY
/s/ William A. Simpson /s/ Robert M. Beuerlein
- ------------------------------ ----------------------------------------
Signature Signature
William A. Simpson Robert M. Beuerlein
Chairman and President Senior Vice President-Actuarial
- ------------------------------ ----------------------------------------
Title Title
/s/ Ross D. Friend /s/ Elizabeth E. Arthur
- ------------------------------ ----------------------------------------
Signature Signature
Elizabeth E. Arthur
Ross D. Friend Vice President, Associate
Assistant Secretary General Counsel and Assistant Secretary
- ------------------------------ ----------------------------------------
Title Title
/s/ Barbara Fossum /s/ Cheryl E. Morton
- ------------------------------ ----------------------------------------
Attested Attested
Barbara Fossum Cheryl E. Morton
Vice President Vice President-Actuarial
- ------------------------------ ----------------------------------------
Title Title
February 25, 1998 February 25, 1998
- ------------------------------ ----------------------------------------
Date Date
<PAGE>
(Revised 9-1-97)
SCHEDULE I
POLICIES SUBJECT TO REINSURANCE
Policies on Policy Form T1735 sold by registered representatives of Franklin
Financial Services Corporation, are subject to reinsurance hereunder, except as
provided in Schedule II. Riders, by whomever sold, attached to such policies
are also subject to reinsurance hereunder.
<PAGE>
(Revised 9-1-97)
SCHEDULE II
AMOUNT OF REINSURANCE
The portion of the risk reinsured under this Agreement shall be 30% on any
policy to the extent reinsured hereunder, as provided in Schedule I, in
accordance with the following rules:
1. There shall be no reinsurance on any benefit under this Agreement
where the REINSURED does not retain its normal retention of risk on a
policy hereunder.
2. There shall be no reinsurance on policies issued as term conversions
from or replacements of policies originally issued by The Franklin
Life Insurance Company, which were originally reinsured under other
reinsurance agreements.
3. There shall be no reinsurance on an automatic basis for any risk
offered on a facultative basis by the REINSURED to any company.
4. There shall be no reinsurance on policies sold in states where The
Franklin Life Insurance Company does not have variable authority as
required for this modified coinsurance agreement.
Additional states will be included in this agreement by mutual
agreement between the REINSURED and The Franklin Life Insurance
Company at a stated effective date or dates, subject to the provisions
in the prior paragraph.
<PAGE>
<TABLE>
<S><C>
EXHIBIT 1-A(10)
APPLICATION TO
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
Springfield, Illinois 62713
- -----------------------------------------------------------------------------------------------------------------
SECTION 1 - CLIENT INFORMATION
- -----------------------------------------------------------------------------------------------------------------
1.a. PROPOSED INSURED
Date of Birth Place of Height
LAST FIRST MIDDLE Sex Relationship Mo. Day Yr. Birth Ft. In. Wt.
- -----------------------------------------------------------------------------------------------------------------
(Primary)
- -----------------------------------------------------------------------------------------------------------------
Drivers License Number & State Social Security No.: - -
- -----------------------------------------------------------------------------------------------------------------
b. SPOUSE, BUSINESS PARTNER, OR APPLICANT FOR JUVENILE POLICY
Date of Birth Place of Height
LAST FIRST MIDDLE Sex Relationship Mo. Day Yr. Birth Ft. In. Wt.
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Drivers License Number & State Social Security No.: - -
- -----------------------------------------------------------------------------------------------------------------
DEPENDENT CHILDREN (LIST ONLY NATURAL CHILDREN, STEPCHILDREN OR LEGALLY ADOPTED
CHILDREN OF THE PROPOSED INSURED OR SPOUSE.)
Date of Birth Place of Height
LAST FIRST MIDDLE Sex Relationship Mo. Day Yr. Birth Ft. In. Wt.
- -----------------------------------------------------------------------------------------------------------------
c.
- -----------------------------------------------------------------------------------------------------------------
d.
- -----------------------------------------------------------------------------------------------------------------
e.
- -----------------------------------------------------------------------------------------------------------------
f.
- -----------------------------------------------------------------------------------------------------------------
g.
- -----------------------------------------------------------------------------------------------------------------
For children not residing with Proposed Insured or Spouse, circle the corresponding letter above
(C through G) and give their complete address.
Name ______________________________________________________________________________________________________
Street, P.O. Box or R.R. __________________________________________________________________________________
City _________________________________________________ State ________________ ZIP Code ____________________
- -----------------------------------------------------------------------------------------------------------------
2. CURRENT ADDRESS OF PROPOSED INSURED OR APPLICANT FOR JUVENILE POLICY
RESIDENCE: BUSINESS:
Street, P.O. Box or R.R. ____________________________ Name ________________________________________________
_____________________________________________________ Street, P.O. Box or R.R. ____________________________
City, State and ZIP Code ____________________________ _____________________________________________________
_____________________________________________________ City, State and ZIP Code ____________________________
Telephone Number: ___________________________________ _____________________________________________________
_____________________________________________________ Telephone Number: ___________________________________
Best time to call: __________ A.M. or ___________P.M. Best time to call: __________ A.M. or ___________P.M.
SEND MAIL TO: / / Proposed Insured or Applicant / / Business
for Juvenile Policy / / Other____________________________________________
/ / Owner Shown on Page 2 _________________________________________________
- -----------------------------------------------------------------------------------------------------------------
1
</TABLE>
<PAGE>
<TABLE>
<S><C>
- -----------------------------------------------------------------------------------------------------------------
SECTION 2 - PLAN INFORMATION
COMPLETE THE APPROPRIATE SECTION BASED ON THE PRODUCT BEING SOLD.
MAKE SURE YOU PLACE CHECK MARKS IN THE APPROPRIATE BOXES.
- -----------------------------------------------------------------------------------------------------------------
3. / / VARIABLE UNIVERSAL LIFE AMOUNT
Initial Specified Amount (Face Amount). . . . . . . $__________
Planned Periodic Premium. . . . . . . . . . . . . . $__________
/ / Accidental Death Benefit (ADB). . . . . . . . . $__________
/ / Term Insurance On Other Insured (OIR) . . . . . $__________ (Spouse or Business Partner Only)
/ / Children's Term . . . . . . . . . . . . . . . . __________ Units (1 Unit = $1,000)
/ / Disability - Waiver Monthly Deductions
/ / _______________________________________________
/ / _______________________________________________
DEATH BENEFIT OPTION (Check One)
/ / Option A - Level / / Option B - Increasing
PREMIUM INSTRUCTIONS: PLACE CHECK MARKS IN THE APPROPRIATE BOXES.
MODE METHOD
/ / Annually / / Direct Bill
/ / Semi-Annually / / Bank Draft
/ / Quarterly / / Salary Allotment Amount Collected With Application $__________________
/ / Monthly Date of Check _______________________________________
- -----------------------------------------------------------------------------------------------------------------
SECTION 3 - OWNERSHIP & BENEFICIARY INFORMATION
- -----------------------------------------------------------------------------------------------------------------
4. POLICYOWNER AND TAXPAYER IDENTIFICATION SECTION (MUST BE COMPLETED.)
NAME OF OWNER _______________________________________ NAME OF CONTINGENT OWNER ____________________________
Relationship ________________________________________ Relationship ________________________________________
Telephone Number ____________________________________ Telephone Number_____________________________________
Social Security No. Or Tax I.D. _____________________ Social Security No. Or Tax I.D. _____________________
Street, P.O. Box or R.R. ____________________________ Street, P.O. Box or R.R. ____________________________
City, State and ZIP Code ____________________________ City, State and ZIP Code ____________________________
5. BENEFICIARY SECTION Make sure to provide full legal name for all named beneficiaries.
(MUST BE COMPLETED.)
PRIMARY BENEFICIARY FOR PROPOSED INSURED PRIMARY BENEFICIARY FOR DEPENDENT CHILDREN
_____________________________________________________ _____________________________________________________
FIRST MIDDLE LAST FIRST MIDDLE LAST
_____________________________________________________ _____________________________________________________
RELATIONSHIP RELATIONSHIP
CONTINGENT BENEFICIARY FOR PROPOSED INSURED CONTINGENT BENEFICIARY FOR DEPENDENT CHILDREN
_____________________________________________________ _____________________________________________________
FIRST MIDDLE LAST FIRST MIDDLE LAST
_____________________________________________________ _____________________________________________________
RELATIONSHIP RELATIONSHIP
PRIMARY BENEFICIARY FOR SPOUSE OR BUSINESS PARTNER TRUST / / PRIMARY / / CONTINGENT
_____________________________________________________ _____________________________________________________
FIRST MIDDLE LAST NAME OF TRUST
_____________________________________________________ _____________________________________________________
RELATIONSHIP
CONTINGENT BENEFICIARY FOR SPOUSE OR BUSINESS PARTNER _____________________________________________________
DATE OF TRUST
_____________________________________________________ _____________________________________________________
FIRST MIDDLE LAST NAME OF TRUSTEE
_____________________________________________________ _____________________________________________________
RELATIONSHIP
6. COMMON DISASTER CLAUSE
/ / No
/ / Yes - ____________________ days. (NO MORE THAN 30 DAYS)
- -----------------------------------------------------------------------------------------------------------------
2
</TABLE>
<PAGE>
<TABLE>
<S><C>
- -----------------------------------------------------------------------------------------------------------------
SECTION 4 - INSURANCE AND REPLACEMENT INFORMATION
- -----------------------------------------------------------------------------------------------------------------
7. OCCUPATION OF PROPOSED INSURED 8. OCCUPATION OF SPOUSE OR BUSINESS PARTNER
OR APPLICANT
Occupation __________________________________________ Occupation________________________________________
Years _______________________________________________ Years ____________________________________________
Type of Business ____________________________________ Type of Business _________________________________
Duties ______________________________________________ Duties ___________________________________________
Do you have any part-time or other full-time jobs? __ Do you have any part-time or other full-time jobs?
/ / Yes ______________ / / No If yes, give details / / Yes / / No If yes, give details __________
_____________________________________________________ __________________________________________________
Do you contemplate any change in occupation? ________ Do you contemplate any change in occupation?
/ / Yes ______________ / / No If yes, give details / / Yes / / No If yes, give details __________
_____________________________________________________ __________________________________________________
- -----------------------------------------------------------------------------------------------------------------
9. REPLACEMENTS AND EXCHANGES
IF ANSWERS TO a. AND/OR b. ARE YES, ATTACH REPLACEMENT FORMS, 1035 EXCHANGE FORMS AND REPLACED POLICIES.
LIST THE COMPANIES BEING REPLACED, TYPE OF COVERAGE AND POLICY NUMBERS.
a. Will this insurance replace, change or use the cash value of any existing insurance policy or annuity
by any company?
/ / Yes / / No
b. Is this insurance intended to be a 1035 tax-free exchange? / / Yes / / No
-----------------------------------------------------------------------------------------------------------
Company Type of Coverage Policy Number
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
10. EXISTING AND PENDING INSURANCE
Total amount of all insurance policies in force and applied for in all companies. $_______________________
(LIST ALL EXISTING AND PENDING INSURANCE FOR ALL PROPOSED INSUREDS. INDICATE IF NONE.)
-----------------------------------------------------------------------------------------------------------
Name of Insured Company Type of Coverage Face Amount ADB Amount
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------
a. Has any application for life insurance been declined, postponed, rate increased, or benefits limited on any
Proposed Insured?
/ / Yes / / No If yes, give details. ________________________________________________________________
b. Will Proposed Insured Juvenile have more life insurance than parents or other family members?
/ / Yes / / No If yes, give details. ________________________________________________________________
- -----------------------------------------------------------------------------------------------------------------
3
</TABLE>
<PAGE>
<TABLE>
<S><C>
- -----------------------------------------------------------------------------------------------------------------
SECTION 5 - NONMEDICAL & FINANCIAL INFORMATION
- -----------------------------------------------------------------------------------------------------------------
CHECK THE APPROPRIATE BOXES FOR ANY Proposed Spouse or Dependent
PROPOSED INSUREDS Insured Business Partner Children
YES NO YES NO YES NO
- -----------------------------------------------------------------------------------------------------------------
11. HAS ANY PROPOSED INSURED:
a. Within the last two years or does Proposed Insured or
Applicant in the future intend to:
(1) Fly as a pilot, student or crew member in any type of
aircraft? . . . . . . . . . . . . . . . . . . . . . . . . / / / / / / / / / / / /
(2) Engage in underwater diving, parachuting, hang
gliding, automobile, boat or motorcycle racing? . . . . . / / / / / / / / / / / /
IF YES, do you agree to accept any policy issued
hereon with an exclusion rider? . . . . . . . . . . . . . / / / / / / / / / / / /
IF NO, submit appropriate Questionnaire.
(3) Travel or reside outside of the United States?. . . . . . / / / / / / / / / / / /
b. Used Tobacco of any form within the past 12 months? . . . . . / / / / / / / / / / / /
c. Within the past five years, used any drugs, substances,
or other controlled materials without a prescription by
a physician?. . . . . . . . . . . . . . . . . . . . . . . . . / / / / / / / / / / / /
d. Been treated or counseled, or been advised to seek
treatment or counsel (inpatient or outpatient) for
substance abuse, including drugs and alcohol? . . . . . . . . / / / / / / / / / / / /
e. Within the past three years, been convicted of a motor
vehicle moving violation, or had drivers license
suspended or revoked? . . . . . . . . . . . . . . . . . . . . / / / / / / / / / / / /
- -----------------------------------------------------------------------------------------------------------------
12. HAS ANY PROPOSED INSURED WITHIN THE PAST 10 YEARS:
a. Been diagnosed or treated by a member of the medical
profession as having Acquired Immune Deficiency Syndrome
(AIDS) or AIDS-Related Complex (ARC)? . . . . . . . . . . . . / / / / / / / / / / / /
b. Tested positive for antibodies to the AIDS (HIV) virus? . . . / / / / / / / / / / / /
- -----------------------------------------------------------------------------------------------------------------
13. HAS ANY PROPOSED INSURED EITHER CURRENTLY OR WITHIN THE
PAST FIVE YEARS:
a. Consulted, been examined or treated by any physician or
practitioner? . . . . . . . . . . . . . . . . . . . . . . . . / / / / / / / / / / / /
b. Had an X-ray, electrocardiogram, or other diagnostic test?. . / / / / / / / / / / / /
c. Had observation or treatment at a clinic, hospital,
sanitarium, or other medical facility?. . . . . . . . . . . . / / / / / / / / / / / /
d. Been advised to have any hospitalization or surgery which
has not been completed? . . . . . . . . . . . . . . . . . . . / / / / / / / / / / / /
- -----------------------------------------------------------------------------------------------------------------
14. HAS ANY PROPOSED INSURED EVER BEEN TREATED FOR OR HAD
ANY KNOWN INDICATION OF:
a. Chest pain, high blood pressure, heart murmur, heart attack,
or other disorder of the heart or blood vessels?. . . . . . . / / / / / / / / / / / /
b. Cancer, tumor, cyst, disease of skin or lymph glands? . . . . / / / / / / / / / / / /
c. ASTHMA*, bronchitis, emphysema, shortness of breath, or other
disease of the lungs or chronic respiratory disorder? . . . . / / / / / / / / / / / /
d. Diabetes; thyroid or other endocrine disorders? . . . . . . . / / / / / / / / / / / /
e. Fainting, EPILEPSY*, SEIZURES*, paralysis or stroke;
depression or any other nervous or mental disorder;
abnormality of the brain? . . . . . . . . . . . . . . . . . . / / / / / / / / / / / /
f. Hernia, ULCER*, or other disorder of the stomach, gall
bladder, liver, intestines, rectum, or pancreas?. . . . . . . / / / / / / / / / / / /
g. Sugar or albumin in urine; stone or other disorder of kidney,
bladder, prostate; disorder of reproductive organs? . . . . . / / / / / / / / / / / /
h. Disorder of muscles, bone, joint, BACK*, SPINE*;
ARTHRITIS*, or amputation?. . . . . . . . . . . . . . . . . . / / / / / / / / / / / /
i. Anemia or other disorder of the blood?. . . . . . . . . . . . / / / / / / / / / / / /
j. Disorder of eyes, ears, nose, or throat?. . . . . . . . . . . / / / / / / / / / / / /
k. Abnormal cholesterol or other blood fat or, lipid study?. . . / / / / / / / / / / / /
(*COMPLETE APPROPRIATE QUESTIONNAIRE)
- -----------------------------------------------------------------------------------------------------------------
15. IS ANY PROPOSED INSURED NOW PREGNANT? . . . . . . . . . . . . / / / / / / / / / / / /
- -----------------------------------------------------------------------------------------------------------------
16. IS ANY PROPOSED INSURED NOW TAKING ANY PRESCRIPTION
OR NON-PRESCRIPTION MEDICATIONS OR DRUGS? . . . . . . . . . . / / / / / / / / / / / /
- -----------------------------------------------------------------------------------------------------------------
4
</TABLE>
<PAGE>
<TABLE>
<S><C>
- -----------------------------------------------------------------------------------------------------------------
SECTION 5 - NONMEDICAL & FINANCIAL INFORMATION (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------
CHECK THE APPROPRIATE BOXES FOR ANY Proposed Spouse or Dependent
PROPOSED INSUREDS Insured Business Partner Children
YES NO YES NO YES NO
- -----------------------------------------------------------------------------------------------------------------
17. Do you have a personal physician or belong to an H.M.O. or
clinic? . . . . . . . . . . . . . . . . . . . . . . . . . . . / / / / / / / / / / / /
If so, please provide information below.
- -----------------------------------------------------------------------------------------------------------------
a. PROPOSED INSURED: b. SPOUSE, BUSINESS PARTNER, OR DEPENDENT CHILDREN
____________________________________________________ ________________________________________________________
NAME NAME
____________________________________________________ ________________________________________________________
TELEPHONE NUMBER TELEPHONE NUMBER
____________________________________________________ ________________________________________________________
ADDRESS (Street, City, State, ZIP) ADDRESS (Street, City, State, ZIP)
____________________________________________________ ________________________________________________________
DATE LAST SEEN REASON DATE LAST SEEN REASON
- -----------------------------------------------------------------------------------------------------------------
18. DETAILS OF ALL YES ANSWERS - QUESTIONS 13 THROUGH 17 ABOVE:
Ques. Person Mo/Yr Ailment Treatment Name & Address of Physician/Medical Facility CHECK if Same
I, S, BP, C as 17
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
19. FAMILY HISTORY: MAKE A NOTE OF DIABETES, CANCER, MELANOMA, HEART, AND KIDNEY DISEASE.
LIVING DECEASED
Age(s) Health History Age(s) at Death Cause of Death
- -----------------------------------------------------------------------------------------------------------------
Father
- -----------------------------------------------------------------------------------------------------------------
Mother
- -----------------------------------------------------------------------------------------------------------------
Siblings
- -----------------------------------------------------------------------------------------------------------------
Siblings
- -----------------------------------------------------------------------------------------------------------------
Siblings
- -----------------------------------------------------------------------------------------------------------------
Siblings
- -----------------------------------------------------------------------------------------------------------------
5
</TABLE>
<PAGE>
<TABLE>
<S><C>
- -----------------------------------------------------------------------------------------------------------------
SECTION 5 - NONMEDICAL & FINANCIAL INFORMATION (CONTINUED)
- -----------------------------------------------------------------------------------------------------------------
20. FINANCIAL INFORMATION MUST BE COMPLETED FOR ALL SALES. IF FACE AMOUNT APPLIED FOR IS $750,000 OR MORE,
PROVIDE AN EXPANDED FINANCIAL STATEMENT.
A. FOR PERSONAL INSURANCE:
1. What is the purpose of the insurance?
CHECK ALL THAT APPLY. / / Estate preservation / / Family protection
/ / Mortgage protection / / Charitable
/ / Other
2. What is the Proposed Insured's What is the Spouse's (complete only if Other
Insured Rider is requested)
/ / Annual earned income $_______________________ / / Annual earned income $___________________________
/ / Annual interest & other income $_____________ / / Annual interest & other income $_________________
/ / Total assets $_______________________________ / / Total assets $___________________________________
/ / Total liabilities $__________________________ / / Total liabilities $______________________________
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
B. FOR BUSINESS INSURANCE:
1. What is the purpose of the insurance? 2. Annual net profit before taxes:
CHECK ALL THAT APPLY.
/ / Key person / / Creditor Last Year $_______________________________________
/ / Buy-Sell / / Cross Purchase 2 years ago $_____________________________________
/ / Split dollar / / Other
/ / Stock redemption
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
C. FOR KEY PERSON INSURANCE:
1. Are all partners of key people to be covered? (If "No" explain). / / Yes / / No
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
2. Does Proposed Insured have an ownership interest in the business? / / Yes / / No
If "Yes," what is Proposed Insured's percent of ownership? ___________%
- -----------------------------------------------------------------------------------------------------------------
FOR HOME OFFICE ADMINISTRATIVE CHANGES ONLY:
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
6
</TABLE>
<PAGE>
<TABLE>
<S><C>
- -----------------------------------------------------------------------------------------------------------------
THERE HAS BEEN PAID TO THE AGENT THE SUM OF $ _____________ IN CASH, ON ACCOUNT OF THE FIRST PREMIUM (SEE
CONDITIONAL PREMIUM RECEIPT).
IT IS REPRESENTED that the statements and answers on this form and those given to the medical examiner on
Part 2, if required, are full, complete and true to the best of my knowledge and belief. IT IS AGREED that:
(1) the only statements which are to be considered as the basis of the policy are those in the application
including Part 2 if required; (2) no waiver or modification shall bind The American Franklin Life Insurance
Company (American Franklin) unless in writing and signed by the President and Secretary; (3) NO INSURANCE
SHALL BE CONSIDERED IN EFFECT UNDER THIS APPLICATION: (a) except as may be provided in a Conditional Premium
Receipt bearing the same date as this application; and (b) unless and until the application is approved and
accepted by American Franklin at its home office; and (c) until the policy has been manually delivered to and
accepted by the Owner during the lifetime of the person proposed for insurance; and (d) unless the health and
insurability of the person proposed for insurance has not changed since the date of this application; and (e)
unless the first premium has been paid in full.
IT IS FURTHER AGREED that, if the health or any of the answers or statements of the person proposed for
insurance change prior to delivery of the policy, I must so inform American Franklin in writing.
American Franklin may indicate administrative changes in the Section entitled "For Home Office Administrative
Changes Only." Any other changes in this application shall be subject to the written consent of the owner.
American Franklin is authorized to obtain medical and other information. This is to be done in order to
evaluate this application for life insurance.
AUTHORIZATION: I authorize: any physician; any practitioner; any hospital; any clinic; any other medical or
medically related facility; The Veterans Administration; the employer of any person named in Item 1.; American
Franklin's reinsurers; insurance support organizations; authorized representatives; the Medical Information
Bureau; or any insurance company; who have/has any information about any person named in Item 1., to furnish
such information to American Franklin or its reinsurers. THIS AUTHORIZATION IS TO INCLUDE INFORMATION ABOUT
DRUGS, ALCOHOLISM OR MENTAL ILLNESS. This authorization will remain valid for twenty-six (26) months after
the date indicated below.
American Franklin or its reinsurers are authorized to make a brief report regarding any person named in
Item 1. to other life insurance companies to whom such person has applied or may apply.
A photographic copy of this authorization will be as valid as the original.
- -------------------------------------------------------------------------------------------------------------------
CERTIFICATION: UNDER PENALTIES OF PERJURY, I CERTIFY THAT: As owner, the number shown on this form
is my correct Social Security Number or Taxpayer Indentification Number (or I am waiting for a number to be issued
to me); and (a) I am not subject to backup withholding; or (b) Check box if applicable: / / THE INTERNAL REVENUE
SERVICE HAS NOTIFIED ME THAT I AM SUBJECT TO BACKUP WITHHOLDING. THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE
YOUR CONSENT TO ANY PROVISION OF THIS DOCUMENT OTHER THAN THE CERTIFICATIONS REQUIRED TO AVOID BACKUP WITHHOLDING.
- -------------------------------------------------------------------------------------------------------------------
Dated at _______________________________________________ this ____________ day of _______________ , __________
CITY STATE DAY MONTH YEAR
SIGNATURE OF OWNER(S):
X ______________________________________________________ X _____________________________________________________
SIGNATURE OF PROPOSED INSURED OR
APPLICANT (IF JUVENILE CONTRACT)
X ______________________________________________________ X _____________________________________________________
TITLE (IF APPLICABLE) SIGNATURE OF SPOUSE OR BUSINESS PARTNER
X ______________________________________________________ X _____________________________________________________
SIGNATURE OF AGENT (STATE LICENSE NO.)
- -----------------------------------------------------------------------------------------------------------------
7
</TABLE>
<PAGE>
<TABLE>
<S><C>
FIELD ASSOCIATE REPORT
1. Current Marital Status Of Proposed Insured Or Applicant
/ / Single / / Married / / Divorced / / Widowed / / Separated
2. How long have you known any of the Proposed Insureds? _______________________________________________________
3. Are all Proposed Insureds U.S. Citizens?
/ / Yes / / No If "No" give length of residence in U.S. _____________________________________________
4. Are you related by blood or marriage to any Proposed Insured?
/ / Yes / / No Relationship _________________________________________________________________________
5. Have the persons proposed for insurance had other names? (i.e., previous alias, married names, maiden name)
/ / Yes / / No If "Yes" give previous name __________________________________________________________
6. Did you personally see all Proposed Insureds and ask each and every question and accurately record their
answers yourself?
/ / Yes / / No If "No" give full details in Special Requests.
7. Did you give a Conditional Premium Receipt to the Applicant?
/ / Yes / / No If "No" give full details in Special Request
8. Did you give the Consumer Report Notification and Medical Bureau Notification to the Proposed Insureds or
Applicant?
/ / Yes / / No If "No" give full details in Special Requests.
9. Do you have any knowledge or reason to believe that replacement of existing insurance or annuities is
involved?
/ / Yes / / No If "Yes" give full details in Special Requests.
10. Did you notify the Proposed Insured(s) that an inspection report may be required? / / Yes / / No
11. Which of the following have you scheduled?
Resting Blood Med Name of Facility Telephone
Paramed HOS EKG Profile Exam APS or Doctor Address Number Date
Insured
- -----------------------------------------------------------------------------------------------------------------
Spouse/
Bus. Partner
- -----------------------------------------------------------------------------------------------------------------
Child
- -----------------------------------------------------------------------------------------------------------------
Child
- -----------------------------------------------------------------------------------------------------------------
Child
- -----------------------------------------------------------------------------------------------------------------
12. Special Requests:
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
13. Agents to receive commission (MUST BE COMPLETED TO RECEIVE COMMISSIONS)
- -----------------------------------------------------------------------------------------------------------------
Name Contract Number Commission Percent
- -----------------------------------------------------------------------------------------------------------------
-
- -----------------------------------------------------------------------------------------------------------------
-
- -----------------------------------------------------------------------------------------------------------------
-
- -----------------------------------------------------------------------------------------------------------------
I CERTIFY THAT TO THE BEST OF MY KNOWLEDGE: (1) THE INFORMATION PROVIDED IN THIS REPORT AND BY THE OWNER AND
PROPOSED INSURED IN THE APPLICATION IS COMPLETE, ACCURATE, AND CORRECTLY RECORDED; AND (2) THERE IS NOTHING
ADVERSELY AFFECTING THE INSURABILITY OF ANY PROPOSED INSURED OTHER THAN AS INDICATED IN THE APPLICATION.
Date: __________________________________________________ X _____________________________________________________
SIGNATURE OF AGENT
________________________________________________________________ _______________________________________________
TELEPHONE NUMBER FAX NUMBER
</TABLE>
<PAGE>
POLICY MAILING INSTRUCTIONS
Please PRINT OR TYPE below the Name and Address of the person
to whom the policy is to be mailed when issued.
(THIS FORM WILL BE USED AS A MAILING LABEL ... SO PLEASE TYPE OR PRINT CLEARLY)
DO NOT DETACH
- --------------------------------------------------------------------------------
Name ____________________________________________________
Street __________________________________________________
City/State ________________________ ZIP _________________
<PAGE>
<TABLE>
<S><C>
- ------------------------
ATTACH VOIDED CHECK HERE
- ------------------------
NEW APPLICATION PRE-AUTHORIZED CHECK AGREEMENT - Complete, date and sign to create a pre-authorized check agreement.
A VOIDED CHECK IS REQUIRED TO INITIATE A PRE-AUTHORIZED CHECK AGREEMENT. PLEASE ATTACH TO THIS AGREEMENT.
- ------------------------------------------------
FINANCIAL INSTITUTION NAME AND ADDRESS
Bank Name ______________________________________ Draft Day Preferred: __________________________
Office or Drafts will be taken from checking account only.
Branch ______________________________________ Draft Frequency: / / Monthly / / Quarterly
/ / Semi-Annually / / Annually
Street
Address ______________________________________ Draft Amount $ __________________________
City
State & ZIP ___________________________________
- ------------------------------------------------
THE BANK ACCOUNT NUMBER AND TRANSIT ROUTING NUMBERS WILL BE TAKEN FROM THE VOIDED CHECK.
- ------------------------------------------------------------------------------------------------------------------------------
PRINT NAME(S) OF ACCOUNT HOLDER(S)
- ------------------------------------------------------------------------------------------------------------------------------
SIGNATURE OF AT LEAST ONE ACCOUNT HOLDER - EXACTLY AS IT APPEARS ON BANK RECORDS DATE
(CONTINUED-SEE REVERSE SIDE)
CONDITIONAL PREMIUM RECEIPT
CAUTION: No interim or temporary insurance coverage is afforded under the provisions of this receipt and no
insurance will become effective prior to policy delivery and acceptance unless each and every condition specified in
paragraph "FIRST" on the reverse side is fulfilled exactly. No agent of the company and no broker is authorized to
alter or waive any of these conditions.
RECEIVED FROM _____________________________________________________________ $ ______________________________________
in cash (which is tendered subject to the conditions listed on the reverse side) on account of the first ____________ premium
MODE
on proposed insurance on the life of _________________________________________ for which an
PROPOSED INSURED
application is this day made to THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY, Springfield, Illinois 62713.
DATED _______________________________ , _________________ SIGNED X ____________________________________________
MONTH DAY YEAR AGENT'S SIGNATURE
This receipt shall be void if altered or modified or if any check or draft tendered on account of first premium is
not paid when presented for payment.
ALL PREMIUM CHECKS MUST BE MADE PAYABLE TO THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY.
DO NOT MAKE CHECKS PAYABLE TO THE AGENT OR LEAVE THE PAYEE BLANK.
(CONTINUED-SEE REVERSE SIDE)
DETACH AND LEAVE WITH PROPOSED INSURED
(WITH APPLICANT IF PROPOSED INSURED IS AGE 0-14)
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY CONSUMER REPORT NOTIFICATION
As part of the Company's customary processing of applications, an investigative consumer report may be prepared.
This report may be obtained through personal interviews with friends, neighbors and associates, and it typically
concerns information as to character, general reputation, personal characteristics and mode of living, whichever is
applicable. Upon written request within a reasonable period of time, a complete and accurate disclosure of the
nature and scope of such a report, if one is made, will be provided. (Re: United States FCR Act, 1970)
MEDICAL INFORMATION BUREAU NOTIFICATION
One of the prime objectives of The American Franklin Life Insurance Company is to provide insurance at reasonable cost. The
underwriting process (evaluation of risks) is necessary not only to assure this reasonable cost, but also to assure that each
policyholder contributes his fair share of the cost. In considering your application, information from various sources must,
therefore, be considered. These include the results of your physical examination, if required, and any reports we may receive
from doctors and hospitals who have attended to you.
(CONTINUED-SEE REVERSE SIDE)
</TABLE>
<PAGE>
AUTHORIZATION AGREEMENT FOR PRE-ARRANGED PAYMENTS (DEBITS TO MY ACCOUNT) IN
FAVOR OF THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY, HEREAFTER REFERRED TO
AS "THE COMPANY"
The authorization does not modify or change the provisions of my policy
contract(s) except the right of the owner to receive a notice of payment due
which is hereby expressly waived. The debit when paid will constitute a
receipt of the premium and/or other amounts if and when the Company receives
the actual cash therefor at its home office. This authority is to remain in
effect until countermanded by me.
You are hereby authorized, as a convenience to me, to initiate debit
entries, including checks, drafts and other orders whether by electronic or
paper means, with such debits made to my account and drawn by the Company on
my account by and payable to the order of the Company. All debits (plus your
service charge therefore, if any) should be made without inquiry as to
whether or not or when any premiums and/or other amounts due the Company
stated to be covered thereby are due, or as to the correctness of the amount
of the debit. In consideration of your acting hereunder I hereby agree that
if any such debit is not paid by you for any reason, with or without cause or
whether such nonpayment is intentional, inadvertent or otherwise, you shall
be under no liability whatsoever, even though such nonpayment results in the
forfeiture of insurance. The authority is to remain in full force and effect
until the Company and Depository has received written notification from me
(or either of us) of its termination in such times and in such manner as to
afford the Company and Depository a reasonable opportunity to act. Notice of
charge of debit is hereby waived.
It is agreed that the tender referred to on the reverse side is made and
accepted subject to the following conditions:
FIRST: Conditions Under Which Insurance May Become Effective Prior to
Policy Delivery and Acceptance. If each and every one of the following
conditions have been fulfilled EXACTLY - (a) full initial premium must be
paid according to the method of premium payment selected in the application
for the amount of insurance applied for; (b) all medical examinations, tests,
X-rays and electrocardiograms required by the Company's underwriting rules
and standards must be completed within 60 days from the date of the
application; (c) each person proposed for insurance must be on the Effective
Date, as defined below, a risk acceptable under the Company's underwriting
rules, limits and standards for a policy EXACTLY as applied for without
modification and at the rate of premium paid - then insurance as provided by
the terms and conditions of the policy applied for and in use by the Company
on the Effective Date but for an amount not exceeding that specified in
paragraph "SECOND" will become effective as of the Effective Date. "Effective
Date" as used herein means the latest of: (a) the date of application, or (b)
the date of completion of all required medical examinations, tests, X-rays
and electrocardiograms required by the Company's underwriting rules and
standards, or (c) the date, if any, requested in the application.
SECOND: LIMITS PROVISION: Maximum Amount of Insurance Which May Become
Effective Prior to Policy Delivery. The total amount of insurance (life
insurance and accidental death benefits) which may become effective prior to
the policy delivery shall not exceed $500,000.
THIRD: Return of Premium Tendered. If one or more of the conditions in
paragraph "FIRST" have not been fulfilled EXACTLY there shall be no liability
on the part of the Company except to return the premium tendered with this
application.
FOURTH: If the Company does make a counteroffer, no insurance will
become effective until the policy has been manually delivered to and accepted
by the Proposed Insured, or by the Owner, if other than the Proposed Insured,
during the lifetime and continued insurability of each person proposed for
insurance and the first premium for the policy offered has been paid in full.
Information regarding your insurability will be treated as confidential.
We or our reinsurers may, however, make a brief report thereon to the
Medical Information Bureau, a nonprofit membership organization of life
insurance companies, which operates an information exchange on behalf of its
members. If you apply to another Bureau member company for life or health
insurance coverage, or a claim for benefits is submitted to such a company,
the Bureau, upon request, will supply such company with the information it
may have in its file.
Upon receipt of a request from you, the Bureau will arrange disclosure
of any information it may have in your file. If you question the accuracy of
information in the Bureau's file, you may contact the Bureau and seek a
correction in accordance with the procedures set forth in the federal Fair
Credit Reporting Act. The address of the Bureau's information office is Post
Office Box 105, Essex Station, Boston, Massachusetts 02112, telephone number
(617) 426-3660. In Canada the address is 330 University Avenue, Suite 403,
Toronto, Ontario Canada M5G 1R7, telephone number (416) 863-0518.
We or our reinsurers may also release information in our file to other
life insurance companies to whom you may apply for life or health insurance,
or to whom a claim for benefits may be submitted.
The purpose of the Bureau is to protect its members and their
policyholders from bearing the expense created by those who would conceal
facts relevant to their insurability. Information furnished by the Bureau
may alert the insurer to the possible need for further investigation. The
Bureau is not a repository of medical reports from hospitals and physicians,
and information in the Bureau file does not reveal whether applications for
insurance are accepted, rated or declined.
<PAGE>
EXHIBIT 7
POWER OF ATTORNEY
The undersigned, acting in the capacity or capacities stated opposite their
respective names below, hereby constitute and appoint ROSS D. FRIEND and
ELIZABETH E. ARTHUR, and each of them, singularly, attorneys-in-fact of the
undersigned with full power to each of them to sign for and in the name of the
undersigned in the capacities indicated below (a) Post-Effective Amendment No. 5
to the Registration Statement under the Securities Act of 1933, as amended (the
"1933 Act"), on Form S-6 (Reg. No. 33-77470) of The American Franklin Life
Insurance Company and Separate Account VUL-2 of The American Franklin Life
Insurance Company in connection with the registration of units of interest in
Separate Account VUL-2 issued under EquiBuilder III-TM- flexible premium
variable life insurance policies, and (b) any and all amendments (including any
further Post-Effective Amendments) thereto, and to give any certification which
may be required in connection therewith pursuant to Rule 485 under the 1933 Act.
Signature Title Date
--------- ----- ----
/s/ Earl W. Baucom
- ------------------------
Earl W. Baucom Senior Vice President, Chief January 13, 1998
Financial Officer, Treasurer
(principal financial officer and
principal accounting officer) and
Director
/s/ Robert M. Beuerlein
- ------------------------
Robert M. Beuerlein Director January 14, 1998
/s/ Brady W. Creel
- ------------------------
Brady W. Creel Director January 14, 1998
- ------------------------
James S. D'Agostino Director ________, 1998
- ------------------------
Robert M. Devlin Director ________, 1998
/s/ Ross D. Friend
- ------------------------
Ross D. Friend Senior Vice President, General January 19, 1998
Counsel and Assistant Secretary
- ------------------------
Rodney O. Martin, Jr. Director ________, 1998
1
<PAGE>
Signature Title Date
--------- ----- ----
- ------------------------
Jon P. Newton Director ________, 1998
/s/ Gary D. Reddick
- ------------------------
Gary D. Reddick Director January 23, 1998
/s/ William A. Simpson
- ------------------------
William A. Simpson Chairman of the Board and January 19, 1998
President (principal executive
officer)
/s/ Peter V. Tuters
- ------------------------
Peter V. Tuters Director February 9, 1998
2
