<PAGE>
1933 Act Registration No.33-77470
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF
SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM
N-8B-2
POST-EFFECTIVE AMENDMENT NO. 6
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)
/X/ on April 30, 1998 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a) (i)
/ / 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. 6
RECONCILIATION AND TIE
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<CAPTION>
Registration Item
of Form N-8B-2 Location in Prospectus
-------------- ----------------------
<S> <C>
1.......................................... Cover Page.
2.......................................... Cover Page.
3.......................................... Inapplicable.
4.......................................... Distribution of the Policies.
5, 6, 7.................................... Separate Account Investment Choices - The Separate
Account and Its Investment Divisions.
8.......................................... Index to Financial Statements.
9.......................................... Legal Proceedings.
10(a)....................................... The Beneficiary; Assignment of a Policy.
10(b)....................................... Policy Account Value - Determination of the
Unit Value; Dividends.
10(c), 10(d).................................The Features of EquiBuilder 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
-------------- ----------------------
<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
-------------- ----------------------
<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
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<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>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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
VARIABLE INSURANCE PRODUCTS FUND AND Funds located at:
VARIABLE INSURANCE PRODUCTS FUND II 82 Devonshire Street
Boston, Massachusetts 02109
Prospectus Dated April 30, 1998
MASSACHUSETTS FINANCIAL SERVICES COMPANY: 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
- --------------------------------------------------------------------------------
<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 VIP MONEY MARKET DIVISION. VIP MONEY MARKET,
VIP HIGH INCOME, VIP EQUITY-INCOME, VIP GROWTH, VIP OVERSEAS, VIPII INVESTMENT
GRADE BOND, VIPII ASSET MANAGER, VIPII INDEX 500, VIPII ASSET MANAGER: GROWTH,
VIPII 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 ("VIP"), THE VARIABLE INSURANCE PRODUCTS FUND II
("VIPII") 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: VIP MONEY MARKET, VIP HIGH INCOME, VIP
EQUITY-INCOME, VIP GROWTH, VIP OVERSEAS, VIPII INVESTMENT GRADE BOND, VIPII
ASSET MANAGER, VIPII INDEX 500, VIPII ASSET MANAGER: GROWTH, VIPII 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.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
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 . . . . . . . . . . . . . . . . . . . . . . 15
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. . . . . . . . . . . . . . . . . . . . . . 18
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
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TABLE OF CONTENTS (CONTINUED)
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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. . . . . . . . . . . . . . . . . . . . . . . . . . . 24
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. . . . . . . . . . . . . . . . . . . . . . . . . . 28
Reinstatement of the Policy. . . . . . . . . . . . . . . . . . . . . . 29
Policy Periods, Anniversaries, Dates and Ages. . . . . . . . . . . . . 29
Federal Tax Considerations . . . . . . . . . . . . . . . . . . . . . . . . 30
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Tax Status of the Policy . . . . . . . . . . . . . . . . . . . . . . . 30
Possible Tax Law Changes . . . . . . . . . . . . . . . . . . . . . . . 31
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)
<CAPTION>
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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Other Policies and Contracts . . . . . . . . . . . . . . . . . . . . . . . 46
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
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.
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<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 annual premium which is based on the age and sex
of the Insured Person, the initial Face Amount of the policy and the types and
amounts of any additional benefits included in the policy. The Target Premium
for each EquiBuilder III policy is shown on the Policy Information page of the
policy.
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<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 VIP Money Market
1
<PAGE>
division of 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:
VIP Money Market
VIP High Income
VIP Equity-Income
VIP Growth
VIP Overseas
VIPII Investment Grade Bond
VIPII Asset Manager
VIPII Index 500
VIPII Asset Manager: Growth
VIPII Contrafund
MFS Emerging Growth
MFS Research
MFS Growth With Income
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<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 ("FMR") 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 FMR. 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 FMR 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; or
45 days after the Policy Owner signed the application for the policy.
See "Additional Information About EquiBuilder III Policies-Right to Examine the
Policy," below.
5
<PAGE>
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 March 5, 1998.
THE FEATURES OF EQUBUILDER 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.
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<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 is available with 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, VIP Money Market, VIP High Income,
VIP Equity-Income, VIP Growth, VIP Overseas, VIPII Investment Grade Bond,
VIPII Asset Manager, VIPII Index 500, VIPII Asset Manager: Growth, VIPII
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 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 and policies of certain portfolios are similar to the investment
objectives and policies of other funds that may be managed by the same
investment adviser. The investment results of the portfolios, however, may
be higher or lower than the results of such other funds. There can be no
assurance, and no representation is made, that the investment results of any
of the portfolios will be comparable to the investment results of any other
fund, even if the other fund has the same investment adviser. The investment
objectives, policies, restrictions and risks of the portfolios of the Funds
are described in detail in the Prospectuses for the Funds, which are
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<PAGE>
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:
VIP 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.
VIP 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.
VIP 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.
VIP 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.
VIP OVERSEAS PORTFOLIO seeks long-term growth of capital primarily
through investments in foreign securities. VIP 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:
VIPII 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.
VIPII 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 money market instruments.
VIPII 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.
VIPII ASSET MANAGER: GROWTH PORTFOLIO seeks to maximize total return
over the long term through investments in stocks, bonds and short-term
instruments.
VIPII CONTRAFUND PORTFOLIO seeks to increase the value of investments
over the long term by investing in securities of companies whose value FMR
believes is not fully recognized by the public, 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 VIP Money Market, VIPII Investment Grade Bond, VIPII
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 FMR 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.
14
<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.
American Franklin deducts the charges described below to cover costs and
expenses, services provided, and risks assumed under the Policies. The
amount of a charge may not necessarily correspond to the costs associated
with providing the services or benefits indicated by the designation of the
charge or associated with the particular Policy. For example, the sales
expense deduction and the surrender charge may not fully cover all of the
sales and distribution expenses actually incurred by American Franklin, and
proceeds from other charges, including the mortality and expense risk charge,
may be used in part to cover such expenses.
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.
15
<PAGE>
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 or levy other taxes or charges. Taxes
currently range up to 5%. American Franklin deducts the applicable tax from
each premium payment. This is a tax to American Franklin, so the Policy Owner
cannot deduct it on his or her income tax return. The amount of the tax will
vary depending on the jurisdiction in which the Policy Owner resides. Since
the tax deduction is a percentage of the premium, the amount of the tax
deduction 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
taxes. 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
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<PAGE>
month will also increase. For this purpose the amount of each Policy Account is
determined before deduction of the cost of insurance charge but after all other
charges due on that date. The amount of the cost of insurance charge will vary
from month to month with changes in the amount at risk and with increasing age
of the Insured Person.
The cost of insurance rate is based on the sex, age and risk class of
the Insured Person and the Face Amount size band of the policy at the time of
the charge. American Franklin may change these rates from time to time, but
they will never be more than the guaranteed maximum rates set forth in a
particular policy. The maximum charges are based on the Commissioner's 1980
Standard Ordinary Male and Female Mortality Tables. The table below shows
the current and guaranteed maximum monthly cost of insurance rates per $1,000
of amount at risk for a male non-tobacco user at various ages. In Montana
and Massachusetts there will be no distinctions based on sex. Congress and
the legislatures of various states have from time to time considered
legislation that would require insurance rates to be the same for males and
females of the same age and risk class. In addition, employers and Employee
Organizations should consider the impact of Title VII of the Civil Rights Act
of 1964 on the purchase of an EquiBuilder III policy in connection with an
employment related insurance or benefit plan. See "Employee Benefit Plans,"
below. Where required, American Franklin will provide cost of insurance
charges that do not distinguish between males and females.
<TABLE>
<CAPTION>
ILLUSTRATIVE TABLE OF MONTHLY COST OF INSURANCE RATES FOR
MALE NON-TOBACCO (ROUNDED) PER $1,000 OF AMOUNT AT RISK
--------------------------------------------------------
$50,000 - $199,999 $200,000 AND OVER
FACE AMOUNT SIZE BAND FACE AMOUNT SIZE BAND
--------------------- ----------------------
ATTAINED GUARANTEED CURRENT GUARANTEED CURRENT
AGE MAXIMUM RATE RATE MAXIMUM RATE RATE
--- ------------ ---- ------------ ----
<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
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<PAGE>
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.
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 FMR 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. FMR has entered into sub-advisory agreements with
affiliated companies with respect to management of the VIP High Income, VIP
Overseas, VIP Money Market, VIPII Asset Manager, VIPII Asset Manager: Growth
and VIPII 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:
<TABLE>
<CAPTION>
MANAGEMENT FEES OTHER EXPENSES
AFTER EXPENSE AFTER EXPENSE TOTAL ANNUAL
REIMBURSEMENT REIMBURSEMENT (3) EXPENSES (1)
-----------------------------------------------------
<S> <C> <C> <C>
VIP Money Market 0.21% 0.10% 0.31%
VIP High Income 0.59% 0.12% 0.71%
VIP Equity-Income 0.50% 0.08% 0.58%
VIP Growth 0.60% 0.09% 0.69%
VIP Overseas 0.75% 0.17% 0.92%
VIPII Investment Grade Bond 0.44% 0.14% 0.58%
VIPII Asset Manager 0.55% 0.10% 0.65%
VIPII Index 500 0.24% 0.04% 0.28%(2)
VIPII Contrafund 0.60% 0.11% 0.71%
VIPII Asset Manager: Growth 0.60% 0.17% 0.77%
MFS Emerging Growth 0.75% 0.12% 0.87%
MFS Research 0.75% 0.13% 0.88%
MFS Growth With Income 0.75% 0.25%(4) 1.00%(4)
MFS Total Return 0.75% 0.25%(4) 1.00%(4)
MFS Utilities 0.75% 0.25%(4) 1.00%(4)
MFS Value 0.75% 0.25%(4) 1.00%(4)
</TABLE>
(1) A portion of the brokerage commissions certain Fidelity portfolios paid
was used to reduce their expenses. In addition, certain Fidelity portfolios
have entered into arrangements with their custodian whereby credits realized, as
a result of uninvested cash balances were used to reduce custodian expenses.
Including these reductions, total annual expenses would have been: for VIP
Equity-Income Portfolio: 0.57%; for VIP Growth Portfolio: 0.67%, for VIP
Overseas Portfolio: 0.90%; for VIPII Asset Manager Portfolio: 0.64%; for VIPII
Contrafund Portfolio: 0.68%; and for VIPII Asset Manager: Growth Portfolio:
0.76%.
(2) Certain expenses were voluntarily reduced by the investment adviser.
Absent reimbursement, management fees, other expenses and total annual expenses
would have been 0.27%, 0.13% and 0.40%, respectively, for VIPII 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
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<PAGE>
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 these MFS
portfolios, 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 Annual Expenses" for these MFS portfolios would be:
<TABLE>
<CAPTION>
OTHER EXPENSES TOTAL ANNUAL EXPENSES
-----------------------------------------
<S> <C> <C>
MFS Growth With Income 0.35% 1.10%
MFS Total Return 0.27% 1.02%
MFS Utilities 0.45% 1.20%
MFS Value 1.33% 2.08%
</TABLE>
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 FMR, 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, the initial Face
Amount of the policy and the types and amounts of any additional benefits
included in the policy. Payment of the Target Premium does not guarantee that
the policy will remain in effect.
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
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<PAGE>
policy year up to the amount of one Target Premium and 9% of any additional
premiums paid during the first ten policy years, but not more than 50% of one
Target Premium.
Paying less than one Target Premium in the first policy year will reduce
the surrender charge only if not more than approximately five Target Premiums
are paid before surrender or lapse (i.e., only if the maximum surrender
charge is not reached). However, structuring payments in this manner will
increasethe risk that a policy will lapse (and that a surrender charge will
be incurred that would not have been 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
21
<PAGE>
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 0the 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. Any amount that
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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.
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
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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 in the aggregate exceed a specified percentage of the Cash Surrender
Value. The following table shows the maximum amount eligible for Preferred
Loan status for the applicable policy year:
Policy Year Maximum Aggregate Amount Eligible for
Preferred Loan Status 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 percentage limits set forth in the table above are cumulative (not
per policy year) limits, and are also subject to the overall maximum
aggregate amount that will be loaned, which is 90% of the Cash Surrender
Value of the policy.
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 in form satisfactory to American Franklin 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 two dates:
10 days after the Policy Owner receives his or her policy; or
45 days after the Policy Owner signs Part 1 of the policy application.
If the Policy Owner cancels the policy, American Franklin will, within
seven days of receipt of the policy and a duly executed, timely notice of
cancellation, refund an amount equal to the premiums paid.
Insurance coverage ends when a Policy Owner sends a request for
cancellation.
LAPSE OF THE POLICY
If the Net Cash Surrender Value of a policy is insufficient to pay the
charges that are made against the Policy Account each month, or if the total
of any policy loan plus loan interest exceeds the Cash
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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 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.
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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 to which policyholders may direct their investments
to particular subaccounts without being treated as owners of the underlying
assets."
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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.
POSSIBLE TAX LAW CHANGES
Although the likelihood of legislative changes is uncertain, there is
always the possibility that the tax treatment of the Policy could change by
legislation or otherwise. For instance, the President's 1999 Budget Proposal
recommended legislation that, if enacted, would adversely modify the federal
taxation of this Policy. It is possible that any legislative change could be
retroactive (that is, effective prior to the date of the change). A tax
adviser should be consulted with respect to legislative developments and
their effect on the Policy.
The following discussion assumes that the policy will qualify as a life
insurance contract for federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
IN GENERAL. American Franklin believes that the proceeds and cash value
increases of a Policy should be treated in a manner consistent with a
flexible-benefit life insurance policy for federal income tax purposes. Thus,
the Death Benefit under the Policy should be excludable from the gross income of
the Beneficiary under Code section 101(a)(1).
Depending on the circumstances, the exchange of a Policy, a change in the
Policy's death benefit option (i.e., a change from option A to option B or vice
versa), a policy loan, a withdrawal, a surrender, or an assignment of the Policy
may have federal income tax consequences. In addition, federal, state and local
transfer, and other tax consequences of ownership or receipt of Policy proceeds
depend on the circumstances of each Policy Owner or Beneficiary.
Generally, the Policy Owner will not be deemed to be in constructive receipt
of the Policy Account, including increments thereof, until there is a
distribution. The tax consequences of distributions from, and loans taken from
or secured by a Policy, depend on whether the Policy is classified as a
"Modified Endowment Contract." Whether a Policy is or is not a modified
endowment contract, upon a complete surrender or lapse of a Policy, or when
benefits are paid at such a Policy's maturity, if the amounts received plus the
amount of indebtedness exceeds the total investment in the Policy the excess
will generally be treated as ordinary income subject to tax.
MODIFIED ENDOWMENT CONTRACTS. Code section 7702A establishes a class of life
insurance contracts designated as "Modified Endowment Contracts," which applies
to Policies entered into or materially changed after June 20, 1988.
Due to the Policy's flexibility, classification as a Modified Endowment
Contract will depend on the individual circumstances of each Policy. In
general, a Policy will be a Modified Endowment Contract if the accumulated
premiums paid at any time during the first seven policy years exceeds the sum of
the net level premiums which would have been paid on or before such time if the
Policy provided for paid-up future benefits after the payment of seven level
annual premiums. The determination of whether a policy will be a Modified
Endowment Contract after a material change generally depends upon the
relationship of the death benefit and Policy Account at the time of such change
and the additional premiums paid in the seven years following the material
change. A reduction in a policy's death benefit may also cause a policy to be
treated as a Modified Endowment Contract.
31
<PAGE>
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 (.60% of aggregate average daily net assets is assumed) and direct
expenses of the Funds (.15% of aggregate average daily net assets is assumed).
The effect of these adjustments is that on a 0% gross rate of return the net
rate of return would be -1.50%, on 4% it would be 2.50%, on 8% it would be 6.50%
and on 12% it would be 10.50%. 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
33
<PAGE>
the portfolios and to use 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
INITIAL FACE AMOUNT $200,000 MALE NON-TOBACCO
<TABLE>
<CAPTION>
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
</TABLE>
INITIAL FACE AMOUNT $100,000 MALE NON-TOBACCO
<TABLE>
<CAPTION>
PREMIUM PAGE
<S> <C> <C>
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>
EQUIBUILDER III FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
INITIAL FACE AMOUNT $200,000 MALE AGE 40 NON-TOBACCO USER
DEATH BENEFIT OPTION A ASSUMING CURRENT CHARGES
Insurance Benefit(2) Policy Account(2)
Last Day Assuming Hypothetical Gross Assuming Hypothetical Gross
of Annual Investment Return of Annual Investment Return of
Policy Accumulated
Year Premiums(1) 0% 4% 8% 12% 0% 4% 8% 12%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,150 200,000 200,000 200,000 200,000 2,146 2,246 2,345 2,445
2 6,458 200,000 200,000 200,000 200,000 4,524 4,817 5,118 5,427
3 9,930 200,000 200,000 200,000 200,000 6,845 7,432 8,050 8,702
4 13,577 200,000 200,000 200,000 200,000 9,111 10,091 11,153 12,301
5 17,406 200,000 200,000 200,000 200,000 11,320 12,795 14,436 16,257
6 21,426 200,000 200,000 200,000 200,000 13,477 15,548 17,915 20,613
7 25,647 200,000 200,000 200,000 200,000 15,552 18,322 21,574 25,383
8 30,080 200,000 200,000 200,000 200,000 17,551 21,122 25,429 30,615
9 34,734 200,000 200,000 200,000 200,000 19,475 23,949 29,496 36,363
10 39,620 200,000 200,000 200,000 200,000 21,324 26,804 33,790 42,685
11 44,751 200,000 200,000 200,000 200,000 23,101 29,690 38,330 49,646
12 50,139 200,000 200,000 200,000 200,000 24,833 32,635 43,158 57,344
13 55,796 200,000 200,000 200,000 200,000 26,488 35,610 48,267 65,833
14 61,736 200,000 200,000 200,000 200,000 28,071 38,618 53,680 75,208
15 67,972 200,000 200,000 200,000 200,000 29,581 41,662 59,422 85,570
16 74,521 200,000 200,000 200,000 200,000 31,014 44,739 65,513 97,031
17 81,397 200,000 200,000 200,000 200,000 32,332 47,815 71,951 109,698
18 88,617 200,000 200,000 200,000 200,000 33,558 50,911 78,784 123,732
19 96,198 200,000 200,000 200,000 200,000 34,684 54,024 86,040 139,295
20 104,158 200,000 200,000 200,000 209,788 35,701 57,147 93,751 156,558
25 150,340 200,000 200,000 200,000 333,556 38,817 72,721 140,551 273,407
<CAPTION>
PLANNED PREMIUM $3,000
Cash Surrender Value(2)
Assuming Hypothetical Gross
Annual Investment Return of
0% 4% 8% 12%
<S> <C> <C> <C> <C>
1 1,512 1,611 1,710 1,810
2 3,620 3,912 4,213 4,522
3 5,705 6,292 6,910 7,562
4 7,971 8,951 10,013 11,161
5 10,180 11,655 13,296 15,117
6 12,337 14,408 16,775 19,473
7 14,640 17,410 20,662 24,471
8 16,867 20,438 24,745 29,931
9 19,019 23,493 29,040 35,907
10 21,096 26,576 33,562 42,457
11 23,101 29,690 38,330 49,646
12 24,833 32,635 43,158 57,344
13 26,488 35,610 48,267 65,833
14 28,071 38,618 53,680 75,208
15 29,581 41,662 59,422 85,570
16 31,014 44,739 65,513 97,031
17 32,332 47,815 71,951 109,698
18 33,558 50,911 78,784 123,732
19 34,684 54,024 86,040 139,295
20 35,701 57,147 93,751 156,558
25 38,817 72,721 140,551 273,407
</TABLE>
EQUIBUILDER III FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
INITIAL FACE AMOUNT $200,000 MALE AGE 40 NON-TOBACCO USER
DEATH BENEFIT OPTION A ASSUMING GUARANTEED CHARGES
Insurance Benefit(2) Policy Account(2)
Last Day Assuming Hypothetical Gross Assuming Hypothetical Gross
of Annual Investment Return of Annual Investment Return of
Policy Accumulated
Year Premiums(1) 0% 4% 8% 12% 0% 4% 8% 12%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,150 200,000 200,000 200,000 200,000 2,146 2,246 2,345 2,445
2 6,458 200,000 200,000 200,000 200,000 4,117 4,402 4,694 4,995
3 9,930 200,000 200,000 200,000 200,000 6,011 6,564 7,148 7,765
4 13,577 200,000 200,000 200,000 200,000 7,824 8,728 9,710 10,776
5 17,406 200,000 200,000 200,000 200,000 9,557 10,893 12,387 14,052
6 21,426 200,000 200,000 200,000 200,000 11,203 13,054 15,180 17,618
7 25,647 200,000 200,000 200,000 200,000 12,764 15,210 18,099 21,506
8 30,080 200,000 200,000 200,000 200,000 14,235 17,356 21,149 25,750
9 34,734 200,000 200,000 200,000 200,000 15,613 19,489 24,336 30,386
10 39,620 200,000 200,000 200,000 200,000 16,894 21,603 27,666 35,457
11 44,751 200,000 200,000 200,000 200,000 18,072 23,694 31,147 41,010
12 50,139 200,000 200,000 200,000 200,000 19,136 25,747 34,777 47,090
13 55,796 200,000 200,000 200,000 200,000 20,072 27,751 38,559 53,753
14 61,736 200,000 200,000 200,000 200,000 20,868 29,691 42,496 61,063
15 67,972 200,000 200,000 200,000 200,000 21,508 31,550 46,587 69,088
16 74,521 200,000 200,000 200,000 200,000 21,982 33,318 50,844 77,920
17 81,397 200,000 200,000 200,000 200,000 22,277 34,983 55,273 87,658
18 88,617 200,000 200,000 200,000 200,000 22,390 36,536 59,893 98,427
19 96,198 200,000 200,000 200,000 200,000 22,305 37,964 64,716 110,364
20 104,158 200,000 200,000 200,000 200,000 22,011 39,254 69,760 123,632
25 150,340 200,000 200,000 200,000 263,088 16,323 42,572 98,786 215,646
<CAPTION>
PLANNED PREMIUM $3,000
Cash Surrender Value(2)
Assuming Hypothetical Gross
Annual Investment Return of
0% 4% 8% 12%
<S> <C> <C> <C> <C>
1 1,512 1,611 1,710 1,810
2 3,213 3,497 3,789 4,090
3 4,871 5,424 6,008 6,625
4 6,684 7,588 8,570 9,636
5 8,417 9,753 11,247 12,912
6 10,063 11,914 14,040 16,478
7 11,852 14,298 17,187 20,594
8 13,551 16,672 20,465 25,066
9 15,157 19,033 23,880 29,930
10 16,666 21,375 27,438 35,229
11 18,072 23,694 31,147 41,010
12 19,136 25,747 34,777 47,090
13 20,072 27,751 38,559 53,753
14 20,868 29,691 42,496 61,063
15 21,508 31,550 46,587 69,088
16 21,982 33,318 50,844 77,920
17 22,277 34,983 55,273 87,658
18 22,390 36,536 59,893 98,427
19 22,305 37,964 64,716 110,364
20 22,011 39,254 69,760 123,632
25 16,323 42,572 98,786 215,646
</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 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
INITIAL FACE AMOUNT $200,000 MALE AGE 40 NON-TOBACCO USER
DEATH BENEFIT OPTION B ASSUMING CURRENT CHARGES
Insurance Benefit(2) Policy Account(2)
Last Day Assuming Hypothetical Gross Assuming Hypothetical Gross
of Annual Investment Return of Annual Investment Return of
Policy Accumulated
Year Premiums(1) 0% 4% 8% 12% 0% 4% 8% 12%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,150 202,143 202,242 202,341 202,441 2,143 2,242 2,341 2,441
2 6,458 204,513 204,805 205,106 205,414 4,513 4,805 5,106 5,414
3 9,930 206,823 207,407 208,023 208,672 6,823 7,407 8,023 8,672
4 13,577 209,072 210,047 211,103 212,245 9,072 10,047 11,103 12,245
5 17,406 211,259 212,724 214,354 216,164 11,259 12,724 14,354 16,164
6 21,426 213,388 215,442 217,790 220,466 13,388 15,442 17,790 20,466
7 25,647 215,427 218,170 221,389 225,159 15,427 18,170 21,389 25,159
8 30,080 217,380 220,908 225,163 230,286 17,380 20,908 25,163 30,286
9 34,734 219,248 223,659 229,126 235,891 19,248 23,659 29,126 35,891
10 39,620 221,031 226,419 233,286 242,025 21,031 26,419 33,286 42,025
11 44,751 222,729 229,190 237,656 248,740 22,729 29,190 37,656 48,740
12 50,139 224,375 232,002 242,281 256,132 24,375 32,002 42,281 56,132
13 55,796 225,930 234,816 247,139 264,230 25,930 34,816 47,139 64,230
14 61,736 227,398 237,637 252,246 273,110 27,398 37,637 52,246 73,110
15 67,972 228,779 240,461 257,617 282,854 28,779 40,461 57,617 82,854
16 74,521 230,065 243,281 263,260 293,542 30,065 43,281 63,260 93,542
17 81,397 231,214 246,049 269,146 305,226 31,214 46,049 69,146 105,226
18 88,617 232,248 248,788 275,313 318,033 32,248 48,788 75,313 118,033
19 96,198 233,159 251,485 281,769 332,070 33,159 51,485 81,769 132,070
20 104,158 233,936 254,126 288,519 347,453 33,936 54,126 88,519 147,453
25 150,340 235,366 265,905 326,814 446,741 35,366 65,905 126,814 246,741
<CAPTION>
PLANNED PREMIUM $3,000
Cash Surrender Value(2)
Assuming Hypothetical Gross
Annual Investment Return of
0% 4% 8% 12%
<S> <C> <C> <C> <C>
1 1,508 1,607 1,706 1,806
2 3,609 3,901 4,201 4,509
3 5,683 6,267 6,883 7,532
4 7,932 8,907 9,963 11,105
5 10,119 11,584 13,214 15,024
6 12,248 14,302 16,650 19,326
7 14,515 17,258 20,477 24,247
8 16,696 20,224 24,479 29,602
9 18,792 23,203 28,670 35,435
10 20,803 26,191 33,058 41,797
11 22,729 29,190 37,656 48,740
12 24,375 32,002 42,281 56,132
13 25,930 34,816 47,139 64,230
14 27,398 37,637 52,246 73,110
15 28,779 40,461 57,617 82,854
16 30,065 43,281 63,260 93,542
17 31,214 46,049 69,146 105,226
18 32,248 48,788 75,313 118,033
19 33,159 51,485 81,769 132,070
20 33,936 54,126 88,519 147,453
25 35,366 65,905 126,814 246,741
</TABLE>
EQUIBUILDER III FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
INITIAL FACE AMOUNT $200,000 MALE AGE 40 NON-TOBACCO USER
DEATH BENEFIT OPTION B ASSUMING GUARANTEED CHARGES
Insurance Benefit(2) Policy Account(2)
Last Day Assuming Hypothetical Gross Assuming Hypothetical Gross
of Annual Investment Return of Annual Investment Return of
Policy Accumulated
Year Premiums(1) 0% 4% 8% 12% 0% 4% 8% 12%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,150 202,143 202,242 202,341 202,441 2,143 2,242 2,341 2,441
2 6,458 204,099 204,382 204,673 204,973 4,099 4,382 4,673 4,973
3 9,930 205,970 206,518 207,099 207,711 5,970 6,518 7,099 7,711
4 13,577 207,752 208,646 209,618 210,672 7,752 8,646 9,618 10,672
5 17,406 209,443 210,761 212,234 213,877 9,443 10,761 12,234 13,877
6 21,426 211,037 212,857 214,946 217,341 11,037 12,857 14,946 17,341
7 25,647 212,535 214,929 217,758 221,091 12,535 14,929 17,758 21,091
8 30,080 213,930 216,973 220,670 225,151 13,930 16,973 20,670 25,151
9 34,734 215,219 218,980 223,682 229,546 15,219 18,980 23,682 29,546
10 39,620 216,396 220,943 226,792 234,303 16,396 20,943 26,792 34,303
11 44,751 217,456 222,853 230,002 239,454 17,456 22,853 30,002 39,454
12 50,139 218,383 224,691 233,297 245,022 18,383 24,691 33,297 45,022
13 55,796 219,163 226,440 236,669 251,032 19,163 26,440 36,669 51,032
14 61,736 219,782 228,080 240,104 257,515 19,782 28,080 40,104 57,515
15 67,972 220,222 229,587 243,584 264,497 20,222 29,587 43,584 64,497
16 74,521 220,473 230,945 247,100 272,019 20,473 30,945 47,100 72,019
17 81,397 220,521 232,134 250,638 280,118 20,521 32,134 50,638 80,118
18 88,617 220,362 233,142 254,191 288,848 20,362 33,142 54,191 88,848
19 96,198 219,984 233,948 257,743 298,259 19,984 33,948 57,743 98,259
20 104,158 219,375 234,534 261,279 308,406 19,375 34,534 61,279 108,406
25 150,340 211,880 232,763 277,437 371,809 11,880 32,763 77,437 171,809
<CAPTION>
PLANNED PREMIUM $3,000
Cash Surrender Value(2)
Assuming Hypothetical Gross
Annual Investment Return of
0% 4% 8% 12%
<S> <C> <C> <C> <C>
1 1,508 1,607 1,706 1,806
2 3,194 3,477 3,768 4,068
3 4,830 5,378 5,959 6,571
4 6,612 7,506 8,478 9,532
5 8,303 9,621 11,094 12,737
6 9,897 11,717 13,806 16,201
7 11,623 14,017 16,846 20,179
8 13,246 16,289 19,986 24,467
9 14,763 18,524 23,226 29,090
10 16,168 20,715 26,564 34,075
11 17,456 22,853 30,002 39,454
12 18,383 24,691 33,297 45,022
13 19,163 26,440 36,669 51,032
14 19,782 28,080 40,104 57,515
15 20,222 29,587 43,584 64,497
16 20,473 30,945 47,100 72,019
17 20,521 32,134 50,638 80,118
18 20,362 33,142 54,191 88,848
19 19,984 33,948 57,743 98,259
20 19,375 34,534 61,279 108,406
25 11,880 32,763 77,437 171,809
</TABLE>
(1) Assumes net interest of 5% compounded annually.
(2) Assumes no policy loan has been made.
The death benefits and Policy Account and Cash Surrender Values will differ if
premiums are paid in different amounts or frequencies. It is emphasized that
the hypothetical investment results are illustrative only and should not be
deemed a representation of past or future investment results. Actual investment
results may be more or less than those shown. The death benefits and Policy
Account and Cash Surrender Values for a policy would be different from those
shown if actual rates of investment return applicable to the policy averaged 0%,
4%, 8% or 12% over a period of years, but also fluctuated above or below that
average for individual policy years. The death benefits and Policy Account. and
Cash Surrender Values for a policy would also be different from those shown,
depending on the investment allocations made to the investment divisions of the
Separate Account and the different rates of return of the Funds' portfolios, if
the actual rates of investment return applicable to the policy averaged 0%, 4%,
8% and 12%, but varied above or below that average for individual divisions. No
representations can be made that these hypothetical rates of return can be
achieved for any one year or sustained over any period of time.
36
<PAGE>
EQUIBUILDER III FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
INITIAL FACE AMOUNT $100,000 MALE AGE 40 NON-TOBACCO USER
DEATH BENEFIT OPTION A ASSUMING CURRENT CHARGES
Insurance Benefit(2) Policy Account(2)
Last Day Assuming Hypothetical Gross Assuming Hypothetical Gross
of Annual Investment Return of Annual Investment Return of
Policy Accumulated
Year Premiums(1) 0% 4% 8% 12% 0% 4% 8% 12%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 100,000 100,000 100,000 100,000 883 928 974 1,020
2 3,229 100,000 100,000 100,000 100,000 2,024 2,157 2,295 2,436
3 4,965 100,000 100,000 100,000 100,000 3,136 3,405 3,689 3,988
4 6,788 100,000 100,000 100,000 100,000 4,217 4,670 5,161 5,691
5 8,703 100,000 100,000 100,000 100,000 5,270 5,955 6,716 7,560
6 10,713 100,000 100,000 100,000 100,000 6,294 7,258 8,359 9,614
7 12,824 100,000 100,000 100,000 100,000 7,275 8,568 10,084 11,859
8 15,040 100,000 100,000 100,000 100,000 8,212 9,882 11,894 14,314
9 17,367 100,000 100,000 100,000 100,000 9,108 11,203 13,798 17,007
10 19,810 100,000 100,000 100,000 100,000 9,961 12,529 15,799 19,960
11 22,376 100,000 100,000 100,000 100,000 10,774 13,863 17,910 23,207
12 25,069 100,000 100,000 100,000 100,000 11,559 15,218 20,150 26,794
13 27,898 100,000 100,000 100,000 100,000 12,303 16,581 22,514 30,746
14 30,868 100,000 100,000 100,000 100,000 13,003 17,948 25,011 35,102
15 33,986 100,000 100,000 100,000 100,000 13,662 19,325 27,653 39,915
16 37,261 100,000 100,000 100,000 100,000 14,292 20,723 30,464 45,247
17 40,699 100,000 100,000 100,000 100,000 14,880 22,129 33,444 51,148
18 44,309 100,000 100,000 100,000 100,000 15,417 23,538 36,601 57,684
19 48,099 100,000 100,000 100,000 100,000 15,901 24,946 39,948 64,931
20 52,079 100,000 100,000 100,000 100,000 16,325 26,350 43,499 72,975
25 75,170 100,000 100,000 100,000 155,764 17,357 33,163 64,943 127,675
<CAPTION>
PLANNED PREMIUM $1,500
Cash Surrender Value(2)
Assuming Hypothetical Gross
Annual Investment Return of
0% 4% 8% 12%
<S> <C> <C> <C> <C>
1 565 611 656 702
2 1,572 1,705 1,842 1,983
3 2,566 2,835 3,119 3,418
4 3,647 4,100 4,591 5,121
5 4,700 5,385 6,146 6,990
6 5,724 6,688 7,789 9,044
7 6,819 8,112 9,628 11,403
8 7,870 9,540 11,552 13,972
9 8,880 10,975 13,570 16,779
10 9,847 12,415 15,685 19,846
11 10,774 13,863 17,910 23,207
12 11,559 15,218 20,150 26,794
13 12,303 16,581 22,514 30,746
14 13,003 17,948 25,011 35,102
15 13,662 19,325 27,653 39,915
16 14,292 20,723 30,464 45,247
17 14,880 22,129 33,444 51,148
18 15,417 23,538 36,601 57,684
19 15,901 24,946 39,948 64,931
20 16,325 26,350 43,499 72,975
25 17,357 33,163 64,943 127,675
</TABLE>
EQUIBUILDER III FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
INITIAL FACE AMOUNT $100,000 MALE AGE 40 NON-TOBACCO USER
DEATH BENEFIT OPTION A ASSUMING GUARANTEED CHARGES
Insurance Benefit(2) Policy Account(2)
Last Day Assuming Hypothetical Gross Assuming Hypothetical Gross
of Annual Investment Return of Annual Investment Return of
Policy Accumulated
Year Premiums(1) 0% 4% 8% 12% 0% 4% 8% 12%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 100,000 100,000 100,000 100,000 883 928 974 1,020
2 3,229 100,000 100,000 100,000 100,000 1,799 1,928 2,060 2,197
3 4,965 100,000 100,000 100,000 100,000 2,677 2,928 3,193 3,473
4 6,788 100,000 100,000 100,000 100,000 3,516 3,926 4,373 4,857
5 8,703 100,000 100,000 100,000 100,000 4,315 4,923 5,603 6,361
6 10,713 100,000 100,000 100,000 100,000 5,072 5,915 6,884 7,994
7 12,824 100,000 100,000 100,000 100,000 5,786 6,901 8,219 9,772
8 15,040 100,000 100,000 100,000 100,000 6,455 7,880 9,611 11,709
9 17,367 100,000 100,000 100,000 100,000 7,079 8,848 11,061 13,821
10 19,810 100,000 100,000 100,000 100,000 7,654 9,804 12,572 16,127
11 22,376 100,000 100,000 100,000 100,000 8,179 10,745 14,146 18,647
12 25,069 100,000 100,000 100,000 100,000 8,645 11,662 15,782 21,401
13 27,898 100,000 100,000 100,000 100,000 9,048 12,550 17,480 24,412
14 30,868 100,000 100,000 100,000 100,000 9,381 13,402 19,240 27,707
15 33,986 100,000 100,000 100,000 100,000 9,635 14,208 21,060 31,317
16 37,261 100,000 100,000 100,000 100,000 9,805 14,963 22,943 35,280
17 40,699 100,000 100,000 100,000 100,000 9,885 15,659 24,891 39,639
18 44,309 100,000 100,000 100,000 100,000 9,873 16,293 26,911 44,449
19 48,099 100,000 100,000 100,000 100,000 9,761 16,856 29,005 49,768
20 52,079 100,000 100,000 100,000 100,000 9,542 17,342 31,181 55,667
25 75,170 100,000 100,000 100,000 118,171 6,300 18,030 43,357 96,861
<CAPTION>
PLANNED PREMIUM $1,500
Cash Surrender Value(2)
Assuming Hypothetical Gross
Annual Investment Return of
0% 4% 8% 12%
<S> <C> <C> <C> <C>
1 565 611 656 702
2 1,347 1,475 1,608 1,744
3 2,107 2,358 2,623 2,903
4 2,946 3,356 3,803 4,287
5 3,745 4,353 5,033 5,791
6 4,502 5,345 6,314 7,424
7 5,330 6,445 7,763 9,316
8 6,113 7,538 9,269 11,367
9 6,851 8,620 10,833 13,593
10 7,540 9,690 12,458 16,013
11 8,179 10,745 14,146 18,647
12 8,645 11,662 15,782 21,401
13 9,048 12,550 17,480 24,412
14 9,381 13,402 19,240 27,707
15 9,635 14,208 21,060 31,317
16 9,805 14,963 22,943 35,280
17 9,885 15,659 24,891 39,639
18 9,873 16,293 26,911 44,449
19 9,761 16,856 29,005 49,768
20 9,542 17,342 31,181 55,667
25 6,300 18,030 43,357 96,861
</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>
EQUIBUILDER III FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
INITIAL FACE AMOUNT $100,000 MALE AGE 40 NON-TOBACCO USER
DEATH BENEFIT OPTION B ASSUMING CURRENT CHARGES
Insurance Benefit(2) Policy Account(2)
Last Day Assuming Hypothetical Gross Assuming Hypothetical Gross
of Annual Investment Return of Annual Investment Return of
Policy Accumulated
Year Premiums(1) 0% 4% 8% 12% 0% 4% 8% 12%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 100,881 100,926 100,972 101,018 881 926 972 1,018
2 3,229 102,019 102,152 102,288 102,429 2,019 2,152 2,288 2,429
3 4,965 103,124 103,392 103,675 103,973 3,124 3,392 3,675 3,973
4 6,788 104,197 104,648 105,135 105,662 4,197 4,648 5,135 5,662
5 8,703 105,239 105,918 106,674 107,512 5,239 5,918 6,674 7,512
6 10,713 106,247 107,203 108,295 109,538 6,247 7,203 8,295 9,538
7 12,824 107,209 108,488 109,988 111,743 7,209 8,488 9,988 11,743
8 15,040 108,122 109,770 111,755 114,142 8,122 9,770 11,755 14,142
9 17,367 108,988 111,050 113,603 116,759 8,988 11,050 13,603 16,759
10 19,810 109,805 112,324 115,532 119,611 9,805 12,324 15,532 19,611
11 22,376 110,575 113,596 117,552 122,726 10,575 13,596 17,552 22,726
12 25,069 111,314 114,879 119,681 126,147 11,314 14,879 19,681 26,147
13 27,898 112,003 116,155 121,910 129,887 12,003 16,155 21,910 29,887
14 30,868 112,640 117,419 124,238 133,974 12,640 17,419 24,238 33,974
15 33,986 113,228 118,676 126,678 138,449 13,228 18,676 26,678 38,449
16 37,261 113,780 119,936 129,248 143,365 13,780 19,936 29,248 43,365
17 40,699 114,282 121,185 131,941 148,752 14,282 21,185 31,941 48,752
18 44,309 114,723 122,410 134,754 154,648 14,723 22,410 34,754 54,648
19 48,099 115,098 123,605 137,687 161,101 15,098 23,605 37,687 61,101
20 52,079 115,401 124,762 140,742 168,159 15,401 24,762 40,742 68,159
25 75,170 115,594 129,649 157,817 213,764 15,594 29,649 57,817 113,764
<CAPTION>
PLANNED PREMIUM $1,500
Cash Surrender Value(2)
Assuming Hypothetical Gross
Annual Investment Return of
0% 4% 8% 12%
<S> <C> <C> <C> <C>
1 564 609 654 700
2 1,566 1,699 1,836 1,977
3 2,554 2,822 3,105 3,403
4 3,627 4,078 4,565 5,092
5 4,669 5,348 6,104 6,942
6 5,677 6,633 7,725 8,968
7 6,753 8,032 9,532 11,287
8 7,780 9,428 11,413 13,800
9 8,760 10,822 13,375 16,531
10 9,691 12,210 15,418 19,497
11 10,575 13,596 17,552 22,726
12 11,314 14,879 19,681 26,147
13 12,003 16,155 21,910 29,887
14 12,640 17,419 24,238 33,974
15 13,228 18,676 26,678 38,449
16 13,780 19,936 29,248 43,365
17 14,282 21,185 31,941 48,752
18 14,723 22,410 34,754 54,648
19 15,098 23,605 37,687 61,101
20 15,401 24,762 40,742 68,159
25 15,594 29,649 57,817 113,764
</TABLE>
EQUIBUILDER III FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
INITIAL FACE AMOUNT $100,000 MALE AGE 40 NON-TOBACCO USER
DEATH BENEFIT OPTION B ASSUMING GUARANTEED CHARGES
Insurance Benefit(2) Policy Account(2)
Last Day Assuming Hypothetical Gross Assuming Hypothetical Gross
of Annual Investment Return of Annual Investment Return of
Policy Accumulated
Year Premiums(1) 0% 4% 8% 12% 0% 4% 8% 12%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 100,881 100,926 100,972 101,018 881 926 972 1,018
2 3,229 101,790 101,918 102,050 102,186 1,790 1,918 2,050 2,186
3 4,965 102,658 102,907 103,170 103,448 2,658 2,907 3,170 3,448
4 6,788 103,483 103,889 104,330 104,810 3,483 3,889 4,330 4,810
5 8,703 104,263 104,863 105,533 106,281 4,263 4,863 5,533 6,281
6 10,713 104,996 105,825 106,777 107,868 4,996 5,825 6,777 7,868
7 12,824 105,681 106,773 108,063 109,583 5,681 6,773 8,063 9,583
8 15,040 106,316 107,704 109,391 111,435 6,316 7,704 9,391 11,435
9 17,367 106,899 108,616 110,761 113,437 6,899 8,616 10,761 13,437
10 19,810 107,426 109,502 112,172 115,599 7,426 9,502 12,172 15,599
11 22,376 107,896 110,360 113,622 117,936 7,896 10,360 13,622 17,936
12 25,069 108,301 111,179 115,106 120,455 8,301 11,179 15,106 20,455
13 27,898 108,633 111,951 116,617 123,169 8,633 11,951 16,617 23,169
14 30,868 108,885 112,667 118,148 126,088 8,885 12,667 18,148 26,088
15 33,986 109,049 113,313 119,690 129,222 9,049 13,313 19,690 29,222
16 37,261 109,119 113,882 121,237 132,589 9,119 13,882 21,237 32,589
17 40,699 109,088 114,364 122,781 136,204 9,088 14,364 22,781 36,204
18 44,309 108,955 114,752 124,318 140,088 8,955 14,752 24,318 40,088
19 48,099 108,713 115,037 125,839 144,262 8,713 15,037 25,839 44,262
20 52,079 108,356 115,208 127,336 148,748 8,356 15,208 27,336 48,748
25 75,170 104,359 113,669 133,768 176,483 4,359 13,669 33,768 76,483
<CAPTION>
PLANNED PREMIUM $1,500
Cash Surrender Value(2)
Assuming Hypothetical Gross
Annual Investment Return of
0% 4% 8% 12%
<S> <C> <C> <C> <C>
1 564 609 654 700
2 1,338 1,466 1,598 1,734
3 2,088 2,337 2,600 2,878
4 2,913 3,319 3,760 4,240
5 3,693 4,293 4,963 5,711
6 4,426 5,255 6,207 7,298
7 5,225 6,317 7,607 9,127
8 5,974 7,362 9,049 11,093
9 6,671 8,388 10,533 13,209
10 7,312 9,388 12,058 15,485
11 7,896 10,360 13,622 17,936
12 8,301 11,179 15,106 20,455
13 8,633 11,951 16,617 23,169
14 8,885 12,667 18,148 26,088
15 9,049 13,313 19,690 29,222
16 9,119 13,882 21,237 32,589
17 9,088 14,364 22,781 36,204
18 8,955 14,752 24,318 40,088
19 8,713 15,037 25,839 44,262
20 8,356 15,208 27,336 48,748
25 4,359 13,669 33,768 76,483
</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 VIP Equity-Income division and 50%
being attributable to the VIP Money Market division, which means that $1,500 is
in each division. Assume that the net asset value of one share in the
corresponding VIP Equity-Income Portfolio is $150 and the net asset value of one
share in the corresponding VIP 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
VIP Equity-Income division and 15 shares for the VIP 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.
Commissions paid on policies issued under Separate Accounts VUL and VUL-2 of
American Franklin during the years 1997, 1996 and 1995 were $17,946,679.69,
$13,454,621.96 and $8,304,001.59, respectively.
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.
44
<PAGE>
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.
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.
45
<PAGE>
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 in the period 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
financial statements of American Franklin at December 31, 1997 and 1996 and for
each of the two years in the period ended December 31, 1997, the eleven months
ended December 31, 1995 and the one month ended January 31, 1995, appearing
herein, 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 reports 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>
PRINCIPAL OCCUPATIONS DURING PAST POSITION HELD WITH AMERICAN
NAME 5 YEARS FRANKLIN AND FRANKLIN FINANCIAL
<S> <C> <C>
B. Shelby Baetz* General Counsel, American General Independent Secretary, American Franklin.
Producer Division, Houston, Texas, since
January, 1998; Associate General Counsel,
American General Corporation, Houston, Texas,
prior to January, 1998.
Wayne A. Barnard** Vice President and Chief Actuary, American Vice President, American
General Life Insurance Company, Houston, Texas. Franklin.
46
<PAGE>
<CAPTION>
PRINCIPAL OCCUPATIONS DURING PAST POSITION HELD WITH AMERICAN
NAME 5 YEARS FRANKLIN AND FRANKLIN FINANCIAL
<S> <C> <C>
Earl W. Baucom Treasurer, The Franklin, since June 30, 1997, Director, Senior Vice President, Chief
Senior Vice President and Chief Financial Financial Officer and Treasurer, American
Officer, The Franklin, since June 10, 1996; Franklin.
Director, The Franklin, since August 21, 1996;
Chief Financial Officer, Providian Direct
Insurance, from October, 1993 to December,
1995; Controller, Providian Corporation, prior
to October, 1993.
Robert M. Beuerlein Senior Vice President-Actuarial and Director, Director, Executive Vice President and
The Franklin. Actuary, American Franklin.
Brady W. Creel Senior Vice President, Chief Marketing Officer Director, Senior Vice President and Chief
and Director, The Franklin since September 3, Marketing Officer, American Franklin.
1996; Regional Manager, The Franklin, prior to
September, 1996.
James S. D'Agostino, Jr.* Vice Chairman and Director, The Franklin, Vice Chairman and Director, American Franklin.
since May 27, 1997; President, American General
Corporation, Houston, Texas, since April 24,
1997; Chief Executive Officer, American General
Life and Accident Insurance Company, Nashville,
Tennessee, from July 1, 1995 to March 5, 1997.
Barbara Fossum Senior Vice President, The Franklin, since Senior Vice President, American Franklin.
March 20, 1998; Vice President, The Franklin,
from June, 1995, to March 20, 1998; Vice
President, American General Life Insurance
Company, Houston, Texas, prior to June, 1995.
Ross D. Friend Senior Vice President and General Counsel, The Senior Vice President, General Counsel and
Franklin, since September 3, 1996; Assistant Assistant Secretary, American Franklin;
Secretary, The Franklin, since November 13, Director, Vice President and Secretary,
1997; Secretary, The Franklin, from September 3, Franklin Financial.
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.
47
<PAGE>
<CAPTION>
PRINCIPAL OCCUPATIONS DURING PAST POSITION HELD WITH AMERICAN
NAME 5 YEARS FRANKLIN AND FRANKLIN FINANCIAL
<S> <C> <C>
Robert F. Herbert, Jr.** Senior Vice President and Chief Financial Vice President, American Franklin.
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 Insurance Vice President and Administrative Officer,
Company, Houston, Texas. American Franklin
Rodney O. Martin, Jr.* President and Chief Executive Officer, American Director and Senior Chairman,
General Life Insurance Company, Houston, Texas, American Franklin.
since August, 1996; President, American General
Life Insurance Company of New York, Syracuse, New
York, from November, 1995 to August, 1996; Vice
President, Connecticut Mutual Life Insurance
Company, Hartford, Connecticut, prior to
November, 1995.
Thomas K. McCracken Director - Marketing, The Franklin. Director - Special Markets, American
Franklin.
Mark R. McGuire Vice President, The Franklin, since January 6, Vice President and Administrative Officer,
1997; Consultant/Manager, American General Life American Franklin.
Insurance Company, Houston, Texas, prior to
January, 1997.
Jon P. Newton* Director and Vice Chairman, The Franklin, since Director and Vice Chairman, American
January 31, 1996; Vice Chairman, American General Franklin.
Corporation, Houston, Texas since April, 1997;
Vice Chairman and General Counsel, American
General Corporation, from October, 1995 to April,
1997; Senior Vice President and General Counsel,
American General Corporation, prior to October,
1995.
Gary D. Reddick Director, The Franklin, since February, 1995; Vice Chairman and Director, American
Vice Chairman, The Franklin, since July 1, 1997; Franklin; Director and Vice Chairman,
Executive Vice President, The Franklin, from Franklin Financial.
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.
48
<PAGE>
<CAPTION>
PRINCIPAL OCCUPATIONS DURING PAST POSITION HELD WITH AMERICAN
NAME 5 YEARS FRANKLIN AND FRANKLIN FINANCIAL
<S> <C> <C>
Richard W. Scott* Executive Vice President and Chief Investment Vice President and Chief Investment Officer,
Officer, American General Corporation, Houston, American Franklin.
Texas, since February, 1998; Vice Chairman and
Chief Investment Officer, Western National
Corporation, Houston, Texas, from February, 1997
to February, 1998; Vice Chairman, Chief Investment
Officer and General Counsel, Western National
Corporation, from July, 1996 to February, 1997;
Executive Vice President, General Counsel and
Chief Investment Officer, Western National
Corporation, from May, 1995 to July, 1996;
Executive Vice President and General Counsel,
Western National Corporation, from February, 1994
to May, 1995; Partner, Vinson & Elkins LLP,
Houston, Texas, prior to February, 1994.
William A. Simpson Director, Chief Executive Officer and President, Chairman and President, American Franklin;
The Franklin, since September 5, 1997; President Director, Franklin Financial.
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, since Director, Corporate Tax, American Franklin.
February 3, 1997; Assistant Vice President and Tax
Manager, First Colony Life, Lynchburg, Virginia,
prior to February, 1997.
Timothy W. Still** Vice President, American General Life Insurance Vice President and Administrative Officer,
Company, Houston, Texas, since October of 1995; American Franklin.
Vice President, The Continuum Company, Kansas
City, Missouri, prior to August of 1995.
49
<PAGE>
<CAPTION>
PRINCIPAL OCCUPATIONS DURING PAST POSITION HELD WITH AMERICAN
NAME 5 YEARS FRANKLIN AND FRANKLIN FINANCIAL
<S> <C> <C>
J. Alan Vala Director - Agency Secretary, The Franklin. Director - Agency Secretary, American
Franklin.
Christian D. Weiss Controller, The Franklin, since June, 1997; Controller, American Franklin.
Assistant Controller, ReliaStar Financial Corp.,
Arlington, Virginia, from January, 1994 to June,
1997; Senior Manager, Ernst & Young LLP, Richmond,
Virginia, prior to January, 1994.
Diane S. Workman Director-Administration, American Franklin. Director-Administration, 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.
50
<PAGE>
Index To Financial Statements
<TABLE>
<CAPTION>
Page
<S> <C>
The Separate Account:
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Audited Financial Statements:
Statement of Net Assets, December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . F-3-F-4
Statement of Operations for the year ended December 31, 1997. . . . . . . . . . . . . . . . . .F-5--F-6
Statements of Changes in Net Assets for the years ended December 31, 1997 and 1996. . . . . . . F-7-F-8
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-9-F-12
The American Franklin Life Insurance Company:*
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-13
Audited Financial Statements:
Statement of Operations for the years ended December 31, 1997 and 1996, the eleven months
ended December 31, 1995, and the one month ended January 31, 1995 . . . . . . . . . . . . . . . . F-14
Balance Sheet, December 31, 1997 and 1996. . . . . . . . . . . . . . . . . . . . . . . . . . F-15-F-16
Statement of Shareholder's Equity for the years ended December 31, 1997 and 1996, the eleven
months ended December 31, 1995, and the one month ended January 31, 1995. . . . . . . . . . . . . F-17
Statement of Cash Flows for the years ended December 31, 1997 and 1996, the eleven months
ended December 31, 1995, and the one month ended January 31, 1995 . . . . . . . . . . . . . . . . F-18
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-19-F-35
</TABLE>
- -----------------------
* The financial statements of American Franklin contained herein should be
considered only as bearing upon the ability of American Franklin to meet its
obligations under the policies offered hereby.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The American Franklin Life Insurance Company
Policyowners of Separate Account VUL-2
We have audited the accompanying statement of net assets of Separate
Account VUL-2 (comprising, respectively, the Money Market,
Equity-Income, Growth, Overseas, High Income, Investment Grade Bond,
Asset Manager, Index 500, Asset Manager: Growth and Contrafund
Divisions) as of December 31, 1997, and the related statement of
operations for the year then ended and the statement of changes in net
assets for each of the two years then ended. These financial
statements are the responsibility of Separate Account VUL-2
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. Our procedures included confirmation of
securities owned as of December 31, 1997 by correspondence with the
custodian. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of each of
the respective Divisions constituting Separate Account VUL-2 at
December 31, 1997, and the results of their operations for the year
then ended and changes in net assets for each of the two years then
ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
January 30, 1998
F-2
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
STATEMENT OF NET ASSETS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
MONEY EQUITY-
MARKET INCOME GROWTH OVERSEAS
DIVISION DIVISION DIVISION DIVISION
------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS - Investments in Variable Insurance
Products Fund and Variable Insurance
Products Fund II, at fair value
(Cost: See below) $ 3,120,690 $39,861,417 $51,757,864 $9,219,983
LIABILITIES - Due to General Account (10,526) (18,723) (39,825) (5,705)
------------------------------------------------------------------
NET ASSETS $3,110,164 $39,842,694 $51,718,039 $9,214,278
------------------------------------------------------------------
------------------------------------------------------------------
Unit value, at December 31, 1997 $ 126.37 $ 291.45 $ 264.35 $ 170.08
------------------------------------------------------------------
------------------------------------------------------------------
Units outstanding, at December 31, 1997 24,611 136,705 195,644 54,175
------------------------------------------------------------------
------------------------------------------------------------------
Cost of Investments $3,135,250 $31,762,665 $39,803,529 $8,291,249
------------------------------------------------------------------
------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
F-3
<PAGE>
<TABLE>
<CAPTION>
ASSET
HIGH INVESTMENT ASSET INDEX MANAGER: CONTRA-
INCOME GRADE BOND MANAGER 500 GROWTH FUND
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS - Investments in Variable Insurance
Products Fund and Variable Insurance
Products Fund II, at fair value
(Cost: See below) $ 2,416,480 $2,011,512 $ 26,502,212 $17,361,588 $4,078,334 $13,184,894
LIABILITIES - Due to General Account (1,582) (1,002) (20,601) (11,188) (2,773) (8,442)
---------------------------------------------------------------------------------------
NET ASSETS $ 2,414,898 $2,010,510 $ 26,481,611 $17,350,400 $4,075,561 $13,176,452
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Unit value, at December 31, 1997 $ 165.81 $ 146.29 $ 200.91 $ 226.02 $ 165.92 $ 174.12
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Units outstanding, at December 31, 1997 14,564 13,744 131,808 76,766 24,563 75,672
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Cost of Investments $ 2,172,860 $1,877,304 $ 22,398,305 $14,359,056 $3,569,525 $11,294,540
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
</TABLE>
F-4
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
MONEY EQUITY-
MARKET INCOME GROWTH OVERSEAS
DIVISION DIVISION DIVISION DIVISION
------------------------------------------------------
<S> <C> <C> <C> <C>
NET INVESTMENT INCOME
Income
Dividends from Variable Insurance Products Fund $182,030 $2,548,247 $ 1,307,633 $606,526
and Variable Insurance Products Fund II
Expenses
Mortality and expense risk charge 23,614 230,070 319,604 60,600
------------------------------------------------------
Net investment income (expense) 158,416 2,318,177 988,029 545,926
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain - 241,758 381,365 61,268
Net unrealized appreciation (depreciation):
Beginning of year (8,346) 4,288,372 6,366,508 786,945
End of year (14,560) 8,098,752 11,954,335 928,734
------------------------------------------------------
Net change in unrealized appreciation
(depreciation) during the year (6,214) 3,810,380 5,587,827 141,789
------------------------------------------------------
Net realized and unrealized gain (loss) on investments (6,214) 4,052,138 5,969,192 203,057
------------------------------------------------------
Net increase in net assets resulting from operations $152,202 $6,370,315 $ 6,957,221 $748,983
------------------------------------------------------
------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
F-5
<PAGE>
<TABLE>
<CAPTION>
ASSET
HIGH INVESTMENT ASSET INDEX MANAGER: CONTRA-
INCOME GRADE BOND MANAGER 500 GROWTH FUND
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET INVESTMENT INCOME
Income
Dividends from Variable Insurance
Products Fund and Variable Insurance $109,941 $100,671 $2,519,534 $ 247,126 $ 2,248 $ 174,269
Products Fund II
Expenses
Mortality and expense risk charge 12,988 13,529 173,975 81,823 17,644 62,797
-----------------------------------------------------------------------------------
Net investment income (expense) 96,953 87,142 2,345,559 165,303 (15,396) 111,472
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain 16,743 11,679 150,118 203,061 18,249 65,136
Net unrealized appreciation (depreciation):
Beginning of year 73,140 90,495 2,931,994 862,708 78,770 583,917
End of year 243,620 134,208 4,103,907 3,002,532 508,809 1,890,354
-----------------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) during the year 170,480 43,713 1,171,913 2,139,824 430,039 1,306,437
-----------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments 187,223 55,392 1,322,031 2,342,885 448,288 1,371,573
-----------------------------------------------------------------------------------
Net increase in net assets resulting
from operations $284,176 $142,534 $3,667,590 $2,508,188 $432,892 $1,483,045
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
</TABLE>
F-6
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
MONEY EQUITY-
MARKET INCOME GROWTH OVERSEAS
FOR THE YEAR ENDED DECEMBER 31, 1997 DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $158,416 $2,318,177 $988,029 $ 545,926
Net realized gain on investments - 241,758 381,365 61,268
Net change in unrealized appreciation
(depreciation) on investments (6,214) 3,810,380 5,587,827 141,789
-------------------------------------------------------------------------
Net increase in net assets from operations 152,202 6,370,315 6,957,221 748,983
FROM POLICY RELATED TRANSACTIONS:
Net contract purchase payments 15,768,314 12,119,616 14,879,501 2,855,311
Transfers for policy related transactions (1,274,078) (5,951,910) (7,325,640) (1,502,429)
Transfers between Separate Account VUL-2's
Divisions, net (14,692,099) 3,478,823 2,739,351 369,757
-------------------------------------------------------------------------
Net increase (decrease) in net assets from policy
related transactions (197,863) 9,646,529 10,293,212 1,722,639
-------------------------------------------------------------------------
Increase (decrease) in net assets (45,661) 16,016,844 17,250,433 2,471,622
Net assets, beginning of year 3,155,825 23,825,850 34,467,606 6,742,656
-------------------------------------------------------------------------
Net assets, end of year $3,110,164 $39,842,694 $51,718,039 $9,214,278
-------------------------------------------------------------------------
-------------------------------------------------------------------------
<CAPTION>
MONEY EQUITY-
MARKET INCOME GROWTH OVERSEAS
FOR THE YEAR ENDED DECEMBER 31, 1996 DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $ 90,006 $ 494,647 $ 1,305,736 $ 81,863
Net realized gain on investments - 119,363 217,472 72,428
Net change in unrealized appreciation
(depreciation) on investments 8,305 2,103,869 2,290,153 475,238
-------------------------------------------------------------------------
Net increase in net assets from operations 98,311 2,717,879 3,813,361 629,529
FROM POLICY RELATED TRANSACTIONS:
Net contract purchase payments 14,105,404 8,358,063 11,727,262 2,440,157
Transfers for policy related transactions (745,614) (3,518,149) (5,082,906) (1,085,007)
Transfers between Separate Account VUL-2's
Divisions, net (12,247,504) 3,540,795 4,024,505 (158,617)
-------------------------------------------------------------------------
Net increase in net assets from policy related
transactions 1,112,286 8,380,709 10,668,861 1,196,533
-------------------------------------------------------------------------
Increase in net assets 1,210,597 11,098,588 14,482,222 1,826,062
Net assets, beginning of year 1,945,228 12,727,262 19,985,384 4,916,594
-------------------------------------------------------------------------
Net assets, end of year $3,155,825 $23,825,850 $34,467,606 $6,742,656
-------------------------------------------------------------------------
-------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
F-7
<PAGE>
<TABLE>
<CAPTION>
ASSET
HIGH INVESTMENT ASSET INDEX MANAGER: CONTRA-
INCOME GRADE BOND MANAGER 500 GROWTH FUND
FOR THE YEAR ENDED DECEMBER 31, 1997 DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $ 96,953 $ 87,142 $ 2,345,559 $ 165,303 $ (15,396) $ 111,472
Net realized gain on investments 16,743 11,679 150,118 203,061 18,249 65,136
Net change in unrealized appreciation
(depreciation) on investments 170,480 43,713 1,171,913 2,139,824 430,039 1,306,437
--------------------------------------------------------------------------------------
Net increase in net assets from operations 284,176 142,534 3,667,590 2,508,188 432,892 1,483,045
FROM POLICY RELATED TRANSACTIONS:
Net contract purchase payments 936,633 525,371 5,954,601 6,747,739 1,946,149 6,031,891
Transfers for policy related transactions (374,337) (329,478) (3,858,162) (2,283,537) (707,474) (1,947,161)
Transfers between Separate Account VUL-2's
Divisions, net 339,645 (21,180) 109,203 3,935,049 1,105,963 2,638,620
--------------------------------------------------------------------------------------
Net increase (decrease) in net assets from
policy related transactions 901,941 174,713 2,205,642 8,399,251 2,344,638 6,723,350
--------------------------------------------------------------------------------------
Increase (decrease) in net assets 1,186,117 317,247 5,873,232 10,907,439 2,777,530 8,206,395
Net assets, beginning of year 1,228,781 1,693,263 20,608,379 6,442,961 1,298,031 4,970,057
--------------------------------------------------------------------------------------
Net assets, end of year $2,414,898 $2,010,510 $26,481,611 $17,350,400 $4,075,561 $13,176,452
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
<CAPTION>
ASSET
HIGH INVESTMENT ASSET INDEX MANAGER: CONTRA-
INCOME GRADE BOND MANAGER 500 GROWTH FUND
FOR THE YEAR ENDED DECEMBER 31, 1996 DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $ 39,298 $ 56,393 $ 950,642 $ 33,984 $ 56,162 $ (6,210)
Net realized gain on investments 8,967 3,089 212,679 55,003 3,633 14,914
Net change in unrealized appreciation
(depreciation) on investments 39,105 (6,922) 1,427,096 753,837 83,858 580,665
--------------------------------------------------------------------------------------
Net increase in net assets from operations 87,370 52,560 2,590,417 842,824 143,653 589,369
FROM POLICY RELATED TRANSACTIONS:
Net contract purchase payments 533,704 486,742 5,498,237 2,673,909 654,319 2,330,711
Transfers for policy related transactions (192,712) (275,951) (3,080,444) (790,840) (178,249) (624,350)
Transfers between Separate Account VUL-2's
Divisions, net 360,417 107,298 (498,477) 2,664,359 437,562 1,823,964
--------------------------------------------------------------------------------------
Net increase in net assets from policy
related transactions 701,409 318,089 1,919,316 4,547,428 913,632 3,530,325
--------------------------------------------------------------------------------------
Increase in net assets 788,779 370,649 4,509,733 5,390,252 1,057,285 4,119,694
Net assets, beginning of year 440,002 1,322,614 16,098,646 1,052,709 240,746 850,363
--------------------------------------------------------------------------------------
Net assets, end of year $1,228,781 $1,693,263 $20,608,379 $6,442,961 $1,298,031 $4,970,057
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
</TABLE>
F-8
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. NATURE OF OPERATIONS
The American Franklin Life Insurance Company (American Franklin)
is a wholly-owned subsidiary of The Franklin Life Insurance
Company. American Franklin established Separate Account VUL-2
(Account) as a unit investment trust registered under the
Investment Company Act of 1940. The Account, which consists of
ten investment divisions, was established on April 9, 1991 in
conformity with Illinois Insurance Law. The assets in each
division are invested in units of beneficial interest (shares) of
a designated portfolio (Portfolio) of two mutual funds, sponsored
by Fidelity Investments, Variable Insurance Products Fund and
Variable Insurance Products Fund II (Funds). The Money Market,
Equity-Income, Growth, Overseas, and High Income Divisions of the
Account are invested in shares of a corresponding Portfolio of
Variable Insurance Products Fund, while the Investment Grade
Bond, Asset Manager, Index 500, Asset Manager: Growth and
Contrafund Divisions of the Account are invested in shares of a
corresponding Portfolio of Variable Insurance Products Fund II.
The Account's financial statements should be read in conjunction
with the financial statements of the Funds. The Account
commenced operations on September 30, 1991.
The Account was established by American Franklin to support the
operations of American Franklin's EquiBuilder II-TM- Flexible
Premium Variable Life Insurance Policies (EquiBuilder II
Policies). The Account also supports the operations of American
Franklin's EquiBuilder III-TM- Flexible Premium Variable Life
Insurance Policies (EquiBuilder III Policies) (the EquiBuilder II
Policies and the EquiBuilder III Policies are referred to
collectively as the Policies). At December 31, 1997, American
Franklin had obtained the necessary state insurance department
approvals for the sale of the EquiBuilder III Policies in 46
states.
Franklin Financial Services Corporation, a wholly-owned
subsidiary of The Franklin Life Insurance Company, acts as the
principal underwriter, as defined in the Investment Company Act
of 1940, of the Policies. The assets of the Account are the
property of American Franklin. The portion of the Account's
assets applicable to the Policies is not chargeable with
liabilities arising out of any other business American Franklin
may conduct.
The net assets of the Account may not be less than the reserves
applicable to the Policies. Assets may also be set aside in
American Franklin's General Account based on the amounts
allocated under the Policies to American Franklin's Guaranteed
Interest Division and for policy loans. Additional assets are
set aside in American Franklin's General Account to provide for
(i) the unearned portion of the monthly charges for mortality and
expense risk charges made under the Policies and (ii) other
policy benefits.
2. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of the Account are as
follows:
Investments in shares of the Funds are carried at fair value.
Investments in shares of the Funds are valued at the net asset
values of the respective Portfolios of the Funds corresponding to
the investment divisions of the Account. Investment transactions
are recorded on the trade date. Dividends are recorded as
received. Realized gains and losses on sales of the Funds'
shares are determined based on the specific identification
method.
F-9
<PAGE>
The operations of the Account are included in the federal income
tax return of American Franklin. Under the provisions of the
Policies, American Franklin has the right to charge the Account
for federal income tax attributable to the Account. No charge is
currently being made against the Account for such tax since,
under current tax law, American Franklin pays no tax on
investment income and capital gains reflected in variable life
insurance policy reserves. However, American Franklin retains
the right to charge for any federal income tax incurred which is
attributable to the Account if the law is changed. Charges for
state and local taxes, if any, attributable to the Account may
also be made.
3. SALES AND ADMINISTRATIVE CHARGES
Certain jurisdictions require that deductions be made from
premium payments for taxes. The amount of such deductions varies
and may be up to 5% of the premium. With respect to the
EquiBuilder III Policies, American Franklin makes a sales expense
deduction equal to 5% of each premium paid during any policy year
up to a "target" premium, which is based on the annual premium
for a fixed whole life insurance policy on the life of the
insured person (no sales expense deduction is made for premiums
in excess of the target premium paid during that policy year).
The balance remaining after any such deduction, the net premium,
is placed by American Franklin in a Policy Account established
for each policyowner. Each month American Franklin makes a
charge against each Policy Account for: administrative expenses
(currently $6 per month plus an additional charge of $24 per
month for each of the first 12 months a policy is in effect); and
cost of insurance, which is based on the insured person's age,
sex, risk class, amount of insurance, and additional benefits, if
any. In addition, American Franklin will make charges for the
following: a partial withdrawal of net cash surrender value
(currently $25 or 2% of the amount withdrawn, whichever is less);
an increase in the face amount of insurance (currently a $1.50
administrative charge for each $1,000 increase up to a maximum
charge of $300); and a transfer between investment divisions in
any policy year in which four transfers have already been made
(up to $25 for each additional transfer in a given policy year).
Charges may also be made for providing more than one illustration
of policy benefits to a given policyholder. American Franklin
assumes mortality and expense risks related to the operations of
the Account and deducts a charge from the assets of the Account
at an effective annual rate of .75% of the Account's net assets
to cover these risks. The total charges paid by the Account to
American Franklin were $18,890,000 and $12,166,000 in 1997 and
1996, respectively.
During the first ten years a Policy is in effect, a surrender
charge may be deducted from a Policy Account by American Franklin
if: the Policy is surrendered for its net cash surrender value,
the face amount of the Policy is reduced or the Policy is
permitted to lapse. The maximum total surrender charge
applicable to a particular Policy is specified in the Policy and
is equal to 50% of one target premium. This maximum will not
vary based on the amount of premiums paid or when they are paid.
At the end of the sixth policy year and at the end of each of the
four succeeding policy years, the maximum surrender charge is
reduced by an amount equal to 20% of the initial maximum
surrender charge until, after the end of the tenth policy year,
there is no surrender charge. Subject to the maximum surrender
charge, the surrender charge with respect to the EquiBuilder II
Policies will equal 30% of actual premiums paid during the first
policy year up to one target premium, plus 9% of all other
premiums actually paid during the first ten policy years, and the
surrender charge with respect to the EquiBuilder III Policies
will equal 25% of actual premiums paid during the first policy
year up to one target premium, plus 9% of all other premiums
actually paid during the first ten policy years.
F-10
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
4. SUMMARY OF UNIT VALUES AND CHANGES IN OUTSTANDING UNITS
Unit value information and a summary of changes in outstanding units is
shown below:
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
MONEY EQUITY- HIGH
MARKET INCOME GROWTH OVERSEAS INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year $120.68 $236.34 $223.47 $152.96 $141.63
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Unit value, end of year $126.37 $291.45 $264.35 $170.08 $165.81
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Number of units outstanding,
beginning of year 26,149 100,813 154,236 44,082 8,676
Net contract purchase payments 127,542 45,380 60,016 16,843 6,070
Transfers for policy related transactions (10,304) (22,424) (29,564) (8,917) (2,437)
Transfers between Separate Account
VUL-2's Divisions, Net (118,776) 12,936 10,956 2,167 2,255
--------------------------------------------------------------------------------
Number of units outstanding, end of year 24,611 136,705 195,644 54,175 14,564
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<CAPTION>
ASSET
INVESTMENT ASSET INDEX MANAGER:
GRADE BOND MANAGER 500 GROWTH CONTRAFUND
DIVISION DIVISION DIVISION DIVISION DIVISION
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year $135.81 $171.77 $178.33 $137.89 $145.66
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Unit value, end of year $146.29 $200.91 $226.02 $165.92 $174.12
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Number of units outstanding,
beginning of year 12,468 119,978 36,130 9,413 34,121
Net contract purchase payments 3,764 31,902 32,530 12,503 37,070
Transfers for policy related transactions (2,338) (20,496) (11,120) (4,526) (11,863)
Transfers between Separate Account
VUL-2's Divisions, Net (150) 424 19,226 7,173 16,344
--------------------------------------------------------------------------------
Number of units outstanding, end of year 13,744 131,808 76,766 24,563 75,672
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
</TABLE>
F-11
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
5. REMUNERATION OF MANAGEMENT
The Account incurs no liability or expense for remuneration to
directors, members of advisory boards, officers or any other
person who might provide a service for the Account, except as
described in Note 3.
F-12
<PAGE>
REPORT OF INDEPENDENT AUDITORS
------------------------------
Board of Directors
and Shareholder
The American Franklin Life Insurance Company
We have audited the accompanying balance sheet of The American Franklin Life
Insurance Company, (the Company), a wholly-owned subsidiary of The Franklin Life
Insurance Company, which is an indirect wholly-owned subsidiary of American
General Corporation, as of December 31, 1997 and 1996, and the related
statements of operations, shareholder's equity and cash flows for the years
ended December 31, 1997 and 1996, the eleven months ended December 31, 1995, and
the one month ended January 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The American Franklin Life
Insurance Company at December 31, 1997 and 1996 and the results of its
operations and its cash flows for the years ended December 31, 1997 and 1996,
the eleven months ended December 31, 1995, and the one month ended January 31,
1995, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
February 23, 1998
F-13
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
Predecessor Basis
-----------------
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
----------------------------------------------------------------
1997 1996 1995 1995
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Premiums and other considerations $ 17,434 $ 16,346 $ 9,472 $ 676
Net investment income 2,530 2,641 2,129 160
Realized investment gains (losses) 283 90 (6) -
Other income (expense) 1,541 (623) 465 842
----------------------------------------------------------------
Total revenues 21,788 18,454 12,060 1,678
Benefits and expenses
Benefits paid or provided 2,450 2,767 2,597 330
Change in policy reserves 1,224 843 458 1,027
Commissions and allowances 20,096 14,843 9,323 706
Change in deferred policy acquisition
costs and cost of insurance purchased (15,351) (7,866) (4,558) (298)
Taxes, licenses and fees 1,484 1,369 988 96
General insurance expenses 8,151 7,175 4,713 312
----------------------------------------------------------------
Total benefits and expenses 18,054 19,131 13,521 2,173
----------------------------------------------------------------
Income (loss) before income taxes 3,734 (677) (1,461) (495)
Income tax expense (benefit)
Current 715 873 452 34
Deferred 244 (1,104) (961) (217)
----------------------------------------------------------------
Total income tax expense (benefit) 959 (231) (509) (183)
----------------------------------------------------------------
Net income (loss) $ 2,775 $ (446) $ (952) $ (312)
----------------------------------------------------------------
----------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
F-14
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
BALANCE SHEET
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
ASSETS 1997 1996
-------------------------
<S> <C> <C>
Investments
Fixed maturity securities (amortized cost:
$21,305; $31,359) $ 22,565 $ 32,599
Policy loans 7,050 4,378
-------------------------
29,615 36,977
Cash and cash equivalents 6,349 2,408
Accrued investment income 472 672
Amounts recoverable from reinsurers 8,885 6,139
Deferred policy acquisition costs 30,515 13,781
Cost of insurance purchased 10,549 12,212
Insurance premiums in course of settlement 1,286 238
Other assets 1,328 551
Assets held in Separate Accounts 223,529 119,850
-------------------------
Total assets $ 312,528 $ 192,828
-------------------------
-------------------------
</TABLE>
See Notes to Financial Statements.
F-15
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
BALANCE SHEET (CONTINUED)
(In thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------
LIABILITIES 1997 1996
-------------------------
<S> <C> <C>
Insurance liabilities
Policy reserves, contract claims and
other policyholders' funds $ 13,051 $ 7,390
Universal life contracts 31,289 30,347
Annuity contracts 2,274 -
Unearned revenue 6,801 3,972
Income taxes
Current 380 185
Deferred (2,211) (2,458)
Accrued expenses and other liabilities 7,767 6,676
Liabilities related to Separate Accounts 223,529 119,850
-------------------------
Total liabilities 282,880 165,962
SHAREHOLDER'S EQUITY
Common stock ($5 par value; 500,000
shares authorized, issued and outstanding) 2,500 2,500
Paid-in capital 25,373 25,373
Net unrealized gains on securities 398 391
Retained earnings (deficit) 1,377 (1,398)
-------------------------
Total shareholder's equity 29,648 26,866
-------------------------
Total liabilities and shareholder's equity $ 312,528 $ 192,828
-------------------------
-------------------------
</TABLE>
See Notes to Financial Statements.
F-16
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
STATEMENT OF SHAREHOLDER'S EQUITY
(In thousands)
<TABLE>
<CAPTION>
Predecessor Basis
-----------------
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
----------------------------------------------------------------
1997 1996 1995 1995
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock $ 2,500 $ 2,500 $ 2,500 $ 2,500
----------------------------------------------------------------
Paid-in capital
Balance at beginning of period 25,373 15,373 15,373 12,500
Capital contribution - 10,000 - -
Adjustment for the acquisition - - - 2,873
----------------------------------------------------------------
Balance at end of period 25,373 25,373 15,373 15,373
----------------------------------------------------------------
Net unrealized gains (losses) on
securities
Balance at beginning of period 391 727 - (9)
Change during the period 10 (516) 1,118 (3)
Amounts applicable to deferred federal
income taxes (3) 180 (391) 1
Adjustment for the acquisition - - - 11
----------------------------------------------------------------
Balance at end of period 398 391 727 -
----------------------------------------------------------------
Retained earnings (deficit)
Balance at beginning of period (1,398) (952) - 2,876
Net income (loss) 2,775 (446) (952) (312)
Adjustment for the acquisition - - - (2,564)
----------------------------------------------------------------
Balance at end of period 1,377 (1,398) (952) -
----------------------------------------------------------------
Total shareholder's equity
at end of period $ 29,648 $ 26,866 $ 17,648 $ 17,873
----------------------------------------------------------------
----------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
F-17
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Predecessor Basis
-----------------
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
------------------------------------------------------------
1997 1996 1995 1995
------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating activities
Net Income (loss) $ 2,775 $ (446) $ (952) $ (312)
Reconciling adjustments to net cash used
for operating activities
Policy reserves, claims and other
policyholders' funds 18,078 12,609 10,786 1,439
Realized investment (gains) losses (283) (90) 6 -
Deferred policy acquisition costs and
cost of insurance purchased (15,351) (7,866) (4,558) (298)
Charges on universal life contracts, net of
interest credited (17,369) (11,602) (8,166) (1,248)
Change in other assets and liabilities (2,939) (2,660) 2,806 (471)
------------------------------------------------------------
Net cash used for operating activities (15,089) (10,055) (78) (890)
------------------------------------------------------------
Investing activities
Investment purchases
Available-for-sale (6,900) (32,704) (5,859) (41)
Other (2,766) (2,107) - -
Investment calls, maturities and sales
Available-for-sale 17,699 26,096 4,426 -
Held-to-maturity - - - 12
------------------------------------------------------------
Net cash provided by (used for)
investing activities 8,033 (8,715) (1,433) (29)
------------------------------------------------------------
Financing activities
Policyholder account deposits 99,023 43,912 27,956 1,957
Policyholder account withdrawals (88,026) (39,565) (21,750) (1,305)
Proceeds from intercompany borrowings 15,320 4,742 1,425 -
Repayments of intercompany borrowings (15,320) (4,832) (1,335) -
Capital contribution - 10,000 - -
------------------------------------------------------------
Net cash provided by financing
activities 10,997 14,257 6,296 652
------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 3,941 (4,513) 4,785 (267)
Cash and cash equivalents at beginning of period 2,408 6,921 2,136 2,403
------------------------------------------------------------
Cash and cash equivalents at end of period $ 6,349 $ 2,408 $ 6,921 $ 2,136
------------------------------------------------------------
------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
F-18
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
1.1 NATURE OF OPERATIONS
The American Franklin Life Insurance Company (AMFLIC), headquartered in
Springfield, Illinois, sells and services variable universal life, variable
annuity and universal life insurance products to the middle income market,
primarily in the Midwest.
1.2 PREPARATION OF FINANCIAL STATEMENTS
The financial statements have been prepared in accordance with generally
accepted accounting principles (GAAP) and include the accounts of AMFLIC, a
wholly-owned subsidiary of The Franklin Life Insurance Company (FLIC).
The preparation of financial statements requires management to make
estimates and assumptions that affect amounts reported in the financial
statements and disclosures of contingent assets and liabilities. Ultimate
results could differ from those estimates.
1.3 ACQUISITION
On January 31, 1995, AGC Life Insurance Company (AGCL), a subsidiary of
American General Corporation (AGC), acquired FLIC for $1.17 billion. The
purchase price consisted of $920 million cash and a $250 million
extraordinary cash dividend paid by FLIC to its former parent prior to
closing. The portion of the purchase price allocated to AMFLIC was $17.9
million.
The acquisition was accounted for using the purchase method of accounting
in accordance with the provisions of Accounting Principles Board Opinion
16, "Business Combinations", and other existing accounting literature
pertaining to purchase accounting. Under purchase accounting, the total
purchase cost was allocated to the assets and liabilities acquired based on
a determination of their fair value. AMFLIC's balance sheets at
December 31, 1997 and 1996, and its statements of operations, shareholder's
equity and cash flows for the years ended December 31, 1997 and 1996, and
the eleven months ended December 31, 1995, are reported under the purchase
method of accounting and, accordingly, are not consistent with the basis of
presentation of the "Predecessor Basis" statements of operations,
shareholder's equity and cash flows for the one month ended January 31,
1995.
F-19
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1.4 INVESTMENTS
FIXED MATURITY SECURITIES. All fixed maturity securities are classified as
available-for-sale and recorded at fair value. After adjusting related
balance sheet accounts as if unrealized gains (losses) had been realized,
the net adjustment is recorded in net unrealized gains (losses) on
securities within shareholder's equity. If the fair value of a security
classified as available-for-sale declines below its cost and this decline
is considered to be other than temporary, the security is reduced to its
fair value, and the reduction is recorded as a realized loss.
POLICY LOANS. Policy loans are reported at unpaid principal balance.
INVESTMENT INCOME. Interest on fixed maturity securities and policy loans
is recorded as income when earned and is adjusted for any amortization of
premium or discount.
REALIZED INVESTMENT GAINS (LOSSES). Realized investment gains (losses) are
recognized using the specific identification method.
1.5 CASH AND CASH EQUIVALENTS
Highly liquid investments with an original maturity of three months or less
are included in cash and cash equivalents. The carrying amount
approximates fair value.
1.6 DEFERRED POLICY ACQUISITION COSTS (DPAC)
Certain costs of writing an insurance policy, including commissions,
underwriting, and marketing expenses, are deferred and reported as DPAC.
DPAC associated with interest-sensitive life insurance contracts and
insurance investment contracts is charged to expense in relation to the
estimated gross profits of those contracts. DPAC associated with all other
insurance contracts is charged to expense over the premium-paying period or
as the premiums are earned over the life of the contract.
DPAC is adjusted for the impact on estimated future gross profits as if net
unrealized gains on securities had been realized at the balance sheet date.
The impact of this adjustment is included in net unrealized gains on
securities within shareholder's equity.
AMFLIC reviews the carrying amount of DPAC on at least an annual basis.
AMFLIC considers estimated future gross profits or future premiums,
expected mortality, interest earned and credited rates, persistency, and
expenses in determining whether the carrying amount is recoverable.
F-20
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1.7 COST OF INSURANCE PURCHASED (CIP)
The cost assigned to insurance contracts in force at January 31, 1995 is
reported as CIP. Interest is accreted on the unamortized balance of CIP at
rates of 6% to 8.5%. CIP is charged to expense and adjusted for the impact
of net unrealized gains on securities in the same manner as DPAC. AMFLIC
reviews the carrying amount of CIP on at least an annual basis using the
same methods used to evaluate DPAC.
1.8 SEPARATE ACCOUNTS
Separate Accounts are assets and liabilities associated with certain
contracts for which the investment risk lies solely with the contract
holder. Therefore, AMFLIC's liability for these accounts equals the value
of the account assets. Investment income, realized investment gains
(losses), and policyholder account deposits and withdrawals related to
Separate Accounts are excluded from the statement of operations. Assets
held in Separate Accounts are primarily shares in mutual funds, which are
carried at fair value, based on the quoted net asset value per share.
1.9 INSURANCE AND ANNUITY LIABILITIES
Substantially all of AMFLIC's insurance and annuity liabilities relate to
long-duration contracts. The contracts normally cannot be changed or
canceled by AMFLIC during the contract period.
For interest-sensitive life and insurance investment contracts, reserves
equal the sum of the policy account balance and deferred revenue charges.
Reserves for other contracts are based on estimates of the cost of future
policy benefits. Reserves are determined using the net level premium
method. Interest assumptions used to compute reserves ranged from 3% to 9%
at December 31, 1997.
1.10 PREMIUM RECOGNITION
Most receipts for annuities and interest-sensitive life insurance contracts
are classified as deposits instead of revenues. Revenues for these
contracts consist of mortality, expense, and surrender charges. Policy
charges that are designed to compensate AMFLIC for future services are
deferred and recognized over the period earned, using the same assumptions
used to amortize DPAC. For all other long-duration contracts, premiums are
recognized when due.
F-21
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1.11 INCOME TAXES
Deferred tax assets and liabilities are established for temporary
differences between the financial reporting basis and the tax basis of
assets and liabilities, at the enacted tax rates expected to be in effect
when the temporary differences reverse. The effect of a tax rate change is
recognized in income in the period of enactment. State income taxes are
included in income tax expense.
A change in deferred taxes related to fluctuations in fair value of
available-for-sale securities is included in net unrealized gains (losses)
on securities in shareholder's equity.
1.12 RECLASSIFICATIONS
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform to the 1997 presentation.
1.13 NEW ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and
displaying comprehensive income and its components in the financial
statements. Beginning in 1998, AMFLIC must adopt this statement for all
periods presented. Application of this statement will not change
recognition or measurement of net income and, therefore, will not impact
AMFLIC's results of operations or financial position.
F-22
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. Investments
2.1 INVESTMENT INCOME
Investment income was as follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
----------------------------------------------------------
In thousands 1997 1996 1995 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities $ 2,291 $ 2,141 $ 2,097 $ 168
Policy loans 264 175 68 8
Other investments 12 369 - -
----------------------------------------------------------
Gross investment income 2,567 2,685 2,165 176
Investment expense 37 44 36 16
----------------------------------------------------------
Net investment income $ 2,530 $ 2,641 $ 2,129 $ 160
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
2.2 REALIZED INVESTMENT GAINS (LOSSES)
Realized investment gains (losses) for fixed maturity securities, net of
DPAC and CIP amortization, were as follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
----------------------------------------------------------
In thousands 1997 1996 1995 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities
Gross gains $ 564 $ 183 $ 153 $ -
Gross losses (10) (10) (171) -
--------------------------------------------------------
Total 554 173 (18) -
--------------------------------------------------------
Other (271) (83) 12 -
--------------------------------------------------------
Realized investment gains (losses) $ 283 $ 90 $ (6) $ -
--------------------------------------------------------
--------------------------------------------------------
</TABLE>
Voluntary sales of investments resulted in the following realized gains
(losses):
<TABLE>
<CAPTION>
Realized
In thousands Category Proceeds Gains Losses
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED AVAILABLE-FOR-SALE $ 9,992 $ 550 $ 8
DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------------
Year Ended Available-for-sale $ 12,081 $ 171 $ 10
December 31, 1996
- -----------------------------------------------------------------------------------------------
Eleven Months Ended Available-for-sale $ 1,517 $ - $ 72
December 31, 1995
</TABLE>
F-23
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2.3 FIXED MATURITY SECURITIES
VALUATION. Amortized cost and fair value of fixed maturity securities were
as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------------
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
In thousands COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate bonds
Investment grade $ 9,172 $ 678 $ 2 $ 9,848
Below investment grade 300 12 - 312
Public utilities 2,622 273 - 2,895
Mortgage-backed 1,897 131 - 2,028
U.S. government 7,111 155 - 7,266
States/political subdivisions 203 13 - 216
-------------------------------------------------------
Total fixed maturity securities $ 21,305 $ 1,262 $ 2 $ 22,565
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------------
Cost Or Gross Gross
Amortized Unrealized Unrealized Fair
In thousands Cost Gains Losses Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate bonds
Investment grade $ 16,860 $ 786 $ - $ 17,646
Below investment grade 955 25 - 980
Public utilities 3,326 244 - 3,570
Mortgage-backed 1,877 121 - 1,998
U.S. government 8,137 149 98 8,188
States/political subdivisions 204 13 - 217
-------------------------------------------------------
Total fixed maturity securities $ 31,359 $ 1,338 $ 98 $ 32,599
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
F-24
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2.3 FIXED MATURITY SECURITIES (CONTINUED)
MATURITIES. The contractual maturities of fixed maturity securities at
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
COST OR FAIR
In thousands AMORTIZED COST VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
Fixed maturity securities, excluding
mortgage-backed securities, due
In years two through five $ 4,805 $ 5,050
In years six through ten 13,442 14,180
After ten years 1,161 1,307
Mortgage-backed securities 1,897 2,028
----------------------------
Total fixed maturity securities $ 21,305 $ 22,565
----------------------------
----------------------------
</TABLE>
Actual maturities may differ from contractual maturities since borrowers
may have the right to call or prepay obligations. Corporate requirements
and investment strategies may result in the sale of investments before
maturity.
F-25
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2.4 NET UNREALIZED GAINS ON SECURITIES
Net unrealized gains on fixed maturity securities included in shareholder's
equity at December 31 were as follows:
<TABLE>
<CAPTION>
In thousands 1997 1996
----------------------------------------------------------------
<S> <C> <C>
Gross unrealized gains $ 1,262 $ 1,338
Gross unrealized losses (2) (98)
DPAC fair value adjustment (39) (33)
CIP fair value adjustment (609) (606)
Deferred federal income taxes (214) (210)
--------------------------
Net unrealized gains on securities $ 398 $ 391
--------------------------
--------------------------
</TABLE>
2.5 INVESTMENTS ON DEPOSIT
At December 31, 1997 and 1996, fixed maturity securities carried at
$7,018,000 and $6,878,000, respectively, were on deposit with regulatory
authorities to comply with state insurance laws.
2.6 INVESTMENT RESTRICTIONS
AMFLIC is restricted by the insurance laws of its domiciliary state as to
the amount which it can invest in any entity. At December 31, 1997 and
1996, AMFLIC's largest investment in any one entity other than U.S.
government obligations was $1,000,000.
F-26
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. Fair Value of Financial Instruments
Carrying amounts and fair values for certain of AMFLIC's financial
instruments at December 31 are presented below. Care should be exercised
in drawing conclusions based on fair value, since (1) the fair values
presented do not include the value associated with all of AMFLIC's assets
and liabilities, and (2) the reporting of investments at fair value without
a corresponding revaluation of related policyholder liabilities can be
misinterpreted.
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------------
CARRYING FAIR Carrying Fair
In thousands AMOUNT VALUE Amount Value
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Fixed maturity securities $ 22,565 $ 22,565 $ 32,599 $ 32,599
Liabilities
Insurance investment contracts $ 2,318 $ 2,193 - -
</TABLE>
The methods and assumptions used to estimate fair value were as follows:
FIXED MATURITY SECURITIES. Fair values of fixed maturity securities were
based on quoted market prices, where available. For investments not
actively traded, fair values were estimated using values obtained from
independent pricing services or, in the case of some private placements, by
discounting expected future cash flows using a current market rate
applicable to yield, credit quality, and the average life of the
investments.
POLICY LOANS. Policy loans have no stated maturity dates and are an
integral part of the related insurance contract. Accordingly, it is not
practicable to estimate a fair value. The weighted average interest rate
charged on policy loan balances during 1997 and 1996 was 7.17%.
INSURANCE INVESTMENT CONTRACTS. Fair value of insurance investment
contracts, which do not subject American Franklin to significant risks
arising from policyholder mortality or morbidity, was estimated using cash
flows discounted at market interest rates. Care should be exercised in
drawing conclusions from the estimated fair value, since the estimates are
based on assumptions regarding future economic activity.
F-27
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. Deferred Policy Acquisition Costs (DPAC)
An analysis of the changes in the DPAC asset is as follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
----------------------------------------------------------
In thousands 1997 1996 1995 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning of period balance $ 13,781 $ 4,101 $ - $ 16,540
Capitalization 18,223 9,861 4,328 445
Amortization (1,307) (343) - (147)
Effect of changes in unrealized
gains on securities (6) 195 (228) -
Effect of realized investment
(gains) losses (176) (33) 1 -
Adjustment for the
acquisition (a) - - (16,838)
----------------------------------------------------------
End of period balance $ 30,515 $ 13,781 $ 4,101 $ -
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
(a) Represents the necessary elimination of the historical DPAC asset
required by purchase accounting.
F-28
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. Cost of Insurance Purchased (CIP)
An analysis of the changes in the CIP asset is as follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
----------------------------------------------------------
In thousands 1997 1996 1995 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning of period balance $ 12,212 $ 13,621 $ 14,279 $ -
Interest accretion 1,054 1,400 1,073 -
Additions - - 1,844 -
Amortization (2,619) (3,052) (2,687) -
Effect of changes in unrealized
gains on securities (3) 293 (899) -
Effect of realized investment (gains) losses (95) (50) 11 -
Adjustment for the acquisition (a) - - - 14,279
----------------------------------------------------------
End of period balance $ 10,549 $ 12,212 $ 13,621 $ 14,279
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
a) Represents the amount necessary to recognize the new CIP asset
attributable to the January 31, 1995 acquisition.
CIP amortization, net of accretion, expected to be recorded in each of
the next five years is:
<TABLE>
<CAPTION>
AMOUNT
YEAR (000's)
--------------------------------------
<S> <C> <C>
1998 $1,367
1999 1,201
2000 1,054
2001 927
2002 820
</TABLE>
F-29
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
6. Separate Account
AMFLIC administers three Separate Accounts in connection with the issuance
of its Variable Universal Life and Variable Annuity products.
7. Income Taxes
AMFLIC is subject to the life insurance company provisions of the federal
tax law and is part of a life/life consolidated return which also includes
FLIC.
The method of allocation of tax expense is subject to a written agreement.
Allocation is based upon separate return calculations with current credit
for net losses and tax credits. Consolidated alternative minimum tax,
excise tax or surtax, if any, is allocated separately. The tax liability
of AMFLIC under this agreement shall not exceed the amount AMFLIC would
have paid if it had filed on a separate return basis. Intercompany tax
balances are to be settled no later than thirty (30) days after the date of
filing the consolidated return.
7.1 DEFERRED TAXES
Components of deferred tax liabilities and assets at December 31, were as
follows:
<TABLE>
<CAPTION>
In thousands 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities, applicable to:
Basis differential of investments $ 341 $ 292
DPAC and CIP 9,213 5,483
Other 1,220 949
-----------------------------
Total deferred tax liabilities 10,774 6,724
Deferred tax assets, applicable to:
Policy reserves (12,438) (8,329)
Other (547) (853)
-----------------------------
Total deferred tax assets (12,985) (9,182)
-----------------------------
Net deferred tax assets $ (2,211) $ (2,458)
-----------------------------
-----------------------------
</TABLE>
AMFLIC expects adequate future taxable income to realize the net deferred
tax assets. Accordingly, no valuation allowance is considered necessary.
F-30
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7.2 TAX EXPENSE
A reconciliation between the federal income tax rate and the effective
income tax rate follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
----------------------------------------------------------
1997 1996 1995 1995
----------------------------------------------------------
<S> <C> <C> <C> <C>
Federal income tax rate 35.0 % 35.0 % 35.0 % 35.0 %
State taxes, net - (0.3) (0.4) 0.4
Invested asset items (5.4) 0.1 0.2 -
Other (3.9) (0.7) - 1.6
----------------------------------------------------------
Effective tax rate 25.7 % 34.1 % 34.8 % 37.0 %
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
7.3 TAXES PAID
Federal income taxes paid during the years ended December 31, 1997 and
1996, and the eleven months ended December 31, 1995 were $519,000,
$228,000, and $1,031,000, respectively. State income taxes paid during the
year ended December 31, 1997, and the eleven months ended December 31, 1995
were $1,000 for each period. No state income taxes were paid during the
year ended December 31, 1996. There were no federal or state income taxes
paid during January 1995.
F-31
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. Statutory Accounting
State insurance laws and regulations prescribe accounting practices for
calculating statutory net income and equity. In addition, state regulators
may permit statutory accounting practices that differ from prescribed
practices. No significant permitted practices are used to prepare AMFLIC's
statutory financial statements.
At December 31, 1997 and 1996, AMFLIC had statutory stockholder's equity of
$17,727,000, and $18,055,000, respectively. AMFLIC's statutory net loss
was $648,000, $1,949,000, and $4,704,000 for the years ended December 31,
1997, 1996 and 1995, respectively.
Generally, AMFLIC is restricted by the insurance laws of its domiciliary
state as to amounts that can be transferred in the form of dividends, loans
or advances without the approval of the Illinois Insurance Department.
Under these restrictions, during 1998 no dividends may be paid out and,
loans and advances in excess of $4,432,000 may not be transferred without
the approval of the Illinois Insurance Department.
F-32
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. Statement of Cash Flows
In addition to the cash activities shown in the statement of cash flows,
the following transactions, occurred:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
----------------------------------------------------------
In thousands 1997 1996 1995 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest added to universal
life contracts and other
deposit funds $ 1,279 $ 1,267 $ 1,126 $ 111
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
10. Related Party Transactions
AMFLIC has no full-time employees or office facilities. General and
administrative expenses are allocated to AMFLIC from FLIC, based upon hours
worked by administrative personnel. Allocated expenses for the years ended
December 31, 1997 and 1996, the eleven months ended December 31, 1995, and
the one month ended January 31, 1995 amounted to approximately $5,104,000,
$3,868,000, $3,277,000, and $204,000, respectively.
AMFLIC participates in a program of short-term borrowing with AGC to
maintain its long-term investment commitments. AMFLIC borrowed $15,320,000
and $4,742,000 and repaid $15,320,000 and $4,832,000 (relating to 1996 and
1995 borrowings) in 1997 and 1996, respectively. Interest was paid on the
outstanding balance based on the rate as stipulated in the program.
11. Reinsurance
AMFLIC is routinely involved in reinsurance transactions. Ceded
reinsurance becomes a liability of the reinsurer that assumes the risk. If
the reinsurer could not meet its obligations, AMFLIC would reassume the
liability. The likelihood of a material reinsurance liability being
reassumed by AMFLIC is considered to be remote. AMFLIC diversifies the
risk of exposure to reinsurance loss by using a number of life reinsurers,
including FLIC, that have strong claims-paying ability ratings. The
maximum retention on one life for individual life insurance is $100,000.
Effective January 1, 1997, AMFLIC entered into a modified coinsurance
agreement with FLIC covering the variable universal life product.
Amounts paid or deemed to have been paid in connection with ceded
reinsurance contracts are recorded as reinsurance receivables. The cost of
reinsurance related to long-duration contracts is recognized over the life
of the underlying reinsured policies using assumptions consistent with
those used to account for the underlying policies.
F-33
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. Reinsurance (continued)
Under the provisions of an assumed reinsurance agreement, AMFLIC recognized
the following:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
----------------------------------------------------------
In thousands 1997 1996 1995 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums and other
considerations $ 1,169 $ 1,433 $ 361 $ 43
Other income 810 1,196 972 8
Benefits 1,329 1,810 1,166 145
Commission expense (59) (9) 54 6
Premium taxes - (6) 6 6
</TABLE>
Under the provisions of a modified coinsurance agreement covering the
Variable Universal Life product, AMFLIC ceded the following:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
----------------------------------------------------------
In thousands 1997 1996 1995 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums and other
considerations $ 5,226 $ 4,014 $ 2,648 $ 125
Expense allowances 4,965 4,394 2,463 186
Other 60 (561) 579 (6)
</TABLE>
AMFLIC also carries reinsurance for policy risks that exceed its retention
limit of $100,000. AMFLIC ceded the following amounts:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
----------------------------------------------------------
In thousands 1997 1996 1995 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums and other
considerations $ 7,994 $ 5,909 $ 4,129 $ 258
Change in policy reserves 7,804 5,924 4,155 3,347
</TABLE>
F-34
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. State Guaranty Associations
State guaranty fund expense included in operating costs and expenses was
$25,000, $31,000, $37,000, and $18,000 for the years ended December 31,
1997 and 1996, the eleven months ended December 31, 1995, and the one month
ended January 31, 1995, respectively. These amounts are assessed by state
life and health insurance guaranty funds to recoup past industry
insolvencies. These assessments are expected to be partially recovered
through credits against the payment of future premium taxes.
There was no liability accrued at December 31, 1997, or in 1996 as these
amounts were determined to be immaterial.
F-35
<PAGE>
- --------------------------------------------------------------------------------
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
EQUIBUILDER III-TM-
ISSUED BY
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
AN AMERICAN GENERAL COMPANY
#1 FRANKLIN SQUARE,
SPRINGFIELD, ILLINOIS 62713-0001
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 consisting of 95 pages.
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
Robert M. Beuerlein, Executive Vice President and Actuary
Ernst & Young LLP
The following exhibits required by Article IX(A) of Form N-8B-2:
<TABLE>
<C> <S>
* 1-A(1) Certified resolutions regarding organization of
Separate Account VUL-2.
1-A(2) Inapplicable.
****1-A(3)(a) Sales Agreement between Franklin Financial Services
Corporation ("Franklin Financial") and Separate Account
VUL-2 of The American Franklin Life Insurance Company,
dated as of January 31, 1995.
* 1-A(3)(b)(i) Specimen Regional Manager Registered Representative
Agreement between Franklin Financial and registered
representatives of Franklin Financial distributing
EquiBuilder III policies.
* 1-A(3)(b)(ii) Specimen Registered Representative Agreement between
Franklin Financial and registered representatives of
Franklin Financial distributing EquiBuilder III
policies.
1-A(3)(c) Schedule of Sales Commissions.
** 1-A(4) Agreement between The American Franklin Life Insurance
Company ("American Franklin") and Franklin Financial,
dated March 31, l994, regarding supervision of agents.
** 1-A(5)(a) EquiBuilder III Flexible Premium Life Insurance Policy.
* 1-A(5)(b) Accidental Death Benefit Rider.
* 1-A(5)(c) Term Insurance Rider.
* 1-A(5)(d) Children's Term Insurance Rider.
* 1-A(5)(e) Disability Rider - Waiver of Monthly Deductions.
** 1-A(5)(f) Endorsement to EquiBuilder III Flexible Premium Life
Insurance policy when issued to a Policy Owner in the
State of Texas.
1-A(5)(g) Accelerated Benefit Settlement Option Rider is
incorporated herein by reference to Exhibit 1-A(5)(g)
to Post-Effective Amendment No. 5 on Form S-6 of
Separate Account VUL-2 of The American Franklin Life
Insurance Company, filed February 27, 1998 (Reg. No.
33-77470).
*****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).
II-2
<PAGE>
1-A(7) Inapplicable.
* 1-A(8)(a)(1) Participation Agreement among American Franklin,
Variable Insurance Products Fund ("VIP") and Fidelity
Distributors Corporation ("FDC"), dated July 18, 1991.
*** 1-A(8)(a)(2) Amendment No. 1 to Participation Agreement among
American Franklin, VIP and FDC, effective as of
November 1, 1991.
* 1-A(8)(a)(3) Participation Agreement among American Franklin,
Variable Insurance Products Fund II ("VIP II") and FDC,
dated July 18, 1991.
*** 1-A(8)(a)(4) Amendment No. 1 to Participation Agreement among
American Franklin, VIP 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, VIP and FDC, dated January 18, 1995.
****1-A(8)(a)(7) Amendment No. 2 to Participation Agreement among
American Franklin, VIP II and FDC, dated January 18,
1995.
1-A(8)(a)(8) Amendment No. 3 to Participation Agreement among
American Franklin, VIP 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, VIP 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, VIP 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, VIP 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.
* 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.
II-3
<PAGE>
1-A(8)(c)(2) Amendment No. 2 to Modified Coinsurance Agreement
between American Franklin and Integrity is incorporated
herein by reference to similarly designated exhibit to
Post-Effective Amendment No. 3 on Form S-6 of Separate
Account VUL-2 of The American Franklin Life Insurance
Company, filed February 28, 1997 (Reg. No. 33-77470).
1-A(8)(c)(3) Amendment No. 3 to Modified Coinsurance Agreement
between American Franklin and Integrity effective April
1, 1989 is incorporated herein by reference to
similarly designated exhibit to Post-Effective
Amendment No. 3 on Form S-6 of Separate Account VUL-2
of The American Franklin Life Insurance Company, filed
February 28, 1997 (Reg. No. 33-77470).
1-A(8)(c)(4) Amendment No. 3 to Modified Coinsurance Agreement
between American Franklin, Integrity, and Phoenix Home
Life Mutual Insurance Company, assignee of Integrity
effective January 1, 1997 is incorporated herein by
reference to similarly designated exhibit to
Post-Effective Amendment No. 3 on Form S-6 of Separate
Account VUL-2 of The American Franklin Life Insurance
Company, filed February 28, 1997 (Reg. No. 33-77470).
* 1-A(8)(d) Reinsurance Agreement between American Franklin and The
Franklin Life Insurance Company ("The Franklin"),
effective as of January 1, 1988.
* 1-A(8)(d)(1) Amendment No. 1 effective as of January 1, 1990 to
Reinsurance Agreement between American Franklin and The
Franklin.
* 1-A(8)(d)(2) Amendment No. 2 effective as of January 1, 1990 to
Reinsurance Agreement between American Franklin and The
Franklin.
1-A(8)(e) Modified Coinsurance Agreement effective as of January
1, 1997 between American Franklin and The Franklin is
incorporated herein by reference to similarly
designated exhibit to Post-Effective Amendment No. 5 on
Form S-6 of Separate Account VUL-2 of The American
Franklin Life Insurance Company, filed February 27,
1998 (Reg. No. 33-77470).
1-A(8)(e)(1) Amendment No. 1 effective September 1, 1997 to Modified
Coinsurance Agreement between American Franklin and The
Franklin is incorporated herein by reference to
similarly designated exhibit to Post-Effective
Amendment No. 5 on Form S-6 of Separate Account VUL-2
of The American Franklin Life Insurance Company, filed
February 27, 1998 (Reg. No. 33-77470).
*1-A(9) Administrative Service Agreement between The Franklin
and American Franklin, dated May 16, l988.
1-A(10) Application for EquiBuilder III Policy is incorporated
herein by reference to similarly designated exhibit to
Post-Effective Amendment No. 5 on Form S-6 of Separate
Account VUL-2 of The American Franklin Life Insurance
Company, filed February 27, 1998 (Reg. No. 33-77470).
<CAPTION>
Other Exhibits:
<C> <S>
2 See Exhibit 1-A(5)(a) above.
** 3(a) Opinion and Consent of Stephen P. Horvat, Jr., Esq.,
Senior Vice President, General Counsel and Secretary of
American Franklin.
3(b) Opinion and Consent of Robert M. Beuerlein, Executive
Vice President and Actuary of American Franklin.
4 Inapplicable.
5 Inapplicable.
6(a) Consent of Ernst & Young LLP.
6(b) Consent of Sutherland, Asbill & Brennan LLP.
7 Power of Attorney is incorporated herein by reference
to similarly designated exhibit to Post Effective
Amendment No. 5 on Form S-6 of Separate Account VUL-2
of The American Franklin Life Insurance Company,
filed February 27, 1998 (Reg. No. 33-77470).
II-4
<PAGE>
8 Description of American Franklin's Issuance, Transfer
and Redemption Procedures for EquiBuilder III Policies
pursuant to Rule 6e-3(T)(b)(12)(iii) under the
Investment Company Act of 1940.
** 9 Notice of Cancellation Right Pursuant to Rule
6e-3(T)(b)(13)(viii) under the Investment Company Act
of 1940.
</TABLE>
- --------------------------------------------------------------------------------
* Incorporated herein by reference to similarly designated exhibit to
Form S-6 of Separate Account VUL-2 of The American Franklin Life
Insurance Company, filed July 24, 1991 (Reg. No. 33-41838).
** Filed with original filing of the Registration Statement on Form S-6,
filed April 7, 1994 (Reg. No. 33-77470).
*** Incorporated herein by reference to similarly designated exhibit to
Post-Effective Amendment No. 3 on Form S-6 of Separate Account VUL-2
of The American Franklin Life Insurance Company, filed February 26,
1993 (Reg. No. 33-41838).
**** Incorporated herein by reference to similarly designated exhibit to
Post-Effective Amendment No. 1 on Form S-6 of Separate Account VUL-2
of The American Franklin Life Insurance Company, filed March 2, 1995
(Reg. No. 33-77470).
***** Incorporated herein by reference to similarly designated exhibit to
Post-Effective Amendment No. 2 on Form S-6 of Separate Account VUL-2
of The American Franklin Life Insurance Company, filed April 30, 1996
(Reg. No. 33-77470).
II-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 certifies
that it meets the requirements of 1933 Act Rule 485(b) for effectiveness of this
Registration Statement and has duly caused this Post-Effective Amendment No. 6
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 28th of
April, 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
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 certifies that it meets the requirements of 1933
Act Rule 485(b) for effectiveness of this Registration Statement and has duly
caused this Post-Effective Amendment to the Registration Statement on Form S-6
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Springfield, and State of Illinois on the 28th day of April, 1998.
THE AMERICAN FRANKLIN
LIFE INSURANCE COMPANY
By: /s/ William A. Simpson
-------------------------------------------
William A. Simpson
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* Director, Senior Vice April 28, 1998
- ------------------------------- President,Chief Financial
Earl W. Baucom Officer and Treasurer
(principal financial officer
and principal accounting
officer)
/s/ Robert M. Beuerlein* Director April 28, 1998
- -------------------------------
Robert M. Beuerlein
/s/ Brady W. Creel* Director April 28, 1998
- -------------------------------
Brady W. Creel
Director ________, 1998
- -------------------------------
James S. D'Agostino, Jr.
Director ________, 1998
- -------------------------------
Rodney O. Martin, Jr.
Director ________, 1998
- -------------------------------
Jon P. Newton
/s/ Gary D. Reddick* Director April 28, 1998
- -------------------------------
Gary D. Reddick
/s/ William A. Simpson Director and President April 28, 1998
- ------------------------------- (principal executive officer)
William A. Simpson
/s/ Elizabeth E. Arthur
- -------------------------------
*By Elizabeth E. Arthur, Attorney-in-Fact
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page No.
<C> <S>
*1-A(1) Certified resolutions regarding organization of Separate
Account VUL-2.
1-A(2) Inapplicable.
****1-A(3)(a) Sales Agreement between Franklin Financial Services
Corporation ("Franklin Financial") and Separate Account
VUL-2 of The American Franklin Life Insurance Company,
dated as of January 31, 1995.
*1-A(3)(b)(i) Specimen Regional Manager Registered Representative
Agreement between Franklin Financial and registered
representatives of Franklin Financial distributing
EquiBuilder III policies.
*1-A(3)(b)(ii) Specimen Registered Representative Agreement between
Franklin Financial and registered representatives of
Franklin Financial distributing EquiBuilder III policies.
1-A(3)(c) Schedule of Sales Commissions.
**1-A(4) Agreement between The American Franklin Life Insurance
Company ("American Franklin") and Franklin Financial,
dated March 31, l994, regarding supervision of agents.
**1-A(5)(a) EquiBuilder III Flexible Premium Life Insurance Policy.
*1-A(5)(b) Accidental Death Benefit Rider.
*1-A(5)(c) Term Insurance Rider.
*1-A(5)(d) Children's Term Insurance Rider.
*1-A(5)(e) Disability Rider - Waiver of Monthly Deductions.
**1-A(5)(f) Endorsement to EquiBuilder III Flexible Premium Life
Insurance policy when issued to a Policy Owner in the
State of Texas.
1-A(5)(g) Accelerated Benefit Settlement Option Rider is
incorporated herein by reference to Exhibit 1-A(5)(g) to
Post-Effective Amendment No. 5 on Form S-6 of Separate
Account VUL-2 of The American Franklin Life Insurance
Company, filed February 27, 1998 (Reg. No. 33-77470).
*****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 ("VIP") and Fidelity Distributors
Corporation ("FDC"), dated July 18, 1991.
***1-A(8)(a)(2) Amendment No. 1 to Participation Agreement among American
Franklin, VIP and FDC, effective as of November 1, 1991.
*1-A(8)(a)(3) Participation Agreement among American Franklin, Variable
Insurance Products Fund II ("VIP II") and FDC, dated July
18, 1991.
***1-A(8)(a)(4) Amendment No. 1 to Participation Agreement among American
Franklin, VIP 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, VIP and FDC, dated January 18, 1995.
****1-A(8)(a)(7) Amendment No. 2 to Participation Agreement among American
Franklin, VIP II and FDC, dated January 18, 1995.
1-A(8)(a)(8) Amendment No. 3 to Participation Agreement among American
Franklin, VIP 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.
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Page No.
<C> <S>
1-A(8)(a)(9) Amendment No. 3 to Participation Agreement among American
Franklin, VIP 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, VIP 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, VIP 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.
*1-A(8)(d)(2) Amendment No. 2 effective as of January 1, 1990 to
Reinsurance Agreement between American Franklin and The
Franklin.
<PAGE>
1-A(8)(e) Modified Coinsurance Agreement effective as of January 1,
1997 between American Franklin and The Franklin is
incorporated herein by reference to similarly designated
exhibit to Post-Effective Amendment No. 5 on Form S-6 of
Separate Account VUL-2 of The American Franklin Life
Insurance Company, filed February 27, 1998 (Reg. No.
33-77470).
1-A(8)(e)(1) Amendment No. 1 effective September 1, 1997 to Modified
Coinsurance Agreement between American Franklin and The
Franklin is incorporated herein by reference to similarly
designated exhibit to Post-Effective Amendment No. 5 on
Form S-6 of Separate Account VUL-2 of The American
Franklin Life Insurance Company, filed February 27, 1998
(Reg. No. 33-77470).
*1-A(9) Administrative Service Agreement between The Franklin and
American Franklin, dated May 16, l988.
1-A(10) Application for EquiBuilder III Policy is incorporated
herein be reference to similarly designated exhibit to
Post-Effective Amendment No. 5 on Form S-6 of Separate
Account VUL-2 of The American Franklin Life Insurance
Company, filed February 27, 1998 (Reg. No. 33-77470).
<CAPTION>
Other Exhibits:
<C> <S>
2 See Exhibit 1-A(5)(a) above.
**3(a) Opinion and Consent of Stephen P. Horvat, Jr., Esq.,
Senior Vice President, General Counsel and Secretary of
American Franklin.
3(b) Opinion and Consent of Robert M. Beuerlein, Executive
Vice President and Actuary of American Franklin.
4 Inapplicable.
5 Inapplicable.
6(a) Consent of Ernst & Young LLP
6(b) Consent of Sutherland, Asbill & Brennan LLP
7 Power of Attorney is incorporated herein by reference to
similarly designated exhibit to Post Effective Amendment
No. 5 on Form S-6 of Separate Account VUL-2 of The
American Franklin Life Insurance Company, filed February
27, 1998 (Reg. No. 33-77470).
8 Description of American Franklin's Issuance, Transfer and
Redemption Procedures for EquiBuilder III Policies
pursuant to Rule 6e-3(T)(b)(12)(iii) under the Investment
Company Act of 1940.
**9 Notice of Cancellation Right Pursuant to Rule
6e-3(T)(b)(13)(viii) under the Investment Company Act of
1940.
</TABLE>
-----------------------------------------------------------------------
* 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(3)(c)
SCHEDULE OF SALES COMMISSIONS
For EquiBuilder III, individual flexible premium variable life insurance
policies.
<TABLE>
<CAPTION>
Policy Year Percent of Target Premiums*
----------- ---------------------------
<S> <C>
1st 90%
2nd through 10th 3%
11th and later 1.5%
</TABLE>
After two years, trail commissions are earned at an annual rate of 0.25% on
the amount in the Policy Account that is in the Separate Account.
*First year and subsequent policy year allowances are generally applicable to
a target premium. For first year premiums in excess of such amount the
distribution allowance is 5%.
If the planned premium is less than the target premium, the first year rate
will be applied to the planned premium only.
The target premium is based on 75% of a net annual premium by using the 1980
CSO mortality table (male and female, age nearest birthday) and a 4.5%
interest rate. It assumes the premium is paid annually at the beginning of
the year until the policy ends.
<PAGE>
EXHIBIT 1-A(8)(b)(4)
AMENDMENT NO. 2 TO PARTICIPATION AGREEMENT
AMONG
MFS VARIABLE INSURANCE TRUST,
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
AND
MASSACHUSETTS FINANCIAL SERVICES COMPANY
Amendment No. 2, dated as of November __, 1997, by and among THE
AMERICAN FRANKLIN LIFE INSURANCE COMPANY (the "Company"), MFS VARIABLE
INSURANCE TRUST (the "Trust") and MASSACHUSETTS FINANCIAL SERVICES COMPANY
("MFS") to the Participation Agreement, dated as of July 30, 1996, as amended
by Amendment No. 1, dated as of November 21, 1996, by and among the Company,
the Trust, and MFS (the "Agreement"),
WHEREAS, the parties to the Agreement wish to amend the Agreement to
revise Schedule A to reflect new products offered by the Company and to
change the amount of administrative service fees paid by MFS to the Company:
NOW, THEREFORE, the parties do hereby agree to amend the Agreement as
follows:
1. Section 5.4 of the Agreement is hereby amended by substituting
"0.20%" for "0.15%" in the third line of such Section, such change to take
effect on April 30, 1998.
2. Schedule A of the Agreement is amended as attached hereto.<PAGE>
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto have executed this
Amendment No. 2 as of the date first above written.
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
By its authorized officer,
By /s/ William A. Simpson
------------------------------
William A. Simpson
Title: President
MFS VARIABLE INSURANCE TRUST, ON BEHALF OF THE PORTFOLIOS
By its authorized officer and not individually,
By /s/ A. Keith Brodkin
------------------------------
A. Keith Brodkin
Chairman
MASSACHUSETTS FINANCIAL SERVICES COMPANY
By its authorized officer,
By /s/ Arnold D. Scott
------------------------------
Arnold D. Scott
Senior Executive Vice President
<PAGE>
As of ___________
SCHEDULE A
ACCOUNTS, POLICIES AND PORTFOLIOS
SUBJECT TO THE PARTICIPATION AGREEMENT
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
NAME OF SEPARATE ACCOUNT
AND DATE ESTABLISHED POLICIES FUNDED PORTFOLIOS
BY BOARD OF DIRECTORS BY SEPARATE ACCOUNT APPLICABLE TO POLICIES
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Separate Account VA-1 The Chairman combination Fixed Emerging Growth Series
May 22, 1996 and Variable Annuity Contracts Research Series
Growth with Income Series
Total Return Series
Utilities Series
Value Series
Separate Account VUL-2, EquiBuilder II Flexible Premium Emerging Growth Series
April 9, 1991 Variable Life Insurance Policies Research Series
Growth with Income Series
EquiBuilder III Flexible Premium Total Return Series
Variable Life Insurance Policies Utilities Series
Value Series
- -------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 3(b)
April 20, 1998
The American Franklin Life
Insurance Company
#1 Franklin Square
Springfield, Illinois 62713
Gentlemen:
This opinion is furnished in connection with the filing of Post-Effective
Amendment No. 6 to the Registration Statement on Form S-6 (Reg. No. 33-77470)
by Separate Account VUL-2 of The American Franklin Life Insurance Company
(the "Separate Account") and The American Franklin Life Insurance Company
("American Franklin") covering an indefinite number of units of interests in
the Separate Account. Net premiums received under American Franklin's
EquiBuilder III individual flexible premium variable life insurance policies
(the "Policies") to be offered by American Franklin may be allocated by
American Franklin to the Separate Account as described in the Prospectus
forming a part of the Registration Statement.
I participated in the preparation of the Policies and I am familiar with
their provisions. I am also familiar with the description contained in the
Prospectus. In my opinion:
1. The illustrations for the Policies set forth under "Illustrations
of Death Benefits, Policy Account and Cash Surrender Values and
Accumulated Premiums" in the Prospectus, based on the assumptions
stated in the illustrations, are consistent with the provisions of
the Policies. The rate structure of the Policies has not been
designed so as to make the relationship between planned premiums
and benefits, as shown in the illustrations, appear to be
correspondingly more favorable to a prospective purchaser of
Policies for males age 40 than to prospective purchasers of
Policies for a male at other ages or for a female.
2. The table of cost of insurance rates, set forth under "Deductions
and Charges - Charges Against the Policy Account - Cost of
Insurance Charge" in the Prospectus, contains both the current and
guaranteed rates to be used for these Policies for males of
illustrative ages. These rates have not been designed so as to make
the relationship between current and guaranteed rates more
favorable for males of the ages illustrated than for a male at
other ages or a female.
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of my name under the caption "Experts"
in the Prospectus forming a part of the Registration Statement.
Very truly yours,
/s/ Robert M. Beuerlein
ROBERT M. BEUERLEIN
EXECUTIVE VICE PRESIDENT AND ACTUARY
<PAGE>
EXHIBIT 6(a)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
to the use of our report dated January 30, 1998, with respect to the
financial statements of Separate Account VUL-2 of The American Franklin Life
Insurance Company and our report dated February 23, 1998 with respect to the
financial statements of The American Franklin Life Insurance Company in this
Post-Effective Amendment No. 6 to the Registration Statement on Form S-6 (No.
33-77470) under the Securities Act of 1933 of Securities of Unit Investment
Trusts Registered on Form N-8B-2 and related Prospectus of Separate Account
VUL-2 of The American Franklin Life Insurance Company.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Chicago, Illinois
April 28, 1998
<PAGE>
EXHIBIT 6(b)
CONSENT OF COUNSEL
We consent to the reference to our firm under the caption "Legal
Matters" in the Prospectus constituting a part of this Post-Effective
Amendment No. 6 to the Registration Statement under the Securities Act of
1933. In giving this consent, we do not admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act of
1933.
/s/ Sutherland, Asbill & Brennan LLP
SUTHERLAND, ASBILL & BRENNAN LLP
Washington, D.C.
April 28, 1998
<PAGE>
Exhibit 8
Description of The American Franklin Life Insurance
Company's Issuance, Transfer
and Redemption Procedures for EquiBuilder III Policies
Pursuant to Rule 6e-3(T)(b)(12)(iii)
under the Investment Company Act of 1940
Set forth below is the information called for under Rule
6e-3(T)(b)(12)(iii) under the Investment Company Act of 1940 ("1940 Act").
That rule provides an exemption for separate accounts, their investment
advisers, principal underwriters and sponsoring insurance companies from
Sections 22(c), 22(d), 22(e), and 27(c)(1) of the 1940 Act, and Rule 22(c)-1
promulgated thereunder, for issuance, transfer and redemption procedures
under flexible premium variable life insurance policies to the extent
necessary to comply with Rule 6e-3(T), state administrative law or
established administrative procedures of the life insurance company. In
order to qualify for the exemption, procedures must be reasonable, fair and
not discriminatory and they must be disclosed in the registration statement
filed by the separate account.
Net premiums received by The American Franklin Life Insurance
Company ("American Franklin") under its EquiBuilder III-TM- flexible premium
variable life insurance policies (the "Policies") are invested in Separate
Account VUL-2 (the "Account") of American Franklin. The Account is
registered under the 1940 Act. Within the Account are investment divisions,
which are as of April, 1997 the Money Market division, the High Income
division, the Equity-Income division, the Growth division, the Overseas
division, the Investment Grade Bond division, the Asset Manager division, the
Index 500 division, the Contrafund division and the Asset Manager: Growth
division (the "investment divisions"). New investment divisions may be
added. Procedures apply equally to each investment division and for purposes
of this description are defined in terms of the Account, except where a
discussion of both the Account and its investment divisions is necessary.
Each current investment division invests in shares of a corresponding
portfolio of the Variable Insurance Products Fund or of the Variable
Insurance Products Fund II (individually, a "Fund," and collectively, the
"Funds"), each a "series" type of mutual fund registered under the 1940 Act.
The investment experience of the current investment divisions of the Account
depends upon the market performance of the corresponding Fund portfolios.
Although the Policies may also provide for fixed benefits supported by
American Franklin's General Account, except as otherwise explicitly stated
herein, this description assumes that net premiums are allocated exclusively
to the Account and that all transactions involve only the investment
divisions of the Account.
American Franklin believes its procedures meet the requirements of
Rule 6e-3(T)(b)(12)(iii) and states the following:
1. Because of the insurance nature of the Policies and due to the
requirements of state insurance laws, the procedures necessarily differ in
significant respects from procedures for mutual funds and contractual plans
for which the 1940 Act was designed.
<PAGE>
2. In structuring its procedures to comply with Rule 6e-3(T) and
state insurance laws, American Franklin has attempted to comply with the
intent of the 1940 Act, to the extent deemed feasible.
3. In general, state insurance laws require that American
Franklin's procedures be reasonable, fair and not discriminatory.
4. Because of the nature of the insurance product, it is often
difficult to determine precisely when American Franklin's procedures deviate
from those required under Sections 22(c), 22(d), 22(e) or 27(c)(1) of the
1940 Act or Rule 22c-1 thereunder. Accordingly, set out below is a summary
of the principal policy provisions and procedures which may be deemed to
constitute, either directly or indirectly, such a deviation. The summary,
while comprehensive, does not attempt to treat each and every procedure or
variation which might occur and does include certain procedural steps which
do not constitute deviations from the above-cited sections or rule.
I. "REDEMPTION PROCEDURES":
SURRENDER AND RELATED TRANSACTIONS
This section will outline those procedures which differ in certain
significant respects from redemption procedures for mutual funds and
contractual plans. American Franklin's Policies provide for the payment of
monies to a policy owner or beneficiary upon presentation of a Policy.
Generally, except for the payment of death benefits, the imposition of cost
of insurance, administrative and transaction charges and the effects of the
surrender charge, the payee will receive a pro rata or proportionate share of
the Account's assets within the meaning of the 1940 Act in any transaction
involving "redemption procedures." The amount received by the payee will
depend upon the particular benefit for which the Policy is presented,
including, for example, the cash surrender value or death benefit. There are
also certain Policy provisions -- such as partial withdrawals and the loan
privilege -- under which the Policy will not be presented to American
Franklin but which will affect the policy owner's benefits and may involve a
transfer of the assets supporting the policy reserve out of the Account. Any
combined transactions on the same day which counteract the effect of each
other will be allowed. American Franklin will assume the policy owner is
aware of the conflicting nature of these transactions and desires their
combined result. In addition, if a transaction is requested which American
Franklin will not allow (for example, a request for a decrease in face amount
which lowers the face amount below American Franklin's minimum) American
Franklin will reject the whole request and not just the portion which causes
the disallowance. Policy owners will be informed of the rejection and will
have an opportunity to give new instructions. Finally, state insurance laws
may require that certain requirements be met before American Franklin is
permitted to make payments to the payee.
2
<PAGE>
a. SURRENDER FOR CASH VALUES
American Franklin will pay the net cash surrender value within
seven days after receipt, at its Administrative Office, of the Policy and a
signed request for surrender in form satisfactory to American Franklin.
Computations with respect to the investment experience of each investment
division will be made at the close of trading on the composite tape on each
business day. This will enable American Franklin to pay a net cash value on
surrender as of the date a request for surrender and the Policy are received
based on the next computed value after a request is received. The surrender
is effective on the date American Franklin receives the request at its
Administrative Office and insurance coverage ends on that day.
The Policy Account (which is equal to the cash surrender value PLUS
any applicable surrender charge) may increase or decrease from day to day
depending on the investment experience of the Account. Calculation of the
Policy Account for any given day will reflect the actual premiums paid,
expenses charged and deductions taken.
American Franklin will deduct from each premium payment a charge
for applicable taxes (which will vary from jurisdiction to jurisdiction).
The charge for applicable taxes covers the tax American Franklin must pay to
states and other jurisdictions based on premiums received. American Franklin
will also deduct from each premium payment a sales expense deduction equal to
5% of each premium paid in each policy year until one "target premium" has
been paid. Premiums paid in any policy year in excess of a "target premium"
will not be subject to a sales expense deduction. The balance (net premium)
is put into the Policy Account. Target premiums are based on the age and sex
of the insured person and the initial face amount of the policy and are never
more than 72% of the applicable guideline level premium for the Policy
determined in accordance with Section 7702 of the Internal Revenue Code. The
sales expense deduction is intended to recover some of the expenses of
distributing the policies.
Each month, American Franklin makes charges against the Policy
Account to cover the cost of insurance and administrative expenses for the
next month. During the first 12 policy months, American Franklin will make an
additional administrative charge, currently $24 per month, designed to
recover the expenses incurred in issuing a new Policy. Other possible
charges against the Policy Account (which will occur on a case-specific
basis) include a charge for additional benefits which are added by rider, a
charge for partial withdrawals, a charge for increases in face amount and a
charge for certain transfers.
A contingent deferred sales load (the "surrender charge") (equal to
25% of first year premiums paid up to the level of a target premium plus 9%
of all other premiums paid with a maximum charge of 50% of one target
premium) will be deducted from the Policy Account if the Policy is
surrendered during the first ten policy years. If the face amount of the
Policy is reduced below the initial face amount, a pro-rata portion of the
surrender charge may be deducted from the Policy Account. The maximum
surrender charge begins to decline after the first six policy years and is
reduced to zero after ten policy years. No minimum amount of cash surrender
value is guaranteed.
3
<PAGE>
If a Policy is totally surrendered American Franklin will pay the
policy owner an amount equal to the net cash surrender value of the policy.
The net cash surrender value of a Policy is equal to the cash surrender value
of the Policy LESS the amount of any outstanding policy loan and accrued
interest. The cash surrender value of a Policy will equal the amount of the
Policy Account LESS the surrender charge. American Franklin will make the
payment of net cash surrender value out of its General Account and, at the
same time, transfer assets from the Account to the General Account in an
amount equal to the policy reserves in the Account for the surrendered
policy, or the portion of the face amount that was reduced.
In lieu of payment of the net cash surrender value in a single sum
upon surrender of a Policy, an election may be made to apply all or a portion
of the proceeds under one of the fixed benefit payment options described in
the Policies. The election may be made by the policy owner during the
insured person's lifetime, or, if no election is in effect at the insured
person's death, by the beneficiary. An option in effect at death may not be
changed to another form of benefit after death. An option is currently
available only if the proceeds to be applied are $1,000 or more and would
result in periodic payments of at least $20. The settlement options are
subject to the restrictions and limitations set forth in the Policies.
The Policy contains a partial withdrawal feature after the first
policy year, subject to a minimum withdrawal amount and other conditions.
Any request for a partial withdrawal must be in writing to American
Franklin's Administrative Office, and will take effect as of the day it is
received. A partial withdrawal will reduce the death benefit, Policy Account
and cash surrender value associated with the Policy by the amount of the
withdrawal plus a charge for administrative expenses associated with it. The
Policy after such a withdrawal must meet minimum face amount requirements and
must continue to qualify as life insurance under applicable tax law.
b. DEATH CLAIMS
American Franklin will pay a death benefit to the beneficiary
within seven days after receipt, at its Administrative Office, of the Policy,
due proof of death of the insured, and all other requirements necessary(1) to
make payment.
The death benefit payable will depend on the option in effect at
the time of death. Under Option A, the death benefit is the greater of the
face amount of insurance and a percentage multiple (see below) of the amount
in the Policy Account. Under Option B, the death benefit is the greater of
the face amount of insurance PLUS the amount in the Policy Account and a
percentage multiple (see below) of the amount in the Policy Account. The
percentage referred to is the applicable percentage from the following table
for the insured person's age (as of his or her nearest birthday) at the
beginning of the policy year of determination.
- ----------------------
(1) State insurance laws impose various requirements, such as receipt of a
tax waiver, before payment of the death benefit may be made. In addition,
payment of the death benefit is subject to the provisions of the Policies
regarding suicide and incontestability.
4
<PAGE>
TABLE OF
APPLICABLE PERCENTAGES
For ages not shown, the applicable percentages will decrease by a
ratable portion for each full year.
<TABLE>
<CAPTION>
Insured Insured
Person's Age Percentage Person's Age Percentage
------------ ---------- ------------ ----------
<S> <C> <C> <C>
40 and under 250% 65 120%
45 215 70 115
50 185 75 thru 90 105
55 150 95 100
60 130
</TABLE>
The proceeds payable to the beneficiary will be adjusted to reflect
any outstanding indebtedness and any overdue monthly charges if death occurs
during the grace period described below under "Default and Options on Lapse."
The proceeds payable on death also reflect interest from the date of death to
the date of payment.
American Franklin will make payment of the death benefit out of its
General Account, and will transfer assets from the Account to the General
Account in an amount equal to the reserve for that policy in the Account.
The excess, if any, of the death benefit over the amount transferred will be
paid out of the General Account reserve maintained for that purpose.
In lieu of payment of the death benefit in a single sum, a
settlement option may be selected as described immediately above with respect
to cash surrender values.
c. EXCHANGE OF POLICY
The Policies allow the policy owner, in lieu of a conversion
privilege, to transfer all the amount in the investment divisions of the
Account to the Guaranteed Interest Division (which is part of American
Franklin's General Account and pays interest at a declared guaranteed rate)
without charge.
d. DEFAULT AND OPTIONS ON LAPSE
The duration of insurance coverage depends upon the net cash
surrender value of a Policy being sufficient to cover the monthly charges.
If the net cash surrender value at the beginning of a month is less than the
charges for that month, a grace period of 61 days will begin. Written notice
will be sent to the policy owner and any assignee on American Franklin's
records
5
<PAGE>
stating that such a grace period has begun and giving the approximate amount
of premium payment necessary to cover three monthly deductions. If this
amount is not received during the grace period, any amount in the Policy
Account will be withdrawn and applied to applicable charges and the Policy
will end without value. If the insured should die during the grace period,
an amount sufficient to cover the overdue monthly charges and other charges
will be deducted from the death benefit.
e. POLICY LOAN
American Franklin's Policies provide that a policy owner may take a
loan of up to 90% of the cash surrender value upon assignment to American
Franklin of the Policy as sole security. The cash surrender value for this
purpose will be that next computed after receipt, at American Franklin's
Administrative Office, of a signed loan request. Payment of the loan out of
American Franklin's General Account will be made to the policy owner within
seven days after such receipt.
Interest on a loan accrues daily at an effective annual interest
rate which is adjusted annually. A rate will be determined as of the
beginning of each policy year and will apply to a new or outstanding loan
during that policy year. The maximum annual loan interest rate for a policy
year will be the greater of 5-1/2% and the monthly Average Corporates yield
published by Moody's Investors Service, Inc., for the month ending two months
before the beginning of the policy year. The loan interest rate for a policy
year after the first will be the same as it was for the immediately preceding
policy year if the formula above would produce a change of less than 1/2 of
1% from the rate for the preceding year.
The amount of any outstanding loan plus accrued interest is called
an "indebtedness". A new loan will not be permitted unless it is at least
$500 more than the existing indebtedness, if any. Outstanding indebtedness
will be added to the amount of any new loan request and the old loan amount
will be cancelled. When a loan is made, the portion of the assets in the
Account (which is a portion of the cash surrender value and which also
constitutes a portion of the reserves for the death benefit) equal to the
indebtedness created thereby is transferred by American Franklin from the
Account to the Guaranteed Interest Division, which is part of American
Franklin's General Account. Allocation of the loan among investment
divisions will be according to the policy owner's request. If this
allocation is not specified or not possible, the loan will be allocated
according to the monthly deduction percentages then in effect. If the loan
cannot be allocated based on these percentages, it will be allocated based on
the proportion the values in each investment division of the Account bear to
the total unloaned value in the Policy Account. American Franklin credits
the loaned portion of a Policy with a rate of interest which is up to 2%
below the interest rate charged on the loan, minus any charges for taxes or
reserves for taxes. Interest credited on loaned amounts in the Guaranteed
Interest Division is allocated to the unloaned portion of the Guaranteed
Interest Division. Because of the transfer, a portion of the policy is not
variable during the loan period (except in accordance with adjustments in the
loan interest rate described above) and, therefore, the death benefit and the
cash surrender value are permanently affected by any indebtedness, whether or
not repaid in whole or in part.
6
<PAGE>
Loan interest is due on each policy anniversary. If not paid when
due, it is added to the existing indebtedness and bears interest at the loan
rate. Failure to repay a loan will not necessarily terminate the Policy. If
the net cash surrender value of the Policy is not sufficient to cover the
monthly charges for the cost of insurance and administrative expenses, the
Policy will go into a 61-day grace period, as described above.
f. TRANSFERS AMONG DIVISIONS
Amounts may be transferred, upon request, at any time from any
investment division of the Account to one or more other divisions of the
Account. The minimum amount allowed for a transfer is the lesser of the
minimum amount shown in a Policy (usually $500) and the total value in the
investment division. The first four transfers in any policy year are free of
charge; however, American Franklin may make a charge for additional transfers
in a policy year of up to $25.
Transfer charges, if any, will be subtracted equally among the
divisions from which transfers are made.
Transfers from an investment division of the Account will take
effect as of the receipt of a request at American Franklin's Administrative
Office.
g. RIGHT OF WITHDRAWAL PROCEDURES
The Policy provides that the policy owner may cancel it by
returning the Policy along with a written request for cancellation to
American Franklin's Administrative Office by 10 days after the policy owner
receives the policy. The policy owner will receive a refund equal to the
premium payments made under the Policy.
II. "PUBLIC OFFERING PRICE": PURCHASE AND RELATED
TRANSACTIONS -- SECTION 22(d) AND RULE 22c-1
This section outlines those principal Policy provisions and
administrative procedures which might be deemed to constitute, either
directly or indirectly, a "purchase" transaction. Because of the insurance
nature of the Policies, the procedures involved necessarily differ in certain
significant respects from the purchase procedures for mutual funds and
contractual plans. The chief differences revolve around the structure of the
cost of insurance charges and the insurance underwriting (I.E., evaluation of
risk) process. There are also certain Policy provisions -- such as
reinstatement and loan repayment -- which do not result in the issuance of a
Policy but which require certain payments by the policy owner and involve a
transfer of assets supporting the policy reserve into the Account.
a. INSURANCE CHARGES AND UNDERWRITING STANDARDS
Cost of insurance charges for American Franklin's Policies will not
be the same for all policy owners. The chief reason is that the principle of
pooling and distribution of mortality
7
<PAGE>
risks is based upon the assumption that each policy owner pays a cost of
insurance charge commensurate with the insured's mortality risk which is
actuarially determined based upon factors such as age, sex and risk class of
the insured and the face amount size band of the Policy. In the context of
life insurance, a uniform mortality charge (the "cost of insurance charge")
for all insureds would discriminate unfairly in favor of those insureds
representing greater mortality risks to the disadvantage of those
representing lesser risks. Accordingly, although there will be a uniform
"public offering price" for all policy owners, because premiums are flexible
and amounts allocated to the Account will be subject to the same charges as
described above), there will be a different "price" for each actuarial
category of policy owners because different cost of insurance rates will
apply. The "price" will also vary based on net amount at risk. The Policies
will be offered and sold pursuant to this cost of insurance schedule and
American Franklin's underwriting standards and in accordance with state
insurance laws. Such laws prohibit unfair discrimination among insureds, but
recognize that premiums must be based upon factors such as age, sex, health
and occupation. A table showing the maximum cost of insurance charges will
be delivered as part of the Policy.
b. APPLICATION AND INITIAL PREMIUM PROCESSING
Upon receipt of a completed application from a prospective policy
owner, American Franklin will follow certain insurance underwriting (I.E.,
evaluation of risks) procedures designed to determine whether the proposed
insured is insurable. This process may involve such verification procedures
as medical examinations and may require that further information be provided
by the proposed policy owner before a determination can be made. A policy
cannot be issued, I.E., physically issued through American Franklin's
computerized issue system, until this underwriting procedure has been
completed.
The date as of which the insurance coverage of the proposed insured
is determined is referred to as the "register date". The register date is
the earlier of the date a Policy is actually issued ("issue date") and the
day American Franklin receives the full initial premium. The register date
represents the first day of the policy year and therefore determines the
policy anniversary. It marks the commencement of the variability of
benefits, except as noted below. The initial net premium is allocated to the
Account as of the later of the register date and the date American Franklin
receives the premium payment. The initial net premium is allocated to the
Money Market division until the first business day 15 days after the issue
date, regardless of the policy owner's premium allocation instructions. The
issue date represents the commencement of the suicide and contestability
periods for purposes of the Policies.
American Franklin will require that the Policy is delivered within
a specific delivery period to protect itself against anti-selection by the
prospective policy owner resulting from a determination of the health of the
proposed insured. Generally, the period will not exceed the shorter of 30
days from the date the Policy is issued and 75 days from the date of Part 2
of the Application.
c. ANNIVERSARY AND PREMIUM PROCESSING
At each monthly anniversary, American Franklin will credit the
unloaned portion of the Guaranteed Interest Division of the Policy Account
with any interest accrued on loan amounts during the previous policy month.
Charges against the Policy Account for administrative
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expenses, additional benefits and cost of insurance charges will also be
made. These deductions cover the cost of the Policy for the next month.
"Net premiums" are credited to the Policy Account as of the date
the premium payments are received by American Franklin. The initial net
premium is allocated to the Money Market division until 15 days after the
issue date, regardless of the policy owner's premium allocation instructions.
Net premiums are equal to the gross premiums minus deductions for applicable
state and local taxes and sales expenses.
Premium payments may be made at any time and for any amount, within
certain limits. Premium payments must be at least $100 (some states may have
lower limits) and may not be more than those allowed under the Internal
Revenue Code for the Policy to continue to qualify as life insurance.
American Franklin makes deductions from each premium for sales expenses (5%
of each premium paid during any policy year until total premiums for that
policy year equal the target premium for the particular Policy) and for any
applicable premium tax, the amount of which varies from jurisdiction to
jurisdiction.
d. REINSTATEMENT
If the Policy has lapsed, it may be reinstated while the insured
person is alive if the policy owner 1) requests reinstatement within 3 years
from the end of the grace period, 2) provides satisfactory evidence of
insurability and 3) makes a premium payment sufficient to keep the Policy in
force for at least 3 months after reinstatement. The effective date of the
reinstated Policy will be the beginning of the policy month which coincides
with or next follows the date American Franklin approves the reinstatement
application. Upon reinstatement, the maximum surrender charge for the policy
will be reduced by the amount of all surrender charges previously imposed on
the policy, and for purposes of determining any future surrender charges on
the policy, the policy will be deemed to have been in effect since the
original register date. No previous indebtedness will be reinstated.
e. REPAYMENT OF LOAN
A loan made under the Policy may be repaid with an amount equal to
the original loan plus loan interest.
When a loan is made, American Franklin will transfer from each
investment division of the Account to the General Account an amount of that
division's cash surrender value equal to the loan amount from that division.
Since American Franklin will credit these assets with interest at a rate
which is up to 2% below the interest rate on the loan (minus any charges for
taxes or reserves for taxes). American Franklin will retain the difference
between these rates and the loan rates in order to cover certain expenses and
contingencies. Upon repayment of indebtedness, American Franklin will reduce
its General Account policy loan assets and transfer assets supporting
corresponding reserves to the divisions according to the policy owner's
instruction or the premium payment allocation percentages then in effect.
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f. CORRECTION OF MISSTATEMENT OF AGE OR SEX
If American Franklin discovers that the age or sex of the insured
has been misstated, the death benefit and any rider benefits will be those
which would be purchased by the most recent deduction for the cost of
insurance and the cost of rider benefits at the correct age and sex.
g. CONTESTABILITY
The Policy is contestable for two years, measured from the issue
date, during the lifetime of the insured for material misstatements made in
the initial application for the Policy. Policy changes may be contested for
two years after the effective date of the change, and a reinstatement for two
years after the effective date of the reinstatement. No statement will be
used to contest a Policy unless it is contained in an application. American
Franklin may not be restricted by the foregoing time limitations in the event
of fraud.
h. REDUCTION IN COST OF
INSURANCE RATE CLASSIFICATION
By administrative practice, American Franklin will reduce the cost
of insurance rate classification for an outstanding Policy if new evidence of
insurability demonstrates that the policy owner qualifies for a lower
classification. After the reduced rating is determined, the policy owner
will pay a lower monthly cost of insurance charge each month.
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