<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 1, 1999
1933 Act Registration No. 33-41838
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF
SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM
N-8B-2
POST-EFFECTIVE AMENDMENT NO. 11
SEPARATE ACCOUNT VUL-2
of
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
(Exact Name of Trust)
THE AMERICAN FRANKLIN LIFE ELIZABETH E. ARTHUR, ESQ.
INSURANCE COMPANY Associate General Counsel
(Name of Depositor) and Assistant Secretary
#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 II-TM- flexible premium variable life policies.
---------------------------------------------------------
It is proposed that this filing will become effective (check
appropriate box)
/ / immediately upon filing pursuant to paragraph (b)
/ / on April 30, 1999 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a) (i)
/X/ on April 30, 1999 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. 11
<TABLE>
<CAPTION>
Reconciliation and Tie
----------------------
Registration Item
of Form N-8B-2 Location in Prospectus
-------------- ----------------------
<S> <C>
1 . . . . . . . . . . . . . . . . . . . . Cover Page.
2 . . . . . . . . . . . . . . . . . . . . Cover Page.
3 . . . . . . . . . . . . . . . . . . . . Inapplicable.
4 . . . . . . . . . . . . . . . . . . . . Distribution of the Policies.
5, 6, 7 . . . . . . . . . . . . . . . . . Separate Account Investment
Choices - The Separate Account and
Its Investment Divisions.
8 . . . . . . . . . . . . . . . . . . . . Index to Financial Statements.
9 . . . . . . . . . . . . . . . . . . . . Legal Proceedings.
10(a). . . . . . . . . . . . . . . . . . . The Beneficiary; Assignment of a
Policy.
10(b). . . . . . . . . . . . . . . . . . . Policy Account Value -
Determination of the Unit Value;
Dividends.
10(c), 10(d) . . . . . . . . . . . . . . . The Features of EquiBuilder II-TM-
Policies - Death Benefits, -
Maturity Benefit, - Changing the
Face Amount of Insurance; Separate
Account Investment Choices - Right
to Change Operations; Deductions
and Charges - Surrender Charge, -
Other Transaction Charges, -
Allocation of Policy Account
Charges; Policy Account
Transactions - Changing Premium
and Deduction Allocation
Percentages, - Transfers of Policy
Account Value Among Investment
Divisions, - Borrowing from the
Policy Account, - Withdrawing
Money from the Policy Account, -
Surrendering the Policy for Its
Net Cash Surrender Value;
Additional Information About
EquiBuilder II-TM- Policies -
Right To Examine the Policy;
Payment of Proceeds; The
Guaranteed Interest Division -
Transfers from the Guaranteed
Interest Division.
10(e). . . . . . . . . . . . . . . . . . . Additional Information About
EquiBuilder II-TM- 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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Registration Item
of Form N-8B-2 Location in Prospectus
-------------- ----------------------
<S> <C>
10(g)(1), 10(g)(2), 10(h)(1), 10(h)(2) . . Separate Account Investment
Choices - The Funds, - Right to
Change Operations; Deductions and
Charges - Charges Against the
Policy Account - Changes in
Monthly Charges; Voting Rights of
a Policy Owner.
10(g)(3), 10(g)(4), 10(h)(3), 10(h)(4) . . Inapplicable.
10(i). . . . . . . . . . . . . . . . . . . The Features of EquiBuilder II-TM-
Policies - Changes in EquiBuilder
II-TM- Policies, - Flexible
Premium Payments, - Additional
Benefits; Separate Account
Investment Choices; Policy Account
Value; 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; Deductions and Charges.
13(b), 13(c), 13(d), 13(e), 13(g). . . . . Inapplicable.
13(f). . . . . . . . . . . . . . . . . . . Distribution of the Policies.
14 . . . . . . . . . . . . . . . . . . . . The Features of EquiBuilder II-TM-
Policies - Policy Issuance
Information; Limitations on
American Franklin's Rights to
Challenge a Policy; Distribution
of the Policies; Applications.
15 . . . . . . . . . . . . . . . . . . . . The Features of EquiBuilder II-TM-
Policies - Flexible Premium
Payments; Separate Account
Investment Choices (Introduction);
Deductions and Charges -
Deductions From Premiums; Policy
Account Transactions - Changing
Premium and Deduction Allocation
Percentages.
16 . . . . . . . . . . . . . . . . . . . . Separate Account Investment
Choices - (Introduction), - The
Separate Account and Its
Investment Divisions, - The Funds;
Policy Account Value - Amounts in
the Separate Account; Policy
Account Transactions - Changing
Premium and Deduction Allocation
Percentages, - Transfers of Policy
Account Value Among Investment
Divisions, - Loan Requests, -
Repaying the Loan; The Guaranteed
Interest Division - Transfers from
the Guaranteed Interest Division;
Additional Information About
EquiBuilder II-TM- Policies -
Policy Periods, Anniversaries,
Dates and Ages.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Registration Item
of Form N-8B-2 Location in Prospectus
-------------- ----------------------
<S> <C>
17(a), 17(b), 17(c). . . . . . . . . . . . The Features of EquiBuilder II-TM-
Policies - Death Benefits, -
Maturity Benefit, - Changing the
Face Amount of Insurance, -
Changes in EquiBuilder II-TM-
Policies, - Flexible Premium
Payments, - Additional Benefits;
Separate Account Investment
Choices - Right to Change
Operations; Policy Account Value;
Policy Account Transactions -
Changing Premium and Deduction
Allocation Percentages, -
Transfers of Policy Account Value
Among Investment Divisions, -
Borrowing from the Policy Account,
- Withdrawing Money from the
Policy Account, - Surrendering the
Policy for Its Net Cash Surrender
Value; The Guaranteed Interest
Division - Transfers from the
Guaranteed Interest Division;
Additional Information About
EquiBuilder II-TM- Policies -
Right To Examine the Policy, -
Lapse of Policy, - Reinstatement
of the Policy; Payment Options;
Payment of Proceeds.
18(a). . . . . . . . . . . . . . . . . . . Policy Account Value -
Determination of the Unit Value.
18(b), 18(d) . . . . . . . . . . . . . . . Inapplicable.
18(c). . . . . . . . . . . . . . . . . . . Summary; 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).
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.
21(b), 21(c) . . . . . . . . . . . . . . . Inapplicable.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Registration Item
of Form N-8B-2 Location in Prospectus
-------------- ----------------------
<S> <C>
22 . . . . . . . . . . . . . . . . . . . . Limits on American Franklin's
Right To Challenge a Policy.
23 . . . . . . . . . . . . . . . . . . . . Inapplicable.
24 . . . . . . . . . . . . . . . . . . . . The Features of EquiBuilder II-TM-
Policies; Additional Information.
25 . . . . . . . . . . . . . . . . . . . . The American Franklin Life
Insurance Company.
26 . . . . . . . . . . . . . . . . . . . . Inapplicable.
27 . . . . . . . . . . . . . . . . . . . . The American Franklin Life
Insurance Company; Other Policies
and Contracts.
28 . . . . . . . . . . . . . . . . . . . . The American Franklin Life
Insurance Company; Management.
29 . . . . . . . . . . . . . . . . . . . . The American Franklin Life
Insurance Company; Management.
30, 31, 32, 33, 34 . . . . . . . . . . . . Inapplicable.
35 . . . . . . . . . . . . . . . . . . . . The American Franklin Life
Insurance Company; Distribution of
the Policies.
36, 37 . . . . . . . . . . . . . . . . . . Inapplicable.
38, 39 . . . . . . . . . . . . . . . . . . Distribution of the Policies.
40 . . . . . . . . . . . . . . . . . . . . Inapplicable.
41(a). . . . . . . . . . . . . . . . . . . Distribution of the Policies.
41(b), 41(c), 42, 43 . . . . . . . . . . . Inapplicable.
44(a)(1) . . . . . . . . . . . . . . . . . Policy Account Value -
Determination of the Unit Value.
44(a)(2), 44(a)(3) . . . . . . . . . . . . The Features of EquiBuilder II-TM-
Policies - Death Benefits, -
Maturity Benefit, - Changes in
EquiBuilder II-TM- Policies;
Separate Account Investment
Choices - (Introduction), - The
Separate Account and Its
Investment Divisions, - The Funds,
- Right to Change Operations;
Deductions and Charges; Policy
Account Value; Policy Account
Transactions - Changing Premium
and Deduction Allocation
Percentages, - Transfers of Policy
Account Value Among Investment
Divisions, - Borrowing from the
Policy Account, - Loan Requests, -
Repaying the Loan, - Withdrawing
Money from the Policy Account, -
Surrendering the Policy for Its
Net Cash Surrender Value; The
Guaranteed Interest Division -
Transfers from the Guaranteed
Interest Division; Additional
Information About EquiBuilder
II-TM- Policies - Right To
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Registration Item
of Form N-8B-2 Location in Prospectus
-------------- ----------------------
<S> <C>
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.
44(a)(5) . . . . . . . . . . . . . . . . . Deductions And Charges -
Deductions From Premiums.
44(a)(6) . . . . . . . . . . . . . . . . . Deductions And Charges -
Deductions From Premiums, -
Charges Against the Policy
Account, - Charges Against the
Separate Account, - Surrender
Charge; Policy Account Value -
Amounts In the Separate Account, -
Determination of the Unit Value.
44(b). . . . . . . . . . . . . . . . . . . The Features of EquiBuilder II-TM-
Policies - Death Benefits, -
Maturity Benefit, - Changes in
EquiBuilder II-TM- Policies;
Separate Account Investment
Choices (Introduction), - The
Separate Account and Its
Investment Divisions, - The Funds,
- Right to Change Operations;
Deductions and Charges; Policy
Account Value; Policy Account
Transactions - Changing Premium
and Deduction Allocation
Percentages, - Transfers of Policy
Account Value Among Investment
Divisions, - Borrowing from the
Policy Account, - Loan Requests, -
Repaying the Loan, - Withdrawing
Money from the Policy Account, -
Surrendering the Policy for Its
Net Cash Surrender Value; The
Guaranteed Interest Division -
Transfers from the Guaranteed
Interest Division; Additional
Information About EquiBuilder
II-TM- Policies - Right To Examine
the Policy, - Policy Periods,
Anniversaries, Dates and Ages;
Payment of Proceeds.
44(c). . . . . . . . . . . . . . . . . . . The Features of EquiBuilder II-TM-
Policies - Death Benefits, -
Maturity Benefit, - Changes in
EquiBuilder II-TM- Policies, -
Flexible Premium Payments;
Separate Account Investment
Choices - (Introduction), - The
Separate Account and Its
Investment Divisions, - The Funds;
Deductions and Charges; Policy
Account Value; Policy Account
Transactions - Changing Premium
and Deduction Allocation
Percentages, - Transfers of Policy
Account Value Among Investment
Divisions, - Borrowing from the
Policy Account, - Loan Requests, -
Repaying the Loan, - Withdrawing
Money from the Policy Account, -
Surrendering the Policy for Its
Net Cash Surrender Value; The
Guaranteed Interest Division -
Transfers from the Guaranteed
Interest Division; Additional
Information About EquiBuilder
II-TM- Policies - Right To
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Registration Item
of Form N-8B-2 Location in Prospectus
-------------- ----------------------
<S> <C>
Examine the Policy, - Policy
Periods, Anniversaries, Dates and
Ages; Payment of Proceeds.
45 . . . . . . . . . . . . . . . . . . . . Inapplicable.
46(a). . . . . . . . . . . . . . . . . . . The Features of EquiBuilder II-TM-
Policies - Death Benefits, -
Maturity Benefit, - Changes in
EquiBuilder II-TM- Policies;
Separate Account Investment
Choices - (Introduction), - The
Separate Account and Its
Investment Divisions, - the Funds,
- Right to Change Operations;
Deductions and Charges; Policy
Account Value; Policy Account
Transactions - Changing Premium
and Deduction Allocation
Percentages, - Transfers of Policy
Account Value Among Investment
Divisions, - Borrowing from the
Policy Account, - Loan Requests, -
Repaying the Loan, - Withdrawing
Money from the Policy Account, -
Surrendering the Policy for Its
Net Cash Surrender Value; The
Guaranteed Interest Division -
Transfers from the Guaranteed
Interest Division; Additional
Information About EquiBuilder
II-TM- Policies - Right To Examine
the Policy, - Policy Periods,
Anniversaries, Dates and Ages;
Payment of Proceeds.
46(b), 47, 48, 49, 50. . . . . . . . . . . Inapplicable.
51(a) - (j). . . . . . . . . . . . . . . . Summary; Detailed Information
About American Franklin and
EquiBuilder II-TM- 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). . . . . . . . . . . . . . . . . . . Payment Options; Assignment of a
Policy; Employee Benefit Plans.
53(b), 54, 55, 56, 57, 58. . . . . . . . . Inapplicable.
59 . . . . . . . . . . . . . . . . . . . . Financial Statements.
</TABLE>
<PAGE>
EQUIBUILDER II-TM-
POLICIES
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
issued by
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
through
Separate Account VUL-2
This Prospectus describes EquiBuilder II-TM- flexible premium variable life
insurance policies issued by The American Franklin Life Insurance Company
("American Franklin"). EquiBuilder II-TM- 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
same meanings as they have in the Prospectus. EquiBuilder II-TM- is a trademark
of American Franklin.
EquiBuilder II-TM- pays a death benefit to a beneficiary you designate when the
person you insure dies. You choose one of two death benefit options. Whichever
option you choose, we will pay a death benefit of a percentage of the Policy
Account as of the day the Insured Person dies, if that benefit would be greater
than the death benefit under the option you picked.
PROSPECTUS
APRIL 30, 1999
We deposit your net premium in your Policy Account. You may allocate amounts to
our Guaranteed Interest Division (which is part of our General Account and pays
interest at a declared rate) or to one or more of the variable investment
divisions of the Separate Account, or both. (For the first fifteen days after
we issue your policy, we require premiums to be invested in the VIP Money Market
division.)
The variable investment divisions each purchase shares of a corresponding
portfolio of the Variable Insurance Products Fund ("VIP"), the Variable
Insurance Products Fund II ("VIP II") or the MFS Variable Insurance Trust (each,
a "Fund," and collectively, the "Funds"). The Prospectuses of the Funds,
attached to this Prospectus, describe the investment objectives, policies and
risks of each Fund Portfolio.
* Fidelity VIP Money Market
* Fidelity VIP High Income
* Fidelity VIP Equity-Income
* Fidelity VIP Growth
* Fidelity VIP Overseas
* Fidelity VIPII Investment Grade Bond
* Fidelity VIPII Asset Manager
* Fidelity VIPII Index 500
* Fidelity VIPII Asset Manager: Growth
* Fidelity VIPII Contrafund
* MFS Emerging Growth
* MFS Research
* MFS Growth With Income
* MFS Total Return
* MFS Utilities
* MFS Capital Opportunities
Each of these portfolios is available through an investment division.
The Policy Account value allocated to a variable investment division depends on
the investment performance of the corresponding Fund. We do not guarantee any
minimum cash value for amounts allocated to the variable investment divisions.
If the Fund investments go down, the value of a Policy can decline. The value
of the Guaranteed Interest Division will depend on the interest rates that we
declare.
After you pay the first premium, you decide, within limits, the amount and
frequency of your premium payments. You can also increase or decrease the
amount of insurance protection, within limits.
Please read this prospectus carefully before investing, and keep it for future
reference. It contains important information about the EquiBuilder II-TM-
variable life insurance policy, which is issued by:
The American Franklin Life Insurance Company
# 1 Franklin Square
Springfield, Illinois 62713-0001
Telephone No. 800/528-2011
The SEC maintains an Internet website (http://www.sec.gov) that contains
material incorporated by reference into this prospectus and other information.
<PAGE>
VARIABLE LIFE INSURANCE POLICIES INVOLVE CERTAIN RISKS, AND YOU MAY LOSE SOME OR
ALL OF YOUR INVESTMENT.
- - WE DO NOT GUARANTEE HOW ANY OF THE VARIABLE INVESTMENT DIVISIONS WILL
PERFORM.
- - THE POLICY IS NOT A DEPOSIT OR OBLIGATION OF ANY BANK, AND NO BANK ENDORSES
OR GUARANTEES THE POLICY.
- - NEITHER THE U.S. GOVERNMENT NOR ANY FEDERAL AGENCY INSURES YOUR INVESTMENT
IN THE POLICY.
THERE IS NO GUARANTEED CASH SURRENDER VALUE FOR AMOUNTS ALLOCATED TO THE
VARIABLE INVESTMENT DIVISIONS.
IF THE NET CASH SURRENDER VALUE (THE CASH SURRENDER VALUE REDUCED BY ANY LOAN
BALANCE) IS INSUFFICIENT TO COVER THE CHARGES DUE UNDER THE POLICY, THE POLICY
MAY TERMINATE WITHOUT VALUE.
BUYING THIS POLICY MIGHT NOT BE A GOOD WAY OF REPLACING YOUR EXISTING INSURANCE
OR ADDING MORE INSURANCE IF YOU ALREADY OWN A FLEXIBLE PREMIUM VARIABLE LIFE
INSURANCE POLICY.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- ii -
<PAGE>
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .vi
SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DETAILED INFORMATION ABOUT AMERICAN FRANKLIN AND EQUIBUILDER II-TM- POLICIES
The American Franklin Life Insurance Company . . . . . . . . . . . . . . . . .
The Features of EquiBuilder II-TM- Policies. . . . . . . . . . . . . . . . . .
How EquiBuilder II-TM- Policies Differ from Whole Life Insurance. . . . . .
Death Benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy Issuance Information . . . . . . . . . . . . . . . . . . . . . . . .
Maturity Benefit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in EquiBuilder II-TM- Policies. . . . . . . . . . . . . . . . . . .
Changing the Face Amount of Insurance . . . . . . . . . . . . . . . . . . .
When Policy Changes Go Into Effect. . . . . . . . . . . . . . . . . . . . .
Flexible Premium Payments . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disability Waiver Benefit. . . . . . . . . . . . . . . . . . . . . . . .
Accidental Death Benefit . . . . . . . . . . . . . . . . . . . . . . . .
Children's Term Insurance. . . . . . . . . . . . . . . . . . . . . . . .
Term Insurance on an Additional Insured Person . . . . . . . . . . . . .
Separate Account Investment Choices. . . . . . . . . . . . . . . . . . . . . .
The Separate Account and Its Investment Divisions . . . . . . . . . . . . .
The Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment Policies of the Portfolios of the Funds. . . . . . . . . . . . .
Ownership of the Assets of the Separate Account . . . . . . . . . . . . . .
Right to Change Operations. . . . . . . . . . . . . . . . . . . . . . . . .
Deductions and Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deductions From Premiums. . . . . . . . . . . . . . . . . . . . . . . . . .
Charges Against the Policy Account. . . . . . . . . . . . . . . . . . . . .
Administrative Charge. . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of Insurance Charge . . . . . . . . . . . . . . . . . . . . . . . .
Charges for Additional Benefits. . . . . . . . . . . . . . . . . . . . .
Changes in Monthly Charges . . . . . . . . . . . . . . . . . . . . . . .
Charges Against the Separate Account. . . . . . . . . . . . . . . . . . . .
Mortality and Expense Risks. . . . . . . . . . . . . . . . . . . . . . .
Charges Against the Funds. . . . . . . . . . . . . . . . . . . . . . . .
Tax Reserve. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Surrender Charge. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Transaction Charges . . . . . . . . . . . . . . . . . . . . . . . . .
Partial Withdrawal of Net Cash Surrender Value . . . . . . . . . . . . .
Increase in the Face Amount of Insurance . . . . . . . . . . . . . . . .
Transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Illustrations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allocation of Policy Account Charges. . . . . . . . . . . . . . . . . . . .
Policy Account Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
- iii -
<PAGE>
Amounts in the Separate Account . . . . . . . . . . . . . . . . . . . . . .
Determination of the Unit 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Policy Loan Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . .
When Interest is Due. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repaying the Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Effects of a Policy Loan on the Policy Account. . . . . . . . . . . . .
Lapse of the Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Withdrawing Money from the Policy Account . . . . . . . . . . . . . . . . .
Withdrawal Charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Effects of a Partial Withdrawal . . . . . . . . . . . . . . . . . . . .
Surrendering the Policy for Its Net Cash Surrender Value. . . . . . . . . .
The Guaranteed Interest Division . . . . . . . . . . . . . . . . . . . . . . .
Amounts in the Guaranteed Interest Division . . . . . . . . . . . . . . .
Interest on the Amounts in the Guaranteed Interest Division . . . . . . . .
Transfers from the Guaranteed Interest Division . . . . . . . . . . . . . .
Additional Information about EquiBuilder II-TM- Policies . . . . . . . . . . .
Right to Examine the Policy . . . . . . . . . . . . . . . . . . . . . . . .
Lapse of the Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinstatement of the Policy . . . . . . . . . . . . . . . . . . . . . . . .
Policy Periods, Anniversaries, Dates and Ages . . . . . . . . . . . . . . .
Federal Tax Considerations . . . . . . . . . . . . . . . . . . . . . . . . . .
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax Status of the Policy. . . . . . . . . . . . . . . . . . . . . . . . . .
Possible Tax Law Changes. . . . . . . . . . . . . . . . . . . . . . . . .
Tax Treatment of Policy Benefits. . . . . . . . . . . . . . . . . . . . . .
American Franklin's Income Taxes. . . . . . . . . . . . . . . . . . . . . .
Income Tax Withholding. . . . . . . . . . . . . . . . . . . . . . . . . . .
ILLUSTRATIONS OF DEATH BENEFITS, POLICY ACCOUNT AND CASH SURRENDER VALUES, AND
ACCUMULATED PREMIUMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Voting Rights of a Policy Owner. . . . . . . . . . . . . . . . . . . . . . . .
Voting Rights of the Funds. . . . . . . . . . . . . . . . . . . . . . . . .
Determination of Voting Shares. . . . . . . . . . . . . . . . . . . . . .
How Shares of the Funds are Voted . . . . . . . . . . . . . . . . . . . . .
Voting Privileges of Participants in Other Separate Accounts. . . . . . . .
Separate Account Voting Rights. . . . . . . . . . . . . . . . . . . . . . .
Reports to Policy Owners . . . . . . . . . . . . . . . . . . . . . . . . . . .
Limits on American Franklin's Right to Challenge a Policy. . . . . . . . . . .
Payment Options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Beneficiary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Assignment of a Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee Benefit Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
- iv -
<PAGE>
Payment of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution of the Policies . . . . . . . . . . . . . . . . . . . . . . . . .
Applications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reinsurance Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Administrative Services. . . . . . . . . . . . . . . . . . . . . . . . . . . .
State Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year 2000 Transition . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Polices and Contracts. . . . . . . . . . . . . . . . . . . . . . . . . .
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
- --------------------------------------------------------------------------------
This prospectus generally describes only the variable portion of the policy,
except where the fixed account is specifically mentioned.
- v -
<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 nearest birthday.
AMERICAN FRANKLIN -- The American Franklin Insurance Company, an Illinois stock
life insurance company and the issuer of the EquiBuilder II-TM- 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 American Franklin receives, at its
Administrative Office, 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) -- Portfolio(s) of the Variable Insurance Products Fund, the Variable
Insurance Products Fund II, and MFS Variable Insurance Trust, which are all
"series" type mutual funds. Each portfolio is referred to as a Fund, and
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 the 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.
- 1 -
<PAGE>
NET PREMIUM -- The amount of any premium paid by the Policy Owner less the
amount of applicable state and local premium taxes, if any.
POLICY ACCOUNT -- The sum of accounts allocated to the investment divisions of
the Separate Account and American Franklin's Guaranteed Interest Division for a
particular policy.
POLICY ANNIVERSARY -- An anniversary of the Register Date of a policy while the
policy is in effect.
POLICY MONTH -- A month-long period beginning on the Register Date and on the
same day in each subsequent calendar month while a policy is in effect.
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 and 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 II-TM- policy is shown on the Policy Information
page of the policy.
- 2 -
<PAGE>
SUMMARY
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- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
This is a summary of some of the more important points that you should know
about your EquiBuilder II-TM- variable life insurance policy. We no longer sell
new policies.
THE POLICY
The EquiBuilder II-TM- variable life insurance policy is an individual flexible
premium variable life insurance policy issued by The American Franklin Life
Insurance Company. Among other things, the policy:
(a) provides insurance protection on the life of the insured until the policy's
maturity date.
(b) allows you to vary the amount and timing of the premiums you pay, within
limits, and to change the amount of the death benefit payable under the
policy, within specified guidelines.
(c) provides the opportunity for cash value build-up on a tax-deferred basis,
depending on investment performance of the underlying mutual fund
portfolios (or Funds). However, there is no guaranteed policy value and
you bear the risk of poor investment performance.
(d) permits you to borrow against the policy value, to make partial surrenders,
or to surrender the policy completely. Loans and partial surrenders will
affect the policy value and may affect the death benefit and termination of
the policy.
In addition to providing life insurance, the policy provides a means of
investing for long-term purposes. Tax deferral allows the entire amount you
have invested (net of charges) to remain in the policy where it can continue to
produce an investment return. Therefore, your money could grow faster than in a
comparable taxable investment where current income taxes would be due each year.
You may divide account value among the guaranteed interest division and sixteen
variable investment divisions which invest in portfolios of the Variable
Insurance Products Fund, Variable Insurance Products Fund II, and MFS Variable
Insurance Trust. We guarantee the principal and a minimum interest rate you
will receive from the guaranteed interest division. However, the value of what
you allocate to the sixteen variable investment divisions is not guaranteed.
Instead, your investment in the variable investment divisions will go up or down
with the performance of the particular Funds you select (and the deduction of
charges). You will lose money on account value allocated to the variable
investment divisions if performance is not sufficiently positive to cover the
charges under the policy.
PAYMENT OF PREMIUMS
Although you select planned periodic premiums, you are not required to pay
them. (The minimum initial premium and planned periodic premium depend on age,
sex, and risk class of the insured, on the Face Amount of the policy, and on any
supplemental benefit riders to the policy.) Within limits, you can vary the
frequency and amount of premium payments and can skip planned periodic premiums.
HOWEVER, EXTRA PREMIUMS MAY BE REQUIRED TO PREVENT POLICY TERMINATION UNDER
CERTAIN CIRCUMSTANCES.
FUNDING CHOICES
We deduct premium taxes from each premium payment, and then we allocate the net
premium among the variable investment divisions and the guaranteed interest
division according to your written instructions.
You may allocate each net premium (and your existing policy value) among
variable investment divisions which invest in the following sixteen portfolios:
* Fidelity VIP Money Market
- 3 -
<PAGE>
* Fidelity VIP High Income
* Fidelity VIP Equity-Income
* Fidelity VIP Growth
* Fidelity VIP Overseas
* Fidelity VIPII Investment Grade Bond
* Fidelity VIPII Asset Manager
* Fidelity VIPII Index 500
* Fidelity VIPII Asset Manager: Growth
* Fidelity VIPII Contrafund
* MFS Emerging Growth
* MFS Research
* MFS Growth With Income
* MFS Total Return
* MFS Utilities
* MFS Capital Opportunities
You may also allocate each net premium (and your existing account value) to the
guaranteed interest division. We guarantee your guaranteed interest division
allocation will earn at least 4 1/2% interest per year.
CHARGES AND DEDUCTIONS
We deduct applicable premium taxes from each premium payment. Premium taxes
vary by state, and are up to 5%.
We also make certain periodic deductions from your policy value. Each month, we
deduct from your policy value:
(a) the cost of insurance charge;
(b) the monthly administrative charge (currently $6 plus $24 per month for the
first 12 policy months); and
(c) any additional benefit charges.
Each day, we deduct a charge from the assets in the variable investment
divisions for certain mortality and expense risks we bear under the policy.
This charge is at an effective annual rate of 0.75% of those assets.
In addition, investment management fees and other expenses are deducted from
each portfolio of the underlying funds. See the table below for a summary of
these portfolio expenses.
<TABLE>
<CAPTION>
FUND ANNUAL EXPENSES
(% of average daily net assets)
- --------------------------------------------------------------------------------
Total
Management 12b-1 Other Fund
Fund Fee Fees Expenses(1) Expenses
- ---- ---------- ----- ----------- --------
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
Fidelity VIP Money Market
- --------------------------------------------------------------------------------
Fidelity VIP High Income
- --------------------------------------------------------------------------------
Fidelity VIP Equity-Income
- --------------------------------------------------------------------------------
Fidelity VIP Growth
- --------------------------------------------------------------------------------
Fidelity VIP Overseas
- --------------------------------------------------------------------------------
Fidelity VIPII Investment Grade Bond
- --------------------------------------------------------------------------------
Fidelity VIPII Asset Manager
- --------------------------------------------------------------------------------
Fidelity VIPII Index 500
- --------------------------------------------------------------------------------
Fidelity VIPII Asset Manager: Growth
- --------------------------------------------------------------------------------
Fidelity VIPII Contrafund
- --------------------------------------------------------------------------------
MFS Emerging Growth
- --------------------------------------------------------------------------------
MFS Research
- --------------------------------------------------------------------------------
MFS Growth with Income
- --------------------------------------------------------------------------------
MFS Total Return
- --------------------------------------------------------------------------------
MFS Utilities
- --------------------------------------------------------------------------------
MFS Capital Opportunities
- --------------------------------------------------------------------------------
</TABLE>
(1)Fund Annual Expenses are those incurred for the year ended December 31, 1998.
- 4 -
<PAGE>
ACTUAL EXPENSES OF A FUND MAY BE GREATER OR LESS THAN THOSE SHOWN.
We deduct a surrender charge on a full surrender of the policy during the first
10 policy years. The surrender charge is approximately 50% of one "target"
premium as shown in your policy. It varies with the insured's age on the
policy's effective date. The surrender charge is constant for the first six
policy years, and then decreases annually to zero at the end of the 10th policy
year.
We deduct a partial surrender charge if you reduce the Face Amount during the
first 10 policy years. The partial surrender charge is a pro rata portion of
the then-applicable surrender charge. We also charge the lesser of $25 or 2% of
the partial surrender amount.
We impose an administrative charge for each Face Amount increase, equal to $1.50
for each $1,000 increase, up to $300. We also charge a transfer fee of up to
$25 for each transfer in excess of four each policy year. We also may charge
for illustrations you request.
TAXES
We intend for the policy to satisfy the definition of life insurance under
the Internal Revenue Code. Therefore, the death benefit generally should be
excludable from the gross income of its recipient. However, there is some
uncertainty as to whether a policy issued on a substandard basis will satisfy
the Internal Revenue Code definition of life insurance. Under certain
circumstances, a policy could be treated as a modified endowment contract.
See "Tax Considerations" for a discussion of when withdrawals and loans from
policy value could be subject to Federal income tax and penalty tax.
CASH BENEFITS
Your Policy Account is the sum of the amounts allocated to the variable
investment divisions and the amount allocated to the guaranteed interest
division. The cash surrender value (the account value less any applicable
surrender charges) may be substantially less than the premiums paid, especially
in early policy years.
POLICY LOANS. You may take loans in the aggregate amount of up to 90% of the
policy's cash surrender value. The minimum loan amount is usually $500. Policy
loans reduce the amount available for allocations and transfers.
FULL SURRENDER. You may surrender the policy at any time for its net cash
surrender value. The net cash surrender value is the cash surrender value less
any outstanding loan and loan interest due.
PARTIAL SURRENDER. You generally may make a partial surrender of the policy at
any time during the insured's life and after the policy has been in force one
year, provided that the policy has sufficient net cash surrender value
remaining.
DEATH BENEFIT
You must select one of two death benefit options under the policy:
Option A - the greater of the policy's Face Amount or a multiple of its Policy
Account value on the date of death; or
Option B - the greater of (i) the policy's Face Amount plus its account value or
(ii) a multiple of its Policy Account value on the date of death.
- 5 -
<PAGE>
Subject to certain limits, you may change the Face Amount and death benefit.
The policy's minimum Face Amount is $50,000.
TERMINATION
There is no minimum guaranteed Policy Account value. The policy value may
decrease if the investment performance of the variable investment divisions (to
which you have allocated Policy Account value) is not sufficiently positive to
cover the charges deducted under the policy.
IF THE NET CASH SURRENDER VALUE BECOMES INSUFFICIENT TO COVER THE MONTHLY
DEDUCTION WHEN DUE, THE POLICY WILL TERMINATE WITHOUT VALUE AFTER A GRACE
PERIOD, EVEN IF YOU PAY ALL PLANNED PERIODIC PREMIUMS IN FULL AND ON SCHEDULE.
Additional premium payments will be necessary during the grace period to keep
the policy in force.
OTHER INFORMATION
FREE LOOK: For a limited time after the policy's effective date, you may cancel
the policy and receive a full refund of all premiums paid.
SUPPLEMENTAL BENEFITS. Your policy may have one or more supplemental benefits
which are attached to the policy by rider. Each has its own requirements for
eligibility, and generally has its own charge. Among the benefits currently
available under the policy are:
(a) accidental death benefit rider;
(b) children's term insurance rider;
(c) additional insured term insurance rider; and
(d) disability waiver benefit rider.
Other supplemental benefits may also be available.
TRANSFERS: Within certain limits, you may transfer all or part of your policy
value among the variable investment divisions and the guaranteed interest
division. We may charge for transfers in excess of four in a policy year.
There are special limits on transfers from the Guaranteed Interest Division.
ILLUSTRATIONS: Sample illustrations of hypothetical death benefits and Policy
Account values are in this prospectus. These may help you:
(a) understand (i) the long-term effects of different levels of investment
performance and (ii) the charges and deductions under the policy; and
(b) compare the policy to other life insurance policies.
The illustrations also show the value of annual premiums accumulated with
interest and demonstrate that the Policy Account value may be low (compared to
the premiums plus accumulated interest) if the policy is surrendered in the
early policy years. Therefore, the policy should not be purchased as a
short-term investment.
FINANCIAL INFORMATION: Our financial statements, and financial statements for
the variable investment divisions, are in Appendix E to this prospectus.
- 6 -
<PAGE>
INQUIRIES
If you have questions about your policy or need to make changes, contact your
financial representative who sold you the policy, or contact us at:
The American Franklin Life Insurance Company
# 1 Franklin Square
Springfield, Illinois 62713-0001
- --------------------------------------------------------------------------------
The policy is not available in all states. THIS PROSPECTUS DOES NOT OFFER
THE POLICIES IN ANY JURISDICTION WHERE THEY CANNOT BE LAWFULLY SOLD. YOU SHOULD
RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS OR THAT WE HAVE
REFERRED YOU TO. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION
THAT IS DIFFERENT.
NOTE: Because this is a summary, it does not contain all the information
that may be important to you. You should read this entire prospectus and the
prospectuses for the Fidelity Variable Insurance Products Fund, the Fidelity
Variable Insurance Products Fund II, and the MFS Variable Insurance Trust
carefully before investing.
- 7 -
<PAGE>
DETAILED INFORMATION ABOUT AMERICAN FRANKLIN AND EQUIBUILDER II POLICIES
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
The American Franklin Life Insurance Company ("American Franklin") is a
legal reserve stock life, accident and health insurance company organized under
the laws of the State of Illinois in 1981. It is engaged in the writing of
variable universal life insurance and variable annuities. American Franklin has
another separate account (Separate Account VUL) which issues interests in
variable insurance policies having policy features that are similar to those of
EquiBuilder II policies but the assets of which are invested in a different
open-end management investment company. American Franklin no longer offers new
policies having an interest in Separate Account VUL. American Franklin also has
a separate account which issues interests in variable annuities. American
Franklin is presently authorized to write insurance in forty-six states, the
District of Columbia and Puerto Rico. American Franklin's home office is located
at #1 Franklin Square, Springfield, Illinois 62713.
American Franklin is a wholly-owned subsidiary of The Franklin Life
Insurance Company ("The Franklin"). The Franklin is a legal reserve stock life
insurance company organized under the laws of the State of Illinois in 1884. The
Franklin issues individual life insurance, annuity and accident and health
insurance policies, group annuities and group life and health insurance and
offers a variety of whole life, life, retirement income and level and decreasing
term insurance plans. Its home office is located at #1 Franklin Square,
Springfield, Illinois 62713. The Franklin is not the issuer of the policies
offered by this Prospectus, however, it has certain indirect obligations in
respect to those policies arising from The Franklin's undertakings to the
issuer, American Franklin, as a reinsurer of portions of the death benefits
provided under the policies.
American General Corporation ("American General"), through its wholly-owned
subsidiary, AGC Life Insurance Company, owns all of the outstanding shares of
common stock of The Franklin. The address of AGC Life Insurance Company is
American General Center, Nashville, Tennessee 37250-0001. The address of
American General is 2929 Allen Parkway, Houston, Texas 77019-2155.
American General is one of the largest diversified financial services
organizations in the United States. American General's operating subsidiaries
are leading providers of retirement services, consumer loans, and life
insurance. American General was incorporated as a general business corporation
in Texas in 1980 and is the successor to American General Insurance Company, an
insurance company incorporated in Texas in 1926.
American General has advised American Franklin that there was no person who
was known to it to be the beneficial owner of 10% or more of the voting power of
American General as of March 5, 1999.
THE FEATURES OF EQUIBUILDER II POLICIES
HOW EQUIBUILDER II POLICIES DIFFER FROM WHOLE LIFE INSURANCE
EquiBuilder II policies are designed to provide life insurance coverage
with flexibility in death benefits, premium payments and investment choices.
EquiBuilder II policies are different from traditional whole life insurance in
that the Policy Owner is not required to pay scheduled premiums and may, within
limits, choose the amount and frequency of premium payments. EquiBuilder II
policies also provide for two different types of death benefit options and the
Policy Owner may change options. Another feature of EquiBuilder II policies
which is not available under traditional whole life insurance is that the Policy
Owner generally has the ability to increase or decrease the Face Amount without
purchasing a new policy. However, evidence of insurability may be required. In
addition, the Policy Owner may direct the investment of net premiums, which will
determine, in part, the value of the Policy Account.
DEATH BENEFITS
American Franklin will pay a death benefit (net of any policy loan and loan
interest and any overdue charges) to the beneficiary of a policy when the
Insured Person dies. The Policy Owner may choose from two death benefit options:
Option A and Option B. Option A provides a benefit that equals the Face Amount
of the policy. Except as described below, the Option A benefit is fixed. Option
B provides a benefit that equals the Face Amount of the policy plus the amount
in the Policy Account on the day the Insured Person dies. Under Option B, the
value of the benefit is variable and fluctuates with the amount in
8
<PAGE>
the Policy Account. Option B entails a higher monthly cost of insurance charge
than Option A and will cause the value of the Policy Account, and hence the Net
Cash Surrender Value of the policy, to be less than if Option A were chosen, all
other things being equal.
Under both options, an alternate death benefit based on provisions of the
federal income tax law applies if it would provide a greater benefit (before
deductions for any outstanding policy loan and loan interest) than the option
selected. This benefit is a percentage multiple of the amount in the Policy
Account. The percentage declines as the Insured Person gets older. The benefit
will be the amount in the Policy Account on the day the Insured Person dies
multiplied by the percentage for the Insured Person's age (as of his or her
nearest birthday) at the beginning of the policy year of the Insured Person's
death. For ages that are not shown on the table set forth below, the applicable
percentages will decrease by a ratable portion for each full year.
Table of Death Benefits
Based On Policy Account Values
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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
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 II
Policies-Lapse of the Policy," below.) The investment experience (which may be
either positive or negative) of any amounts in the investment divisions of the
Separate Account and the interest earned in the Guaranteed Interest Division
will affect the amount in the Policy Account. As a result, the returns from
these divisions will affect the length of time a policy remains in force. See
"Policy Account Value," below.
Policy Owners who prefer to have insurance coverage that varies with the
investment experience of their Policy Account should choose Option B. In no
event will the death benefit under Option B be less than the greater of the Face
Amount of the policy or the alternate death benefit described above (in either
case, less any outstanding policy loan and loan interest). Policy Owners who
prefer to have insurance coverage that does not vary in amount and that has
lower cost of insurance charges should choose Option A.
POLICY ISSUANCE INFORMATION
American Franklin will not issue a new policy having a Face Amount that is
less than $50,000 nor will it issue a policy in respect of an Insured Person who
is older than 75.
No insurance under a policy will take effect: (a) until a policy is
delivered and the full initial premium is paid while the person proposed to be
insured is living and (b) unless the information in the application continues to
be true and complete, without material change, as of the time the premium is
paid.
9
<PAGE>
See "The Features of EquiBuilder II Policies-Flexible Premium Payments" and
"Distribution of the Policies-Applications," below for additional information
concerning procedures for obtaining a policy.
MATURITY BENEFIT
If the Insured Person is still living on the policy anniversary nearest his
or her 95th birthday, American Franklin will pay the Policy Owner the amount in
the Policy Account net of any outstanding loan and loan interest. The policy
will then end.
CHANGES IN EQUIBUILDER II POLICIES
EquiBuilder II policies provide the Policy Owner flexibility to choose from
a variety of strategies, described in the sections that follow, which enable the
Policy Owner to increase or decrease his or her insurance protection.
A reduction in Face Amount lessens emphasis on the policy's insurance
coverage by reducing both the death benefit and the amount at risk (the
difference between the current death benefit under the policy and the amount of
the Policy Account). The reduced amount at risk results in lower cost of
insurance charges against the Policy Account. See "The Features of EquiBuilder
II Policies-Changing the Face Amount of Insurance," below. A partial withdrawal
of Net Cash Surrender Value reduces the Policy Account and death benefit while
providing a cash payment, but does not reduce the amount at risk or the cost of
insurance charges. See "Policy Account Transactions-Withdrawing Money from the
Policy Account," below. Choosing not to make premium payments may have the
effect of reducing the Policy Account. Reducing the Policy Account will, under
Option A, increase the amount at risk (and thereby increase cost of insurance
charges) while leaving the death benefit unchanged; under Option B, it will
decrease the death benefit while leaving the amount at risk and the cost of
insurance charge unchanged. See "The Features of EquiBuilder II
Policies-Flexible Premium Payments," below.
Increases in the Face Amount emphasize insurance coverage by increasing
both the death benefit and the amount at risk. See "The Features of EquiBuilder
II Policies-Changing the Face Amount of Insurance," below. Additional premium
payments may increase the Policy Account, which has the effect, under Option A,
of reducing the amount at risk and cost of insurance charge while leaving the
death benefit unchanged, or, under Option B, of increasing the death benefit
while leaving the amount at risk and cost of insurance charge unchanged. See
"The Features of EquiBuilder II Policies-Flexible Premium Payments," below.
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
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<PAGE>
partial withdrawal of Net Cash Surrender Value from the Policy Account and then
a decrease in the Face Amount. See "The Features of EquiBuilder II
Policies-Death Benefits," below.
American Franklin's current procedure, if the Policy Owner requests a Face
Amount decrease when there has been a previous increase in the Face Amount, is
to apply the decrease first against the most recent increase in the Face Amount.
Decreases will then be applied to prior increases in the Face Amount in the
reverse order in which such increases took place, and then to the original Face
Amount.
Policy changes that result in a reduction of the death benefit, such as
a decrease in the Face Amount, may cause a policy to become a "modified
endowment contract," or may have other adverse tax consequences. See
"Federal Tax Considerations," below.
CHANGING DEATH BENEFIT OPTIONS
At any time after the first policy year while a policy is in force, the
Policy Owner may change the death benefit option by sending a written request
to American Franklin's Administrative Office. If the death benefit is changed
from Option A to Option B, the Face Amount will be decreased by the amount in
the Policy Account on the date of the change. Such a change may not be
permitted if it would reduce the Face Amount below the minimum American
Franklin requires to issue a policy at the time of the reduction. If the
death benefit is changed from Option B to Option A, the Face Amount of
insurance will be increased by the amount in the Policy Account on the date
of the change. Changing the death benefit option may have adverse tax
consequences. You should consult a tax adviser before changing the death
benefit option.
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.
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<PAGE>
American Franklin will send the Policy Owner premium reminder notices based
on the planned premium unless the Policy Owner requests American Franklin not to
do so in his or her application or by writing to American Franklin's
Administrative Office. Nevertheless, the Policy Owner may make the planned
payment, skip the planned payment or change the frequency or the amount of the
payment.
Generally, the Policy Owner may pay other premiums at any time and in any
amount, as long as each payment is at least $100. (Policies issued in some
states may have different minimum premium payments.) American Franklin may
increase this minimum upon 90 days' written notice. American Franklin may also
reject premium payments in a policy year if the payments would cause the policy
to cease to qualify as life insurance under federal tax law. See "Federal Tax
Considerations," below.
If the Policy Owner stops paying premiums temporarily or permanently, the
policy will continue in effect until the Net Cash Surrender Value can no longer
cover the monthly charges against the Policy Account for the benefits selected.
In addition, it should be noted that planned premiums may not be sufficient to
maintain a policy because of investment experience, policy changes or other
factors.
The tables set forth below under "Illustrations of Death Benefits, Policy
Account and Cash Surrender Values, and Accumulated Premiums" illustrate how the
key financial elements of EquiBuilder II policies work. The tables show death
benefits and Policy Account and Cash Surrender Values with Face Amounts and
planned annual premiums of different amounts for Insured Persons of different
ages.
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<PAGE>
ADDITIONAL BENEFITS
A policy may include additional benefits. A charge will be made against the
Policy Account monthly for each additional benefit. These benefits may be
cancelled at any time. More details will be included in the policy if any of
these benefits are selected. The following additional benefits are currently
available:
DISABILITY WAIVER BENEFIT. With this benefit, monthly charges from the
Policy Account are waived if the Insured Person becomes totally disabled on
or after the Insured Person's fifth birthday and the disability continues
for six months. If the disability starts before the policy anniversary
nearest the Insured Person's 60th birthday, American Franklin will waive
monthly charges for life as long as the disability continues. If the
disability starts after that, the charges will be waived only up to the
policy anniversary nearest the Insured Person's 65th birthday (as long as
the disability continues).
ACCIDENTAL DEATH BENEFIT. American Franklin will pay an additional
benefit if the Insured Person dies from bodily injury that results from an
accident, provided the Insured Person dies before the policy anniversary
nearest his or her 70th birthday.
CHILDREN'S TERM INSURANCE. This benefit provides term life insurance
on the lives of the Insured Person's children, including natural children,
stepchildren and legally adopted children, who have not yet reached their
eighteenth birthdays. The charge for this benefit covers all children under
eighteen. They are covered only until the Insured Person reaches age 65 or
the child reaches age 25, whichever first occurs.
TERM INSURANCE ON AN ADDITIONAL INSURED PERSON. Term insurance may be
obtained for another person, such as the Insured Person's spouse, under a
policy. A separate charge will be deducted for each additional insured
person.
SEPARATE ACCOUNT INVESTMENT CHOICES
After certain amounts are deducted from each premium, the balance, called
the net premium, is put into the Policy Account established for each policy. The
net premium is credited to the Policy Account as of the date the premium payment
is received at American Franklin's Administrative Office, or, if later, the
Register Date. The net premium is credited to the Policy Account prior to
deductions of any charges against the Policy Account due on that date. See
"Deductions and Charges-Deductions from Premiums," below. The Policy Account
will be invested in the Money Market division until the first business day
fifteen days after the Issue Date of the policy. At that time, the Policy
Account will be allocated to the Guaranteed Interest Division or to one or more
of the investment divisions of the Separate Account or both, according to the
directions provided in the policy application. These instructions will apply to
any subsequent premium until the Policy Owner provides new instructions to
American Franklin at its Administrative Office. Premium allocation percentages
may be any whole number from zero to 100, but the sum must equal 100. See "The
Guaranteed Interest Division," below.
THE SEPARATE ACCOUNT AND ITS INVESTMENT DIVISIONS
The Separate Account was established on April 9, 1991 under the Insurance
Law of the State of Illinois, and is a unit investment trust registered with the
Securities and Exchange Commission under the Investment Company Act of 1940.
This registration does not involve any supervision by the Securities and
Exchange Commission of the management or investment policies of the Separate
Account. A unit investment trust is a type of investment company. The Separate
Account meets the definition of a "separate account" under federal securities
laws. The Separate Account has 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
Capital Opportunities divisions are available for investment under EquiBuilder
II policies. The Separate Account also issues interests under EquiBuilder III
variable life insurance policies, which have policy features that are similar to
those of EquiBuilder II policies but which have a different sales charge
structure.
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<PAGE>
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 attached to this Prospectus, and in the Funds' Statements
of Additional Information. The policies and objectives of the portfolios of the
Variable Insurance Products Fund corresponding to the divisions currently
available for investment under EquiBuilder II policies may be summarized as
follows:
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 the 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.
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<PAGE>
The policies and objectives of the portfolios of the Variable Insurance
Products Fund II corresponding to the divisions currently available for
investment under EquiBuilder II policies may be summarized as follows:
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 II 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.
MFS GROWTH WITH INCOME PORTFOLIO seeks to provide reasonable current
income and long-term growth of capital and income.
MFS TOTAL RETURN PORTFOLIO seeks 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 CAPITAL OPPORTUNITIES 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.
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<PAGE>
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 II 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 II 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 II 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 II policies, other variable life
policies and other variable life policies it may issue in the future. The
portion of the Separate Account's assets supporting these policies may not be
used to satisfy liabilities arising out of any other business of American
Franklin. Under certain unlikely circumstances, one investment division of the
Separate Account may be liable for claims relating to the operations of another
division. In addition to premiums from EquiBuilder II policies, American
Franklin may allocate premiums from other policies to the Separate Account.
These policy owners will participate in the Separate Account in proportion to
the amounts in the Separate Account relating to their policies. American
Franklin may also permit charges owed to it to stay in the Separate Account.
Thus, American Franklin may also participate proportionately in the Separate
Account. These accumulated amounts belong to American Franklin and American
Franklin may transfer them from the Separate Account to its General Account at
any time.
RIGHT TO CHANGE OPERATIONS
American Franklin reserves the right to change or add investment companies
in which Policy Accounts will be invested and to modify how it or the Separate
Account operates. American Franklin intends to comply with applicable law in
making any changes and, if necessary, will seek Policy Owner approval. American
Franklin has the right to:
add investment divisions to, or remove investment divisions from, the
Separate Account, combine two or more divisions within the Separate
Account, or withdraw assets relating to EquiBuilder II policies from one
investment division and put them into another;
register or end the registration of the Separate Account under the
Investment Company Act of 1940;
operate the Separate Account under the direction of a committee or
discharge such a committee at any time (the committee may be composed
entirely of persons who are "interested persons" of American Franklin
within the meaning of the Investment Company Act of 1940);
restrict or eliminate any voting rights of Policy Owners or other
people who have voting rights that affect the Separate Account;
operate the Separate Account or one or more of its investment
divisions in any other form the law allows, including a form that allows
the Separate Account to make direct investments. The Separate Account may
be charged an advisory fee if its investments are made directly, rather
than through an investment company. American Franklin may invest the assets
of the Separate Account in any legal investments. In choosing these
investments American Franklin will rely on its own or outside counsel
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<PAGE>
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 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. Applicable taxes are deducted from all premiums. The balance of each
premium (the net premium) is placed in the Policy Account.
All states and certain other jurisdictions (cities, counties,
municipalities) tax premium payments 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.
CHARGES AGAINST THE POLICY ACCOUNT
At the beginning of each policy month, the following charges are made
against each Policy Account. Additional charges against amounts in the Separate
Account are described under "Deductions and Charges-Charges Against the Separate
Account," below.
ADMINISTRATIVE CHARGE. The current charge is $6 per month. This charge is
designed to cover the continuing costs of maintaining the EquiBuilder II
policies, such as premium billing and collection, claim processing, policy
transactions, record keeping, communications with Policy Owners and other
expenses and overhead. This charge may be raised to reflect higher costs, but
American Franklin guarantees it will never be more than $12 per month. At the
beginning of each of the first twelve policy months that a policy is in effect,
an additional administrative charge of $24 per month will be deducted. This
charge permits American Franklin to recover the costs of issuance and placement
of the policy such as application processing, medical examinations,
establishment of policy records and underwriting costs (determining insurability
and assigning the Insured Person to a risk class).
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<PAGE>
COST OF INSURANCE CHARGE. The monthly cost of insurance is American
Franklin's current monthly cost of insurance rate multiplied by the amount at
risk at the beginning of the policy month divided by $1,000. The amount at risk
is the difference between the current death benefit and the amount in the Policy
Account. If the current death benefit for the month is increased due to the
requirements of federal tax law (see "The Features of EquiBuilder II
Policies-Death Benefits," above), the amount at risk for the month will also
increase. For this purpose the amount of each Policy Account is determined
before deduction of the cost of insurance charge but after all other charges due
on that date. The amount of the cost of insurance charge will vary from month to
month with changes in the amount at risk and with increasing age of the Insured
Person.
The cost of insurance rate is based on the sex, age and risk class of the
Insured Person and the Face Amount size band of the policy at the time of the
charge. American Franklin may change these rates from time to time, but they
will never be more than the guaranteed maximum rates set forth in a particular
policy. The maximum charges are based on the Commissioner's 1980 Standard
Ordinary Male and Female Mortality Tables. The table below shows the current and
guaranteed maximum monthly cost of insurance rates per $1,000 of amount at risk
for a male non-tobacco user at various ages. In Montana and Massachusetts there
will be no distinctions based on sex. Congress and the legislatures of various
states have from time to time considered legislation that would require
insurance rates to be the same for males and females of the same age and risk
class. In addition, employers and Employee Organizations should consider the
impact of Title VII of the Civil Rights Act of 1964 on the purchase of an
EquiBuilder II policy in connection with an employment related insurance or
benefit plan. See "Employee Benefit Plans," below. Where required, American
Franklin will provide cost of insurance charges that do not distinguish between
males and females.
<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 .49 .88 .42
65 2.14 1.42 2.14 1.20
</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
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.
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MORTALITY AND EXPENSE RISKS. American Franklin makes a charge for assuming
mortality and expense risks. American Franklin guarantees that monthly
administrative and cost of insurance deductions from the Policy Account will
never be greater than the maximum amounts shown in the policy. The mortality
risk assumed is that insured persons will live for shorter periods than
estimated. When this happens, American Franklin has to pay a greater amount of
death benefit than expected in relation to the cost of insurance charges it
received. The expense risk assumed is that the cost of issuing and administering
policies will be greater than expected. American Franklin makes a daily charge
for mortality and expense risks at an effective annual rate of .75% of the value
of the assets in the Separate Account attributable to EquiBuilder II policies.
This charge is reflected in the unit values for the investment divisions of the
Separate Account. See "Policy Account Value-Determination of Unit Value," below.
If the money collected from this charge is not needed, it will be to American
Franklin's gain 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 1998 by each
portfolio, expressed as a percentage of average net assets of each portfolio:
<TABLE>
<CAPTION>
MANAGEMENT FEES OTHER EXPENSES
AFTER EXPENSE AFTER EXPENSE
REIMBURSEMENT REIMBURSEMENT (3) TOTAL ANNUAL EXPENSES (1)
---------------------------------------------------------------
<S> <C> <C> <C>
VIP Money Market
VIP High Income
VIP Equity-Income
VIP Growth
VIP Overseas
VIPII Investment Grade Bond
VIPII Asset Manager
VIPII Index 500
VIPII Contrafund
VIPII Asset Manager:
Growth
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
MANAGEMENT FEES OTHER EXPENSES
AFTER EXPENSE AFTER EXPENSE
REIMBURSEMENT REIMBURSEMENT (3) TOTAL ANNUAL EXPENSES (1)
---------------------------------------------------------------
<S> <C> <C> <C>
MFS Emerging Growth
MFS Research
MFS Growth With Income
MFS Total Return
MFS Utilities
MFS Capital Opportunities
</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 "Distribution of the Policies," below. The amount of the
surrender charge will vary depending on the policy year in which the redemption
occurs and the amount of premium paid. No surrender charge will be applicable
after the tenth policy year. If during the first ten policy years a policy is
not surrendered or permitted to lapse and the Face Amount is not reduced, no
surrender charge will be incurred.
The surrender charge is a contingent deferred sales load. It is a
contingent load because it is imposed only if the Policy Owner surrenders his or
her policy (or reduces its Face Amount or lets it lapse) during the first ten
policy years. It is a deferred load because it is not deducted from premiums.
The amount of the load in a policy year is not necessarily related to actual
sales expense in that year. See "Distribution of the Policies," below.
The surrender charge is the difference between the amount in a particular
Policy Account and the Cash Surrender Value of the related policy during the
first ten policy years.
In the first ten policy years, a surrender charge will be imposed if the
Policy Owner:
totally surrenders his or her policy for its Net Cash Surrender Value;
reduces the Face Amount of his or her policy; or
lets his or her policy lapse.
Surrender charges are based on Target Premiums. Target Premiums are not
based on the "planned" premium the Policy Owner determines. See "The Features Of
EquiBuilder II Policies-Flexible Premium Payments." Target Premiums are based on
the age and sex of the Insured Person, 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 30% of premium
payments made during the first policy year up to the amount of one Target
Premium and 9% of any additional premiums paid during the first ten policy
years, but not more than 50% of one Target Premium.
20
<PAGE>
Paying less than one Target Premium in the first policy year will reduce
the surrender charge only if not more than approximately five Target Premiums
are paid before surrender or lapse (i.e., only if the maximum surrender charge
is not reached). However, structuring payments in this manner will increase the
risk that a policy will lapse (and that a surrender charge will be incurred that
would not have been incurred if the policy had remained in force). If payments
are structured in this manner, the amounts in the Policy Account would need to
receive favorable investment performance for the policy not to lapse. In
addition, paying less premiums may increase cost of insurance charges (which are
based on amount at risk). Attempting to structure the timing and amount of
premium payments to reduce the potential surrender charge below the maximum is
not recommended.
EXAMPLE: Assume the purchase of a $200,000 initial Face Amount policy for a male
age 40. This policy would have a Target Premium of $2,280 and a maximum
surrender charge of $1,140 ($2,280 x 50%). Also, assume that all premium
payments are made at the beginning of each policy year. The following table
shows the surrender charge which would apply under different premium payment
assumptions if surrender of the policy were to occur during the indicated policy
year:
21
<PAGE>
<TABLE>
<CAPTION>
DURING YEAR PREMIUM CHARGE PREMIUM CHARGE PREMIUM CHARGE
<S> <C> <C> <C> <C> <C> <C>
1 $3,000 $749 $2,280 $684 $1,140 $342
2 3,000 1,019 2,280 889 3,420 650
3 3,000 1,140 2,280 1,094 2,280 855
4 3,000 1,140 2,280 1,140 2,280 1,060
5 3,000 1,140 2,280 1,140 2,280 1,140
6 3,000 1,140 2,280 1,140 2,280 1,140
7 3,000 912 2,280 912 2,280 912
8 3,000 684 2,280 684 2,280 684
9 3,000 456 2,280 456 2,280 456
10 3,000 228 2,280 228 2,280 228
</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.
OTHER TRANSACTION CHARGES
In addition to the deductions and charges described above, fees for certain
policy transactions are charged against the Policy Account:
PARTIAL WITHDRAWAL OF NET CASH SURRENDER VALUE. There is an
administrative charge that is currently $25 or 2% of the amount withdrawn,
whichever is less, each time a partial withdrawal is made. See "Policy
Account Transactions-Withdrawing Money from the Policy Account," below.
INCREASE IN THE FACE AMOUNT OF INSURANCE. There is an administrative
charge that is currently $1.50 for each $1,000 of increase up to a maximum
charge of $300. See "The Features of EquiBuilder II Policies-Changes in
EquiBuilder II Policies," above.
TRANSFERS. If more than four transfers of Policy Account value are
made in a policy year among investment divisions, a charge of up to a
maximum of $25 for each additional transfer in that policy year may be
made. However, if all of the assets are transferred to the Guaranteed
Interest Division, no transfer charge will be imposed. See "Policy Account
Transactions-Transfers of Policy Account
22
<PAGE>
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
guaranteed minimum cash value. The value of amounts in a Policy Account
allocated to the Guaranteed Interest Division is guaranteed.
See "The Guaranteed Interest Division," below.
AMOUNTS IN THE SEPARATE ACCOUNT
Amounts allocated, transferred or added to the investment divisions of the
Separate Account are used to purchase units representing undivided interests in
the various divisions. The amount in each division is represented by the value
of the units credited to the Policy Account for that division. The number of
units purchased or redeemed in an investment division of the Separate Account is
calculated by dividing the dollar amount of the transaction by the division's
unit value next calculated at the close of business on the date of the
transaction (see "Additional Information About EquiBuilder II Policies-Policy
Periods, Anniversaries, Dates and Ages," below, regarding the date that the net
amount of the initial premium is credited to the Policy Account and interim
allocation of the initial net premium and any other net premium received prior
to the time that 15 days have elapsed after the Issue Date, and see "Policy
Account Transactions" and "The Guaranteed Interest Division-Transfers from the
Guaranteed Interest Division,"
23
<PAGE>
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 .00002063, which is an effective
annual rate of .75%. This charge is for mortality and expense risks assumed
by American Franklin under the policy;
Finally, any daily charge for taxes or amounts set aside as a reserve
for taxes is subtracted.
Generally, this means that unit values are adjusted to reflect what happens
to the Funds, and also for the mortality and expense risk charge and any charge
for taxes.
POLICY ACCOUNT TRANSACTIONS
The transactions described below may have different effects on the Policy
Account, death benefit, Face Amount or cost of insurance. The Policy Owner
should consider the net effects before combining Policy Account transactions.
See "The Features of EquiBuilder II Policies-Changes in EquiBuilder II
Policies," above. Certain transactions also entail charges. For information
regarding other charges, see "Deductions And Charges," above.
24
<PAGE>
CHANGING PREMIUM AND DEDUCTION ALLOCATION PERCENTAGES
A Policy Owner may change the allocation percentages of his or her net
premiums or of his or her monthly deductions by giving instructions to American
Franklin at its Administrative Office. These changes will go into effect as of
the date American Franklin receives the request at its Administrative Office and
will affect transactions on and after that date.
TRANSFERS OF POLICY ACCOUNT VALUE AMONG INVESTMENT DIVISIONS
A Policy Owner may transfer amounts from any investment division of the
Separate Account to any other investment division of the Separate Account or to
the Guaranteed Interest Division. A Policy Owner may make up to four transfers
of Policy Account value among investment divisions of the Separate Account in
each policy year without charge. Depending on the overall cost of performing
these transactions, American Franklin may charge up to a current maximum of $25
for each additional transfer, except that no charge will be imposed for a
transfer of all amounts in the investment divisions of the Separate Account to
the Guaranteed Interest Division. If all amounts are in the Guaranteed Interest
Division, the policy will not vary for investment experience. To make a
transfer, the Policy Owner should give instructions to American Franklin at its
Administrative Office.
If a charge is imposed for making a transfer, American Franklin will
allocate the charge as described under "Deductions And Charges-Allocation of
Policy Account Charges," above. All simultaneous transfers included in one
transfer request count as one transfer for purposes of any fee.
A transfer from an investment division of the Separate Account will take
effect as of the date American Franklin receives instructions to make the
transfer. The minimum amount American Franklin will transfer on any date will be
shown on the Policy Information page in each policy and is usually $500. This
minimum need not come from any one investment division or be transferred to any
one investment division as long as the total amount transferred that day equals
or exceeds the minimum. However, American Franklin will transfer the entire
amount in any investment division of the Separate Account even if it is less
than the minimum specified in a policy. Policy Owners should note that future
premiums will continue to be allocated to investment divisions of the Separate
Account or the Guaranteed Interest Division in accordance with existing
allocations unless instructions are also given with respect to changing them.
Special rules apply to transfers from the Guaranteed Interest Division. See
"The Guaranteed Interest Division-Transfers From The Guaranteed Interest
Division," below.
BORROWING FROM THE POLICY ACCOUNT
At any time that a policy has a Net Cash Surrender Value, the Policy Owner
may borrow money from American Franklin using only his or her policy as security
for the loan. The maximum aggregate amount that will be loaned is equal to 90%
of the Cash Surrender Value of the policy on the date the request for a loan is
received by American Franklin at its Administrative Office. Any new loan must be
at least the minimum amount shown on the Policy Information page of a policy,
usually $500. Any amount that secures a loan remains part of the Policy Account
but is assigned to the Guaranteed Interest Division. This loaned amount earns
interest at a rate that American Franklin expects will be different from the
interest rate for unloaned amounts in the Guaranteed Interest Division. See
"Federal Tax Considerations-Policy Proceeds," below, with respect to the federal
income tax consequences of a loan.
LOAN REQUESTS
Requests for loans should be made to American Franklin at its
Administrative Office. The Policy Owner may specify how much of the loan should
be taken from the unloaned amount, if any, of his or her Policy Account
allocated to the Guaranteed Interest Division and how much should be taken from
the amounts allocated to the investment divisions of the Separate Account. If a
loan is requested from an investment division of the Separate Account, American
Franklin will redeem units sufficient to cover that part of the loan and
transfer the amount to the loaned portion of the Guaranteed Interest Division.
The amounts in each division will be determined as of the day American Franklin
receives the request for a loan at its Administrative Office.
25
<PAGE>
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 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
26
<PAGE>
of the loan is set aside in the Guaranteed Interest Division where it earns a
declared rate for loaned amounts. The loan amount will not be available for
investment in the investment divisions of the Separate Account or in the
unloaned portion of the Guaranteed Interest Division.
The interest rate for loaned amounts in the Guaranteed Interest Division is
expected to be different from the rate that applies to unloaned amounts in the
Guaranteed Interest Division. Generally, it will be 2% less than the interest
rate charged on the loan, minus any charge for taxes or reserves for taxes, but
never less than 4-1/2%. Each month, this interest is added to unloaned amounts
of the Policy Account in the Guaranteed Interest Division.
The impact of a loan on a Policy Account will depend, on one hand, on the
investment experience of the investment divisions of the Separate Account and
the rates declared for the unloaned portion of the Guaranteed Interest Division
and, on the other hand, the rates declared for the loaned portion of the
Guaranteed Interest Division. For example, if $1,000 is borrowed against $5,000
in the Money Market Division, the $1,000 will be set aside in the Guaranteed
Interest Division. This $1,000 would not be affected by any increases or
decreases in the value of units in the Money Market Division. However, the
$1,000 earns interest at a declared interest rate.
LAPSE OF THE POLICY
A policy loan may also affect the amount of time that the insurance
provided by a policy remains in force. For example, a policy may lapse more
quickly when a loan is outstanding because the loaned amount cannot be used to
cover the monthly charges that are made against the Policy Account. If these
charges exceed the Net Cash Surrender Value of the policy, then the lapse
provisions of the policy will apply. Since the policy permits loans up to 90% of
the Cash Surrender Value, additional premium payments may be required to keep
the policy in force if the maximum amount is borrowed. For more information
about these provisions, see "Additional Information About EquiBuilder II
Policies-Lapse of the Policy," below.
WITHDRAWING MONEY FROM THE POLICY ACCOUNT
After a policy has been in effect for a year, the Policy Owner may request a
partial withdrawal of the Net Cash Surrender Value by making a written request
to American Franklin at its Administrative Office. Any withdrawal is subject to
certain conditions. It must:
be at least $500;
not cause the death benefit to fall below the minimum for which
American Franklin would issue the policy at the time (see "Policy Account
Transactions-The Effects of a Partial Withdrawal," below); and
not cause the policy to fail to qualify as life insurance under
applicable tax law.
The Policy Owner may specify how much of the withdrawal he or she wants
taken from each investment division. If no instructions are given, American
Franklin will make the withdrawal on the basis of the then current deduction
allocation percentages. If American Franklin cannot withdraw the amount based on
the Policy Owner's directions or on the deduction allocation percentages,
American Franklin will withdraw the amount based on the proportions of the
unloaned amount, if any, of the Policy Account allocated to the Guaranteed
Interest Division and the respective amounts allocated to the investment
divisions of the Separate Account to the total unloaned value of the Policy
Account. For example, if 50% of a Policy Account is in the Guaranteed Interest
Division and 50% is in the Money Market Division and the Policy Owner wants to
withdraw $1,000, American Franklin would take $500 from each division.
WITHDRAWAL CHARGES
When a partial withdrawal of Net Cash Surrender Value is made, a current
expense charge of $25 or 2% of the amount withdrawn, whichever is less, will be
charged against the Policy Account. This charge will be allocated equally among
the divisions from which the withdrawal was made. If the charge cannot be
allocated in this manner, it will be allocated as described under "Deductions
And Charges-Allocation of Policy Account Charges," above.
27
<PAGE>
THE EFFECTS OF A PARTIAL WITHDRAWAL
A partial withdrawal of Net Cash Surrender Value reduces the amount in the
Policy Account. It also reduces the Cash Surrender Value and the death benefit
on a dollar-for-dollar basis. If the death benefit based on a percentage
multiple applies, the reduction in death benefit can be greater. See "The
Features of EquiBuilder II Policies-Death Benefits," above. If death benefit
Option A is selected, the Face Amount of the policy will also be reduced so
there will be no change in the amount at risk. No pro rata surrender charge will
be deducted in connection with a reduction in Face Amount made in connection
with a partial withdrawal of Net Cash Surrender Value. An endorsement will be
sent to the Policy Owner to reflect this change. The Policy Owner may be asked
to return the policy to American Franklin's Administrative Office to make a
change. A partial withdrawal will not affect the Face Amount of the policy if
death benefit Option B is in effect. The withdrawal and these reductions will be
effective as of the date American Franklin receives the request at its
Administrative Office. See "Federal Tax Considerations-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.
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<PAGE>
The amount allocated to the Guaranteed Interest Division at any time is the
sum of all net premiums and loan repayments allocated to that division and all
transfers and earned interest, and includes amounts securing any policy loan
outstanding. This amount is reduced by amounts transferred or withdrawn from and
charges allocated to this division.
INTEREST ON AMOUNTS IN THE GUARANTEED INTEREST DIVISION
American Franklin pays a declared interest rate on all amounts in the
Guaranteed Interest Division. At policy issuance and prior to each policy
anniversary, American Franklin declares the rates that will apply to amounts in
the Guaranteed Interest Division for the following policy year. Different rates
are paid on unloaned and loaned amounts in the Guaranteed Interest Division.
These annual interest rates will never be less than the minimum guaranteed
interest rate of 4-1/2%. Interest is compounded daily at an effective annual
rate that equals the declared rate for each policy year.
At the end of each policy month, American Franklin will credit interest to
amounts in the Guaranteed Interest Division in the following way:
amounts in the Guaranteed Interest Division during the entire policy
month are credited with interest from the beginning to the end of the
month;
amounts added to the Guaranteed Interest Division during the month
from net premiums or loan repayments are credited with interest from the
date American Franklin receives them. The only exception to this rule
applies to the initial net premium payment. American Franklin will allocate
the initial net premium to the Money Market division until 15 days after
the Issue Date (any other net premium received during this period will be
allocated in the same way), and will then allocate the amounts in the
Policy Account to the Guaranteed Interest Division and the investment
divisions of the Separate Account in accordance with the Policy Owner's
premium allocation percentages. See "Additional Information About
EquiBuilder II-Policy Periods, Anniversaries, Dates and Ages," below;
amounts transferred to the Guaranteed Interest Division are credited
with interest from the date of the transfer to the end of the month; and
amounts charged against or withdrawn from the Guaranteed Interest
Division are credited with interest from the beginning of the policy month
to the date of the charge or withdrawal.
Interest credited to any loaned amounts in the Guaranteed Interest Division
is allocated to the unloaned portion of the Guaranteed Interest Division.
TRANSFERS FROM THE GUARANTEED INTEREST DIVISION
A Policy Owner may request a transfer of unloaned amounts in the Guaranteed
Interest Division to one or more of the investment divisions of the Separate
Account. American Franklin will make the transfer as of the date a written
request for transfer is received, provided that the request is received within
30 days after a policy anniversary. The maximum amount that may be transferred
is the greater of 25% of the unloaned value in the Guaranteed Interest Division
on the date the transfer takes effect or the minimum transfer amount shown in
the policy when it is issued. The smallest amount that may be transferred is the
lesser of the unloaned value in the Guaranteed Interest Division on the date the
transfer takes effect or the minimum transfer amount shown in the policy.
ADDITIONAL INFORMATION ABOUT EQUIBUILDER II POLICIES
RIGHT TO EXAMINE THE POLICY
Each Policy Owner has a right to examine the policy. If for any reason the
Policy Owner is not satisfied with it, he or she may cancel the policy within
the time limits described below. The Policy Owner may cancel the policy by
sending it with a written request to cancel to American Franklin's
Administrative Office.
29
<PAGE>
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 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.
30
<PAGE>
POLICY PERIODS, ANNIVERSARIES, DATES AND AGES
Policy years, policy months and policy anniversaries are measured from the
Register Date shown on the Policy Information page in the policy. Each policy
month begins on the same day in each calendar month as the day of the month of
the Register Date. For purposes of receiving Policy Owner requests, American
Franklin is open from 8:00 a.m. to 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
II Policies-Death Benefits," above, regarding the commencement of insurance
coverage.
The Final Policy Date is the policy anniversary nearest the Insured
Person's 95th birthday. The policy ends on that date if the Insured Person is
still alive and the maturity benefit is paid.
Generally, references in this Prospectus to the age of the Insured Person
refer to his or her age on the birthday nearest to that particular date.
FEDERAL TAX CONSIDERATIONS
INTRODUCTION
The following summary provides a general description of the Federal income
tax considerations associated with the EquiBuilder II-TM- policies and does not
purport to be complete or to cover all tax situations. This discussion is not
intended as tax advice. Counsel or other competent tax advisors should be
consulted for more complete information. This discussion is based upon our
understanding of the present Federal income tax laws. No representation is made
as to the likelihood of continuation of the present Federal income tax laws or
as to how they may be interpreted by the Internal Revenue Service.
TAX STATUS OF THE POLICY
In order to qualify as a life insurance contract for Federal income tax
purposes and to receive the tax treatment normally accorded life insurance
contracts under Federal tax law, a life insurance policy must satisfy certain
requirements which are set forth in the Internal Revenue Code. Guidance as to
how these requirements are to be applied is limited. Nevertheless, we believe
that EquiBuilder II-TM- policies issued on the basis of a standard rate class
should satisfy the applicable requirements. There is less guidance, however,
with respect to EquiBuilder II-TM- policies issued on a substandard basis (I.E.,
a premium class involving higher than standard mortality risk) and it is not
clear whether such EquiBuilder II-TM- policies will in all cases satisfy the
applicable requirements. If it is subsequently determined that an EquiBuilder
II-TM- policy does not satisfy the applicable requirements, we may take
appropriate steps to bring the policy into compliance with such requirements and
we reserve the right to modify an EquiBuilder II-TM- policy in order to do so.
In certain circumstances, owners of variable life insurance policies have
been considered for Federal income tax purposes to be the owners of the assets
of variable account supporting their contracts due to their ability to exercise
investment control over those assets. Where this is the case, the policyowners
have been currently taxed on income and gains attributable to variable account
assets. There is little guidance in this area, and some features of the
EquiBuilder II-TM- policies, such as the flexibility of Policy Owners to
allocate premiums and Policy Accounts, have not been explicitly addressed in
published rulings. While we believe that the EquiBuilder II-TM- policies do not
give Policy Owners investment control over Separate Account assets, we reserve
the right to modify the EquiBuilder II-TM- policies as necessary to prevent
Policy Owners from being treated as the owners of the Separate Account assets
supporting their policies.
In addition, the Code requires that the investments of the investment
divisions of the Separate Account be "adequately diversified" in order for the
EquiBuilder II-TM- policies to be treated as life insurance contracts for
Federal income tax purposes. It is intended that the investment divisions of
the Separate Account, through the Funds, will satisfy these diversification
requirements.
The following discussion assumes that the EquiBuilder II-TM- policies will
qualify as life
31
<PAGE>
insurance contracts for Federal income tax purposes.
TAX TREATMENT OF POLICY BENEFITS
IN GENERAL. We believe that the death benefit under an EquiBuilder II-TM-
policy should be excludible from the gross income of the beneficiary. Federal,
state and local estate, inheritance, transfer, and other tax consequences of
ownership or receipt of policy proceeds depend on the circumstances of each
Policy Owner or beneficiary. A tax advisor should be consulted on these
consequences.
Generally, the Policy Owner of an EquiBuilder II-TM- policy will not be
deemed to be in constructive receipt of the Policy Account until there is a
distribution. When distributions from a policy occur, or when loans are taken
out from or secured by a policy, the tax consequences depend on whether the
policy is classified as a "modified endowment contract."
MODIFIED ENDOWMENT CONTRACTS. Under the Internal Revenue Code, certain
life insurance contracts are classified as "modified endowment contracts,"
with less favorable tax treatment than other life insurance contracts. Due
to the flexibility of the EquiBuilder II-TM- policies as to premiums and
benefits, the individual circumstances of each EquiBuilder II-TM- policy will
determine whether it is classified as a modified endowment contract. The
rules are too complex to be summarized here, but generally depend on the
amount of premiums paid during the first seven policy years. Certain changes
in a policy after it is issued could also cause it to be classified as a
modified endowment contract. A Policy Owner should consult with a competent
advisor to determine whether a policy transaction will cause the policy to be
classified as a modified endowment contract.
DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS.
EquiBuilder II-TM- policies classified as modified endowment contracts are
subject to the following tax rules:
(1) All distributions other than death benefits from a modified endowment
contract, including distributions upon surrender and withdrawals, will
be treated first as distributions of gain taxable as ordinary income
and as tax-free recovery of the Policy Owner's investment in the
policy only after all gain has been distributed.
(2) Loans taken from or secured by a policy classified as a modified
endowment contract are treated as distributions and taxed accordingly.
(3) A 10 percent additional income tax is imposed on the amount subject to
tax except where the distribution or loan is made when the Policy
Owner has attained age 591/2 or is disabled, or where the distribution
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 or designated beneficiary.
32
<PAGE>
DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED
ENDOWMENT CONTRACTS. Distributions other than death benefits from EquiBuilder
II-TM- policies that are not classified as modified endowment contracts are
generally treated first as a recovery of the Policy Owner's investment in the
policy and only after the recovery of all investment in the policy as taxable
income. However, certain distributions which must be made in order to enable
the policy to continue to qualify as a life insurance contract for Federal
income tax purposes if policy benefits are reduced during the first 15 policy
years may be treated in whole or in part as ordinary income subject to tax.
Loans from or secured by a policy that is not a modified endowment contract
are generally not treated as distributions.
Finally, neither distributions from nor loans from or secured by a policy
that is not a modified endowment contract are subject to the 10 percent
additional income tax.
INVESTMENT IN THE POLICY. Your investment in the policy is generally your
aggregate premiums. When a distribution is taken from the policy, your
investment in the policy is reduced by the amount of the distribution that is
tax-free.
POLICY LOANS. In general, interest on a Policy Loan will not be
deductible. Before taking out a Policy Loan, you should consult a tax adviser
as to the tax consequences.
MULTIPLE POLICIES. All modified endowment contracts that are issued by us
(or our affiliates) to the same Policy Owner during any calendar year are
treated as one modified endowment contract for purposes of determining the
amount includible in the Policy Owner's income when a taxable distribution
occurs.
OTHER POLICY OWNER TAX MATTERS. Businesses can use the EquiBuilder
II-TM- policies in various arrangements, including nonqualified deferred
compensation or salary continuance plans, split dollar insurance plans,
executive bonus plans, tax exempt and nonexempt welfare benefit plans,
retiree medical benefit plans and others. The tax consequences of such plans
may vary depending on the particular facts and circumstances. If you are
purchasing an EquiBuilder II-TM- policy for any arrangement the value of
which depends in part on its tax consequences, you should consult a qualified
tax adviser. In recent years, moreover, Congress has adopted new rules
relating to life insurance owned by businesses. Any business contemplating a
change in an existing EquiBuilder II-TM- policy should consult a tax adviser.
POSSIBLE TAX LAW CHANGES. Although the likelihood of legislative changes
is uncertain, there is always the possibility that the tax treatment of the
EquiBuilder II-TM- policy could change by legislation or otherwise. Consult a
tax adviser with respect to legislative developments and their effect on the
EquiBuilder II-TM- policy.
POSSIBLE CHARGES FOR AMERICAN FRANKLIN'S TAXES
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<PAGE>
At the present time, American Franklin makes no charge for any Federal,
state or local taxes (other than the charge for state premium taxes) that may be
attributable to the Separate Account or its investment divisions or the policy.
We reserve the right to charge the investment divisions for any future taxes or
economic burden we may incur.
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
34
<PAGE>
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 1998 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. FMR has voluntarily agreed to reimburse the management fees and
other expenses above a specified percentage of average net assets of some of the
portfolios and to use a portion of the brokerage commissions paid by certain
portfolios to reduce their total expenses. 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 assume an applicable tax rate based on premiums of 2%. There are
tables for both Death Benefit Option A and Death Benefit Option B and each
option is illustrated using current and guaranteed policy cost factors. The
current cost tables assume that the monthly administrative charge remains
constant at $6. The guaranteed tables assume that the monthly administrative
charge is $6 in the first year and $12 thereafter. In each case, deduction of
the current additional monthly administrative charge of $24 per month to cover
costs of establishing a policy is assumed in each of the first 12 policy months.
The tables reflect the fact that no deduction is currently made for federal or
state income taxes. If a charge is made for those taxes in the future, it will
take a higher rate of return to produce after-tax returns of 0%, 4%, 8% or 12%.
All illustrations assume that no transfers, withdrawals, policy loans, or
changes in Face Amount or Death Benefit Option will be made and that no
additional benefits are added to the policy.
The second column of each table shows what would happen if an amount equal
to the gross premiums were invested to earn interest, after taxes, of 5%
compounded annually. These tables show that if a policy is surrendered in its
very early years for payment of its Cash Surrender Value, that Cash Surrender
Value will be low in comparison to the amount of the premiums accumulated with
interest. Thus, the cost of owning a policy for a relatively short time will be
high.
At the request of an applicant for a policy, American Franklin will furnish
a comparable illustration based on the age and sex of the proposed Insured
Person, standard risk assumptions, a stipulated initial Face Amount and proposed
premiums. Upon request after issuance American Franklin will also provide an
illustration of future policy benefits based on both guaranteed and current cost
factor assumptions and actual Policy Account value. If illustrations are
requested more than once in any policy year, a charge may be imposed.
TABLE OF CONTENTS FOR ILLUSTRATIONS
<TABLE>
<CAPTION>
INITIAL FACE AMOUNT $200,000 MALE NON-TOBACCO
PREMIUM PAGE
<S> <C> <C>
Age 40, Option A-Current Charges $3,000 36
Age 40, Option A-Guaranteed Charges $3,000 36
Age 40, Option B-Current Charges $3,000 37
Age 40, Option B-Guaranteed Charges $3,000 37
<CAPTION>
INITIAL FACE AMOUNT $100,000 MALE NON-TOBACCO
PREMIUM PAGE
<S> <C> <C>
Age 40, Option A-Current Charges $1,500 38
Age 40, Option A-Guaranteed Charges $1,500 38
Age 40, Option B-Current Charges $1,500 39
Age 40, Option B-Guaranteed Charges $1,500 39
</TABLE>
35
<PAGE>
EquiBuilder II Flexible Premium Variable Life Insurance
The American Franklin Life Insurance Company
<TABLE>
<CAPTION>
INITIAL FACE AMOUNT $200,000 MALE AGE 40 NON-TOBACCO USER PLANNED PREMIUM $3,000
DEATH BENEFIT OPTION A ASSUMING CURRENT CHARGES
Insurance Benefit(2) Policy Account(2) Cash Surrender Value(2)
Last Day Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross
of Annual Investment Return of Annual Investment Return of Annual Investment Return of
Policy Accumulated
Year Premiums (1) 0% 4% 8% 12% 0% 4% 8% 12% 0% 4% 8% 12%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,150 200,000 200,000 200,000 200,000 2,259 2,363 2,467 2,571 1,510 1,614 1,718 1,822
2 6,458 200,000 200,000 200,000 200,000 4,748 5,054 5,369 5,693 3,729 4,035 4,351 4,674
3 9,930 200,000 200,000 200,000 200,000 7,178 7,792 8,440 9,122 6,038 6,652 7,300 7,982
4 13,577 200,000 200,000 200,000 200,000 9,552 10,578 11,690 12,892 8,412 9,438 10,550 11,752
5 17,406 200,000 200,000 200,000 200,000 11,868 13,413 15,131 17,039 10,728 12,273 13,991 15,899
6 21,426 200,000 200,000 200,000 200,000 14,130 16,299 18,778 21,605 12,990 15,159 17,638 20,465
7 25,647 200,000 200,000 200,000 200,000 16,310 19,211 22,617 26,607 15,398 18,299 21,705 25,695
8 30,080 200,000 200,000 200,000 200,000 18,412 22,153 26,665 32,098 17,728 21,469 25,981 31,414
9 34,734 200,000 200,000 200,000 200,000 20,438 25,126 30,938 38,133 19,982 24,670 30,482 37,677
10 39,620 200,000 200,000 200,000 200,000 22,388 28,132 35,453 44,773 22,160 27,904 35,225 44,545
11 44,751 200,000 200,000 200,000 200,000 24,266 31,173 40,228 52,088 24,266 31,173 40,228 52,088
12 50,139 200,000 200,000 200,000 200,000 26,097 34,278 45,309 60,178 26,097 34,278 45,309 60,178
13 55,796 200,000 200,000 200,000 200,000 27,851 37,418 50,689 69,104 27,851 37,418 50,689 69,104
14 61,736 200,000 200,000 200,000 200,000 29,532 40,597 56,393 78,964 29,532 40,597 56,393 78,964
15 67,972 200,000 200,000 200,000 200,000 31,140 43,817 62,446 89,867 31,140 43,817 62,446 89,867
16 74,521 200,000 200,000 200,000 200,000 32,669 47,076 68,872 101,930 32,669 47,076 68,872 101,930
17 81,397 200,000 200,000 200,000 200,000 34,085 50,341 75,671 115,269 34,085 50,341 75,671 115,269
18 88,617 200,000 200,000 200,000 200,000 35,372 53,601 82,865 130,033 35,372 53,601 82,865 130,033
19 96,198 200,000 200,000 200,000 202,050 36,551 56,877 90,505 146,413 36,551 56,877 90,505 146,413
20 104,158 200,000 200,000 200,000 220,472 37,606 60,156 98,621 164,531 37,606 60,156 98,621 164,531
25 150,340 200,000 200,000 200,000 349,849 40,360 76,159 147,792 286,762 40,360 76,159 147,792 286,762
</TABLE>
EquiBuilder II Flexible Premium Variable Life Insurance
The American Franklin Life Insurance Company
<TABLE>
<CAPTION>
INITIAL FACE AMOUNT $200,000 MALE AGE 40 NON-TOBACCO USER PLANNED PREMIUM $3,000
DEATH BENEFIT OPTION A ASSUMING GUARANTEED CHARGES
Insurance Benefit(2) Policy Account(2) Cash Surrender Value(2)
Last Day Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross
of Annual Investment Return of Annual Investment Return of Annual Investment Return of
Policy Accumulated
Year Premiums (1) 0% 4% 8% 12% 0% 4% 8% 12% 0% 4% 8% 12%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,150 200,000 200,000 200,000 200,000 2,259 2,363 2,467 2,571 1,510 1,614 1,718 1,822
2 6,458 200,000 200,000 200,000 200,000 4,341 4,639 4,946 5,261 3,322 3,620 3,927 4,242
3 9,930 200,000 200,000 200,000 200,000 6,345 6,925 7,539 8,187 5,205 5,785 6,399 7,047
4 13,577 200,000 200,000 200,000 200,000 8,267 9,217 10,250 11,370 7,127 8,077 9,110 10,230
5 17,406 200,000 200,000 200,000 200,000 10,108 11,514 13,086 14,838 8,968 10,374 11,946 13,698
6 21,426 200,000 200,000 200,000 200,000 11,861 13,811 16,050 18,617 10,721 12,671 14,910 17,477
7 25,647 200,000 200,000 200,000 200,000 13,528 16,107 19,153 22,742 12,616 15,195 18,241 21,830
8 30,080 200,000 200,000 200,000 200,000 15,104 18,398 22,399 27,249 14,420 17,714 21,715 26,565
9 34,734 200,000 200,000 200,000 200,000 16,588 20,681 25,797 32,180 16,132 20,225 25,341 31,724
10 39,620 200,000 200,000 200,000 200,000 17,972 22,950 29,354 37,577 17,744 22,722 29,126 37,349
11 44,751 200,000 200,000 200,000 200,000 19,255 25,201 33,078 43,496 19,255 25,201 33,078 43,496
12 50,139 200,000 200,000 200,000 200,000 20,423 27,421 36,971 49,984 20,423 27,421 36,971 49,984
13 55,796 200,000 200,000 200,000 200,000 21,463 29,598 41,037 57,104 21,463 29,598 41,037 57,104
14 61,736 200,000 200,000 200,000 200,000 22,363 31,719 45,281 64,925 22,363 31,719 45,281 64,925
15 67,972 200,000 200,000 200,000 200,000 23,108 33,767 49,705 73,524 23,108 33,767 49,705 73,524
16 74,521 200,000 200,000 200,000 200,000 23,688 35,733 54,321 83,000 23,688 35,733 54,321 83,000
17 81,397 200,000 200,000 200,000 200,000 24,091 37,604 59,143 93,465 24,091 37,604 59,143 93,465
18 88,617 200,000 200,000 200,000 200,000 24,313 39,376 64,189 105,052 24,313 39,376 64,189 105,052
19 96,198 200,000 200,000 200,000 200,000 24,339 41,033 69,477 117,913 24,339 41,033 69,477 117,913
20 104,158 200,000 200,000 200,000 200,000 24,158 42,566 75,030 132,226 24,158 42,566 75,030 132,226
25 150,340 200,000 200,000 200,000 281,533 19,098 47,358 107,486 230,765 19,098 47,358 107,486 230,765
</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 II Flexible Premium Variable Life Insurance
The American Franklin Life Insurance Company
<TABLE>
<CAPTION>
INITIAL FACE AMOUNT $200,000 MALE AGE 40 NON-TOBACCO USER PLANNED PREMIUM $3,000
DEATH BENEFIT OPTION B ASSUMING CURRENT CHARGES
Insurance Benefit(2) Policy Account(2) Cash Surrender Value(2)
Last Day Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross
of Annual Investment Return of Annual Investment Return of Annual Investment Return of
Policy Accumulated
Year Premiums (1) 0% 4% 8% 12% 0% 4% 8% 12% 0% 4% 8% 12%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,150 202,255 202,359 202,463 202,567 2,255 2,359 2,463 2,567 1,506 1,610 1,714 1,818
2 6,458 204,736 205,042 205,356 205,679 4,736 5,042 5,356 5,679 3,718 4,023 4,338 4,660
3 9,930 207,155 207,766 208,411 209,091 7,155 7,766 8,411 9,091 6,015 6,626 7,271 7,951
4 13,577 209,511 210,532 211,638 212,834 9,511 10,532 11,638 12,834 8,371 9,392 10,498 11,694
5 17,406 211,804 213,338 215,045 216,940 11,804 13,338 15,045 16,940 10,664 12,198 13,905 15,800
6 21,426 214,037 216,189 218,647 221,450 14,037 16,189 18,647 21,450 12,897 15,049 17,507 20,310
7 25,647 216,178 219,052 222,423 226,373 16,178 19,052 22,423 26,373 15,266 18,140 21,511 25,461
8 30,080 218,232 221,929 226,387 231,753 18,232 21,929 26,387 31,753 17,548 21,245 25,703 31,069
9 34,734 220,200 224,822 230,550 237,638 20,200 24,822 30,550 37,638 19,744 24,366 30,094 37,182
10 39,620 222,081 227,728 234,924 244,081 22,081 27,728 34,924 44,081 21,853 27,500 34,696 43,853
11 44,751 223,876 230,649 239,522 251,139 23,876 30,649 39,522 51,139 23,876 30,649 39,522 51,139
12 50,139 225,616 233,614 244,390 258,908 25,616 33,614 44,390 58,908 25,616 33,614 44,390 58,908
13 55,796 227,265 236,586 249,506 267,423 27,265 36,586 49,506 67,423 27,265 36,586 49,506 67,423
14 61,736 228,826 239,567 254,889 276,765 28,826 39,567 54,889 76,765 28,826 39,567 54,889 76,765
15 67,972 230,297 242,556 260,553 287,018 30,297 42,556 60,553 87,018 30,297 42,556 60,553 87,018
16 74,521 231,673 245,545 266,508 298,270 31,673 45,545 66,508 98,270 31,673 45,545 66,508 98,270
17 81,397 232,910 248,487 272,727 310,576 32,910 48,487 72,727 110,576 32,910 48,487 72,727 110,576
18 88,617 233,987 251,359 279,202 324,024 33,987 51,359 79,202 124,024 33,987 51,359 79,202 124,024
19 96,198 234,929 254,181 285,975 338,758 34,929 54,181 85,975 138,758 34,929 54,181 85,975 138,758
20 104,158 235,716 256,929 293,041 354,879 35,716 56,929 93,041 154,879 35,716 56,929 93,041 154,879
25 150,340 236,487 268,525 332,437 457,260 36,487 68,525 132,437 257,260 36,487 68,525 132,437 257,260
</TABLE>
EquiBuilder II Flexible Premium Variable Life Insurance
The American Franklin Life Insurance Company
<TABLE>
<CAPTION>
INITIAL FACE AMOUNT $200,000 MALE AGE 40 NON-TOBACCO USER PLANNED PREMIUM $3,000
DEATH BENEFIT OPTION B ASSUMING GUARANTEED CHARGES
Insurance Benefit(2) Policy Account(2) Cash Surrender Value(2)
Last Day Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross
of Annual Investment Return of Annual Investment Return of Annual Investment Return of
Policy Accumulated
Year Premiums (1) 0% 4% 8% 12% 0% 4% 8% 12% 0% 4% 8% 12%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,150 202,255 202,359 202,463 202,567 2,255 2,359 2,463 2,567 1,506 1,610 1,714 1,818
2 6,458 204,322 204,618 204,924 205,238 4,322 4,618 4,924 5,238 3,303 3,600 3,905 4,219
3 9,930 206,302 206,878 207,487 208,130 6,302 6,878 7,487 8,130 5,162 5,738 6,347 6,990
4 13,577 208,191 209,131 210,153 211,261 8,191 9,131 10,153 11,261 7,051 7,991 9,013 10,121
5 17,406 209,988 211,375 212,925 214,653 9,988 11,375 12,925 14,653 8,848 10,235 11,785 13,513
6 21,426 211,686 213,603 215,804 218,325 11,686 13,603 15,804 18,325 10,546 12,463 14,664 17,185
7 25,647 213,286 215,811 218,793 222,305 13,286 15,811 18,793 22,305 12,374 14,899 17,881 21,393
8 30,080 214,783 217,994 221,893 226,618 14,783 17,994 21,893 26,618 14,099 17,310 21,209 25,934
9 34,734 216,171 220,144 225,106 231,293 16,171 20,144 25,106 31,293 15,715 19,688 24,650 30,837
10 39,620 217,446 222,252 228,431 236,360 17,446 22,252 28,431 36,360 17,218 22,024 28,203 36,132
11 44,751 218,602 224,312 231,868 241,853 18,602 24,312 31,868 41,853 18,602 24,312 31,868 41,853
12 50,139 219,624 226,303 235,406 247,798 19,624 26,303 35,406 47,798 19,624 26,303 35,406 47,798
13 55,796 220,498 228,209 239,036 254,226 20,498 28,209 39,036 54,226 20,498 28,209 39,036 54,226
14 61,736 221,210 230,010 242,747 261,170 21,210 30,010 42,747 61,170 21,210 30,010 42,747 61,170
15 67,972 221,740 231,682 246,520 268,662 21,740 31,682 46,520 68,662 21,740 31,682 46,520 68,662
16 74,521 222,081 233,209 250,349 276,746 22,081 33,209 50,349 76,746 22,081 33,209 50,349 76,746
17 81,397 222,217 234,572 254,219 285,468 22,217 34,572 54,219 85,468 22,217 34,572 54,219 85,468
18 88,617 222,145 235,758 258,126 294,886 22,145 35,758 58,126 94,886 22,145 35,758 58,126 94,886
19 96,198 221,853 236,746 262,055 305,057 21,853 36,746 62,055 105,057 21,853 36,746 62,055 105,057
20 104,158 221,328 237,519 265,993 316,044 21,328 37,519 65,993 116,044 21,328 37,519 65,993 116,044
25 150,340 214,235 236,755 284,586 384,750 14,235 36,755 84,586 184,750 14,235 36,755 84,586 184,750
</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 II Flexible Premium Variable Life Insurance
The American Franklin Life Insurance Company
<TABLE>
<CAPTION>
INITIAL FACE AMOUNT $100,000 MALE AGE 40 NON-TOBACCO USER PLANNED PREMIUM $1,500
DEATH BENEFIT OPTION A ASSUMING CURRENT CHARGES
Insurance Benefit(2) Policy Account(2) Cash Surrender Value(2)
Last Day Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross
of Annual Investment Return of Annual Investment Return of Annual Investment Return of
Policy Accumulated
Year Premiums (1) 0% 4% 8% 12% 0% 4% 8% 12% 0% 4% 8% 12%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 100,000 100,000 100,000 100,000 939 987 1,035 1,083 565 612 660 708
2 3,229 100,000 100,000 100,000 100,000 2,136 2,276 2,420 2,569 1,626 1,767 1,911 2,059
3 4,965 100,000 100,000 100,000 100,000 3,302 3,585 3,884 4,198 2,732 3,015 3,314 3,628
4 6,788 100,000 100,000 100,000 100,000 4,438 4,914 5,429 5,987 3,868 4,344 4,859 5,417
5 8,703 100,000 100,000 100,000 100,000 5,544 6,264 7,063 7,951 4,974 5,694 6,493 7,381
6 10,713 100,000 100,000 100,000 100,000 6,620 7,634 8,791 10,110 6,050 7,064 8,221 9,540
7 12,824 100,000 100,000 100,000 100,000 7,654 9,013 10,606 12,472 7,198 8,557 10,150 12,016
8 15,040 100,000 100,000 100,000 100,000 8,643 10,398 12,513 15,057 8,301 10,056 12,171 14,715
9 17,367 100,000 100,000 100,000 100,000 9,590 11,792 14,520 17,893 9,362 11,564 14,292 17,665
10 19,810 100,000 100,000 100,000 100,000 10,494 13,194 16,632 21,006 10,380 13,080 16,518 20,892
11 22,376 100,000 100,000 100,000 100,000 11,357 14,606 18,862 24,431 11,357 14,606 18,862 24,431
12 25,069 100,000 100,000 100,000 100,000 12,193 16,042 21,228 28,215 12,193 16,042 21,228 28,215
13 27,898 100,000 100,000 100,000 100,000 12,987 17,488 23,730 32,387 12,987 17,488 23,730 32,387
14 30,868 100,000 100,000 100,000 100,000 13,736 18,941 26,373 36,988 13,736 18,941 26,373 36,988
15 33,986 100,000 100,000 100,000 100,000 14,444 20,407 29,173 42,074 14,444 20,407 29,173 42,074
16 37,261 100,000 100,000 100,000 100,000 15,109 21,883 32,140 47,699 15,109 21,883 32,140 47,699
17 40,699 100,000 100,000 100,000 100,000 15,709 23,350 35,270 53,915 15,709 23,350 35,270 53,915
18 44,309 100,000 100,000 100,000 100,000 16,233 24,798 38,571 60,792 16,233 24,798 38,571 60,792
19 48,099 100,000 100,000 100,000 100,000 16,695 26,241 42,070 68,421 16,695 26,241 42,070 68,421
20 52,079 100,000 100,000 100,000 103,037 17,085 27,670 45,778 76,893 17,085 27,670 45,778 76,893
25 75,170 100,000 100,000 100,000 163,588 17,527 34,281 68,070 134,089 17,527 34,281 68,070 134,089
</TABLE>
EquiBuilder II Flexible Premium Variable Life Insurance
The American Franklin Life Insurance Company
<TABLE>
<CAPTION>
INITIAL FACE AMOUNT $100,000 MALE AGE 40 NON-TOBACCO USER PLANNED PREMIUM $1,500
DEATH BENEFIT OPTION A ASSUMING GUARANTEED CHARGES
Insurance Benefit(2) Policy Account(2) Cash Surrender Value(2)
Last Day Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross
of Annual Investment Return of Annual Investment Return of Annual Investment Return of
Policy Accumulated
Year Premiums (1) 0% 4% 8% 12% 0% 4% 8% 12% 0% 4% 8% 12%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 100,000 100,000 100,000 100,000 939 987 1,035 1,083 565 612 660 708
2 3,229 100,000 100,000 100,000 100,000 1,911 2,046 2,186 2,330 1,401 1,537 1,677 1,820
3 4,965 100,000 100,000 100,000 100,000 2,844 3,109 3,388 3,684 2,274 2,539 2,818 3,114
4 6,788 100,000 100,000 100,000 100,000 3,738 4,171 4,643 5,154 3,168 3,601 4,073 4,584
5 8,703 100,000 100,000 100,000 100,000 4,591 5,234 5,952 6,754 4,021 4,664 5,382 6,184
6 10,713 100,000 100,000 100,000 100,000 5,401 6,293 7,319 8,494 4,831 5,723 6,749 7,924
7 12,824 100,000 100,000 100,000 100,000 6,168 7,350 8,746 10,390 5,712 6,894 8,290 9,934
8 15,040 100,000 100,000 100,000 100,000 6,890 8,401 10,235 12,459 6,548 8,059 9,893 12,117
9 17,367 100,000 100,000 100,000 100,000 7,566 9,444 11,791 14,718 7,338 9,216 11,563 14,490
10 19,810 100,000 100,000 100,000 100,000 8,193 10,477 13,415 17,187 8,079 10,363 13,301 17,073
11 22,376 100,000 100,000 100,000 100,000 8,770 11,498 15,112 19,890 8,770 11,498 15,112 19,890
12 25,069 100,000 100,000 100,000 100,000 9,289 12,499 16,880 22,848 9,289 12,499 16,880 22,848
13 27,898 100,000 100,000 100,000 100,000 9,743 13,474 18,720 26,087 9,743 13,474 18,720 26,087
14 30,868 100,000 100,000 100,000 100,000 10,128 14,416 20,633 29,638 10,128 14,416 20,633 29,638
15 33,986 100,000 100,000 100,000 100,000 10,435 15,316 22,619 33,535 10,435 15,316 22,619 33,535
16 37,261 100,000 100,000 100,000 100,000 10,658 16,170 24,682 37,820 10,658 16,170 24,682 37,820
17 40,699 100,000 100,000 100,000 100,000 10,792 16,970 26,826 42,543 10,792 16,970 26,826 42,543
18 44,309 100,000 100,000 100,000 100,000 10,834 17,713 29,059 47,761 10,834 17,713 29,059 47,761
19 48,099 100,000 100,000 100,000 100,000 10,778 18,391 31,386 53,542 10,778 18,391 31,386 53,542
20 52,079 100,000 100,000 100,000 100,000 10,616 18,998 33,816 59,964 10,616 18,998 33,816 59,964
25 75,170 100,000 100,000 100,000 127,632 7,688 20,423 47,707 104,616 7,688 20,423 47,707 104,616
</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>
EquiBuilder II Flexible Premium Variable Life Insurance
The American Franklin Life Insurance Company
<TABLE>
<CAPTION>
INITIAL FACE AMOUNT $100,000 MALE AGE 40 NON-TOBACCO USER PLANNED PREMIUM $1,500
DEATH BENEFIT OPTION B ASSUMING CURRENT CHARGES
Insurance Benefit(2) Policy Account(2) Cash Surrender Value(2)
Last Day Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross
of Annual Investment Return of Annual Investment Return of Annual Investment Return of
Policy Accumulated
Year Premiums (1) 0% 4% 8% 12% 0% 4% 8% 12% 0% 4% 8% 12%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 100,937 100,985 101,033 101,081 937 985 1,033 1,081 563 610 658 706
2 3,229 102,130 102,270 102,414 102,562 2,130 2,270 2,414 2,562 1,621 1,760 1,904 2,052
3 4,965 103,290 103,572 103,869 104,183 3,290 3,572 3,869 4,183 2,720 3,002 3,299 3,613
4 6,788 104,417 104,890 105,403 105,957 4,417 4,890 5,403 5,957 3,847 4,320 4,833 5,387
5 8,703 105,511 106,225 107,019 107,900 5,511 6,225 7,019 7,900 4,941 5,655 6,449 7,330
6 10,713 106,572 107,577 108,723 110,030 6,572 7,577 8,723 10,030 6,002 7,007 8,153 9,460
7 12,824 107,585 108,929 110,505 112,350 7,585 8,929 10,505 12,350 7,129 8,473 10,049 11,894
8 15,040 108,548 110,280 112,367 114,876 8,548 10,280 12,367 14,876 8,206 9,938 12,025 14,534
9 17,367 109,464 111,631 114,315 117,632 9,464 11,631 14,315 17,632 9,236 11,403 14,087 17,404
10 19,810 110,330 112,979 116,351 120,639 10,330 12,979 16,351 20,639 10,216 12,865 16,237 20,525
11 22,376 111,149 114,326 118,485 123,926 11,149 14,326 18,485 23,926 11,149 14,326 18,485 23,926
12 25,069 111,934 115,685 120,736 127,535 11,934 15,685 20,736 27,535 11,934 15,685 20,736 27,535
13 27,898 112,671 117,039 123,093 131,484 12,671 17,039 23,093 31,484 12,671 17,039 23,093 31,484
14 30,868 113,353 118,384 125,560 135,801 13,353 18,384 25,560 35,801 13,353 18,384 25,560 35,801
15 33,986 113,987 119,723 128,146 140,531 13,987 19,723 28,146 40,531 13,987 19,723 28,146 40,531
16 37,261 114,568 121,051 130,855 145,711 14,568 21,051 30,855 45,711 14,568 21,051 30,855 45,711
17 40,699 115,069 122,340 133,666 151,360 15,069 22,340 33,666 51,360 15,069 22,340 33,666 51,360
18 44,309 115,479 123,576 136,573 157,512 15,479 23,576 36,573 57,512 15,479 23,576 36,573 57,512
19 48,099 115,813 124,771 139,596 164,237 15,813 24,771 39,596 64,237 15,813 24,771 39,596 64,237
20 52,079 116,057 125,910 142,727 171,577 16,057 25,910 42,727 71,577 16,057 25,910 42,727 71,577
25 75,170 115,452 130,140 159,668 217,920 15,452 30,140 59,668 117,920 15,452 30,140 59,668 117,920
</TABLE>
EquiBuilder II Flexible Premium Variable Life Insurance
The American Franklin Life Insurance Company
<TABLE>
<CAPTION>
INITIAL FACE AMOUNT $100,000 MALE AGE 40 NON-TOBACCO USER PLANNED PREMIUM $1,500
DEATH BENEFIT OPTION B ASSUMING GUARANTEED CHARGES
Insurance Benefit(2) Policy Account(2) Cash Surrender Value(2)
Last Day Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross
of Annual Investment Return of Annual Investment Return of Annual Investment Return of
Policy Accumulated
Year Premiums (1) 0% 4% 8% 12% 0% 4% 8% 12% 0% 4% 8% 12%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 100,937 100,985 101,033 101,081 937 985 1,033 1,081 563 610 658 706
2 3,229 101,902 102,037 102,176 102,319 1,902 2,037 2,176 2,319 1,392 1,527 1,666 1,809
3 4,965 102,824 103,087 103,364 103,658 2,824 3,087 3,364 3,658 2,254 2,517 2,794 3,088
4 6,788 103,702 104,131 104,598 105,104 3,702 4,131 4,598 5,104 3,132 3,561 4,028 4,534
5 8,703 104,535 105,170 105,879 106,669 4,535 5,170 5,879 6,669 3,965 4,600 5,309 6,099
6 10,713 105,320 106,198 107,205 108,360 5,320 6,198 7,205 8,360 4,750 5,628 6,635 7,790
7 12,824 106,056 107,214 108,580 110,189 6,056 7,214 8,580 10,189 5,600 6,758 8,124 9,733
8 15,040 106,742 108,215 110,003 112,169 6,742 8,215 10,003 12,169 6,400 7,873 9,661 11,827
9 17,367 107,375 109,197 111,473 114,310 7,375 9,197 11,473 14,310 7,147 8,969 11,245 14,082
10 19,810 107,951 110,157 112,991 116,627 7,951 10,157 12,991 16,627 7,837 10,043 12,877 16,513
11 22,376 108,470 111,089 114,555 119,135 8,470 11,089 14,555 19,135 8,470 11,089 14,555 19,135
12 25,069 108,922 111,985 116,161 121,843 8,922 11,985 16,161 21,843 8,922 11,985 16,161 21,843
13 27,898 109,301 112,836 117,801 124,765 9,301 12,836 17,801 24,765 9,301 12,836 17,801 24,765
14 30,868 109,599 113,632 119,470 127,915 9,599 13,632 19,470 27,915 9,599 13,632 19,470 27,915
15 33,986 109,808 114,361 121,158 131,305 9,808 14,361 21,158 31,305 9,808 14,361 21,158 31,305
16 37,261 109,923 115,014 122,862 134,953 9,923 15,014 22,862 34,953 9,923 15,014 22,862 34,953
17 40,699 109,936 115,583 124,572 138,879 9,936 15,583 24,572 38,879 9,936 15,583 24,572 38,879
18 44,309 109,847 116,060 126,286 143,107 9,847 16,060 26,286 43,107 9,847 16,060 26,286 43,107
19 48,099 109,647 116,436 127,995 147,661 9,647 16,436 27,995 47,661 9,647 16,436 27,995 47,661
20 52,079 109,333 116,701 129,693 152,567 9,333 16,701 29,693 52,567 9,333 16,701 29,693 52,567
25 75,170 105,537 115,665 137,342 183,160 5,537 15,665 37,342 83,160 5,537 15,665 37,342 83,160
</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.
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ADDITIONAL INFORMATION
VOTING RIGHTS OF A POLICY OWNER
VOTING RIGHTS OF THE FUNDS
As was explained in "Separate Account Investment Choices," above, the
assets in the divisions of the Separate Account are invested in shares of the
corresponding portfolios of the Funds. American Franklin is the legal owner of
the shares and, as such, has the right to vote on certain matters. Among other
things, it may vote to:
a. elect the Boards of Trustees of the Funds;
b. ratify the selection of independent auditors for the Funds; and
c. vote on any other matters described in the current prospectuses of the
Funds or requiring a vote by shareholders under the Investment Company
Act of 1940.
Even though American Franklin owns the shares, American Franklin will
provide Policy Owners the opportunity to tell it how to vote the number of
shares that are allocated to their policies. American Franklin will vote those
shares at meetings of shareholders of the Funds according to such instructions.
If American Franklin does not receive instructions in time from all Policy
Owners, it will vote shares for which no instructions have been received in a
portfolio in the same proportion as it votes shares for which it received
instructions in that portfolio. American Franklin will also vote any shares of
the Funds that it is entitled to vote directly due to amounts it has accumulated
in the Separate Account in the same proportions that Policy Owners vote. If the
federal securities laws or regulations or interpretations of them change so that
American Franklin is permitted to vote shares of the Funds without seeking
instructions from Policy Owners or to restrict Policy Owner voting, American
Franklin may do so.
DETERMINATION OF VOTING SHARES
A Policy Owner may participate in voting only on matters concerning a
Fund's portfolios in which his or her assets have been invested. American
Franklin determines the number of a Fund's shares in each division that are
attributable to a particular policy by dividing the amount in the Policy Account
allocated to that division by the net asset value of one share of the
corresponding portfolio as of the record date set by the Fund's Board for the
Fund's shareholders meeting. The record date for this purpose must be at least
10 and no more than 90 days before the meeting of the Fund. American Franklin
will count fractional shares for these purposes.
For example, suppose that a Policy Account has a net value of $3,000, with
50% of this amount being attributable to the 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
investment advisory agreement. Shareholders in a portfolio not affected by a
particular matter generally would not be entitled to vote on it.
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VOTING PRIVILEGES OF PARTICIPANTS IN OTHER SEPARATE ACCOUNTS
Shares of the Funds may be owned by other separate accounts of American
Franklin or by separate accounts of other insurance companies affiliated or
unaffiliated with American Franklin. Shares owned by these separate accounts
will probably be voted according to the instructions of the owners of insurance
policies and contracts issued by those other insurance companies. Moreover,
American Franklin expects that the number of shares owned in the Funds by
separate accounts of insurance companies that are not affiliated with American
Franklin will initially exceed the number of shares owned by the Separate
Account. These factors will dilute the effect of the voting instructions of
Policy Owners. American Franklin currently does not foresee any disadvantages to
Policy Owners arising out of this. The Securities and Exchange Commission has
granted the Funds exemptive orders pursuant to the Investment Company Act of
1940 that permit the Funds to offer their shares to separate accounts, like the
Separate Account, that are maintained by life insurance companies that are not
affiliated with the Funds. Those exemptive orders impose several conditions on
the Funds and participating separate accounts to protect the holders of
interests in the various separate accounts investing in shares of the Funds. The
Boards of Trustees of the Funds have agreed to monitor events in order to
identify any material irreconcilable conflicts that possibly may arise and to
determine what action, if any, should be taken in response by, and at the
expense of, American Franklin or one or more of the other participating
insurance companies. American Franklin and the other participating insurance
companies are obligated to report potential or existing conflicts of interest to
the Funds' Boards of Trustees. If American Franklin believes that a Fund's
response to any of those events insufficiently protects Policy Owners, American
Franklin will take appropriate action to protect Policy Owners. Corrective
action for an irreconcilable conflict of interest involving the Separate Account
might include withdrawal of the assets of the Separate Account from a Fund.
Also, if American Franklin ever believes that any of the Funds' portfolios is so
large as to impair materially the investment performance of a portfolio or a
Fund, American Franklin will examine other investment options.
SEPARATE ACCOUNT VOTING RIGHTS
Under the Investment Company Act of 1940, certain actions (such as some of
those described under "Separate Account Investment Choices-Right to Change
Operations," above) may require Policy Owner approval. In that case, a Policy
Owner will be entitled to one vote for every $100 of value allocated to his or
her policy in the investment divisions of the Separate Account, and a
proportionate fractional vote for any amount less than $100. American Franklin
will cast votes attributable to amounts retained in the investment divisions of
the Separate Account in the same proportions as votes cast by Policy Owners.
REPORTS TO POLICY OWNERS
After the end of each policy year, each Policy Owner will be sent a report
that shows the current death benefit for his or her policy, the value of his or
her Policy Account, information about investment divisions, the Cash Surrender
Value of his or her policy, the amount of any outstanding policy loans, the
amount of any interest owed on the loan and information about the current loan
interest rate. The annual report will also show any transactions involving the
Policy Owner's Policy Account that occurred during the year. Transactions
include premium allocations, deductions, and any transfers or withdrawals that
were made in that year. American Franklin will also send semi-annual reports
with financial information on the Separate Account and the Funds, including a
list of the investments held by each portfolio.
In addition, reports will also contain any other information that is
required by the insurance supervisory official in the jurisdiction in which a
policy is delivered.
Notices will be sent to Policy Owners for transfers of amounts between
investment divisions and certain other policy transactions.
LIMITS ON AMERICAN FRANKLIN'S RIGHT TO CHALLENGE A POLICY
American Franklin can challenge the validity of an insurance policy (based
on material misstatements in the application or, with respect to any policy
change, based on material misstatements in the application for the change) if it
appears that the Insured Person is not actually covered by the policy under
American Franklin's rules. However, there are some limits on how and when
American Franklin can challenge the policy.
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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.
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.
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American Franklin may also pay or credit excess interest on the options
from time to time. The rate and manner of payment or crediting will be
determined by American Franklin. Under the second option no excess interest will
be paid on the part of the proceeds used to provide payments beyond the fixed
term of years.
The beneficiary or any other person who is entitled to receive payment may
name a successor to receive any amount that would otherwise be paid to that
person's estate if that person died. No successor may be named if a payment
option chosen is contingent on the life of a beneficiary. The person who is
entitled to receive payment may change the successor at any time.
American Franklin must approve any arrangements that involve more than one
of the payment options, or a payee who is not a natural person (for example, a
corporation), or a payee who is a fiduciary. Also, the details of all
arrangements will be subject to American Franklin's rules at the time the
arrangements take effect. This includes rules on the minimum amount payable
under an option, minimum amounts for installment payments, withdrawal or
commutation rights (rights to cancel an arrangement involving payments over time
in return for a lump sum payment), the naming of people who are entitled to
receive payment and their successors and the ways of proving age and survival.
A Policy Owner may change his or her choice of a payment option (and may
make later changes) and that change will take effect in the same way as it would
if a beneficiary were being changed. (See "The Beneficiary," below). Any amounts
paid under the payment options will not be subject to the claims of creditors or
to legal process, to the extent that the law provides.
THE BENEFICIARY
An applicant for a policy must name a beneficiary when he or she applies
for a policy. The beneficiary is entitled to the insurance benefits of the
policy. The Policy Owner may change the beneficiary during the Insured Person's
lifetime by written notice satisfactory to American Franklin at its
Administrative Office. The change will take effect on the date the notice is
signed. However, the change will be subject to all payments made and actions
taken by American Franklin under the Policy before American Franklin receives
the notice at its Administrative Office. If the beneficiary is changed, any
previous arrangement made as to a payment option for benefits is canceled. A
payment option for the new beneficiary may be chosen.
At the time of the Insured Person's death, the benefit will be paid equally
to the primary beneficiaries, or, if no primary beneficiaries are living, the
first contingent beneficiaries (if any), or, if no primary or first contingent
beneficiaries are living, the second contingent beneficiaries (if any). If no
beneficiary is living when the Insured Person dies, the death benefit will be
paid to the Policy Owner, or to the executors or administrators of the Policy
Owner.
ASSIGNMENT OF A POLICY
The Policy Owner may assign (transfer) his or her rights in a policy to
someone else as collateral for a loan or for some other reason. In order to do
so the Policy Owner must send a copy of the assignment to American Franklin's
Administrative Office. American Franklin is not responsible for any payment made
or any action taken before it has received notice of the assignment (or of
termination of the assignment) or for the validity of the assignment. An
absolute assignment is a change of ownership. The federal income tax treatment
of a policy that has been assigned for valuable consideration may be different
from the federal income tax treatment described herein.
EMPLOYEE BENEFIT PLANS
Employers and employee organizations should consider, in consultation with
counsel, the impact of Title VII of the Civil Rights Act of 1964 on the purchase
of EquiBuilder II policies in connection with an employment-related insurance or
benefit plan. The United States Supreme Court held, in a 1983 decision, that,
under Title VII, optional annuity benefits under a deferred compensation plan
could not vary on the basis of sex.
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The policies described herein are not intended for use in connection with
qualified plans or trusts under the Code.
PAYMENT OF PROCEEDS
American Franklin will pay any death benefits, Net Cash Surrender Value or
loan proceeds within seven days after it receives the required form or request
(and other documents that may be required) at its Administrative Office. Death
benefits are determined as of the date of death of the Insured Person and will
not be affected by subsequent changes in the unit values of the investment
divisions of the Separate Account. Interest will be paid in respect of the
period from the date of death to the date of payment.
American Franklin may, however, delay payment for one or more of the
following reasons:
American Franklin contests the policy or is deciding whether or not to
contest the policy;
American Franklin cannot determine the amount of the payment because
the New York Stock Exchange is closed, because trading in securities has
been restricted by the Securities and Exchange Commission, or because the
Securities and Exchange Commission has declared that an emergency exists;
or
The Securities and Exchange Commission by order permits American
Franklin to delay payment to protect the Policy Owners.
American Franklin may defer payment of any Net Cash Surrender Value or loan
amount from the Guaranteed Interest Division for up to six months after receipt
of a request. American Franklin will pay interest of at least 3% a year from the
date a request for withdrawal of Net Cash Surrender Value is received if payment
from the Guaranteed Interest Division is delayed more than 30 days.
DIVIDENDS
No dividends are paid on the policies offered by this Prospectus.
DISTRIBUTION OF THE POLICIES
Franklin Financial Services Corporation ("Franklin Financial"), a Delaware
corporation and a wholly-owned subsidiary of The Franklin Life Insurance
Company, is the principal underwriter, as defined by the Investment Company Act
of 1940, of the EquiBuilder II policies for the Separate Account under a Sales
Agreement between Franklin Financial and the Separate Account. Franklin
Financial's principal executive office is at #1 Franklin Square, Springfield,
Illinois 62713.
Franklin Financial is registered with the Securities and Exchange
Commission as a broker-dealer under the Securities and Exchange Act of 1934 and
is a member of the National Association of Securities Dealers, Inc. Franklin
Financial also acts as principal underwriter for Franklin Life Variable Annuity
Funds A and B and Franklin Life Money Market Variable Annuity Fund C, which are
separate accounts of The Franklin Life Insurance Company and registered
investment companies issuing interests in variable annuity contracts. Franklin
Financial also acts as principal underwriter for Separate Account VUL of
American Franklin, which is a registered investment company issuing interests in
variable life insurance contracts having policy features that are similar to
those of EquiBuilder II policies but the assets of which are invested in a
different open-end management investment company. American Franklin no longer
offers new policies having an interest in that separate account. Franklin
Financial is the principal underwriter of American Franklin's EquiBuilder III
variable life insurance policies under which interests in the Separate Account
are issued. The EquiBuilder III policies have policy features that are similar
to those of the EquiBuilder II policies but have a different sales charge
structure.
Policies are sold primarily by persons who are insurance agents or brokers
for American Franklin authorized by applicable law to sell life and other forms
of personal insurance, including variable life insurance. Pursuant to an
agreement between American Franklin and Franklin Financial, Franklin 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.
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Franklin Financial incurs certain sales expenses, such as sales literature
preparation and related costs, in connection with the sale of the policies
pursuant to a Sales Agreement with American Franklin. Surrender charges imposed
in connection with the surrender of a policy and certain reductions of Face
Amount are paid to Franklin Financial as a means to recover sales expenses.
Surrender charges are not necessarily related to Franklin Financial's actual
sales expenses in any particular year. To the extent sales expenses are not
covered by surrender charges, Franklin Financial will cover them from other
assets.
Commissions earned by registered representatives of Franklin Financial on
the sale of the policies range up to 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 surrender charges paid to Franklin Financial over the sales
and promotional expenses incurred by Franklin Financial to the extent necessary
to reimburse American Franklin for commissions or other remuneration paid in
connection with sales of the policies. Such Agreement also provides that the
amount of such commissions and other remuneration not so reimbursed shall be
deemed to have been contributed by American Franklin to the capital of Franklin
Financial. Commissions and other remuneration will be paid by American Franklin
from other sources, including mortality and expense risk charges or other
charges in connection with the EquiBuilder II policies, or from its General
Account to the extent it does not receive reimbursement from Franklin Financial.
Commissions paid on policies issued under Separate Accounts VUL and VUL-2
of American Franklin during the years 1998, 1997 and 1996 were $_____________,
$17,946,679.69, and $13,454,621.96, 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 II policies.
This agreement was terminated as to policies sold on or after January 1, 1997
but will continue as to business in force prior to that date.
Integrity is a subsidiary of ARM Financial Group, Inc., a financial
services company controlled by Morgan Stanley & Co. Incorporated, an investment
banking firm headquartered in New York, New York.
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 II policies issued after January 1, 1997.
ADMINISTRATIVE SERVICES
While American Franklin has primary responsibility for all administration
of the Policies, American General Life Companies ("AGLC") has agreed pursuant to
a services agreement among American General Corporation and almost all of its
subsidiaries to provide the following administrative services in
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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 AGLC are
parties to the services agreement. Pursuant to such agreement, American Franklin
reimburses AGLC for the costs and expenses which AGLC incurs in providing such
administrative services in connection with the Policies, but neither American
Franklin nor AGLC incurs a loss or realizes a profit by reason thereof.
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
INTERNAL SYSTEMS. American Franklin's ultimate parent, American General
Corporation (AGC), has numerous technology systems that are managed on a
decentralized basis. AGC's Year 2000 readiness efforts are therefore being
undertaken by its key business units with centralized oversight. Each business
unit, including American Franklin, has developed and is implementing a plan to
minimize the risk of a significant negative impact on its operations.
While the specifics of the plans vary, the plans include the following
activities: (1) perform an inventory of American Franklin's information
technology and non-information technology systems; (2) assess which items in the
inventory may expose American Franklin to business interruptions due to Year
2000 issues; (3) reprogram or replace systems that are not Year 2000 ready; (4)
test systems to prove that they will function into the next century as they do
currently; and (5) return the systems to operations. As of December 31, 1998,
substantially all of American Franklin's critical systems are Year 2000 ready
and have been returned to operations. However, activities (3) through (5) for
certain systems are ongoing, with vendor upgrades expected to be received during
the first half of 1999.
THIRD PARTY RELATIONSHIPS. American Franklin has relationships with various
third parties who must also be Year 2000 ready. These third parties provide (or
receive) resources and services to (or from) American Franklin and include
organizations with which American Franklin exchanges information. Third parties
include vendors of hardware, software, and information services; providers of
infrastructure services such as voice and data communications and utilities for
office facilities; investors; customers; distribution channels; and joint
venture partners. Third parties differ from internal systems in that American
Franklin exercises less, or no, control over Year 2000 readiness. American
Franklin has developed a plan to assess and attempt to mitigate the risks
associated with the potential failure of third parties to achieve Year 2000
readiness. The plan includes the following activities: (1) identify and classify
third party dependencies; (2) research, analyze, and document Year 2000
readiness for critical third parties; and (3) test critical hardware and
software products and electronic interfaces. As of December 31, 1998, AGC has
identified and assessed approximately 700 critical third party dependencies,
including those relating to American Franklin. A more detailed evaluation will
be completed during the first quarter 1999 as part of American Franklin's
contingency planning efforts. Due to the various stages of third parties' Year
2000 readiness, American Franklin's testing activities will extend through 1999.
CONTINGENCY PLANS. American Franklin has commenced contingency planning to
reduce the risk of Year 2000-related business failures. The contingency plans,
which address both internal systems and third party relationships, include the
following activities: (1) evaluate the consequences of failure of business
processes with significant exposure to Year 2000 risk; (2) determine the
probability of a year 2000-related failure for those processes that have a high
consequence of failure; (3) develop an action
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plan to complete contingency plans for those processes that rank high in
consequence and probability of failure; and (4) complete the application action
plans. American Franklin is currently developing contingency plans and expects
to substantially complete all contingency planning activities by April 30, 1999.
RISKS AND UNCERTAINTIES. Based on its plans to make internal systems ready
for Year 2000, to deal with third party relationships, and to develop
contingency actions, American Franklin believes that it will experience at most
isolated and minor disruptions of business processes following the turn of the
century. Such disruptions are not expected to have a material effect on American
Franklin future results of operations, liquidity, or financial condition.
However, due to the magnitude and complexity of this project, risks and
uncertainties exist and American Franklin is not able to predict a most
reasonably likely worst case scenario. If conversion of American Franklin's
internal systems is not completed on a timely basis (due to non-performance by
significant third-party vendors, lack of qualified personnel to perform the Year
2000 work, or other unforeseen circumstances in completing American Franklin's
plans) or if critical third parties fail to achieve Year 2000 readiness on a
timely basis, the Year 2000 issues could have a material adverse impact on
American Franklin's operations following the turn of the century.
COSTS. Through December 31, 1998 American Franklin has incurred, and
anticipates that it will continue to incur, costs for internal staff,
third-party vendors, and other expenses to achieve Year 2000 readiness. These
costs are not passed to the divisions of the Account. The cost of activities
related to Year 2000 readiness has not had a material adverse effect on American
Franklin's results of operations or financial condition. In addition, American
Franklin has elected to accelerate the planned replacement of certain systems as
part of the Year 2000 plans. Costs of the replacement systems are being
capitalized and amortized over their useful lives, in accordance with American
Franklin's normal accounting policies.
LEGAL MATTERS
Sutherland Asbill & Brennan LLP of Washington, D.C. has provided advice on
certain matters relating to the federal securities laws.
LEGAL PROCEEDINGS
In recent years, various life insurance companies have been named as
defendants in class action lawsuits relating to life insurance and sales
practices, and a number of these lawsuits have resulted in substantial
settlements. American Franklin is a defendant in such purported class action
lawsuits filed since 1996, asserting claims related to pricing and sales
practices. On December 16, 1998, AGC announced that certain of its life
insurance subsidiaries had entered into agreements to resolve the market conduct
class action lawsuits. The settlements are not final until approval by the
courts and until the respective time periods for filing appeals have been
finally resolved. If court approvals are obtained and appeals are not taken, it
is expected the settlements will be final in the third quarter of 1999. The
proposed settlements will not have a material impact on American Franklin=s
financial condition or business operations.
The Company is a party to various other lawsuits and proceedings arising in
the ordinary course of business. Many of these lawsuits and proceedings arise in
jurisdictions, such as Alabama and Mississippi, that permit damage awards
disproportionate to the actual economic damages incurred. Based upon information
presently available, American Franklin believes that the total amounts that will
ultimately be paid, if any, arising from these lawsuits and proceedings will not
have a material adverse effect on American Franklin=s results of operations and
financial position. However, it should be noted that the frequency of large
damage awards, including large punitive damage awards, that bear little or no
relation to actual economic damages incurred by plaintiffs in jurisdictions like
Alabama and Mississippi continues to create the potential for an unpredictable
judgment in any given suit.
EXPERTS
The statement of net assets as of December 31, 1998 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, 1998 and 1997 and for
each of the three years in the period ended December 31, 1998 have been audited
by Ernst & Young LLP, independent auditors, as set forth in their
47
<PAGE>
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 Senior Vice President - Actuarial and Financial of American
Franklin. His opinion on actuarial matters is filed as an exhibit to the
Registration Statement relating to the policies filed with the SEC.
REGISTRATION STATEMENT
A Registration Statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, with respect to the
policies offered hereby. This Prospectus does not contain all the information
set forth in the Registration Statement and amendments thereto and exhibits
filed as a part thereof, to all of which reference is hereby made for further
information concerning American Franklin, the Separate Account and the policies
offered hereby. Statements contained in this Prospectus as to the content of
policies and other legal instruments are summaries. For a complete statement of
the terms thereof, reference is made to such instruments as filed.
OTHER POLICIES AND CONTRACTS
American Franklin may offer, under other prospectuses, other variable life
policies or variable annuity contracts having interests in the Separate Account
and containing terms and conditions different from those of the policies offered
hereby. Interests in the Separate Account are also issued under American
Franklin's EquiBuilder III variable life insurance policies, which have policy
features that are similar to those of EquiBuilder II policies but which have a
different sales charge structure.
MANAGEMENT
The following persons hold the positions designated with respect to
American Franklin. The table also shows their principal occupations during the
past five years and any positions held with The Franklin and Franklin Financial.
<TABLE>
<CAPTION>
Principal Occupations Position Held with American
Name During Past Five Years Franklin and Franklin Financial
---- ---------------------- -------------------------------
<S> <C> <C>
Robert M. Beuerlein Senior Vice President-Actuarial/Financial Director, Senior Vice
and Treasurer, The Franklin since December President-Actual/Financial and
of 1998; Senior Vice President-Actuarial, Treasurer, American Franklin and
The Franklin, prior thereto; Director, The Franklin Financial
Franklin
Pauletta P. Cohn** Secretary, The Franklin, since Secretary, American Franklin.
______________, 199____; Associate General
Counsel and Secretary, American General
Life Companies, Houston, Texas, since
____________, 199____;
_______________________.
Brady W. Creel Senior Vice President, Chief Marketing Director, Senior Vice President and
Officer and Director, The Franklin since Chief Marketing Officer, American
September 3, 1996; Regional Manger, The Franklin.
Franklin, prior to September, 1996.
48
<PAGE>
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 Chief Compliance Senior Vice President and Chief
Officer, The Franklin, since December of Compliance Officer, American Franklin
1998; Senior Vice President and Chief and Franklin Financial.
Compliance Officer, American General Life
Companies, Houston, Texas, since December
of 1998; Senior Vice President and General
Counsel, The Franklin, from September,
1996 to December, 1998;
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.
Rodney O. Martin, Jr.** Chairman, President and Chief Executive Director and Senior Chairman, American
Officer, American General Life Companies, Franklin.
Houston, Texas, since December of 1998;
President and Chief Executive Officer,
American General Life Insurance Company,
Houston, Texas, August, 1996 to December
of 1998; 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.
Jon P. Newton* Director and Vice Chairman, The Franklin, Director and Vice Chairman, American
since January 31, 1996; Vice Chairman, Franklin.
American General 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.
49
<PAGE>
Michael M. Nicholson Director and President, The Franklin, Director and President, American Franklin
since August, 1998; Senior Vice President,
General American Life Insurance Company,
from January, 1994 to August, 1998;
self-employed insurance agent prior to
January, 1994.
Gary D. Reddick** Executive Vice President, American General Vice Chairman and Director, American
Life Companies, Houston, Texas, since Franklin; Director and Vice Chairman,
December, 1998; Director, The Franklin, Franklin Financial.
since February, 1995; Vice Chairman, The
Franklin, since July 1, 1997; Executive
Vice President, The Franklin, from
February, 1995 to July 1, 1997; Senior
Vice President, American General
Corporation, Houston, Texas prior to
February, 1995; Senior Vice President,
American General Life Insurance Company,
Houston, Texas, prior to October, 1994.
Richard W. Scott* Executive Vice President and Chief Vice President and Chief Investment
Investment Officer, American General Officer, American Franklin.
Corporation, Houston, 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.
50
<PAGE>
William A. Simpson Director and Chief Executive Officer, The Director and Chief Executive Officer,
Franklin, since September 5, 1997; American Franklin; Director, Franklin
President, The Franklin, from September, Financial.
1997 to August, 1998; President and Chief
Executive Officer, The Old Line Life
Insurance Company of America, Milwaukee,
Wisconsin from May 1, 1990 to September 8,
1997; President-Life Insurance Division,
USLIFE Corporation, New York, New York
from February, 1996 to May, 1996;
President and Chief Executive Officer,
USLIFE Corporation from January, 1995 to
February, 1996; Vice Chairman and Chief
Executive Officer, All American Life
Insurance Company, Chicago, Illinois from
October 25, 1994 to May 1, 1995; President
and Chief Executive Officer, All American
Life Insurance Company, from April 16,
1990 to October 25, 1994.
T. Clayton Spires Director, Corporate Tax, The Franklin, Director, Corporate Tax, American
since February 3, 1997; Assistant Vice Franklin.
President and Tax Manager, First Colony
Life, Lynchburg, Virginia, prior to
February, 1997.
Christian D. Weiss Controller, The Franklin, since June, Director-Controller, American Franklin.
1997; 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 Vice President-Administration, American Vice President-Administration, American
Franklin. 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.
51
<PAGE>
Index To Financial Statements
[To be filed by amendment]
<TABLE>
<CAPTION>
Page
<S> <C>
The Separate Account:
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . .F-2
Audited Financial Statements:
Statement of Net Assets, December 31, 1998 . . . . . . . . . . F-3-F-4
Statement of Operations for the year ended December 31, 1998. . F-5-F-6
Statements of Changes in Net Assets for the years ended
December 31, 1998 and 1997. . . . . . . . . . . . . . . . . . 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, 1998,
1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . F-14
Balance Sheet, December 31, 1998, 1997 and 1996 . . . . . . . F-15-F-16
Statement of Shareholder's Equity for the years ended
December 31, 1998, 1997 and 1996. . . . . . . . . . . . . . . . . F-17
Statement of Cash Flows for the years ended December 31, 1998,
1997 and 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . 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>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Flexible Premium Variable Life Insurance Policy
EQUIBUILDER II-TM-
ISSUED BY
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
Prospectus Dated April 30, 1999
FIDELITY INVESTMENTS:
VARIABLE INSURANCE PRODUCTS FUND AND Principal Office of both Fidelity
VARIABLE INSURANCE PRODUCTS FUND II Funds located at:
82 Devonshire Street
Boston, Massachusetts 02109
Prospectus Dated April 30, 1999
MASSACHUSETTS FINANCIAL SERVICES COMPANY: Principal Office located at:
MFS VARIABLE INSURANCE TRUST 500 Boylston Street
Boston, Massachusetts 02116
Prospectus Dated May 1, 1999
THESE SECURITIES HAVE NOT BEEN APPROVED
OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE
COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
EquiBuilder II is a trademark of The American Franklin Life Insurance Company
- --------------------------------------------------------------------------------
<PAGE>
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 ____ 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, Senior Vice President - Actuarial/Financial and
Treasurer
Ernst & Young LLP
The following exhibits required by Article IX(A) of Form N-8B-2:
*1-A(1) Certified resolutions regarding organization of
Separate Account VUL-2.
1-A(2) Inapplicable.
*1-A(3)(a) Sales Agreement between Franklin Financial Services
Corporation ("Franklin Financial") and Separate
Account VUL-2 of The American Franklin Life Insurance
Company, dated as of January 31, 1995.
*1-A(3)(b)(i) Specimen Regional Manager Registered Representative
Agreement between Franklin Financial and registered
representatives of Franklin Financial distributing
EquiBuilder II policies.
*1-A(3)(b)(ii) Specimen Registered Representative Agreement between
Franklin Financial and registered representatives of
Franklin Financial distributing EquiBuilder II
policies.
***1-A(3)(c) Schedule of Sales Commissions.
*1-A(4) Agreement between The American Franklin Life Insurance
Company ("American Franklin") and Franklin Financial,
dated July 15, l991, regarding supervision of agents.
*1-A(5)(a) EquiBuilder II Flexible Premium Life Insurance Policy.
*1-A(5)(b) Accidental Death Benefit Rider.
*1-A(5)(c) Term Insurance Rider.
*1-A(5)(d) Children's Term Insurance Rider.
*1-A(5)(e) Disability Rider - Waiver of Monthly Deductions.
*1-A(5)(f) Endorsement to EquiBuilder II Flexible Premium Life
Insurance policy when issued to a Policy Owner in the
State of Texas.
**1-A(6)(a) Articles of Incorporation of American Franklin.
1-A(6)(b) By-Laws of American Franklin are incorporated herein by
reference to Exhibit 1-A(6)(b) to Post-Effective
Amendment No. 7 on Form S-6 of Separate Account VUL-2
of The American Franklin Life Insurance Company, filed
February 28, 1997 (Reg. No. 33-41838).
1-A(7) Inapplicable.
II-2
<PAGE>
*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.
1-A(8)(c)(2) Amendment No. 2 to Modified Coinsurance Agreement
between American Franklin and Integrity is incorporated
herein by reference to similarly designated exhibit to
Post-Effective Amendment No. 7 on Form S-6 of Separate
Account VUL-2 of The American Franklin Life Insurance
Company, filed February 28, 1997 (Reg. No. 33-41838).
II-3
<PAGE>
1-A(8)(c)(3) Amendment No. 3 to Modified Coinsurance Agreement
between American Franklin and Integrity effective April
1, 1989 is incorporated herein by reference to
similarly designated exhibit to Post-Effective
Amendment No. 7 on Form S-6 of Separate Account VUL-2
of The American Franklin Life Insurance Company, filed
February 28, 1997 (Reg. No. 33-41838).
1-A(8)(c)(4) Amendment No. 3 to Modified Coinsurance Agreement
between American Franklin, Integrity, and Phoenix
Home Life Mutual Insurance Company, assignee of
Integrity, effective January 1, 1997 is
incorporated herein by reference to similarly
designated exhibit to Post-Effective Amendment No.
7 on Form S-6 of Separate Account VUL-2 of The
American Franklin Life Insurance Company, filed
February 28, 1997 (Reg. No. 33-41838).
*1-A(8)(d) Reinsurance Agreement between American Franklin and
The Franklin Life Insurance Company ("The
Franklin"), effective as of January 1, 1988.
*1-A(8)(d)(1) Amendment No. 1 effective as of January 1, 1990 to
Reinsurance Agreement between American Franklin and The
Franklin.
*1-A(8)(d)(2) Amendment No. 2 effective as of January 1, 1990 to
Reinsurance Agreement between American Franklin and The
Franklin.
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. 9 on
Form S-6 of Separate Account VUL-2 of The American
Franklin Life Insurance Company, filed February 27,
1998 (Reg. No. 33-41838).
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. 9 on Form S-6 of Separate Account VUL-2
of The American Franklin Life Insurance Company, filed
February 27, 1998 (Reg. No. 33-41838).
*1-A(9) Administrative Service Agreement between The Franklin
and American Franklin, dated May 16, l988.
1-A(10) Application for EquiBuilder II Policy is incorporated
herein by reference to similarly designated exhibit to
Post-Effective Amendment No. 9 on Form S-6 of Separate
Account VUL-2 of The American Franklin Life Insurance
Company, filed February 27, 1998 (Reg. No. 33-41838).
Other Exhibits:
2 See Exhibit 1-A(5)(a) above.
*3(a) Opinion and Consent of Stephen P. Horvat, Jr., Esq.,
Senior Vice President, General Counsel and Secretary of
American Franklin.
*3(b) Opinion and Consent of Robert M. Beuerlein, Senior
Vice President - Actuarial/Financial and Treasurer
of American Franklin
4 Inapplicable.
5 Inapplicable.
*6(a) Consent of Ernst & Young LLP.
*6(b) Consent of Sutherland Asbill & Brennan LLP.
7(a) Power of Attorney is incorporated herein by reference
to similarly designated exhibit to Post-Effective
Amendment No. 9 on Form S-6 of Separate Account VUL-2
of The American Franklin Life Insurance Company, filed
February 27, 1998 (Reg. No. 33-41838).
7(b) Power of Attorney.
***8 Description of American Franklin's Issuance, Transfer
and Redemption Procedures for Policies pursuant to Rule
6e-3(T)(b)(12)(iii) under the Investment Company Act of
1940.
*9 Notice of Cancellation Right Pursuant to Rule
6e-3(T)(b)(13)(viii) under the Investment Company Act
of 1940.
- ---------------
II-4
<PAGE>
* To be filed by amendment.
** Incorporated herein by reference to similarly designated exhibit to
Post-Effective Amendment No. 6 on Form S-6 of Separate Account VUL-2
of The American Franklin Life Insurance Company, filed April 30, 1996
(Reg. No. 33-41838).
*** Incorporated herein by reference to similarly designated exhibit to
Post-Effective Amendment No. 10 on Form S-6 of Separate Account VUL-2
of The American Franklin Life Insurance Company, filed April 30, 1998
(Reg. No. 33-41838).
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
Separate Account VUL-2 of The American Franklin Life Insurance Company has duly
caused this Post-Effective Amendment No. 11 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 26th day of February, 1999.
SEPARATE ACCOUNT VUL-2 OF
THE AMERICAN FRANKLIN LIFE
INSURANCE COMPANY
By: THE AMERICAN FRANKLIN
LIFE INSURANCE COMPANY,
Depositor
[SEAL] By: /s/ William A. Simpson
-----------------------
William A. Simpson
Chairman of the Board
and Chief Executive
Officer
Attest:
/s/ Elizabeth E. Arthur
- -----------------------
Elizabeth E. Arthur
Assistant Secretary
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, The American
Franklin Life Insurance Company has duly caused this Post-Effective Amendment to
the Registration Statement on Form S-6 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Springfield, and State
of Illinois on the 26th day of February, 1999.
THE AMERICAN FRANKLIN
LIFE INSURANCE COMPANY
By /s/ William A. Simpson
---------------------------
William A. Simpson
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement on Form S-6 has been
signed by the following persons in the capacities and on the dates indicated:
Signature Title Date
- --------- ----- ----
/s/ Robert M. Beuerlein*
- ----------------------------- Director February 26, 1999
Robert M. Beuerlein
/s/ Brady W. Creel*
- ----------------------------- Director February 26, 1999
Brady W. Creel
- ----------------------------- Director February__, 1999
Rodney O. Martin, Jr.
- ----------------------------- Director February__, 1999
Jon P. Newton
/s/ Michael M. Nicholson*
- ----------------------------- Director February 26, 1999
Michael M. Nicholson
/s/ Philip K. Polkinghorn*
- ----------------------------- Executive Vice President February 26, 1999
Philip K. Polkinghorn and Chief Financial
Officer
- ----------------------------- Director February__, 1999
Gary D. Reddick
/s/ William A. Simpson*
- ----------------------------- Chairman of the Board February 26, 1999
William A. Simpson and Chief Executive
Officer
/s/ Elizabeth E. Arthur
- -----------------------------------------
*By Elizabeth E. Arthur, Attorney-in-Fact
II-7
<PAGE>
EXHIBIT INDEX
7(b) Power of Attorney.
II-8
<PAGE>
POWER OF ATTORNEY
The undersigned, acting in the capacity or capacities stated opposite their
respective names below, hereby constitute and appoint WAYNE A. ROBINSON and
ELIZABETH E. ARTHUR, and each of them, singularly, attorneys-in-fact of the
undersigned with full power to each of them to sign for and in the name of the
undersigned in the capacities indicated below (a) Post-Effective Amendment No.
11 to the Registration Statement under the Securities Act of 1933, as amended
(the "1933 Act"), on Form S-6 (Reg. No. 33-41838) of The American Franklin Life
Insurance Company and Separate Account VUL-2 of The American Franklin Life
Insurance Company in connection with the registration of units of interest in
Separate Account VUL-2 issued under EquiBuilder II-TM- flexible premium variable
life insurance policies, and (b) any and all amendments (including any further
Post-Effective Amendments) thereto, and to give any certification which may be
required in connection therewith pursuant to Rule 485 under the 1933 Act.
Signature Title Date
--------- ----- ----
/s/ Robert M. Beuerlein
- ------------------------------
Robert M. Beuerlein Director February 10, 1999
/s/ Brady W. Creel
- ------------------------------
Brady W. Creel Director February 10, 1999
- ------------------------------
Rodney O. Martin, Jr. Director ___________, 1999
- ------------------------------
Jon P. Newton Director ___________, 1999
/s/ Michael M. Nicholson
- ------------------------------
Michael M. Nicholson Director February 16, 1999
/s/ Philip K. Polkinghorn
- ------------------------------
Philip K. Polkinghorn Executive Vice President February 12, 1999
and Chief Financial
Officer (principal
financial officer and
principal accounting
officer)
- ------------------------------
Gary D. Reddick Director ___________, 1999
/s/ William A. Simpson
- ------------------------------
William A. Simpson Chairman of the Board and February 16, 1999
Chief Executive Officer
(principal executive officer)
