<PAGE>
1933 Act Registration No.33-41838
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF
SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM
N-8B-2
POST-EFFECTIVE AMENDMENT NO. 12
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)
/X/ on April 30, 1999 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a) (i)
/ / on_____, 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. 12
RECONCILIATION AND TIE
<TABLE>
<CAPTION>
REGISTRATION ITEM
OF FORM N-8B-2 LOCATION IN PROSPECTUS
- ----------------- --------------------------------
<S> <C>
1............................................ Cover Page.
2............................................ Cover Page.
3............................................ Inapplicable.
4............................................ Distribution of the Policies.
5, 6, 7...................................... Separate Account Investment
Choices--The Separate Account
and Its Investment Divisions.
8............................................ Index to Financial Statements.
9............................................ Legal Proceedings.
10(a)........................................ The Beneficiary; Assignment of a
Policy.
10(b)........................................ Policy Account Value
--Determination of the Unit
REGISTRATION ITEM alue; 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>
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
PremiumPayments; 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>
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>
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>
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>
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>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Flexible Premium Variable Life Insurance Policy
EQUIBUILDER II(TM)
ISSUED BY
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
THROUGH SEPARATE ACCOUNT VUL-2
Prospectus Dated April 30, 1999
--------------
FIDELITY INVESTMENTS:
VARIABLE INSURANCE PRODUCTS FUND AND Principal Office of
VARIABLE INSURANCE PRODUCTS FUND II both Fidelity 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>
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.
THE SEC HAS NOT 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...................................................................................... 1
DETAILED INFORMATION ABOUT AMERICAN FRANKLIN AND EQUIBUILDER II-TM- POLICIES
The American Franklin Life Insurance Company................................................. 6
The Features of EquiBuilder II-TM- Policies.................................................... 6
How EquiBuilder II-TM- Policies Differ from Whole Life Insurance.................... 6
Death Benefits...................................................................... 6
Policy Issuance Information......................................................... 7
Maturity Benefit.................................................................... 8
Changes in EquiBuilder II-TM- Policies.............................................. 8
Changing the Face Amount of Insurance............................................... 8
When Policy Changes Go Into Effect.................................................. 9
Flexible Premium Payments........................................................... 9
Additional Benefits................................................................. 10
Disability Waiver Benefit........................................................... 10
Accidental Death Benefit............................................................ 10
Children's Term Insurance........................................................... 10
Term Insurance on an Additional Insured Person...................................... 10
Separate Account Investment Choices.......................................................... 10
The Separate Account and Its Investment Divisions................................... 11
The Funds........................................................................... 11
Investment Policies of the Portfolios of the Funds.................................. 11
Ownership of the Assets of the Separate Account..................................... 14
Right to Change Operations.......................................................... 14
Deductions and Charges....................................................................... 15
Deductions From Premiums............................................................ 15
Charges Against the Policy Account.................................................. 15
Administrative Charge............................................................... 15
Cost of Insurance Charge............................................................ 15
Charges for Additional Benefits..................................................... 16
Changes in Monthly Charges.......................................................... 16
Charges Against the Separate Account................................................ 16
Mortality and Expense Risks......................................................... 16
Charges Against the Funds........................................................... 17
Tax Reserve......................................................................... 17
Surrender Charge.................................................................... 18
Other Transaction Charges........................................................... 20
Partial Withdrawal of Net Cash Surrender Value...................................... 20
Increase in the Face Amount of Insurance............................................ 20
Transfers........................................................................... 20
Illustrations....................................................................... 20
Allocation of Policy Account Charges................................................ 20
Policy Account Value......................................................................... 21
Amounts in the Separate Account..................................................... 21
Determination of the Unit Value..................................................... 21
</TABLE>
-iii-
<PAGE>
<TABLE>
<S> <C>
Policy Account Transactions.................................................................. 22
Changing Premium and Deduction Allocation Percentages............................... 22
Transfers of Policy Account Value Among Investment Divisions........................ 22
Borrowing from the Policy Account................................................... 23
Loan Requests....................................................................... 23
Policy Loan Interest................................................................ 23
When Interest is Due................................................................ 24
Repaying the Loan................................................................... 24
The Effects of a Policy Loan on the Policy Account.................................. 24
Lapse of the Policy................................................................. 24
Withdrawing Money from the Policy Account........................................... 25
Withdrawal Charges.................................................................. 25
The Effects of a Partial Withdrawal................................................. 25
Surrendering the Policy for Its Net Cash Surrender Value............................ 25
The Guaranteed Interest Division............................................................. 26
Amounts in the Guaranteed Interest Division......................................... 26
Interest on the Amounts in the Guaranteed Interest Division......................... 26
Transfers from the Guaranteed Interest Division..................................... 27
Additional Information about EquiBuilder II-TM- Policies..................................... 27
Right to Examine the Policy......................................................... 27
Lapse of the Policy................................................................. 27
Reinstatement of the Policy......................................................... 28
Policy Periods, Anniversaries, Dates and Ages....................................... 28
Federal Tax Considerations................................................................... 28
Introduction........................................................................ 28
Tax Status of the Policy............................................................ 29
Tax Treatment of Policy Benefits.................................................... 29
Other Policy Owner Tax Matters...................................................... 30
Possible Tax Law Changes............................................................ 30
Possible Charges for American Franklin's Taxes...................................... 31
ILLUSTRATIONS OF DEATH BENEFITS, POLICY ACCOUNT AND CASH SURRENDER VALUES, AND
ACCUMULATED PREMIUMS........................................................................ 31
ADDITIONAL INFORMATION....................................................................... 37
Voting Rights of a Policy Owner.............................................................. 37
Voting Rights of the Funds.......................................................... 37
Determination of Voting Shares...................................................... 37
How Shares of the Funds are Voted................................................... 37
Voting Privileges of Participants in Other Separate Accounts........................ 38
Separate Account Voting Rights...................................................... 38
Reports to Policy Owners..................................................................... 38
Limits on American Franklin's Right to Challenge a Policy.................................... 38
Payment Options.............................................................................. 39
The Beneficiary.............................................................................. 40
Assignment of a Policy....................................................................... 40
Employee Benefit Plans....................................................................... 40
Payment of Proceeds.......................................................................... 41
Dividends.................................................................................... 41
Distribution of the Policies................................................................. 41
</TABLE>
-iv-
<PAGE>
<TABLE>
<S> <C>
Applications................................................................................. 42
Reinsurance Agreements....................................................................... 42
Administrative Services...................................................................... 43
State Regulation............................................................................. 43
Year 2000 Transition......................................................................... 43
Legal Matters................................................................................ 44
Legal Proceedings............................................................................ 44
Experts .................................................................................... 45
Registration Statement....................................................................... 45
Other Polices and Contracts.................................................................. 45
Management................................................................................... 45
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.
NET PREMIUM--The amount of any premium paid by the Policy Owner less the
amount of applicable state and local premium taxes, if any.
-vi-
<PAGE>
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.
-vii-
<PAGE>
SUMMARY
- -------------------------------------------------------------------------------
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 bulid-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
* Fidelity VIP High Income
<PAGE>
* 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.
FUND ANNUAL EXPENSES
(% of average daily net assets)
<TABLE>
<CAPTION>
TOTAL
MANAGEMENT OTHER FUND
FUND FEE EXPENSES(1) EXPENSES(2)(3)
- ---- ---------- ----------- --------------
<S> <C> <C> <C>
Fidelity VIP Money Market 0.20% 0.10% 0.30%
Fidelity VIP High Income 0.58% 0.12% 0.70%
Fidelity VIP Equity-Income 0.49% 0.09% 0.58%
Fidelity VIP Growth 0.59% 0.09% 0.68%
Fidelity VIP Overseas 0.74% 0.17% 0.91%
Fidelity VIPII Investment Grade Bond 0.43% 0.14% 0.57%
Fidelity VIPII Asset Manager 0.54% 0.10% 0.64%
Fidelity VIPII Index 500 0.24% 0.11% 0.35%
Fidelity VIPII Asset Manager: Growth 0.59% 0.14% 0.73%
Fidelity VIPII Contrafund 0.59% 0.11% 0.70%
MFS Emerging Growth 0.75% 0.10% 0.85%
MFS Research 0.75% 0.11% 0.86%
MFS Growth with Income 0.75% 0.13% 0.88%
MFS Total Return 0.75% 0.16% 0.91%
MFS Utilities 0.75% 0.26% 1.01%
MFS Capital Opportunities 0.75% 0.36%(4) 1.11%(4)
</TABLE>
- ----------------------------------------------------------------------------
(1) Fund Annual Expenses are those incurred for the year ended December 31,
1998.
(2) A portion of the brokerage commissions that certain Fidelity portfolios pay
was used to reduce their expenses. In addition, certain Fidelity portfolios
have entered into arrangements with their custodian whereby credits
realized as a result of uninvested cash
-2-
<PAGE>
balances were used to reduce custodian expenses. Including these
reductions, the total operating expenses, after reimbursement for Index 500
Portfolio, would have been: for VIP Equity-Income Portfolio: 0.57%; for VIP
Growth Portfolio: 0.66%; for VIP Overseas Portfolio: 0.89%; for VIPII Asset
Manager Portfolio: 0.63%; for VIPII Index 500 Portfolio: 0.28%; for VIPII
Contrafund Portfolio: 0.66%; and for VIPII Asset Manager: Growth Portfolio:
0.72%.
(3) Each MFS series has an expense offset arrangement which reduces the series'
custodian fee based upon the amount of cash maintained by the series with
its custodian and dividend disbursing agent. Each MFS series may enter into
other such arrangements and directed brokerage arrangements, which would
also have the effect of reducing the series' expenses. MFS series expenses
do not take into account these expense reductions, and are therefore higher
than the actual expenses of the series.
(4) MFS has agreed to bear expenses for this series, subject to reimbursement
by this series, such that such series' "Other Expenses" shall not exceed
0.25% of the average daily net assets of the series during the current
fiscal year. After taking this expense reimbursement into account, the
total operating expenses for MFS Capital Opportunities would have been
1.02%. The payments made by MFS on behalf of the series under this
arrangement are subject to reimbursement by the series to MFS, which will
be accomplished by the payment of an expense reimbursement fee by the
series to MFS computed and paid monthly at a percentage of the series'
average daily net assets for its then current fiscal year, with a
limitation that immediately after such payment the series' "Other Expenses"
will not exceed the percentage set forth above for that series. The
obligation of MFS to bear a series' "Other Expenses" pursuant to this
arrangement, and the series' obligation to pay the reimbursement fee to
MFS, terminates on the earlier of the date on which payments made by the
series equal the prior payment of such reimbursable expenses by MFS, or
December 31, 2004. MFS may, in its discretion, terminate this arrangement
at an earlier date, provided that the arrangement will continue for the
series until at least May 1, 2000, unless terminated with the consent of
the board of trustees which oversees the series.
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 maximum surrender charge is 50% of one "target" premium as
shown in your policy. The amount of the surrender charge varies depending on the
policy year in which you surrender the policy and the amount of premium you have
paid. 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
-3-
<PAGE>
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.
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 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
-4-
<PAGE>
(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 A to this prospectus.
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.
-5-
<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.
THE FEATURES OF EQUIBUILDER II POLICIES
HOW EQUIBUILDER II POLICIES DIFFER FROM WHOLE LIFE INSURANCE
EquiBuilder II policies are designed to provide life insurance coverage
with flexibility in death benefits, premium payments and investment choices.
EquiBuilder II policies are different from traditional whole life insurance in
that the Policy Owner is not required to pay scheduled premiums and may, within
limits, choose the amount and frequency of premium payments. EquiBuilder II
policies also provide for two different types of death benefit options and the
Policy Owner may change options. Another feature of EquiBuilder II policies
which is not available under traditional whole life insurance is that the Policy
Owner generally has the ability to increase or decrease the Face Amount without
purchasing a new policy. However, evidence of insurability may be required. In
addition, the Policy Owner may direct the investment of net premiums, which will
determine, in part, the value of the Policy Account.
DEATH BENEFITS
American Franklin will pay a death benefit (net of any policy loan and loan
interest and any overdue charges) to the beneficiary of a policy when the
Insured Person dies. The Policy Owner may choose from two death benefit options:
Option A and Option B. Option A provides a benefit that equals the Face Amount
of the policy. Except as described below, the Option A benefit is fixed. Option
B provides a benefit that equals the Face Amount of the policy plus the amount
in the Policy Account on the day the Insured Person dies. Under Option B, the
value of the benefit is variable and fluctuates with the amount in the Policy
Account. Option B entails a higher monthly cost of insurance charge than Option
A and will
-6-
<PAGE>
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.
-7-
<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.
-8-
<PAGE>
American Franklin's current procedure is to disapprove a requested decrease
in the Face Amount if it would cause the alternate death benefit to apply.
Instead, the Policy Owner will be requested to make a partial withdrawal of Net
Cash Surrender Value from the Policy Account and then a decrease in the Face
Amount. See "The Features of EquiBuilder II Policies-Death Benefits," below.
American Franklin's current procedure, if the Policy Owner requests a Face
Amount decrease when there has been a previous increase in the Face Amount, is
to apply the decrease first against the most recent increase in the Face Amount.
Decreases will then be applied to prior increases in the Face Amount in the
reverse order in which such increases took place, and then to the original Face
Amount.
Policy changes that result in a reduction of the death benefit, such as a
decrease in the Face Amount, may cause a policy to become a "modified endowment
contract," 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
-9-
<PAGE>
this minimum initial premium. American Franklin determines the applicable
minimum initial premium based on the age, sex and risk class of the Insured
Person, the initial Face Amount of the policy and any additional benefits
selected. The first premium payment may be made by check or money order payable
to "The American Franklin Life Insurance Company." Any additional premiums
should be made by check or money order payable to "The American Franklin Life
Insurance Company" and should be sent directly to its Administrative Office.
American Franklin will send the Policy Owner premium reminder notices based
on the planned premium unless the Policy Owner requests American Franklin not to
do so in his or her application or by writing to American Franklin's
Administrative Office. Nevertheless, the Policy Owner may make the planned
payment, skip the planned payment or change the frequency or the amount of the
payment.
Generally, the Policy Owner may pay other premiums at any time and in any
amount, as long as each payment is at least $100. (Policies issued in some
states may have different minimum premium payments.) American Franklin may
increase this minimum upon 90 days' written notice. American Franklin may also
reject premium payments in a policy year if the payments would cause the policy
to cease to qualify as life insurance under federal tax law. See "Federal Tax
Considerations," below.
If the Policy Owner stops paying premiums temporarily or permanently, the
policy will continue in effect until the Net Cash Surrender Value can no longer
cover the monthly charges against the Policy Account for the benefits selected.
In addition, it should be noted that planned premiums may not be sufficient to
maintain a policy because of investment experience, policy changes or other
factors.
The tables set forth below under "Illustrations of Death Benefits, Policy
Account and Cash Surrender Values, and Accumulated Premiums" illustrate how the
key financial elements of EquiBuilder II policies work. The tables show death
benefits and Policy Account and Cash Surrender Values with Face Amounts and
planned annual premiums of different amounts for Insured Persons of different
ages.
ADDITIONAL BENEFITS
A policy may include additional benefits. A charge will be made against the
Policy Account monthly for each additional benefit. These benefits may be
cancelled at any time. More details will be included 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
-10-
<PAGE>
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.
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
-11-
<PAGE>
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 as high a level of current income as
is consistent with the preservation of capital and liquidity. The Portfolio
invests in U.S. dollar-denominated money market securities of domestic and
foreign issuers and complies with industry-standard requirements for money
market funds regarding the quality, maturity and diversification of the
Portfolio's investments.
VIP HIGH INCOME PORTFOLIO seeks a high level of current income while
also considering growth of capital. The Portfolio normally invests at least
65% of its total assets in income-producing debt securities, preferred
stocks and convertible securities, with an emphasis on lower-quality debt
securities 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 junk bonds, see the Prospectus for the Variable
Insurance Products Fund, which is attached to this Prospectus.
VIP EQUITY-INCOME PORTFOLIO seeks reasonable income. The Portfolio
will also consider the potential for capital appreciation. The Portfolio
seeks a yield which exceeds the composite yield on the securities
comprising the Standard & Poor's 500 Composite Stock Price Index. The
Portfolio normally invests at least 65% of its total assets in
income-producing equity securities.
VIP GROWTH PORTFOLIO seeks capital appreciation and normally invests
its assets primarily in common stocks. The Portfolio invests its assets in
companies which its investment adviser believes have above-average growth
potential.
VIP OVERSEAS PORTFOLIO seeks long-term growth of capital and normally
invests at least 65% of its total assets in foreign securities. The
Portfolio normally invests its assets primarily in common stocks.
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 and normally
invests its assets in U.S. dollar-denominated investment-grade bonds. The
investment adviser uses the Lehman Brothers Aggregate Bond Index as a guide
in structuring the Portfolio and selecting investments and manages the
Portfolio to have similar overall interest rate risk to the index.
VIPII ASSET MANAGER PORTFOLIO seeks high total return with reduced
risk over the long term by allocating its assets among domestic and foreign
stocks, bonds and short-term instruments.
VIPII INDEX 500 PORTFOLIO seeks investment results that correspond to
the total return of common stocks publicly traded in the United States, as
represented by Standard & Poor's 500 Composite Stock Price Index ("S & P
500"), and normally invests at least 80% of its assets in common stocks
included in the S & P 500. The S & P 500 is a widely recognized, unmanaged
index of common stock prices.
VIPII ASSET MANAGER: GROWTH PORTFOLIO seeks to maximize total return
by allocating its assets among stocks, bonds, short-term instruments and
other investments.
VIPII CONTRAFUND PORTFOLIO seeks long-term capital appreciation and
normally invests its assets primarily in common stocks. The Portfolio
invests its assets in securities of companies whose value the investment
adviser believes is not fully recognized by the public.
-12-
<PAGE>
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 SERIES will seek long-term growth of capital. The
series invests, under normal market conditions, at least 65% of its total assets
in common stocks and related securities, such as preferred stocks, convertible
securities and depositary receipts for those securities, of emerging growth
companies.
MFS RESEARCH SERIES will seek to provide long-term growth of capital and
future income. The series invests, under normal market conditions, at least 80%
of its total assets in common stocks and related securities, such as preferred
stocks, convertible securities and depositary receipts.
MFS GROWTH WITH INCOME SERIES will seek long-term growth of capital and
future income while providing more current dividend income than is normally
obtainable from a portfolio of only growth stocks. The series invests, under
normal market conditions, at least 65% of its total assets in common stock and
related securities, such as preferred stocks, convertible securities and
depositary receipts for those securities.
MFS TOTAL RETURN SERIES will primarily seek to obtain above-average income
(compared to a portfolio invested entirely in equity securities) consistent with
prudent employment of capital; its secondary objective is to take advantage of
opportunities for growth of capital and income since many securities offering a
better than average yield may also possess growth potential. The series is a
"balanced fund," and invests in a combination of equity and fixed income
securities.
MFS UTILITIES SERIES will seek capital growth and current income (income
above that available from a portfolio invested entirely in equity securities) by
investing under normal market conditions, at least 65% of its total assets in
equity and debt securities of both domestic and foreign companies in the
utilities industry.
MFS CAPITAL OPPORTUNITIES SERIES will seek capital appreciation. The series
invests, under normal market conditions, at least 65% of its total assets in
common stocks and related securities, such as preferred stocks, convertible
securities and depositary receipts for those securities.
Except for the VIP Money Market, VIPII Investment Grade Bond, VIPII Index
500 and MFS Growth With Income Portfolios, the portfolios may purchase
lower-quality bonds which provide poor protection for payment of principal and
interest (commonly referred to as "junk bonds"). These securities are highly
speculative. Lower-quality bonds involve greater risk of default or price
changes than securities assigned a higher quality rating due to changes in the
issuer's creditworthiness. This is an aggressive approach to income investing.
For a discussion of the risks of investment in these securities, please see the
Prospectuses for the Funds, which are attached to this Prospectus.
There is no guarantee that any portfolio of the Funds will achieve its
objective. In addition, the Funds' Prospectuses advise that no single portfolio
constitutes a balanced investment plan.
BEFORE SELECTING ANY DIVISION, the Policy Owner should carefully read the
Prospectuses for the Funds, which include more complete information about each
portfolio, including investment objectives and policies, charges and expenses. A
Policy Owner may obtain additional copies of the Prospectuses of the Funds by
contacting American Franklin's Administrative Office.
American Franklin may enter into agreements with affiliates of the Funds
that provide for reimbursement of American Franklin for certain costs incurred
in connection with administering the Funds as variable funding options for the
EquiBuilder 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.
-13-
<PAGE>
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. This compensation will not be
paid by the portfolios, their shareholders or the Policy Owners.
OWNERSHIP OF THE ASSETS OF THE SEPARATE ACCOUNT
Under Illinois law, American Franklin owns the assets of the Separate
Account and uses them to support EquiBuilder II policies, other variable life
policies and other variable life policies it may issue in the future. The
portion of the Separate Account's assets supporting these policies may not be
used to satisfy liabilities arising out of any other business of American
Franklin. Under certain unlikely circumstances, one investment division of the
Separate Account may be liable for claims relating to the operations of another
division. In addition to premiums from EquiBuilder II policies, American
Franklin may allocate premiums from other policies to the Separate Account.
These policy owners will participate in the Separate Account in proportion to
the amounts in the Separate Account relating to their policies. American
Franklin may also permit charges owed to it to stay in the Separate Account.
Thus, American Franklin may also participate proportionately in the Separate
Account. These accumulated amounts belong to American Franklin and American
Franklin may transfer them from the Separate Account to its General Account at
any time.
RIGHT TO CHANGE OPERATIONS
American Franklin reserves the right to change or add investment companies
in which Policy Accounts will be invested and to modify how it or the Separate
Account operates. American Franklin intends to comply with applicable law in
making any changes and, if necessary, will seek Policy Owner approval. American
Franklin has the right to:
add investment divisions to, or remove investment divisions from, the
Separate Account, combine two or more divisions within the Separate
Account, or withdraw assets relating to EquiBuilder II policies from one
investment division and put them into another;
register or end the registration of the Separate Account under the
Investment Company Act of 1940;
operate the Separate Account under the direction of a committee or
discharge such a committee at any time (the committee may be composed
entirely of persons who are "interested persons" of American Franklin
within the meaning of the Investment Company Act of 1940);
restrict or eliminate any voting rights of Policy Owners or other
people who have voting rights that affect the Separate Account;
operate the Separate Account or one or more of its investment
divisions in any other form the law allows, including a form that allows
the Separate Account to make direct investments. The Separate Account may
be charged an advisory fee if its investments are made directly, rather
than through an investment company. American Franklin may invest the assets
of the Separate Account in any legal investments. In choosing these
investments American Franklin will rely on its own or outside counsel for
advice. In addition, American Franklin may disapprove any change in
investment advisers or in investment policy unless a law or regulation
provides differently; and
modify the provisions of the policies to assure qualification under
the pertinent provisions of the Code or to comply with other applicable
federal or state laws.
If any changes are made that result in a material change in the underlying
investments of an investment division, Policy Owners will be notified as
required by law. American Franklin may, for example, cause an investment
division to invest in a mutual fund other than or in addition to the Funds. If,
as a result of any such material change, a Policy Owner then wishes to transfer
the amount of his or her Policy Account invested in one investment division to
another division of the Separate Account or to the Guaranteed Interest Division,
he or she may do so without charge, by giving written instructions to
-14-
<PAGE>
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).
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.
-15-
<PAGE>
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.
ILLUSTRATIVE TABLE OF MONTHLY COST OF INSURANCE RATES FOR
MALE NON-TOBACCO (ROUNDED) PER $1,000 OF AMOUNT AT RISK
<TABLE>
<CAPTION>
$50,000 - $199,999 $200,000 AND OVER
FACE AMOUNT SIZE BAND FACE AMOUNT SIZE BAND
------------------------ ------------------------
ATTAINED GUARANTEED CURRENT GUARANTEED CURRENT
AGE MAXIMUM RATE RATE MAXIMUM RATE RATE
-------- ------------ ------- ------------ -------
<S> <C> <C> <C> <C>
5 $ .08 $ .08 $ .08 $ .08
15 .11 .11 .11 .10
25 .15 .10 .15 .10
35 .18 .11 .18 .10
45 .38 .20 .38 .17
55 .88 .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.
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
-16-
<PAGE>
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 TOTAL ANNUAL EXPENSES (1)(2)
--------------- -------------- ----------------------------
<S> <C> <C> <C>
VIP Money Market 0.20% 0.10% 0.30%
VIP High Income 0.58% 0.12% 0.70%
VIP Equity-Income 0.49% 0.09% 0.58%
VIP Growth 0.59% 0.09% 0.68%
VIP Overseas 0.74% 0.17% 0.91%
VIPII Investment Grade Bond 0.43% 0.14% 0.57%
VIPII Asset Manager 0.54% 0.10% 0.64%
VIPII Index 500 0.24% 0.11% 0.35%
VIPII Contrafund 0.59% 0.11% 0.70%
VIPII Asset Manager: Growth 0.59% 0.14% 0.73%
MFS Emerging Growth 0.75% 0.10% 0.85%
MFS Research 0.75% 0.11% 0.86%
MFS Growth With Income 0.75% 0.13% 0.88%
MFS Total Return 0.75% 0.16% 0.91%
MFS Utilities 0.75% 0.26% 1.01%
MFS Capital Opportunities 0.75% 0.36%(3) 1.11%(3)
</TABLE>
(1) A portion of the brokerage commissions that certain Fidelity portfolios pay
was used to reduce their expenses. In addition, certain Fidelity portfolios
have entered into arrangements with their custodian whereby credits
realized as a result of uninvested cash balances were used to reduce
custodian expenses. Including these reductions, the total operating
expenses, after reimbursement for Index 500
-17-
<PAGE>
Portfolio, would have been: for VIP Equity-Income Portfolio: 0.57%; for VIP
Growth Portfolio: 0.66%; for VIP Overseas Portfolio: 0.89%; for VIPII Asset
Manager Portfolio: 0.63%; for VIPII Index 500 Portfolio: 0.28%; for VIPII
Contrafund Portfolio: 0.66%; and for VIPII Asset Manager: Growth Portfolio:
0.72%.
(2) Each MFS series has an expense offset arrangement which reduces the series'
custodian fee based upon the amount of cash maintained by the series with its
custodian and dividend disbursing agent. Each MFS series may enter into other
such arrangements and directed brokerage arrangements, which would also have the
effect of reducing the series' expenses. MFS series expenses do not take into
account these expense reductions, and are therefore higher than the actual
expenses of the series.
(3) MFS has agreed to bear expenses for this series, subject to reimbursement by
this series, such that such series' "Other Expenses" shall not exceed 0.25% of
the average daily net assets of the series during the current fiscal year. After
taking this expense reimbursement into account, the total operating expenses for
MFS Capital Opportunities would have been 1.02%. The payments made by MFS on
behalf of the series under this arrangement are subject to reimbursement by the
series to MFS, which will be accomplished by the payment of an expense
reimbursement fee by the series to MFS computed and paid monthly at a percentage
of the series' average daily net assets for its then current fiscal year, with a
limitation that immediately after such payment the series' "Other Expenses" will
not exceed the percentage set forth above for that series. The obligation of MFS
to bear a series' "Other Expenses" pursuant to this arrangement, and the series'
obligation to pay the reimbursement fee to MFS, terminates on the earlier of the
date on which payments made by the series equal the prior payment of such
reimbursable expenses by MFS, or December 31, 2004. MFS may, in its discretion,
terminate this arrangement at an earlier date, provided that the arrangement
will continue for the series until at least May 1, 2000, unless terminated with
the consent of the board of trustees which oversees the series.
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.
-18-
<PAGE>
The maximum surrender charge for a policy will be shown on the Policy
Information page of a policy and will equal 50% of one Target Premium. This
maximum will not vary based on the amount of premiums paid or when they are
paid. At the end of the sixth policy year, and at the end of each of the four
succeeding policy years, the maximum surrender charge is reduced by an amount
equal to 20% of the initial maximum surrender charge. After the end of the tenth
policy year, there is no surrender charge.
Subject to the maximum surrender charge, the surrender charge is calculated
based on actual premium payments. The surrender charge equals 30% of premium
payments made during the first policy year up to the amount of one Target
Premium and 9% of any additional premiums paid during the first ten policy
years, but not more than 50% of one Target Premium.
Paying less than one Target Premium in the first policy year will reduce
the surrender charge only if not more than approximately five Target Premiums
are paid before surrender or lapse (i.e., only if the maximum surrender charge
is not reached). However, structuring payments in this manner will increase the
risk that a policy will lapse (and that a surrender charge will be incurred that
would not have been incurred if the policy had remained in force). If payments
are structured in this manner, the amounts in the Policy Account would need to
receive favorable investment performance for the policy not to lapse. In
addition, paying less premiums may increase cost of insurance charges (which are
based on amount at risk). Attempting to structure the timing and amount of
premium payments to reduce the potential surrender charge below the maximum is
not recommended.
EXAMPLE: Assume the purchase of a $200,000 initial Face Amount policy for a male
age 40. This policy would have a Target Premium of $2,280 and a maximum
surrender charge of $1,140 ($2,280 x 50%). Also, assume that all premium
payments are made at the beginning of each policy year. The following table
shows the surrender charge which would apply under different premium payment
assumptions if surrender of the policy were to occur during the indicated policy
year:
<TABLE>
<CAPTION>
DURING YEAR PREMIUM CHARGE PREMIUM CHARGE PREMIUM CHARGE
- ----------- ------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
1 $3,000 $ 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 / $200,000 = .5)
-19-
<PAGE>
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 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.
-20-
<PAGE>
POLICY ACCOUNT VALUE
The amount in a Policy Account is the sum of the amounts allocated to the
Guaranteed Interest Division and to the various investment divisions of the
Separate Account. The amount in a Policy Account also reflects various
deductions and charges. Monthly charges are made as of the first day of each
policy month. Transaction charges or surrender charges are made as of the
effective date of the transaction (for example, administrative charges for
increases in Face Amount are made as of the next monthly policy anniversary
after American Franklin approves the Policy Owner's request).
Charges against the Separate Account are reflected daily. Any amount
allocated to an investment division of the Separate Account will increase or
decrease depending on the investment experience of that division. For amounts
allocated to the investment divisions of the Separate Account, there is no
guaranteed minimum cash value. The value of amounts in a Policy Account
allocated to the Guaranteed Interest Division is guaranteed. See "The Guaranteed
Interest Division," below.
AMOUNTS IN THE SEPARATE ACCOUNT
Amounts allocated, transferred or added to the investment divisions of the
Separate Account are used to purchase units representing undivided interests in
the various divisions. The amount in each division is represented by the value
of the units credited to the Policy Account for that division. The number of
units purchased or redeemed in an investment division of the Separate Account is
calculated by dividing the dollar amount of the transaction by the division's
unit value next calculated at the close of business on the date of the
transaction (see "Additional Information About EquiBuilder II Policies-Policy
Periods, Anniversaries, Dates and Ages," below, regarding the date that the net
amount of the initial premium is credited to the Policy Account and interim
allocation of the initial net premium and any other net premium received prior
to the time that 15 days have elapsed after the Issue Date, and see "Policy
Account Transactions" and "The Guaranteed Interest Division-Transfers from the
Guaranteed Interest Division," below, regarding the effective dates of Policy
Account transactions). The number of units for an investment division at any
time is the number of units purchased less the number of units redeemed. The
value of units fluctuates with the investment performance of the corresponding
portfolio of a Fund, which reflects the investment income and realized and
unrealized capital gains and losses of the portfolio and the Fund's expenses.
The unit values also reflect charges American Franklin makes against the
Separate Account. The number of units credited to a Policy Account, however,
will not vary because of changes in unit values. On any given day, the value a
Policy Account has in an investment division of 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,
-21-
<PAGE>
such as premium payments or surrenders). For this purpose, American
Franklin uses the share value reported to it by the Fund;
Next, any dividends or capital gains distributions paid by the Fund
for the corresponding portfolio on that day are added;
Then, this sum is divided by the value of the amounts in the
investment division at the close of business on the immediately preceding
business day (after giving effect to any policy transactions on that day);
Then, a daily asset charge for each calendar day between business days
is subtracted (for example, a Monday calculation may include charges for
Saturday and Sunday). The daily charge is .00002063, which is an effective
annual rate of .75%. This charge is for mortality and expense risks assumed
by American Franklin under the policy;
Finally, any daily charge for taxes or amounts set aside as a reserve
for taxes is subtracted.
Generally, this means that unit values are adjusted to reflect what happens
to the Funds, and also for the mortality and expense risk charge and any charge
for taxes.
POLICY ACCOUNT TRANSACTIONS
The transactions described below may have different effects on the Policy
Account, death benefit, Face Amount or cost of insurance. The Policy Owner
should consider the net effects before combining Policy Account transactions.
See "The Features of EquiBuilder II Policies-Changes in EquiBuilder II
Policies," above. Certain transactions also entail charges. For information
regarding other charges, see "Deductions And Charges," above.
CHANGING PREMIUM AND DEDUCTION ALLOCATION PERCENTAGES
A Policy Owner may change the allocation percentages of his or her net
premiums or of his or her monthly deductions by giving instructions to American
Franklin at its Administrative Office. These changes will go into effect as of
the date American Franklin receives the request at its Administrative Office and
will affect transactions on and after that date.
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.
-22-
<PAGE>
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.
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.
-23-
<PAGE>
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 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.
-24-
<PAGE>
WITHDRAWING MONEY FROM THE POLICY ACCOUNT
After a policy has been in effect for a year, the Policy Owner may request a
partial withdrawal of the Net Cash Surrender Value by making a written request
to American Franklin at its Administrative Office. Any withdrawal is subject to
certain conditions. It must:
be at least $500;
not cause the death benefit to fall below the minimum for which
American Franklin would issue the policy at the time (see "Policy Account
Transactions-The Effects of a Partial Withdrawal," below); and
not cause the policy to fail to qualify as life insurance under
applicable tax law.
The Policy Owner may specify how much of the withdrawal he or she wants
taken from each investment division. If no instructions are given, American
Franklin will make the withdrawal on the basis of the then current deduction
allocation percentages. If American Franklin cannot withdraw the amount based on
the Policy Owner's directions or on the deduction allocation percentages,
American Franklin will withdraw the amount based on the proportions of the
unloaned amount, if any, of the Policy Account allocated to the Guaranteed
Interest Division and the respective amounts allocated to the investment
divisions of the Separate Account to the total unloaned value of the Policy
Account. For example, if 50% of a Policy Account is in the Guaranteed Interest
Division and 50% is in the Money Market Division and the Policy Owner wants to
withdraw $1,000, American Franklin would take $500 from each division.
WITHDRAWAL CHARGES
When a partial withdrawal of Net Cash Surrender Value is made, a current
expense charge of $25 or 2% of the amount withdrawn, whichever is less, will be
charged against the Policy Account. This charge will be allocated equally among
the divisions from which the withdrawal was made. If the charge cannot be
allocated in this manner, it will be allocated as described under "Deductions
And Charges-Allocation of Policy Account Charges," above.
THE EFFECTS OF A PARTIAL WITHDRAWAL
A partial withdrawal of Net Cash Surrender Value reduces the amount in the
Policy Account. It also reduces the Cash Surrender Value and the death benefit
on a dollar-for-dollar basis. If the death benefit based on a percentage
multiple applies, the reduction in death benefit can be greater. See "The
Features of EquiBuilder 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
-25-
<PAGE>
the policy to American Franklin at its Administrative Office. The Net Cash
Surrender Value of the policy equals the Cash Surrender Value minus any
outstanding loan and loan interest. American Franklin will compute the Net Cash
Surrender Value as of the date a request for surrender and the policy are
received by American Franklin at its Administrative Office, and all insurance
coverage under the policy will end on that date. See "Federal Tax Considerations
- - Tax Treatment of Policy Benefits," below, for the tax consequences of a
surrender.
THE GUARANTEED INTEREST DIVISION
A Policy Owner may allocate some or all of a Policy Account to the
Guaranteed Interest Division, which is part of American Franklin's General
Account and pays interest at a declared rate guaranteed by American Franklin for
each policy year. The principal, after charges, is also guaranteed by American
Franklin. The General Account supports American Franklin's insurance and annuity
obligations. Because of applicable exemptive and exclusionary provisions,
interests in the Guaranteed Interest Division have not been registered under the
Securities Act of 1933, and neither the Guaranteed Interest Division nor the
General Account has been registered as an investment company under the
Investment Company Act of 1940. Accordingly, neither the General Account, the
Guaranteed Interest Division nor any interests therein are generally subject to
regulation under the 1933 Act or the 1940 Act. American Franklin has been
advised that the staff of the Securities and Exchange Commission has not made a
review of the disclosures which are included in this Prospectus which relate to
the General Account and the Guaranteed Interest Division. These disclosures,
however, may be subject to certain generally applicable provisions of the
federal securities law relating to the accuracy and completeness of statements
made in a prospectus.
AMOUNTS IN THE GUARANTEED INTEREST DIVISION
A Policy Owner may accumulate amounts in the Guaranteed Interest Division
by:
allocating net premiums and loan repayments;
transferring amounts from the investment divisions of the Separate
Account; or
earning interest on amounts already allocated to the Guaranteed
Interest Division.
The amount allocated to the Guaranteed Interest Division at any time is the
sum of all net premiums and loan repayments allocated to that division and all
transfers and earned interest, and includes amounts securing any policy loan
outstanding. This amount is reduced by amounts transferred or withdrawn from and
charges allocated to this division.
INTEREST ON AMOUNTS IN THE GUARANTEED INTEREST DIVISION
American Franklin pays a declared interest rate on all amounts in the
Guaranteed Interest Division. At policy issuance and prior to each policy
anniversary, American Franklin declares the rates that will apply to amounts in
the Guaranteed Interest Division for the following policy year. Different rates
are paid on unloaned and loaned amounts in the Guaranteed Interest Division.
These annual interest rates will never be less than the minimum guaranteed
interest rate of 4-1/2%. Interest is compounded daily at an effective annual
rate that equals the declared rate for each policy year.
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
-26-
<PAGE>
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.
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
-27-
<PAGE>
less than the Stipulated Amount received before the end of the grace period will
be applied to overdue charges but will not prevent lapse of the policy.
If American Franklin does not receive payment within the 61 days, the
policy will lapse without value. American Franklin will withdraw any amount left
in the Policy Account and apply this amount to the charges owed to it, including
any applicable surrender charge.
If the Insured Person dies during the grace period, American Franklin will
pay the insurance benefits to the beneficiary, minus any outstanding policy loan
and loan interest and overdue charges.
REINSTATEMENT OF THE POLICY
A Policy Owner may reinstate his or her policy within three years after it
lapses if:
evidence is provided that the Insured Person is still insurable; and
a premium payment sufficient to keep the policy in force for three
months after the date it is reinstated is paid to American Franklin.
The effective date of the reinstated policy will be the beginning of the
policy month which coincides with or follows the date American Franklin approves
the reinstatement application. Upon reinstatement, the maximum surrender charge
for the policy will be reduced by the amount of all surrender charges previously
imposed on the policy, and for purposes of determining any future surrender
charges on the policy, the policy will be deemed to have been in effect since
the original Register Date. Previous loans will not be reinstated.
POLICY PERIODS, ANNIVERSARIES, DATES AND AGES
Policy years, policy months and policy anniversaries are measured from the
Register Date shown on the Policy Information page in the policy. Each policy
month begins on the same day in each calendar month as the day of the month of
the Register Date. For purposes of receiving Policy Owner requests, American
Franklin is open from 8:00 a.m. to 3:00 p.m., Springfield, Illinois time.
The Register Date is the earlier of the Issue Date or the Date of Payment.
The Date of Payment will normally be the day of receipt of a check for the full
initial premium at American Franklin's Administrative Office. The Issue Date,
shown on the Policy Information page of each policy, is the date a policy is
actually issued, and depends on the underwriting and other requirements for
issuing a particular policy.
Contestability is measured from the Issue Date, as is the suicide exclusion.
The initial net premium will be put in the Policy Account as of the Date of
Payment. The initial net premium will be allocated to the Money Market division
of the Separate Account, regardless of the Policy Owner's premium allocation
percentages, until the first business day 15 days after the Issue Date. Any
other net premium received during that period will also be allocated to the
Money Market division. On the first business day 15 days after the Issue Date,
the amount in the Policy Account will be reallocated in accordance with the
Policy Owner's premium allocation percentages. Charges and deductions under the
policy are first made as of the Register Date. See "The Features of EquiBuilder
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
-28-
<PAGE>
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 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.
-29-
<PAGE>
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 59 1/2 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.
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.
-30-
<PAGE>
POSSIBLE CHARGES FOR AMERICAN FRANKLIN'S TAXES
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 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 (0.59% of aggregate average daily net assets is assumed) and direct
expenses of the Funds (0.13% 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 -1.47%, on 4% it would be 2.53%, on 8% it would be 6.53%
and on 12% it would be 10.53%. 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 use a portion of the brokerage
commissions paid by certain portfolios to reduce their total expenses. In
addition, certain Fidelity portfolios have entered into arrangements with their
custodian whereby credits realized as a result of uninvested cash balances were
used to reduce custodian expenses. Each MFS portfolio has an expense offset
arrangement which reduces the portfolios' custodian fee, and the investment
adviser has agreed to bear expenses for the MFS Capital Opportunities series
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
-31-
<PAGE>
that if a policy is surrendered in its very early years for payment of its Cash
Surrender Value, that Cash Surrender Value will be low in comparison to the
amount of the premiums accumulated with interest. Thus, the cost of owning a
policy for a relatively short time will be high.
At the request of an applicant for a policy, American Franklin will furnish
a comparable illustration based on the age and sex of the proposed Insured
Person, standard risk assumptions, a stipulated initial Face Amount and proposed
premiums. Upon request after issuance American Franklin will also provide an
illustration of future policy benefits based on both guaranteed and current cost
factor assumptions and actual Policy Account value. If illustrations are
requested more than once in any policy year, a charge may be imposed.
TABLE OF CONTENTS FOR ILLUSTRATIONS
INITIAL FACE AMOUNT $200,000 MALE NON-TOBACCO
<TABLE>
<CAPTION>
PREMIUM PAGE
------- ----
<S> <C> <C>
Age 40, Option A-Current Charges $3,000 33
Age 40, Option A-Guaranteed Charges $3,000 33
Age 40, Option B-Current Charges $3,000 34
Age 40, Option B-Guaranteed Charges $3,000 34
</TABLE>
INITIAL FACE AMOUNT $100,000 MALE NON-TOBACCO
<TABLE>
<CAPTION>
PREMIUM PAGE
------- ----
<S> <C> <C>
Age 40, Option A-Current Charges $1,500 35
Age 40, Option A-Guaranteed Charges $1,500 35
Age 40, Option B-Current Charges $1,500 36
Age 40, Option B-Guaranteed Charges $1,500 36
</TABLE>
-32-
<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 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 3,150 200,000 200,000 200,000 200,000 2,260 2,363 2,467 2,571 1,511 1,615 1,719 1,823
2 6,458 200,000 200,000 200,000 200,000 4,750 5,057 5,372 5,696 3,731 4,038 4,353 4,677
3 9,930 200,000 200,000 200,000 200,000 7,183 7,797 8,445 9,128 6,043 6,657 7,305 7,988
4 13,577 200,000 200,000 200,000 200,000 9,559 10,586 11,699 12,902 8,419 9,446 10,559 11,762
5 17,406 200,000 200,000 200,000 200,000 11,879 13,425 15,144 17,054 10,739 12,285 14,004 15,914
6 21,426 200,000 200,000 200,000 200,000 14,145 16,317 18,798 21,627 13,005 15,177 17,658 20,487
7 25,647 200,000 200,000 200,000 200,000 16,330 19,235 22,645 26,639 15,418 18,323 21,733 25,727
8 30,080 200,000 200,000 200,000 200,000 18,437 22,184 26,702 32,143 17,753 21,500 26,018 31,459
9 34,734 200,000 200,000 200,000 200,000 20,469 25,165 30,987 38,193 20,013 24,709 30,531 37,737
10 39,620 200,000 200,000 200,000 200,000 22,427 28,181 35,515 44,852 22,199 27,953 35,287 44,624
11 44,751 200,000 200,000 200,000 200,000 24,311 31,232 40,306 52,190 24,311 31,232 40,306 52,190
12 50,139 200,000 200,000 200,000 200,000 26,150 34,349 45,405 60,307 26,150 34,349 45,405 60,307
13 55,796 200,000 200,000 200,000 200,000 27,912 37,502 50,806 69,266 27,912 37,502 50,806 69,266
14 61,736 200,000 200,000 200,000 200,000 29,601 40,696 56,534 79,166 29,601 40,696 56,534 79,166
15 67,972 200,000 200,000 200,000 200,000 31,218 43,932 62,615 90,115 31,218 43,932 62,615 90,115
16 74,521 200,000 200,000 200,000 200,000 32,757 47,208 69,072 102,233 32,757 47,208 69,072 102,233
17 81,397 200,000 200,000 200,000 200,000 34,183 50,492 75,907 115,637 34,183 50,492 75,907 115,637
18 88,617 200,000 200,000 200,000 200,000 35,480 53,773 83,141 130,479 35,480 53,773 83,141 130,479
19 96,198 200,000 200,000 200,000 202,789 36,669 57,071 90,827 146,949 36,669 57,071 90,827 146,949
20 104,158 200,000 200,000 200,000 221,323 37,734 60,375 98,995 165,167 37,734 60,375 98,995 165,167
25 150,340 200,000 200,000 200,000 351,574 40,548 76,531 148,541 288,176 40,548 76,531 148,541 288,176
</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 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 3,150 200,000 200,000 200,000 200,000 2,260 2,363 2,467 2,571 1,511 1,615 1,719 1,823
2 6,458 200,000 200,000 200,000 200,000 4,343 4,641 4,948 5,264 3,325 3,623 3,929 4,245
3 9,930 200,000 200,000 200,000 200,000 6,349 6,930 7,544 8,192 5,209 5,790 6,404 7,052
4 13,577 200,000 200,000 200,000 200,000 8,274 9,225 10,258 11,379 7,134 8,085 9,118 10,239
5 17,406 200,000 200,000 200,000 200,000 10,118 11,526 13,098 14,852 8,978 10,386 11,958 13,712
6 21,426 200,000 200,000 200,000 200,000 11,875 13,827 16,068 18,637 10,735 12,687 14,928 17,497
7 25,647 200,000 200,000 200,000 200,000 13,546 16,128 19,177 22,771 12,634 15,216 18,265 21,859
8 30,080 200,000 200,000 200,000 200,000 15,127 18,425 22,432 27,289 14,443 17,741 21,748 26,605
9 34,734 200,000 200,000 200,000 200,000 16,615 20,715 25,840 32,233 16,159 20,259 25,384 31,777
10 39,620 200,000 200,000 200,000 200,000 18,005 22,992 29,408 37,647 17,777 22,764 29,180 37,419
11 44,751 200,000 200,000 200,000 200,000 19,294 25,252 33,146 43,585 19,294 25,252 33,146 43,585
12 50,139 200,000 200,000 200,000 200,000 20,467 27,483 37,055 50,098 20,467 27,483 37,055 50,098
13 55,796 200,000 200,000 200,000 200,000 21,514 29,670 41,138 57,246 21,514 29,670 41,138 57,246
14 61,736 200,000 200,000 200,000 200,000 22,421 31,803 45,403 65,101 22,421 31,803 45,403 65,101
15 67,972 200,000 200,000 200,000 200,000 23,173 33,864 49,850 73,741 23,173 33,864 49,850 73,741
16 74,521 200,000 200,000 200,000 200,000 23,760 35,844 54,494 83,266 23,760 35,844 54,494 83,266
17 81,397 200,000 200,000 200,000 200,000 24,171 37,731 59,345 93,787 24,171 37,731 59,345 93,787
18 88,617 200,000 200,000 200,000 200,000 24,400 39,519 64,426 105,442 24,400 39,519 64,426 105,442
19 96,198 200,000 200,000 200,000 200,000 24,434 41,195 69,753 118,382 24,434 41,195 69,753 118,382
20 104,158 200,000 200,000 200,000 200,000 24,261 42,747 75,349 132,789 24,261 42,747 75,349 132,789
25 150,340 200,000 200,000 200,000 283,043 19,240 47,661 108,128 232,003 19,240 47,661 108,128 232,003
</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.
-33-
<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 0% 4% 8% 12% 0% 4% 8% 12% 0% 4% 8% 12%
YEAR PREMIUMS 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 3,150 202,256 202,360 202,463 202,567 2,256 2,360 2,463 2,567 1,507 1,611 1,715 1,818
2 6,458 204,739 205,044 205,359 205,682 4,739 5,044 5,359 5,682 3,720 4,026 4,340 4,663
3 9,930 207,159 207,771 208,416 209,096 7,159 7,771 8,416 9,096 6,019 6,631 7,276 7,956
4 13,577 209,518 210,540 211,647 212,843 9,518 10,540 11,647 12,843 8,378 9,400 10,507 11,703
5 17,406 211,815 213,351 215,059 216,955 11,815 13,351 15,059 16,955 10,675 12,211 13,919 15,815
6 21,426 214,052 216,206 218,667 221,473 14,052 16,206 18,667 21,473 12,912 15,066 17,527 20,333
7 25,647 216,198 219,075 222,451 226,405 16,198 19,075 22,451 26,405 15,286 18,163 21,539 25,493
8 30,080 218,258 221,960 226,424 231,797 18,258 21,960 26,424 31,797 17,574 21,276 25,740 31,113
9 34,734 220,231 224,861 230,598 237,698 20,231 24,861 30,598 37,698 19,775 24,405 30,142 37,242
10 39,620 222,118 227,776 234,985 244,158 22,118 27,776 34,985 44,158 21,890 27,548 34,757 43,930
11 44,751 223,920 230,707 239,598 251,238 23,920 30,707 39,598 51,238 23,920 30,707 39,598 51,238
12 50,139 225,668 233,683 244,484 259,034 25,668 33,683 44,484 59,034 25,668 33,683 44,484 59,034
13 55,796 227,324 236,668 249,620 267,581 27,324 36,668 49,620 67,581 27,324 36,668 49,620 67,581
14 61,736 228,893 239,663 255,025 276,960 28,893 39,663 55,025 76,960 28,893 39,663 55,025 76,960
15 67,972 230,373 242,667 260,716 287,258 30,373 42,667 60,716 87,258 30,373 42,667 60,716 87,258
16 74,521 231,758 245,672 266,701 298,561 31,758 45,672 66,701 98,561 31,758 45,672 66,701 98,561
17 81,397 233,003 248,632 272,952 310,928 33,003 48,632 72,952 110,928 33,003 48,632 72,952 110,928
18 88,617 234,090 251,522 279,465 324,448 34,090 51,522 79,465 124,448 34,090 51,522 79,465 124,448
19 96,198 235,041 254,365 286,279 339,264 35,041 54,365 86,279 139,264 35,041 54,365 86,279 139,264
20 104,158 235,837 257,135 293,391 355,478 35,837 57,135 93,391 155,478 35,837 57,135 93,391 155,478
25 150,340 236,655 268,858 333,104 458,524 36,655 68,858 133,104 258,524 36,655 68,858 133,104 258,524
</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 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 3,150 202,256 202,360 202,463 202,567 2,256 2,360 2,463 2,567 1,507 1,611 1,715 1,818
2 6,458 204,324 204,621 204,926 205,240 4,324 4,621 4,926 5,240 3,305 3,602 3,907 4,221
3 9,930 206,306 206,882 207,492 208,135 6,306 6,882 7,492 8,135 5,166 5,742 6,352 6,995
4 13,577 208,197 209,138 210,161 211,270 8,197 9,138 10,161 11,270 7,057 7,998 9,021 10,130
5 17,406 209,998 211,386 212,938 214,667 9,998 11,386 12,938 14,667 8,858 10,246 11,798 13,527
6 21,426 211,700 213,618 215,821 218,346 11,700 13,618 15,821 18,346 10,560 12,478 14,681 17,206
7 25,647 213,304 215,832 218,817 222,334 13,304 15,832 18,817 22,334 12,392 14,920 17,905 21,422
8 30,080 214,805 218,020 221,925 226,657 14,805 18,020 21,925 26,657 14,121 17,336 21,241 25,973
9 34,734 216,198 220,177 225,148 231,345 16,198 20,177 25,148 31,345 15,742 19,721 24,692 30,889
10 39,620 217,478 222,293 228,483 236,427 17,478 22,293 28,483 36,427 17,250 22,065 28,255 36,199
11 44,751 218,640 224,361 231,933 241,938 18,640 24,361 31,933 41,938 18,640 24,361 31,933 41,938
12 50,139 219,667 226,362 235,486 247,906 19,667 26,362 35,486 47,906 19,667 26,362 35,486 47,906
13 55,796 220,547 228,277 239,132 254,360 20,547 28,277 39,132 54,360 20,547 28,277 39,132 54,360
14 61,736 221,265 230,089 242,861 261,335 21,265 30,089 42,861 61,335 21,265 30,089 42,861 61,335
15 67,972 221,801 231,773 246,655 268,864 21,801 31,773 46,655 68,864 21,801 31,773 46,655 68,864
16 74,521 222,147 233,312 250,507 276,990 22,147 33,312 50,507 76,990 22,147 33,312 50,507 76,990
17 81,397 222,290 234,688 254,404 285,762 22,290 34,688 54,404 85,762 22,290 34,688 54,404 85,762
18 88,617 222,225 235,888 258,339 295,237 22,225 35,888 58,339 95,237 22,225 35,888 58,339 95,237
19 96,198 221,938 236,891 262,300 305,473 21,938 36,891 62,300 105,473 21,938 36,891 62,300 105,473
20 104,158 221,419 237,678 266,273 316,536 21,419 37,678 66,273 116,536 21,419 37,678 66,273 116,536
25 150,340 214,349 236,996 285,097 385,774 14,349 36,996 85,097 185,774 14,349 36,996 85,097 185,774
</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.
-34-
<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 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 1,575 100,000 100,000 100,000 100,000 939 987 1,035 1,083 565 613 661 709
2 3,229 100,000 100,000 100,000 100,000 2,137 2,277 2,421 2,570 1,627 1,768 1,912 2,060
3 4,965 100,000 100,000 100,000 100,000 3,304 3,587 3,886 4,201 2,734 3,017 3,316 3,631
4 6,788 100,000 100,000 100,000 100,000 4,441 4,918 5,433 5,991 3,871 4,348 4,863 5,421
5 8,703 100,000 100,000 100,000 100,000 5,549 6,269 7,070 7,958 4,979 5,699 6,500 7,388
6 10,713 100,000 100,000 100,000 100,000 6,628 7,642 8,801 10,121 6,058 7,072 8,231 9,551
7 12,824 100,000 100,000 100,000 100,000 7,663 9,024 10,619 12,487 7,207 8,568 10,163 12,031
8 15,040 100,000 100,000 100,000 100,000 8,655 10,412 12,530 15,078 8,313 10,070 12,188 14,736
9 17,367 100,000 100,000 100,000 100,000 9,605 11,810 14,542 17,921 9,377 11,582 14,314 17,693
10 19,810 100,000 100,000 100,000 100,000 10,511 13,216 16,661 21,043 10,397 13,102 16,547 20,929
11 22,376 100,000 100,000 100,000 100,000 11,378 14,634 18,898 24,479 11,378 14,634 18,898 24,479
12 25,069 100,000 100,000 100,000 100,000 12,218 16,075 21,273 28,276 12,218 16,075 21,273 28,276
13 27,898 100,000 100,000 100,000 100,000 13,015 17,527 23,785 32,463 13,015 17,527 23,785 32,463
14 30,868 100,000 100,000 100,000 100,000 13,768 18,988 26,439 37,083 13,768 18,988 26,439 37,083
15 33,986 100,000 100,000 100,000 100,000 14,481 20,461 29,252 42,191 14,481 20,461 29,252 42,191
16 37,261 100,000 100,000 100,000 100,000 15,150 21,946 32,234 47,842 15,150 21,946 32,234 47,842
17 40,699 100,000 100,000 100,000 100,000 15,754 23,421 35,381 54,089 15,754 23,421 35,381 54,089
18 44,309 100,000 100,000 100,000 100,000 16,283 24,879 38,701 61,002 16,283 24,879 38,701 61,002
19 48,099 100,000 100,000 100,000 100,000 16,750 26,333 42,222 68,674 16,750 26,333 42,222 68,674
20 52,079 100,000 100,000 100,000 103,441 17,145 27,773 45,954 77,195 17,145 27,773 45,954 77,195
25 75,170 100,000 100,000 100,000 164,403 17,614 34,456 68,424 134,756 17,614 34,456 68,424 134,756
</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 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 1,575 100,000 100,000 100,000 100,000 939 987 1,035 1,083 565 613 661 709
2 3,229 100,000 100,000 100,000 100,000 1,912 2,047 2,187 2,331 1,402 1,538 1,678 1,821
3 4,965 100,000 100,000 100,000 100,000 2,846 3,111 3,390 3,686 2,276 2,541 2,820 3,116
4 6,788 100,000 100,000 100,000 100,000 3,741 4,175 4,646 5,158 3,171 3,605 4,076 4,588
5 8,703 100,000 100,000 100,000 100,000 4,595 5,239 5,958 6,760 4,025 4,669 5,388 6,190
6 10,713 100,000 100,000 100,000 100,000 5,407 6,301 7,327 8,503 4,837 5,731 6,757 7,933
7 12,824 100,000 100,000 100,000 100,000 6,176 7,359 8,757 10,404 5,720 6,903 8,301 9,948
8 15,040 100,000 100,000 100,000 100,000 6,900 8,413 10,251 12,477 6,558 8,071 9,909 12,135
9 17,367 100,000 100,000 100,000 100,000 7,579 9,460 11,811 14,742 7,351 9,232 11,583 14,514
10 19,810 100,000 100,000 100,000 100,000 8,209 10,497 13,440 17,219 8,095 10,383 13,326 17,105
11 22,376 100,000 100,000 100,000 100,000 8,788 11,522 15,143 19,931 8,788 11,522 15,143 19,931
12 25,069 100,000 100,000 100,000 100,000 9,309 12,527 16,918 22,900 9,309 12,527 16,918 22,900
13 27,898 100,000 100,000 100,000 100,000 9,767 13,507 18,766 26,152 9,767 13,507 18,766 26,152
14 30,868 100,000 100,000 100,000 100,000 10,155 14,455 20,689 29,719 10,155 14,455 20,689 29,719
15 33,986 100,000 100,000 100,000 100,000 10,465 15,361 22,686 33,635 10,465 15,361 22,686 33,635
16 37,261 100,000 100,000 100,000 100,000 10,691 16,221 24,761 37,942 10,691 16,221 24,761 37,942
17 40,699 100,000 100,000 100,000 100,000 10,829 17,028 26,919 42,690 10,829 17,028 26,919 42,690
18 44,309 100,000 100,000 100,000 100,000 10,874 17,778 29,167 47,940 10,874 17,778 29,167 47,940
19 48,099 100,000 100,000 100,000 100,000 10,821 18,465 31,512 53,757 10,821 18,465 31,512 53,757
20 52,079 100,000 100,000 100,000 100,000 10,663 19,080 33,962 60,222 10,663 19,080 33,962 60,222
25 75,170 100,000 100,000 100,000 128,335 7,751 20,560 47,999 105,193 7,751 20,560 47,999 105,193
</TABLE>
(1) Assumes net interest of 5% compounded annually.
(2) Assumes no policy loan has been made.
The death benefits and Policy Account and Cash Surrender Values will differ
if premiums are paid in different amounts or frequencies. It is emphasized
that the hypothetical investment results are illustrative only and should not
be deemed a representation of past or future investment results. Actual
investment results may be more or less than those shown. The death benefits
and Policy Account and Cash Surrender Values for a policy would be different
from those shown if actual rates of investment return applicable to the
policy averaged 0%, 4%, 8%or 12% over a period of years, but also fluctuated
above or below that average for individual policy years. The death benefits
and Policy Account and Cash Surrender Values for a policy would also be
different from those shown, depending on the investment allocations made to
the investment divisions of the Separate Account and the different rates of
return of the Funds' portfolios, if the actual rates of investment return
applicable to the policy averaged 0%, 4%, 8% and 12%, but varied above or
below that average for individual divisions. No representations can be made
that these hypothetical rates of return can be achieved for any one year or
sustained over any period of time.
-35-
<PAGE>
EQUIBUILDER 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 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 1,575 100,938 100,985 101,033 101,081 938 985 1,033 1,081 563 611 659 706
2 3,229 102,131 102,271 102,415 102,563 2,131 2,271 2,415 2,563 1,622 1,762 1,905 2,053
3 4,965 103,292 103,574 103,872 104,185 3,292 3,574 3,872 4,185 2,722 3,004 3,302 3,615
4 6,788 104,420 104,894 105,407 105,961 4,420 4,894 5,407 5,961 3,850 4,324 4,837 5,391
5 8,703 105,516 106,231 107,026 107,907 5,516 6,231 7,026 7,907 4,946 5,661 6,456 7,337
6 10,713 106,579 107,585 108,733 110,040 6,579 7,585 8,733 10,040 6,009 7,015 8,163 9,470
7 12,824 107,594 108,940 110,518 112,364 7,594 8,940 10,518 12,364 7,138 8,484 10,062 11,908
8 15,040 108,560 110,294 112,384 114,896 8,560 10,294 12,384 14,896 8,218 9,952 12,042 14,554
9 17,367 109,479 111,649 114,337 117,660 9,479 11,649 14,337 17,660 9,251 11,421 14,109 17,432
10 19,810 110,347 113,001 116,380 120,675 10,347 13,001 16,380 20,675 10,233 12,887 16,266 20,561
11 22,376 111,169 114,353 118,521 123,972 11,169 14,353 18,521 23,972 11,169 14,353 18,521 23,972
12 25,069 111,959 115,717 120,779 127,594 11,959 15,717 20,779 27,594 11,959 15,717 20,779 27,594
13 27,898 112,699 117,078 123,147 131,558 12,699 17,078 23,147 31,558 12,699 17,078 23,147 31,558
14 30,868 113,385 118,429 125,624 135,893 13,385 18,429 25,624 35,893 13,385 18,429 25,624 35,893
15 33,986 114,022 119,775 128,222 140,643 14,022 19,775 28,222 40,643 14,022 19,775 28,222 40,643
16 37,261 114,607 121,111 130,945 145,848 14,607 21,111 30,945 45,848 14,607 21,111 30,945 45,848
17 40,699 115,113 122,408 133,772 151,525 15,113 22,408 33,772 51,525 15,113 22,408 33,772 51,525
18 44,309 115,526 123,652 136,696 157,710 15,526 23,652 36,696 57,710 15,526 23,652 36,696 57,710
19 48,099 115,865 124,856 139,738 164,473 15,865 24,856 39,738 64,473 15,865 24,856 39,738 64,473
20 52,079 116,114 126,005 142,890 171,858 16,114 26,005 42,890 71,858 16,114 26,005 42,890 71,858
25 75,170 115,529 130,293 159,977 218,507 15,529 30,293 59,977 118,507 15,529 30,293 59,977 118,507
</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 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 1,575 100,938 100,985 101,033 101,081 938 985 1,033 1,081 563 611 659 706
2 3,229 101,903 102,038 102,177 102,320 1,903 2,038 2,177 2,320 1,393 1,528 1,667 1,811
3 4,965 102,826 103,089 103,366 103,660 2,826 3,089 3,366 3,660 2,256 2,519 2,796 3,090
4 6,788 103,705 104,135 104,602 105,108 3,705 4,135 4,602 5,108 3,135 3,565 4,032 4,538
5 8,703 104,540 105,175 105,884 106,675 4,540 5,175 5,884 6,675 3,970 4,605 5,314 6,105
6 10,713 105,326 106,205 107,214 108,369 5,326 6,205 7,214 8,369 4,756 5,635 6,644 7,799
7 12,824 106,064 107,223 108,591 110,202 6,064 7,223 8,591 10,202 5,608 6,767 8,135 9,746
8 15,040 106,752 108,227 110,018 112,186 6,752 8,227 10,018 12,186 6,410 7,885 9,676 11,844
9 17,367 107,387 109,213 111,492 114,334 7,387 9,213 11,492 14,334 7,159 8,985 11,264 14,106
10 19,810 107,966 110,175 113,015 116,658 7,966 10,175 13,015 16,658 7,852 10,061 12,901 16,544
11 22,376 108,487 111,112 114,585 119,174 8,487 11,112 14,585 19,174 8,487 11,112 14,585 19,174
12 25,069 108,941 112,012 116,197 121,893 8,941 12,012 16,197 21,893 8,941 12,012 16,197 21,893
13 27,898 109,323 112,867 117,845 124,827 9,323 12,867 17,845 24,827 9,323 12,867 17,845 24,827
14 30,868 109,624 113,668 119,522 127,991 9,624 13,668 19,522 27,991 9,624 13,668 19,522 27,991
15 33,986 109,836 114,402 121,220 131,397 9,836 14,402 21,220 31,397 9,836 14,402 21,220 31,397
16 37,261 109,953 115,061 122,934 135,065 9,953 15,061 22,934 35,065 9,953 15,061 22,934 35,065
17 40,699 109,970 115,636 124,656 139,013 9,970 15,636 24,656 39,013 9,970 15,636 24,656 39,013
18 44,309 109,883 116,120 126,383 143,267 9,883 16,120 26,383 43,267 9,883 16,120 26,383 43,267
19 48,099 109,686 116,502 128,107 147,851 9,686 16,502 28,107 47,851 9,686 16,502 28,107 47,851
20 52,079 109,374 116,773 129,820 152,792 9,374 16,773 29,820 52,792 9,374 16,773 29,820 52,792
25 75,170 105,587 115,774 137,574 183,645 5,587 15,774 37,574 83,645 5,587 15,774 37,574 83,645
</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>
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.
-37-
<PAGE>
VOTING PRIVILEGES OF PARTICIPANTS IN OTHER SEPARATE ACCOUNTS
Shares of the Funds may be owned by other separate accounts of American
Franklin or by separate accounts of other insurance companies affiliated or
unaffiliated with American Franklin. Shares owned by these separate accounts
will probably be voted according to the instructions of the owners of insurance
policies and contracts issued by those other insurance companies. Moreover,
American Franklin expects that the number of shares owned in the Funds by
separate accounts of insurance companies that are not affiliated with American
Franklin will initially exceed the number of shares owned by the Separate
Account. These factors will dilute the effect of the voting instructions of
Policy Owners. American Franklin currently does not foresee any disadvantages to
Policy Owners arising out of this. The Securities and Exchange Commission has
granted the Funds exemptive orders pursuant to the Investment Company Act of
1940 that permit the Funds to offer their shares to separate accounts, like the
Separate Account, that are maintained by life insurance companies that are not
affiliated with the Funds. Those exemptive orders impose several conditions on
the Funds and participating separate accounts to protect the holders of
interests in the various separate accounts investing in shares of the Funds. The
Boards of Trustees of the Funds have agreed to monitor events in order to
identify any material irreconcilable conflicts that possibly may arise and to
determine what action, if any, should be taken in response by, and at the
expense of, American Franklin or one or more of the other participating
insurance companies. American Franklin and the other participating insurance
companies are obligated to report potential or existing conflicts of interest to
the Funds' Boards of Trustees. If American Franklin believes that a Fund's
response to any of those events insufficiently protects Policy Owners, American
Franklin will take appropriate action to protect Policy Owners. Corrective
action for an irreconcilable conflict of interest involving the Separate Account
might include withdrawal of the assets of the Separate Account from a Fund.
Also, if American Franklin ever believes that any of the Funds' portfolios is so
large as to impair materially the investment performance of a portfolio or a
Fund, American Franklin will examine other investment options.
SEPARATE ACCOUNT VOTING RIGHTS
Under the Investment Company Act of 1940, certain actions (such as some of
those described under "Separate Account Investment Choices-Right to Change
Operations," above) may require Policy Owner approval. In that case, a Policy
Owner will be entitled to one vote for every $100 of value allocated to his or
her policy in the investment divisions of the Separate Account, and a
proportionate fractional vote for any amount less than $100. American Franklin
will cast votes attributable to amounts retained in the investment divisions of
the Separate Account in the same proportions as votes cast by Policy Owners.
REPORTS TO POLICY OWNERS
After the end of each policy year, each Policy Owner will be sent a report
that shows the current death benefit for his or her policy, the value of his or
her Policy Account, information about investment divisions, the Cash Surrender
Value of his or her policy, the amount of any outstanding policy loans, the
amount of any interest owed on the loan and information about the current loan
interest rate. The annual report will also show any transactions involving the
Policy Owner's Policy Account that occurred during the year. Transactions
include premium allocations, deductions, and any transfers or withdrawals that
were made in that year. American Franklin will also send semi-annual reports
with financial information on the Separate Account and the Funds, including a
list of the investments held by each portfolio.
In addition, reports will also contain any other information that is
required by the insurance supervisory official in the jurisdiction in which a
policy is delivered.
Notices will be sent to Policy Owners for transfers of amounts between
investment divisions and certain other policy transactions.
LIMITS ON AMERICAN FRANKLIN'S RIGHT TO CHALLENGE A POLICY
American Franklin can challenge the validity of an insurance policy (based
on material misstatements in the application or, with respect to any policy
change, based on material misstatements in the application for the change) if it
appears that the Insured Person is not actually covered by the
-38-
<PAGE>
policy under American Franklin's rules. However, there are some limits on how
and when American Franklin can challenge the policy.
Except on the basis of fraud, American Franklin cannot challenge the policy
after it has been in effect, during the Insured Person's lifetime, for two years
from the date the policy was issued or reinstated. (Some states may require this
time to be measured in some other way.)
Except on the basis of fraud, American Franklin cannot challenge any policy
change that requires evidence of insurability (such as an increase in Face
Amount) after the change has been in effect for two years during the Insured
Person's lifetime.
American Franklin can challenge at any time (and require proof of
continuing disability) an additional benefit that provides benefits to the
Insured Person in the event that the Insured Person becomes totally disabled.
If the Insured Person dies within the time that the validity of the policy
may be challenged, American Franklin may delay payment until it decides whether
to challenge the policy.
If the Insured Person's age or sex is misstated on any application, the
death benefit and any additional benefits provided will be those which would
have been purchased by the most recent deduction for the cost of insurance and
the cost of any additional benefits at the Insured Person's correct age and sex.
If the Insured Person commits suicide within two years after the date on
which the policy was issued or reinstated, the death benefit will be limited to
the total of all premiums that have been paid to the time of death minus the
amount of any outstanding policy loan and loan interest and minus any partial
withdrawals of Net Cash Surrender Value. If the Insured Person commits suicide
within two years after the effective date of an increase in death benefit that
the Policy Owner requested, American Franklin will pay the death benefit which
was in effect before the increase, plus the monthly cost of insurance deductions
for the increase (including the expense charge). (Some states require this time
to be measured by some other date.)
PAYMENT OPTIONS
Policy benefits or other payments such as the Net Cash Surrender Value or
death benefit may be paid immediately in one sum or another form of payment
described below may be designated for all or part of the proceeds. Payments
under these options are not affected by the investment experience of any
investment division of the Separate Account. Instead, interest accrues pursuant
to the options chosen (such interest will be appropriately includable in federal
gross income of the beneficiary). If the Policy Owner does not arrange for a
specific form of payment before the Insured Person dies, the beneficiary will
have his choice. However, if the Policy Owner makes an arrangement for payment
of the money, the beneficiary cannot change that choice after the Insured Person
dies. Payment Options will also be subject to American Franklin's rules at the
time of selection. Currently, these alternate payment options are only available
if the proceeds applied are $1,000 or more and any periodic payment will be at
least $20.
The following payment options are generally available:
INCOME PAYMENTS FOR A FIXED PERIOD: American Franklin will pay the
amount applied in equal installments (including applicable interest) for a
specific number of years, for up to 30 years.
LIFE INCOME WITH PAYMENTS GUARANTEED FOR A FIXED TERM OF YEARS:
American Franklin will pay the money at agreed intervals as a definite
number of equal payments and as long thereafter as the payee lives. The
Policy Owner (or beneficiary in some cases) may choose any one of four
definite periods: 5, 10, 15 or 20 years.
PROCEEDS AT INTEREST: THE MONEY WILL STAY ON DEPOSIT WITH AMERICAN
FRANKLIN WHILE THE PAYEE IS ALIVE. Interest will accrue on the money at a
declared interest rate, and interest will be paid at agreed upon intervals.
-39-
<PAGE>
FIXED AMOUNT: American Franklin will pay the sum in installments in a
specified amount. Installments will be paid until the original amount,
together with any interest, has been exhausted.
American Franklin guarantees interest under the foregoing options at the
rate of 3% a year.
American Franklin may also pay or credit excess interest on the options
from time to time. The rate and manner of payment or crediting will be
determined by American Franklin. Under the second option no excess interest will
be paid on the part of the proceeds used to provide payments beyond the fixed
term of years.
The beneficiary or any other person who is entitled to receive payment may
name a successor to receive any amount that would otherwise be paid to that
person's estate if that person died. No successor may be named if a payment
option chosen is contingent on the life of a beneficiary. The person who is
entitled to receive payment may change the successor at any time.
American Franklin must approve any arrangements that involve more than one
of the payment options, or a payee who is not a natural person (for example, a
corporation), or a payee who is a fiduciary. Also, the details of all
arrangements will be subject to American Franklin's rules at the time the
arrangements take effect. This includes rules on the minimum amount payable
under an option, minimum amounts for installment payments, withdrawal or
commutation rights (rights to cancel an arrangement involving payments over time
in return for a lump sum payment), the naming of people who are entitled to
receive payment and their successors and the ways of proving age and survival.
A Policy Owner may change his or her choice of a payment option (and may
make later changes) and that change will take effect in the same way as it would
if a beneficiary were being changed. (See "The Beneficiary," below). Any amounts
paid under the payment options will not be subject to the claims of creditors or
to legal process, to the extent that the law provides.
THE BENEFICIARY
An applicant for a policy must name a beneficiary when he or she applies
for a policy. The beneficiary is entitled to the insurance benefits of the
policy. The Policy Owner may change the beneficiary during the Insured Person's
lifetime by written notice satisfactory to American Franklin at its
Administrative Office. The change will take effect on the date the notice is
signed. However, the change will be subject to all payments made and actions
taken by American Franklin under the Policy before American Franklin receives
the notice at its Administrative Office. If the beneficiary is changed, any
previous arrangement made as to a payment option for benefits is canceled. A
payment option for the new beneficiary may be chosen.
At the time of the Insured Person's death, the benefit will be paid equally
to the primary beneficiaries, or, if no primary beneficiaries are living, the
first contingent beneficiaries (if any), or, if no primary or first contingent
beneficiaries are living, the second contingent beneficiaries (if any). If no
beneficiary is living when the Insured Person dies, the death benefit will be
paid to the Policy Owner, or to the executors or administrators of the Policy
Owner.
ASSIGNMENT OF A POLICY
The Policy Owner may assign (transfer) his or her rights in a policy to
someone else as collateral for a loan or for some other reason. In order to do
so the Policy Owner must send a copy of the assignment to American Franklin's
Administrative Office. American Franklin is not responsible for any payment made
or any action taken before it has received notice of the assignment (or of
termination of the assignment) or for the validity of the assignment. An
absolute assignment is a change of ownership. The federal income tax treatment
of a policy that has been assigned for valuable consideration may be different
from the federal income tax treatment described herein.
EMPLOYEE BENEFIT PLANS
Employers and employee organizations should consider, in consultation with
counsel, the impact of Title VII of the Civil Rights Act of 1964 on the purchase
of EquiBuilder II policies in connection with an employment-related insurance or
benefit plan. The United States Supreme Court held, in a 1983
-40-
<PAGE>
decision, that, under Title VII, optional annuity benefits under a deferred
compensation plan could not vary on the basis of sex.
The policies described herein are not intended for use in connection with
qualified plans or trusts under the Code.
PAYMENT OF PROCEEDS
American Franklin will pay any death benefits, Net Cash Surrender Value or
loan proceeds within seven days after it receives the required form or request
(and other documents that may be required) at its Administrative Office. Death
benefits are determined as of the date of death of the Insured Person and will
not be affected by subsequent changes in the unit values of the investment
divisions of the Separate Account. Interest will be paid in respect of the
period from the date of death to the date of payment.
American Franklin may, however, delay payment for one or more of the
following reasons:
American Franklin contests the policy or is deciding whether or not to
contest the policy;
American Franklin cannot determine the amount of the payment because
the New York Stock Exchange is closed, because trading in securities has
been restricted by the Securities and Exchange Commission, or because the
Securities and Exchange Commission has declared that an emergency exists;
or
The Securities and Exchange Commission by order permits American
Franklin to delay payment to protect the Policy Owners.
American Franklin may defer payment of any Net Cash Surrender Value or loan
amount from the Guaranteed Interest Division for up to six months after receipt
of a request. American Franklin will pay interest of at least 3% a year from the
date a request for withdrawal of Net Cash Surrender Value is received if payment
from the Guaranteed Interest Division is delayed more than 30 days.
DIVIDENDS
No dividends are paid on the policies offered by this Prospectus.
DISTRIBUTION OF THE POLICIES
Franklin Financial Services Corporation ("Franklin Financial"), a Delaware
corporation and a wholly-owned subsidiary of The Franklin Life Insurance
Company, is the principal underwriter, as defined by the Investment Company Act
of 1940, of the EquiBuilder II policies for the Separate Account under a Sales
Agreement between Franklin Financial and the Separate Account. Franklin
Financial's principal executive office is at #1 Franklin Square, Springfield,
Illinois 62713.
Franklin Financial is registered with the Securities and Exchange
Commission as a broker-dealer under the Securities and Exchange Act of 1934 and
is a member of the National Association of Securities Dealers, Inc. Franklin
Financial also acts as principal underwriter for Franklin Life Variable Annuity
Funds A and B and Franklin Life Money Market Variable Annuity Fund C, which are
separate accounts of The Franklin Life Insurance Company and registered
investment companies issuing interests in variable annuity contracts. Franklin
Financial also acts as principal underwriter for Separate Account VUL of
American Franklin, which is a registered investment company issuing interests in
variable life insurance contracts having policy features that are similar to
those of EquiBuilder II policies but the assets of which are invested in a
different open-end management investment company. American Franklin no longer
offers new policies having an interest in that separate account. Franklin
Financial is the principal underwriter of American Franklin's EquiBuilder III
variable life insurance policies under which interests in the Separate Account
are issued. The EquiBuilder III policies have policy features that are similar
to those of the EquiBuilder II policies but have a different sales charge
structure.
Policies are sold primarily by persons who are insurance agents or brokers
for American Franklin authorized by applicable law to sell life and other forms
of personal insurance, including variable life
-41-
<PAGE>
insurance. Pursuant to an agreement between American Franklin and Franklin
Financial, Franklin Financial has agreed to employ and supervise agents chosen
by American Franklin to sell the policies and to use its best efforts to qualify
such persons as registered representatives of Franklin Financial.
Franklin Financial incurs certain sales expenses, such as sales literature
preparation and related costs, in connection with the sale of the policies
pursuant to a Sales Agreement with American Franklin. 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 year 1998 were $22,024,072.
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.
-42-
<PAGE>
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 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 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 were Year 2000 ready
and had 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 had
identified and assessed approximately 700 critical third party dependencies,
including those relating to American Franklin. A more detailed evaluation was
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.
-43-
<PAGE>
CONTINGENCY PLANS. American Franklin and its affiliates have 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 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 during the second quarter of 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 size 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.
<PAGE>
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. 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 not passed to divisions of the Separate Account.
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.
American Franklin 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.
44
<PAGE>
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 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>
POSITION HELD WITH AMERICAN
PRINCIPAL OCCUPATIONS 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 July 21, Secretary, American Franklin; Assistant
1998; Associate General Counsel and Secretary, Franklin Financial.
Secretary, American General Life
Companies, Houston, Texas, since July 21, 1998;
Senior Attorney, American General Corporation
from 1993 to 1998.
45
<PAGE>
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.
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.
46
<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.
47
<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.
48
<PAGE>
Appendix A
Index To Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
The Separate Account:
Report of Independent Auditors............................................. F-2
Audited Financial Statements:
Statement of Net Assets, December 31, 1998 ............................. F-3-F-5
Statement of Operations for the year ended December 31, 1998............ F-6-F-8
Statements of Changes in Net Assets for the years ended December
31, 1998 and 1997.................................................... F-9-F-11
Notes to Financial Statements .......................................... F-12-F-16
The American Franklin Life Insurance Company:*
Report of Independent Auditors............................................. F-17
Audited Financial Statements:
Statement of Operations for the years ended December 31, 1998, 1997
and 1996............................................................. F-18
Balance Sheet, December 31, 1998 and 1997............................... F-19
Statement of Shareholder's Equity for the years ended December 31,
1998, 1997 and 1996.................................................. F-20
Statement of Cash Flows for the years ended December 31, 1998, 1997
and 1996............................................................. F-21
Notes to Financial Statements .......................................... F-22-F-32
</TABLE>
- ----------
* The financial statements of American Franklin contained herein should be
considered only as bearing upon the ability of American Franklin to meet
its obligations under the policies offered hereby.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The American Franklin Life Insurance Company
Policyowners of Separate Account VUL-2
We have audited the accompanying statement of net assets of Separate Account
VUL-2 (comprising, respectively, the VIP Money Market, VIP Equity-Income, VIP
Growth, VIP Overseas, VIP High Income, VIPII Investment Grade Bond, VIPII Asset
Manager, VIPII Index 500, VIPII Asset Manager: Growth, and VIPII Contrafund, MFS
Emerging Growth, MFS Research, MFS Growth with Income, MFS Total Return, MFS
Utilities, and MFS Value Divisions) as of December 31, 1998, and the related
statement of operations for the year then ended and the statement of changes in
net assets for each of the two years then ended for the VIP Money Market, VIP
Equity-Income, VIP Growth, VIP Overseas, VIP High Income, VIPII Investment Grade
Bond, VIPII Asset Manager, VIPII Index 500, VIPII Asset Manager: Growth and
VIPII Contrafund Divisions and the related statements of operations and changes
in net assets for the MFS Emerging Growth, MFS Research, MFS Growth with Income,
MFS Total Return, MFS Utilities, and MFS Value Divisions for the period from May
1, 1998 (date of inception) to December 31, 1998. These financial statements are
the responsibility of Separate Account VUL-2 management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1998 by correspondence with
the custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of each of the respective
Divisions constituting Separate Account VUL-2 at December 31, 1998, and the
results of their operations and changes in net assets for the periods referred
to above in conformity with generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
February 16, 1999
F-2
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND
----------------------------------------------------------------------------------
VIP VIP VIP
MONEY EQUITY- VIP VIP HIGH
MARKET INCOME GROWTH OVERSEAS INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Investments in Funds at fair value
( cost: see below) $ 4,437,445 $ 54,194,406 $ 81,878,257 $ 11,233,509 $ 2,882,181
Due from (to) general account 64,823 (28,710) (18,565) 78,106 (1,342)
------------ ------------ ------------ ------------ ------------
NET ASSETS $ 4,502,268 $ 54,165,696 $ 81,859,692 $ 11,311,615 $ 2,880,839
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Unit value $ 132.28 $ 329.63 $ 373.90 $ 191.40 $ 156.98
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Units outstanding 34,035 164,324 218,934 59,098 18,351
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Cost of investments $ 4,521,180 $ 43,041,827 $ 54,801,021 $ 10,004,212 $ 3,088,375
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
F-3
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
STATEMENT OF NET ASSETS (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND II
----------------------------------------------------------------------------------
VIPII VIPII
INVESTMENT VIPII VIPII ASSET VIPII
GRADE ASSET INDEX MANAGER: CONTRA-
BOND MANAGER 500 GROWTH FUND
DIVISION DIVISION DIVISION DIVISION DIVISION
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Investments in Funds at fair value
(cost: see below) $ 2,312,465 $ 31,731,884 $ 33,286,972 $ 7,838,860 $ 25,393,704
Due from (to) general account 3,602 (40,989) (55,710) (9,125) (17,633)
------------ ------------ ------------ ------------ ------------
NET ASSETS $ 2,316,067 $ 31,690,895 $ 33,231,262 $ 7,829,735 $ 25,376,071
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Unit value $ 157.66 $ 232.11 $ 295.61 $ 196.85 $ 229.00
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Units outstanding 14,690 136,532 112,414 39,775 110,811
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
Cost of investments $ 2,156,277 $ 26,788,005 $ 24,496,035 $ 6,792,472 $ 19,033,712
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
F-4
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
STATEMENT OF NET ASSETS (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MFS VARIABLE INSURANCE TRUST
---------------------------------------------------------------------------------------
MFS
MFS GROWTH MFS
EMERGING MFS WITH TOTAL MFS MFS
GROWTH RESEARCH INCOME RETURN UTILITIES VALUE
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
----------- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Investments in Funds at fair value
(cost: see below) $ 1,505,947 $ 1,284,799 $ 619,319 $ 591,362 $ 454,919 $ 627,301
Due from (to) general account (242) (52) (76) 35 (56) (1,392)
----------- ----------- --------- --------- --------- ---------
NET ASSETS $ 1,505,705 $ 1,284,747 $ 619,243 $ 591,397 $ 454,863 $ 625,909
----------- ----------- --------- --------- --------- ---------
----------- ----------- --------- --------- --------- ---------
Unit value $ 113.74 $ 104.90 $ 107.39 $ 103.73 $ 106.58 $ 105.18
----------- ----------- --------- --------- --------- ---------
----------- ----------- --------- --------- --------- ---------
Units outstanding 13,238 12,247 5,767 5,701 4,268 5,951
----------- ----------- --------- --------- --------- ---------
----------- ----------- --------- --------- --------- ---------
Cost of investments $ 1,253,528 $ 1,144,706 $ 561,750 $ 558,494 $ 424,494 $ 572,986
----------- ----------- --------- --------- --------- ---------
----------- ----------- --------- --------- --------- ---------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
F-5
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND
----------------------------------------------------------------------------
VIP VIP VIP
MONEY EQUITY- VIP VIP HIGH
MARKET INCOME GROWTH OVERSEAS INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net investment income (expense)
Income
Dividends $ 143,599 $ 2,655,378 $ 7,473,038 $ 738,344 $ 285,271
Expenses
Mortality and expense risk charge 26,798 371,485 505,739 81,400 21,335
----------- ----------- ----------- ----------- -----------
Net investment income (expense) 116,801 2,283,893 6,967,299 656,944 263,936
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain (loss) -- 405,037 876,982 150,702 27,178
Net unrealized appreciation
(depreciation)
Beginning of year (14,560) 8,098,752 11,954,335 928,734 243,620
End of year (83,735) 11,152,579 27,077,236 1,229,297 (206,194)
----------- ----------- ----------- ----------- -----------
Net change in unrealized appreciation
(depreciation) during the year (69,175) 3,053,827 15,122,901 300,563 (449,814)
----------- ----------- ----------- ----------- -----------
Net realized and unrealized gain (loss
on investments) (69,175) 3,458,864 15,999,883 451,265 (422,636)
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in net assets
resulting from operations $ 47,626 $ 5,742,757 $22,967,182 $ 1,108,209 $ (158,700)
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
F-6
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
STATEMENT OF OPERATIONS (CONTINUED)
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND II
----------------------------------------------------------------------
VIPII VIPII
INVESTMENT VIPII VIPII ASSET VIPII
GRADE ASSET INDEX MANAGER: CONTRA-
BOND MANAGER 500 GROWTH FUND
DIVISION DIVISION DIVISION DIVISION DIVISION
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net investment income (expense)
Income
Dividends $ 106,859 $3,425,567 $ 730,351 $ 524,069 $ 830,942
Expenses
Mortality and expense risk charge 17,044 228,879 188,527 45,053 143,634
---------- ---------- ---------- ---------- ----------
Net investment income
(expense) 89,815 3,196,688 541,824 479,016 687,308
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain (loss) 46,148 203,507 397,039 10,497 165,251
Net unrealized appreciation
(depreciation)
Beginning of year 134,208 4,103,907 3,002,532 508,809 1,890,354
End of year 156,188 4,943,879 8,790,937 1,046,388 6,359,992
---------- ---------- ---------- ---------- ----------
Net change in unrealized appreciation
(depreciation) during the year 21,980 839,972 5,788,405 537,579 4,469,638
---------- ---------- ---------- ---------- ----------
Net realized and unrealized gain (loss)
on investments 68,128 1,043,479 6,185,444 548,076 4,634,889
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in net assets
resulting from operations $ 157,943 $4,240,167 $6,727,268 $1,027,092 $5,322,197
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
F-7
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
STATEMENT OF OPERATIONS (CONTINUED)
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
MFS VARIABLE INSURANCE TRUST*
-------------------------------------------------------------------------------------
MFS
MFS GROWTH MFS
EMERGING MFS WITH TOTAL MFS MFS
GROWTH RESEARCH INCOME RETURN UTILITIES VALUE
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net investment income (expense)
Income
Dividends $ -- $ -- $ -- $ -- $ -- $ --
Expenses
Mortality and expense risk charge 2,485 2,082 688 1,042 1,577 1,230
--------- --------- --------- --------- --------- ---------
Net investment income (expense) (2,485) (2,082) (688) (1,042) (1,577) (1,230)
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain (loss) (880) (1,176) 140 (502) (10) 13,534
Net unrealized appreciation
(depreciation)
Beginning of year -- -- -- -- -- --
End of year 252,419 140,093 57,569 32,868 30,425 54,315
--------- --------- --------- --------- --------- ---------
Net change in unrealized
appreciation(depreciation) during
the year 252,419 140,093 57,569 32,868 30,425 54,315
--------- --------- --------- --------- --------- ---------
Net realized and unrealized gain
(loss) on investments 251,539 138,917 57,709 32,366 30,415 67,849
--------- --------- --------- --------- --------- ---------
Net increase (decrease) in net
assets resulting from operations $ 249,054 $ 136,835 $ 57,021 $ 31,324 $ 28,838 $ 66,619
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
* FOR THE PERIOD FROM MAY 1, 1998 (DATE OF INCEPTION) TO DECEMBER 31,
1998.
SEE NOTES TO FINANCIAL STATEMENTS
F-8
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND
-----------------------------------------------------------------------------------
VIP VIP VIP
MONEY EQUITY- VIP VIP HIGH
MARKET INCOME GROWTH OVERSEAS INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1998
FROM OPERATIONS:
Net investment income (expense) $ 116,801 $ 2,283,893 $ 6,967,299 $ 656,944 $ 263,936
Net realized gain (loss) on investments -- 405,037 876,982 150,702 27,178
Net change in unrealized appreciation
(depreciation) on investments (69,175) 3,053,827 15,122,901 300,563 (449,814)
Net increase (decrease) in net assets from
operations 47,626 5,742,757 22,967,182 1,108,209 (158,700)
FROM POLICY RELATED TRANSACTIONS:
Net contract purchase payments 18,043,987 14,163,958 16,320,192 3,010,083 1,104,184
Withdrawals (1,147,285) (8,392,173) (11,303,864) (1,817,197) (606,904)
Transfers between Separate Account
VUL-2 divisions, net (15,552,224) 2,808,460 2,158,143 (203,758) 127,361
------------ ------------ ------------ ------------ -----------
Net increase in net assets from policy
related transactions 1,344,478 8,580,245 7,174,471 989,128 624,641
------------ ------------ ------------ ------------ -----------
Net increase in net assets 1,392,104 14,323,002 30,141,653 2,097,337 465,941
Net assets, beginning of year 3,110,164 39,842,694 51,718,039 9,214,278 2,414,898
------------ ------------ ------------ ------------ -----------
Net assets, end of year $ 4,502,268 $ 54,165,696 $ 81,859,692 $ 11,311,615 $ 2,880,839
------------ ------------ ------------ ------------ -----------
------------ ------------ ------------ ------------ -----------
YEAR ENDED DECEMBER 31, 1997
FROM OPERATIONS:
Net investment income (expense) $ 158,416 $ 2,318,177 $ 988,029 $ 545,926 $ 96,953
Net realized gain on investments -- 241,758 381,365 61,268 16,743
Net change in unrealized appreciation
(depreciation) on investments (6,214) 3,810,380 5,587,827 141,789 170,480
------------ ------------ ------------ ------------ -----------
Net increase in net
assets from operations 152,202 6,370,315 6,957,221 748,983 284,176
FROM POLICY RELATED TRANSACTIONS:
Net contract purchase payments 15,768,314 12,119,616 14,879,501 2,855,311 936,633
Withdrawals (1,274,078) (5,951,910) (7,325,640) (1,502,429) (374,337)
Transfers between Separate Account
VUL-2 divisions, net (14,692,099) 3,478,823 2,739,351 369,757 339,645
------------ ------------ ------------ ------------ -----------
Net increase (decrease) in net assets from
policy related transactions (197,863) 9,646,529 10,293,212 1,722,639 901,941
------------ ------------ ------------ ------------ -----------
Net Increase (decrease) in net assets (45,661) 16,016,844 17,250,433 2,471,622 1,186,117
Net assets, beginning of year 3,155,825 23,825,850 34,467,606 6,742,656 1,228,781
------------ ------------ ------------ ------------ -----------
Net assets, end of year $ 3,110,164 $ 39,842,694 $ 51,718,039 $ 9,214,278 $ 2,414,898
------------ ------------ ------------ ------------ -----------
------------ ------------ ------------ ------------ -----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
F-9
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
STATEMENT OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND II
----------------------------------------------------------------------------------
VIPII VIPII
INVESTMENT VIPII VIPII ASSET VIPII
GRADE ASSET INDEX MANAGER: CONTRA-
BOND MANAGER 500 GROWTH FUND
DIVISION DIVISION DIVISION DIVISION DIVISION
----------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Change in net assets
From operations:
Net investment income (expense) $ 89,815 $ 3,196,688 $ 541,824 $ 479,016 $ 687,308
Net realized gain (loss) on investments 46,148 203,507 397,039 10,497 165,251
Net change in unrealized appreciation
(depreciation) on investments 21,980 839,972 5,788,405 537,579 4,469,638
----------- ------------ ------------ ----------- ------------
Net increase (decrease) in net assets
from operations 157,943 4,240,167 6,727,268 1,027,092 5,322,197
FROM POLICY RELATED TRANSACTIONS:
Net contract purchase payments 485,792 5,773,958 10,353,647 3,131,484 8,348,551
Withdrawals (439,642) (4,714,381) (5,713,776) (1,426,100) (3,884,561)
Transfers between Separate Account
VUL-2 divisions, net 101,464 (90,460) 4,513,723 1,021,698 2,413,432
----------- ------------ ------------ ----------- ------------
Net increase in net assets from policy
related transactions 147,614 969,117 9,153,594 2,727,082 6,877,422
----------- ------------ ------------ ----------- ------------
Net Increase in net assets 305,557 5,209,284 15,880,862 3,754,174 12,199,619
Net assets, beginning of year 2,010,510 26,481,611 17,350,400 4,075,561 13,176,452
----------- ------------ ------------ ----------- ------------
Net assets, end of year $ 2,316,067 $ 31,690,895 $ 33,231,262 $ 7,829,735 $ 25,376,071
----------- ------------ ------------ ----------- ------------
----------- ------------ ------------ ----------- ------------
CHANGE IN NET ASSETS
From operations:
Net investment income (expense) $ 87,142 $ 2,345,559 $ 165,303 $ (15,396) $ 111,472
Net realized gain on investments 11,679 150,118 203,061 18,249 65,136
Net change in unrealized appreciation
(depreciation) on investments 43,713 1,171,913 2,139,824 430,039 1,306,437
----------- ------------ ------------ ----------- ------------
Net increase in net assets from operations 142,534 3,667,590 2,508,188 432,892 1,483,045
FROM POLICY RELATED TRANSACTIONS:
Net contract purchase payments 525,371 5,954,601 6,747,739 1,946,149 6,031,891
Withdrawals (329,478) (3,858,162) (2,283,537) (707,474) (1,947,161)
Transfers between Separate Account
VUL-2 divisions, net (21,180) 109,203 3,935,049 1,105,963 2,638,620
----------- ------------ ------------ ----------- ------------
Net increase (decrease) in net assets from
policy related transactions 174,713 2,205,642 8,399,251 2,344,638 6,723,350
----------- ------------ ------------ ----------- ------------
Net increase (decrease) in net assets 317,247 5,873,232 10,907,439 2,777,530 8,206,395
Net assets, beginning of year 1,693,263 20,608,379 6,442,961 1,298,031 4,970,057
----------- ------------ ------------ ----------- ------------
Net assets, end of year $ 2,010,510 $ 26,481,611 $ 17,350,400 $ 4,075,561 $ 13,176,452
----------- ------------ ------------ ----------- ------------
----------- ------------ ------------ ----------- ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
F-10
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
STATEMENT OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
MFS VARIABLE INSURANCE TRUST
-------------------------------------------------------------------------------
MFS
MFS GROWTH MFS
EMERGING MFS WITH TOTAL MFS MFS
PERIOD FROM MAY 1, 1998 GROWTH RESEARCH INCOME RETURN UTILITIES VALUE
(DATE OF INCEPTION) TO DECEMBER 31, 1998 DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
----------- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
CHANGE IN NET ASSETS
From operations:
Net investment income (expense) $ (2,485) $ (2,082) $ (688) $ (1,042) $ (1,577) $ (1,230)
Net realized gain (loss) on investments (880) (1,176) 140 (502) (10) 13,534
Net change in unrealized appreciation
(depreciation) on investments 252,419 140,093 57,569 32,868 30,425 54,315
----------- ----------- --------- --------- --------- ---------
Net increase (decrease) in net assets from
operations 249,054 136,835 57,021 31,324 28,838 66,619
FROM POLICY RELATED
TRANSACTIONS:
Net contract purchase payments 616,401 526,652 233,241 218,045 253,967 275,910
Withdrawals (105,620) (78,873) (9,664) (33,304) (37,203) (38,438)
Transfers between Separate Account
VUL-2 divisions, net 745,870 700,133 338,645 375,332 209,261 321,818
----------- ----------- --------- --------- --------- ---------
Net increase in net assets from
policy related transactions 1,256,651 1,147,912 562,222 560,073 426,025 559,290
----------- ----------- --------- --------- --------- ---------
Net increase in net assets 1,505,705 1,284,747 619,243 591,397 454,863 625,909
Net assets, beginning of year -- -- -- -- -- --
----------- ----------- --------- --------- --------- ---------
Net assets, end of year $ 1,505,705 $ 1,284,747 $ 619,243 $ 591,397 $ 454,863 $ 625,909
----------- ----------- --------- --------- --------- ---------
----------- ----------- --------- --------- --------- ---------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
F-11
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. NATURE OF OPERATIONS
The American Franklin Life Insurance Company (American Franklin) is a
wholly-owned subsidiary of The Franklin Life Insurance Company. American
Franklin established Separate Account VUL-2 (Account) as a unit
investment trust registered under the Investment Company Act of 1940.
The Account, which consists of sixteen investment divisions at December
31, 1998, was established in April 1991 in conformity with Illinois
Insurance Law. The assets in each division are invested in units of
beneficial interest (shares) of a designated portfolio (Portfolio) of
three mutual funds: Variable Insurance Products Fund and Variable
Insurance Products Fund II, sponsored by Fidelity Investments, and
beginning May 1, 1998, the MFS Variable Insurance Trust, sponsored by
MFS Investment Management (collectively, the Funds). The VIP Money
Market, VIP Equity-Income, VIP Growth, VIP Overseas, and VIP High Income
Divisions of the Account are invested in shares of a corresponding
Portfolio of Variable Insurance Products Fund; the VIPII Investment
Grade Bond, VIPII Asset Manager, VIPII Index 500, VIPII Asset Manager:
Growth and VIPII Contrafund Divisions of the Account are invested in
shares of a corresponding Portfolio of Variable Insurance Products Fund
II; and the MFS Emerging Growth, MFS Research, MFS Growth With Income,
MFS Total Return, MFS Utilities, and MFS Value Divisions of the Account
are invested in shares of a corresponding Portfolio of MFS Variable
Insurance Trust. The Account's financial statements should be read in
conjunction with the financial statements of the Funds. The Account
commenced operations on September 30, 1991. The initial unit value for
each investment division was set at $100.
The Account was established by American Franklin to support the
operations of American Franklin's EquiBuilder II-TM- Flexible Premium
Variable Life Insurance Policies (EquiBuilder II Policies). American
Franklin no longer offers new EquiBuilder II Policies. The Account also
supports the operations of American Franklin's EquiBuilder III-TM-
Flexible Premium Variable Life Insurance Policies (EquiBuilder III
Policies) (the EquiBuilder II Policies and the EquiBuilder III Policies
are referred to collectively as the Policies).
Franklin Financial Services Corporation, a wholly-owned subsidiary of
The Franklin Life Insurance Company, acts as the principal underwriter,
as defined in the Investment Company Act of 1940, of the Policies. The
assets of the Account are the property of American Franklin. The portion
of the Account's assets applicable to the Policies is not chargeable
with liabilities arising out of any other business American Franklin may
conduct.
The net assets of the Account may not be less than the reserves
applicable to the Policies. Assets may also be set aside in American
Franklin's General Account based on the amounts allocated under the
Policies to American Franklin's Guaranteed Interest Division and for
policy loans. Additional assets are set aside in American Franklin's
General Account to provide for (i) the unearned portion of the monthly
charges for mortality and expense risk charges made under the Policies
and (ii) other policy benefits.
2. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of the Account are as follows:
Investments in shares of the Funds are carried at fair value.
Investments in shares of the Funds are valued at the net asset values of
the respective Portfolios of the Funds. Investment transactions are
recorded on the trade date. Dividends are recorded as received. Realized
gains
F-12
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
and losses on sales of the Account's shares are determined based on the
specific identification method.
The operations of the Account are included in the federal income tax
return of American Franklin. Under the provisions of the Policies,
American Franklin has the right to charge the Account for federal income
tax attributable to the Account. No charge is currently being made
against the Account for such tax since, under current tax law, American
Franklin pays no tax on investment income and capital gains reflected in
variable life insurance policy reserves. However, American Franklin
retains the right to charge for any federal income tax incurred which is
attributable to the Account if the law is changed. Charges for state and
local taxes, if any, attributable to the Account may also be made.
3. SALES AND ADMINISTRATIVE CHARGES
Certain jurisdictions require that deductions be made from premium
payments for taxes. The amount of such deductions varies and may be up
to 5% of the premium. With respect to the EquiBuilder III Policies,
American Franklin makes a sales expense deduction equal to 5% of each
premium paid during any policy year up to a "target" premium, which is
based on the annual premium for a fixed whole life insurance policy on
the life of the insured person (no sales expense deduction is made for
premiums in excess of the target premium paid during that policy year).
The balance remaining after any such deduction, the net premium, is
placed by American Franklin in a Policy Account established for each
policyowner. Each month American Franklin makes a charge against each
Policy Account for: administrative expenses (currently $6 per month plus
an additional charge of $24 per month for each of the first 12 months a
policy is in effect); and cost of insurance, which is based on the
insured person's age, sex, risk class, amount of insurance, and
additional benefits, if any. In addition, American Franklin will make
charges for the following: a partial withdrawal of net cash surrender
value (currently $25 or 2% of the amount withdrawn, whichever is less);
an increase in the face amount of insurance (currently a $1.50
administrative charge for each $1,000 increase up to a maximum charge of
$300); and a transfer between investment divisions in any policy year in
which four transfers have already been made (up to $25 for each
additional transfer in a given policy year). Charges may also be made
for providing more than one illustration of policy benefits to a given
policyholder. American Franklin assumes mortality and expense risks
related to the operations of the Account and deducts a charge from the
assets of the Account at an effective annual rate of .75% of the
Account's net assets to cover these risks. The total charges paid by the
Account to American Franklin were $26,329,000 and $18,890,000 in 1998
and 1997, respectively.
During the first ten years a Policy is in effect, a surrender charge may
be deducted from a Policy Account by American Franklin if the Policy is
surrendered for its net cash surrender value, the face amount of the
Policy is reduced or the Policy is permitted to lapse. The maximum total
surrender charge applicable to a particular Policy is specified in the
Policy and is equal to 50% of one "target" premium. This maximum will
not vary based on the amount of premiums paid or when they are paid. At
the end of the sixth policy year and at the end of each of the four
succeeding policy years, the maximum surrender charge is reduced by an
amount equal to 20% of the initial maximum surrender charge until, after
the end of the tenth policy year, there is no surrender charge. Subject
to the maximum surrender charge, the surrender charge with respect to
the EquiBuilder II Policies will equal 30% of actual premiums paid
during the first policy year up to one "target" premium, plus 9% of all
other premiums actually paid during the first ten policy years, and the
surrender charge with respect to the EquiBuilder III Policies will equal
25% of actual premiums paid during the first policy year up to one
"target" premium, plus 9% of all other premiums actually paid during the
first ten policy years.
F-13
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
4. SUMMARY OF UNIT VALUES AND CHANGES IN OUTSTANDING UNITS
Unit value information and a summary of changes in outstanding units is
shown below:
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND
----------------------------------------------------------------
VIP VIP VIP
MONEY EQUITY- VIP VIP HIGH
MARKET INCOME GROWTH OVERSEAS INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year $ 126.37 $ 291.45 $ 264.35 $ 170.08 $ 165.81
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Unit value, end of year $ 132.28 $ 329.63 $ 373.90 $ 191.40 $ 156.98
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Number of units outstanding,
beginning of year 24,611 136,705 195,644 54,175 14,564
Net contract purchase payments 139,608 45,371 52,816 16,324 6,720
Withdrawals (9,420) (26,883) (36,782) (10,271) (3,708)
Transfers between Separate Account
VUL-2 divisions, net (120,764) 9,131 7,256 (1,130) 775
-------- -------- -------- -------- --------
Number of units outstanding,
end of year 34,035 164,324 218,934 59,098 18,351
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND II
----------------------------------------------------------------
VIPII VIPII
INVESTMENT VIPII VIPII ASSET VIPII
GRADE ASSET INDEX MANAGER: CONTRA-
BOND MANAGER 500 GROWTH FUND
DIVISION DIVISION DIVISION DIVISION DIVISION
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year $ 146.29 $ 200.91 $ 226.02 $ 165.92 $ 174.12
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Unit value, end of year $ 157.66 $ 232.11 $ 295.61 $ 196.85 $ 229.00
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Number of units outstanding,
beginning of year 13,744 131,808 76,766 24,563 75,672
Net contract purchase payments 3,255 26,871 40,257 17,385 42,562
Withdrawals (2,942) (21,817) (22,184) (7,849) (19,811)
Transfers between Separate Account
VUL-2 divisions, net 633 (330) 17,575 5,676 12,388
-------- -------- -------- -------- --------
Number of units outstanding,
end of year 14,690 136,532 112,414 39,775 110,811
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
</TABLE>
F-14
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
4. SUMMARY OF UNIT VALUES AND CHANGES IN OUTSTANDING UNITS (continued)
Unit value information and a summary of changes in outstanding units is
shown below:
PERIOD FROM MAY 1, 1998 (DATE OF INCEPTION) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
MFS VARIABLE INSURANCE TRUST
------------------------------------------------------------------------
MFS MFS MFS
EMERGING MFS GROWTH WITH TOTAL MFS MFS
GROWTH RESEARCH INCOME RETURN UTILITIES VALUE
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Unit value, at May 1, 1998
(Date of Inception) $100.00 $100.00 $100.00 $100.00 $100.00 $100.00
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Unit value, end of year $113.74 $104.90 $107.39 $103.73 $106.58 $105.18
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Number of units outstanding,
at inception -- -- -- -- -- --
Net contract purchase payments 6,446 5,663 2,392 2,207 2,530 2,951
Withdrawals (1,098) (850) (121) (336) (366) (390)
Transfers between Separate
Account VUL-2 divisions, net 7,890 7,434 3,496 3,830 2,104 3,390
------- ------- ------- ------- ------- -------
Number of units outstanding,
end of year 13,238 12,247 5,767 5,701 4,268 5,951
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</TABLE>
5. REMUNERATION OF MANAGEMENT
The Account incurs no liability for remuneration to directors, members
of advisory boards, officers or any other person who might provide a
service for the Account, except as described in Note 3.
6. YEAR 2000 (UNAUDITED)
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 the company's information
technology and non-information technology systems; (2) assess which
items in the inventory may expose the company 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.
F-15
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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 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 plan to complete contingency plans for those processes
that rank high in consequence and probability of failure; and (4)
complete the applicable 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's 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, AGC 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 AGC's normal accounting policies.
F-16
<PAGE>
REPORT OF INDEPENDENT AUDITORS
-----------------------------------
Board of Directors
and Shareholder
The American Franklin Life Insurance Company
We have audited the accompanying balance sheets of The American Franklin Life
Insurance Company, (the Company), a wholly-owned subsidiary of The Franklin Life
Insurance Company, which is an indirect wholly-owned subsidiary of American
General Corporation, as of December 31, 1998 and 1997, and the related
statements of operations, shareholder's equity, cash flows, and comprehensive
income (loss) for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The American Franklin Life
Insurance Company at December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
February 16, 1999
F-17
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
1998 1997 1996
--------------------------------
<S> <C> <C> <C>
Revenues
Premiums and other considerations $ 17,688 $ 17,434 $ 16,346
Net investment income 2,419 2,530 2,641
Realized investment gains 47 283 90
Other income (expense) 8,715 1,541 (623)
--------------------------------
Total revenues 28,869 21,788 18,454
Benefits and expenses
Insurance and annuity benefits 4,889 3,674 3,610
Operating cost and expenses 15,910 9,635 8,544
Commissions and allowances 27,695 20,096 14,843
Change in deferred policy acquisition costs and
cost of insurance purchased (20,354) (15,351) (7,866)
Litigation settlement 8,064 -- --
--------------------------------
Total benefits and expenses 36,204 18,054 19,131
--------------------------------
Income (loss) before income taxes (7,335) 3,734 (677)
Income tax expense (benefit)
Current (1,247) 715 873
Deferred (2,270) 244 (1,104)
--------------------------------
Total income tax expense (benefit) (3,517) 959 (231)
--------------------------------
Net income (loss) $ (3,818) $ 2,775 $ (446)
--------------------------------
--------------------------------
</TABLE>
See Notes to Financial Statements.
F-18
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
BALANCE SHEET
(In thousands, except share data)
<TABLE>
<CAPTION>
AT DECEMBER 31
ASSETS 1998 1997
----------------------
<S> <C> <C>
Investments
Fixed maturity securities (amortized cost: $31,219; $21,305) $ 32,587 $ 22,565
Policy loans 12,371 7,050
----------------------
Total investments 44,958 29,615
Cash 14,211 6,349
Accrued investment income 408 472
Amounts recoverable from reinsurers 10,314 8,885
Deferred policy acquisition costs 52,352 30,515
Cost of insurance purchased 8,941 10,549
Insurance premiums in course of settlement 1,620 1,286
Other assets 1,922 1,328
Assets held in Separate Accounts 442,801 223,529
----------------------
Total assets $ 577,527 $ 312,528
----------------------
----------------------
LIABILITIES
Insurance and annuity liabilities
Policy reserves, contract claims and other policyholders' funds $ 16,965 $ 13,051
Universal life contracts 31,150 31,289
Annuity contracts 5,376 2,274
Unearned revenue 9,591 6,801
Income tax liabilities
Current (1,220) 380
Deferred (4,464) (2,211)
Accrued expenses and other liabilities 25,402 7,767
Liabilities related to Separate Accounts 442,801 223,529
----------------------
Total liabilities 525,601 282,880
SHAREHOLDER'S EQUITY
Common stock ($5 par value; 500,000 shares authorized,
issued and outstanding) 2,500 2,500
Paid-in capital 51,437 25,373
Accumulated other comprehensive income 430 398
Retained earnings (deficit) (2,441) 1,377
----------------------
Total shareholder's equity 51,926 29,648
----------------------
Total liabilities and shareholder's equity $ 577,527 $ 312,528
----------------------
----------------------
</TABLE>
See Notes to Financial Statements.
F-19
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
STATEMENT OF SHAREHOLDER'S EQUITY
(In thousands)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
1998 1997 1996
--------------------------------
<S> <C> <C> <C>
Common stock, balance at beginning and end of year $ 2,500 $ 2,500 $ 2,500
--------------------------------
Paid-in capital
Balance at beginning of year 25,373 25,373 15,373
Capital contribution 26,064 -- 10,000
--------------------------------
Balance at end of year 51,437 25,373 25,373
--------------------------------
Retained earnings (deficit)
Balance at beginning of year 1,377 (1,398) (952)
Net income (loss) (3,818) 2,775 (446)
--------------------------------
Balance at end of year (2,441) 1,377 (1,398)
--------------------------------
Accumulated other comprehensive income
Balance at beginning of year 398 391 727
Change during the year 49 10 (516)
Amounts applicable to deferred federal income taxes (17) (3) 180
--------------------------------
Balance at end of year 430 398 391
--------------------------------
Total shareholder's equity at end of year $ 51,926 $ 29,648 $ 26,866
--------------------------------
--------------------------------
</TABLE>
STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
1998 1997 1996
-----------------------------
<S> <C> <C> <C>
Net income (loss) $(3,818) $ 2,775 $ (446)
Other comprehensive income (loss)
Gross change in unrealized gains (losses) on
securities (pretax: $97; $294; $(426)) 63 191 (277)
Less: gains (losses) realized in net income
(pretax: $48; $284, $90) 31 184 59
-----------------------------
Change in net unrealized gains (losses) on
securities (pretax: $49; $10; $(516)) 32 7 (336)
-----------------------------
Comprehensive income (loss) $(3,786) $ 2,782 $ (782)
-----------------------------
-----------------------------
</TABLE>
See Notes to Financial Statements.
F-20
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
1998 1997 1996
------------------------------------
<S> <C> <C> <C>
Operating activities
Net income (loss) $ (3,818) $ 2,775 $ (446)
Reconciling adjustments to net cash used for
operating activities
Policy reserves, claims and other
policyholders' funds 12,783 18,078 12,609
Realized investment gains (47) (283) (90)
Deferred policy acquisition costs and cost of
insurance purchased (20,354) (15,351) (7,866)
Charges on universal life contracts, net of
interest credited (21,569) (17,369) (11,602)
Change in other assets and liabilities 11,343 (2,939) (2,660)
------------------------------------
Net cash used for operating activities (21,662) (15,089) (10,055)
------------------------------------
Investing activities
Investment purchases
Available-for-sale (26,271) (6,900) (32,704)
Other (5,794) (2,766) (2,107)
Investment calls, maturities and sales
Available-for-sale 17,072 17,699 26,096
------------------------------------
Net cash provided by (used for)
investing activities (14,993) 8,033 (8,715)
------------------------------------
Financing activities
Policyholder account deposits 191,502 99,023 43,912
Policyholder account withdrawals (173,049) (88,026) (39,565)
Proceeds from intercompany borrowings 18,896 15,320 4,742
Repayments of intercompany borrowings (18,896) (15,320) (4,832)
Capital contribution 26,064 -- 10,000
------------------------------------
Net cash provided by financing activities 44,517 10,997 14,257
------------------------------------
Net increase (decrease) in cash 7,862 3,941 (4,513)
Cash at beginning of year 6,349 2,408 6,921
------------------------------------
Cash at end of year $ 14,211 $ 6,349 $ 2,408
------------------------------------
------------------------------------
</TABLE>
See Notes to Financial Statements.
F-21
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
1.1 NATURE OF OPERATIONS
The American Franklin Life Insurance Company (AMFLIC), headquartered in
Springfield, Illinois, sells and services variable universal life, variable
annuity and universal life insurance products to the middle income market,
primarily in the Midwest.
1.2 PREPARATION OF FINANCIAL STATEMENTS
The financial statements have been prepared in accordance with generally
accepted accounting principles (GAAP) and include the accounts of AMFLIC, a
wholly-owned subsidiary of The Franklin Life Insurance Company (FLIC).
AMFLIC's ultimate parent is American General Corporation (AGC).
The preparation of financial statements requires management to make
estimates and assumptions that affect amounts reported in the financial
statements and disclosures of contingent assets and liabilities. Ultimate
results could differ from these estimates.
1.3 INVESTMENTS
FIXED MATURITY SECURITIES. All fixed maturity securities are classified as
available-for-sale and recorded at fair value. After adjusting related
balance sheet accounts as if unrealized gains (losses) had been realized,
the net adjustment is recorded in accumulated other comprehensive income
within shareholder's equity. If the fair value of a security classified as
available-for-sale declines below its cost and this decline is considered
to be other than temporary, the security is reduced to its fair value, and
the reduction is recorded as a realized loss.
POLICY LOANS. Policy loans are reported at unpaid principal balance.
INVESTMENT INCOME. Interest on fixed maturity securities and policy loans
is recorded as income when earned and is adjusted for any amortization of
premium or discount.
REALIZED INVESTMENT GAINS (LOSSES). Realized investment gains (losses) are
recognized using the specific identification method.
1.4 SEPARATE ACCOUNTS
Separate Accounts are assets and liabilities associated with certain
contracts, principally universal life and annuities, for which the
investment risk lies predominantly with the contract holder. Therefore,
AMFLIC's liability for these accounts equals the value of the account
assets. Investment income, realized investment gains (losses), and
policyholder account deposits and withdrawals related to Separate Accounts
are excluded from the statement of operations. Assets held in Separate
Accounts are primarily shares in mutual funds, which are carried at fair
value, based on the quoted net asset value per share.
1.5 DEFERRED POLICY ACQUISITION COSTS (DPAC)
Certain costs of writing an insurance policy, including commissions,
underwriting, and marketing expenses, are deferred and reported as DPAC.
DPAC associated with interest-sensitive life insurance contracts and
insurance investment contracts is charged to expense in relation to the
estimated gross profits of those contracts. DPAC associated with all other
insurance contracts is charged to expense over the premium-paying period or
as the premiums are earned over the life of the contract.
F-22
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1.5 DEFERRED POLICY ACQUISITION COSTS (DPAC) (CONTINUED)
DPAC is adjusted for the impact on estimated future gross profits as if net
unrealized gains (losses) on securities had been realized at the balance
sheet date. The impact of this adjustment is included in accumulated other
comprehensive income within shareholder's equity.
AMFLIC reviews the carrying amount of DPAC on at least an annual basis.
AMFLIC considers estimated future gross profits or future premiums,
expected mortality, interest earned and credited rates, persistency, and
expenses in determining whether the carrying amount is recoverable.
1.6 COST OF INSURANCE PURCHASED (CIP)
The cost assigned to insurance contracts in force at January 31, 1995, the
date of AGC's acquisition of FLIC and AMFLIC, is reported as CIP. Interest
is accreted on the unamortized balance of CIP at rates of 6% to 8.5%. The
amortization of CIP is charged to expense and CIP is also adjusted for the
impact of net unrealized gains (losses) on securities in the same manner as
DPAC. AMFLIC reviews the carrying amount of CIP on at least an annual basis
using the same methods used to evaluate DPAC.
1.7 INSURANCE AND ANNUITY LIABILITIES
Substantially all of AMFLIC's insurance and annuity liabilities relate to
long-duration contracts. The contracts normally cannot be changed or
canceled by AMFLIC during the contract period.
For interest-sensitive life and insurance investment contracts, reserves
equal the sum of the policy account balance and deferred revenue charges.
Reserves for other contracts are based on estimates of the cost of future
policy benefits. Reserves are calculated using the net level premium
method. Interest assumptions used to compute reserves ranged from 3% to
5.5% at December 31, 1998.
1.8 PREMIUM RECOGNITION
Receipts for insurance investment and interest-sensitive life insurance
contracts are classified as deposits instead of revenues. Revenues for
these contracts consist of mortality, expense, and surrender charges.
Policy charges that compensate AMFLIC for future services are deferred and
recognized over the period earned, using the same assumptions used to
amortize DPAC. For all other contracts, premiums are recognized when due.
1.9 INCOME TAXES
Deferred tax assets and liabilities are established for temporary
differences between the financial reporting basis and the tax basis of
assets and liabilities, at the enacted tax rates expected to be in effect
when the temporary differences reverse. The effect of a tax rate change is
recognized in income in the period of enactment. State income taxes are
included in income tax expense.
A valuation allowance for deferred tax assets is provided if it is more
likely than not that some portion of the deferred tax asset will not be
realized. A change in deferred tax assets or liabilities related to
fluctuations in the fair value of available-for-sale securities is included
in accumulated other comprehensive income within shareholder's equity.
F-23
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1.10 ACCOUNTING CHANGES
During 1998, AMFLIC adopted Statement of Financial Accounting Standards
(SFAS) No. 130, "Reporting Comprehensive Income," which establishes
standards for reporting and displaying comprehensive income and its
components in the financial statements. AMFLIC elected to report
comprehensive income and its components in a separate statement of
comprehensive income. Adoption of this statement did not change recognition
or measurement of net income and, therefore, did not impact AMFLIC's
results of operations or financial position.
1.11 RECLASSIFICATION
Certain amounts in the 1997 and 1996 financial statements have been
reclassified to conform to the 1998 presentation.
2. INVESTMENTS
2.1 FIXED MATURITY SECURITIES
VALUATION. Cost or amortized cost and fair value of fixed maturity
securities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------------
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
In thousands COST GAINS LOSSES VALUE
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate bonds
Investment grade $ 7,422 $ 614 $ -- $ 8,036
Below investment grade 300 4 -- 304
Public utilities 2,649 300 -- 2,949
Mortgage-backed 1,189 93 -- 1,282
U.S. government 19,456 343 -- 19,799
States/political subdivisions 203 14 -- 217
--------------------------------------------------
Total fixed maturity securities $31,219 $ 1,368 $ -- $32,587
--------------------------------------------------
--------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
In thousands Cost Gains Losses Value
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate bonds
Investment grade $ 9,172 $ 678 $ 2 $ 9,848
Below investment grade 300 12 -- 312
Public utilities 2,622 273 -- 2,895
Mortgage-backed 1,897 131 -- 2,028
U.S. government 7,111 155 -- 7,266
States/political subdivisions 203 13 -- 216
-----------------------------------------------
Total fixed maturity securities $21,305 $ 1,262 $ 2 $22,565
-----------------------------------------------
-----------------------------------------------
</TABLE>
F-24
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2.1 FIXED MATURITY SECURITIES (CONTINUED)
Net unrealized gains on fixed maturity securities included in accumulated
other comprehensive income at December 31 were as follows:
<TABLE>
<CAPTION>
In thousands 1998 1997
- ------------------------------------------------------------------
<S> <C> <C>
Gross unrealized gains $ 1,368 $ 1,262
Gross unrealized losses -- (2)
DPAC fair value adjustment (86) (39)
CIP fair value adjustment (621) (609)
Deferred federal income taxes (231) (214)
-------------------
Net unrealized gains on securities $ 430 $ 398
-------------------
-------------------
</TABLE>
MATURITIES. The contractual maturities of fixed maturity securities at
December 31, 1998 were as follows:
<TABLE>
<CAPTION>
COST OR AMORTIZED FAIR
In thousands COST VALUE
------------------------------------------------------------------------------------
<S> <C> <C>
Fixed maturity securities, excluding mortgage-backed
securities, due
In one year or less $12,952 $12,978
In years two through five 10,924 11,572
In years six through ten 4,496 4,965
After ten years 1,658 1,790
Mortgage-backed securities 1,189 1,282
----------------------------
Total fixed maturity securities $31,219 $32,587
----------------------------
----------------------------
</TABLE>
Actual maturities may differ from contractual maturities since borrowers
may have the right to call or prepay obligations. Corporate requirements
and investment strategies may result in the sale of investments before
maturity.
2.2 INVESTMENT INCOME
Investment income was as follows:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
----------------------------------------------------
<S> <C> <C> <C>
Fixed maturity securities $1,592 $2,291 $2,141
Policy loans 445 264 175
Other investments 473 12 369
------------------------
Gross investment income 2,510 2,567 2,685
Investment expense 91 37 44
------------------------
Net investment income $2,419 $2,530 $2,641
------------------------
------------------------
</TABLE>
F-25
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2.3 REALIZED INVESTMENT GAINS
Realized investment gains (losses), net of DPAC and CIP amortization and
investment expenses, were as follows:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
----------------------------------------------------
<S> <C> <C> <C>
Fixed maturity securities
Gross gains $ 116 $ 564 $ 183
Gross losses -- (10) (10)
------------------------
Total 116 554 173
Other (69) (271) (83)
------------------------
Realized investment gains $ 47 $ 283 $ 90
------------------------
------------------------
</TABLE>
Voluntary sales of investments resulted in the following realized gains
(losses):
<TABLE>
<CAPTION>
Realized
--------------------
In thousands Category Proceeds Gains Losses
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998 AVAILABLE-FOR-SALE $ 2,110 $ 116 $ --
-----------------------------------------------------------------------
-----------------------------------------------------------------------
1997 Available-for-sale $ 9,992 $ 550 $ 8
-----------------------------------------------------------------------
-----------------------------------------------------------------------
1996 Available-for-sale $12,081 $ 171 $ 10
</TABLE>
2.4 INVESTMENTS ON DEPOSIT
At December 31, 1998 and 1997, fixed maturity securities with a
carrying value of $6,717,000 and $7,018,000, respectively, were on
deposit with regulatory authorities to comply with state insurance
laws.
2.5 INVESTMENT RESTRICTIONS
AMFLIC is restricted by the insurance laws of its domiciliary state as to
the amount which it can invest in any entity. At December 31, 1998 and
1997, AMFLIC's largest investment in any one entity other than U.S.
government obligations was $1,000,000.
3. DEFERRED POLICY ACQUISITION COSTS (DPAC)
Activity in DPAC was as follows:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
----------------------------------------------------------------------
<S> <C> <C> <C>
Beginning at January 1 $ 30,515 $ 13,781 $ 4,101
Deferrals 25,320 18,223 9,861
Amortization (3,383) (1,307) (343)
Effect of changes in unrealized
(gains) losses on securities (47) (6) 195
Effect of realized investment gains (53) (176) (33)
--------------------------------
Balance at December 31 $ 52,352 $ 30,515 $ 13,781
--------------------------------
--------------------------------
</TABLE>
F-26
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. COST OF INSURANCE PURCHASED (CIP)
Activity in CIP was as follows:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
----------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1 $ 10,549 $ 12,212 $ 13,621
Interest accretion 926 1,054 1,400
Amortization (2,509) (2,619) (3,052)
Effect of changes in unrealized
(gains) losses on securities (12) (3) 293
Effect of realized investment gains (13) (95) (50)
--------------------------------
Balance at December 31 $ 8,941 $ 10,549 $ 12,212
--------------------------------
--------------------------------
</TABLE>
CIP amortization, net of accretion, expected to be recorded in each of the
next five years is:
<TABLE>
<CAPTION>
AMOUNT
YEAR (000'S)
-------------------------------------
<S> <C>
1999 $1,201
2000 1,054
2001 927
2002 820
2003 727
</TABLE>
5. INCOME TAXES
AMFLIC is subject to the life insurance company provisions of the federal
tax law and is part of a life/life consolidated return which also includes
FLIC.
The method of allocation of tax expense is subject to a written agreement.
Allocation is based upon separate return calculations with current credit
for net losses and tax credits. Consolidated alternative minimum tax,
excise tax or surtax, if any, is allocated separately. The tax liability of
AMFLIC under this agreement shall not exceed the amount AMFLIC would have
paid if it had filed on a separate return basis. Intercompany tax balances
are to be settled no later than thirty (30) days after the date of filing
the consolidated return.
5.1 DEFERRED TAXES
Components of deferred tax liabilities and assets at December 31, were as
follows:
<TABLE>
<CAPTION>
In thousands 1998 1997
---------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities, applicable to:
Basis differential of investments $ 398 $ 341
DPAC and CIP 14,891 9,213
Other 1,202 1,220
--------------------
Total deferred tax liabilities 16,491 10,774
Deferred tax assets, applicable to:
Policy reserves (20,738) (12,438)
Other (217) (547)
--------------------
Total deferred tax assets (20,955) (12,985)
--------------------
Net deferred tax assets $ (4,464) $ (2,211)
--------------------
--------------------
</TABLE>
F-27
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5.1 DEFERRED TAXES (CONTINUED)
AMFLIC expects adequate future taxable income to realize the net deferred
tax assets. Accordingly, no valuation allowance is considered necessary.
5.2 TAX EXPENSE
A reconciliation between the Federal statutory income tax rate and the
effective income tax rate follows:
<TABLE>
<CAPTION>
1998 1997 1996
-----------------------
<S> <C> <C> <C>
Federal income tax rate 35.0% 35.0% 35.0%
State taxes, net -- -- (0.3)
Invested asset items 14.3 (5.4) 0.1
Other (1.4) (3.9) (0.7)
------------------------
Effective tax rate 47.9% 25.7% 34.1%
------------------------
------------------------
</TABLE>
5.3 TAXES PAID
Federal income taxes paid during the years ended December 31, 1998, 1997
and 1996, were $243,000, $519,000 and $228,000, respectively. State income
taxes paid during the years ended December 31, 1998 and 1997, were $110,000
and $1,000, respectively. No state income taxes were paid during the year
ended December 31, 1996.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts and fair values for certain of AMFLIC's financial
instruments at December 31 are presented below. Care should be exercised in
drawing conclusions based on fair value, since (1) the fair values
presented do not include the value associated with all of AMFLIC's assets
and liabilities, (2) the reporting of investments at fair value without a
corresponding revaluation of related policyholder liabilities can be
misinterpreted, and (3) the estimates are based on assumptions regarding
future economic activity.
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------
CARRYING FAIR Carrying Fair
In thousands AMOUNT VALUE Amount Value
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Fixed maturity securities $32,587 $32,587 $22,565 $22,565
Liabilities
Insurance investment contracts $ 5,479 $ 5,189 $ 2,318 $ 2,193
</TABLE>
The following methods and assumptions were used to estimate the fair value
of financial instruments:
FIXED MATURITY SECURITIES. Fair values of fixed maturity securities were
based on quoted market prices, where available. For investments not
actively traded, fair values were estimated using values obtained from
independent pricing services or, in the case of some private placements, by
discounting expected future cash flows using a current market rate
applicable to yield, credit quality, and average life of the investments.
POLICY LOANS. Policy loans have no stated maturity dates and are an
integral part of the related insurance contract. Accordingly, it is not
practicable to estimate a fair value. The weighted average interest rate
charged on policy loan balances during 1998 and 1997 was 6.96% and 7.17%,
respectively.
F-28
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
INSURANCE INVESTMENT CONTRACTS. Fair value of insurance investment
contracts, which do not subject AMFLIC to significant risks arising from
policyholder mortality or morbidity, was estimated using cash flows
discounted at market interest rates.
7. STATUTORY ACCOUNTING
State insurance laws and regulations prescribe accounting practices for
calculating statutory net income and equity. In addition, state regulators
may permit statutory accounting practices that differ from prescribed
practices. No significant permitted practices are used to prepare AMFLIC's
statutory financial statements.
At December 31, 1998 and 1997, AMFLIC had statutory stockholder's equity of
$32,662,000 and $17,727,000, respectively. AMFLIC's statutory net loss was
$2,615,000, $648,000 and $1,949,000 for the years ended December 31, 1998,
1997 and 1996, respectively.
Generally, AMFLIC is restricted by the insurance laws of its domiciliary
state as to amounts that can be transferred in the form of dividends, loans
or advances without the approval of the Illinois Insurance Department.
Under these restrictions, during 1999 no dividends may be paid out and,
loans and advances in excess of $8,165,000 may not be transferred without
the approval of the Illinois Insurance Department.
8. STATEMENT OF CASH FLOWS
In addition to the cash activities shown in the statement of cash flows,
the following transactions, occurred:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
------------------------------------------------------
<S> <C> <C> <C>
Interest added to universal
life contracts and other
deposit funds $1,387 $1,279 $1,267
------------------------
------------------------
</TABLE>
9. RELATED PARTY TRANSACTIONS
AMFLIC has no full-time employees or office facilities. General and
administrative expenses are allocated to AMFLIC from FLIC, based upon hours
worked by administrative personnel. Allocated expenses for the years ended
December 31, 1998, 1997 and 1996, amounted to approximately $8,541,000,
$5,104,000, and $3,868,000, respectively.
AMFLIC participates in a program of short-term borrowing with AGC to
maintain its long-term investment commitments. AMFLIC borrowed and repaid
$18,896,000, and $15,320,000 in 1998 and 1997, respectively. Interest was
paid on the outstanding balance based on the rate as stipulated in the
program.
F-29
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. REINSURANCE
AMFLIC is routinely involved in reinsurance transactions. Ceded reinsurance
becomes a liability of the reinsurer that assumes the risk. If the
reinsurer could not meet its obligations, AMFLIC would reassume the
liability. The likelihood of a material reinsurance liability being
reassumed by AMFLIC is considered to be remote. AMFLIC diversifies the risk
of exposure to reinsurance loss by using a number of life reinsurers,
including FLIC, that have strong claims-paying ability ratings. The maximum
retention on one life for individual life insurance is $100,000.
Effective January 1, 1997, AMFLIC entered into a modified coinsurance
agreement with FLIC covering the variable universal life product.
Amounts paid or deemed to have been paid in connection with ceded
reinsurance contracts are recorded as reinsurance receivables. The cost of
reinsurance related to long-duration contracts is recognized over the life
of the underlying reinsured policies using assumptions consistent with
those used to account for the underlying policies.
Under the provisions of an assumed reinsurance agreement, AMFLIC recognized
the following:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
--------------------------------------------------
<S> <C> <C> <C>
Premiums and other
considerations $ 2,387 $ 1,169 $ 1,433
Other income 1,869 810 1,196
Benefits 3,331 1,329 1,810
Commission expense (20) (59) (9)
Premium taxes -- -- (6)
</TABLE>
Under the provisions of a modified coinsurance agreement covering the
Variable Universal Life product, AMFLIC ceded the following:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
------------------------------------------------
<S> <C> <C> <C>
Premiums and other
considerations $ 9,058 $ 5,226 $ 4,014
Expense allowances 7,239 4,965 4,394
Other 885 60 (561)
</TABLE>
AMFLIC also carries reinsurance for policy risks that exceed its
retention limit of $100,000. AMFLIC ceded the following amounts:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
----------------------------------------------------
<S> <C> <C> <C>
Premiums and other
considerations $9,476 $7,994 $5,909
Change in policy reserves 9,086 7,804 5,924
</TABLE>
11. LEGAL PROCEEDINGS
In recent years, various life insurance companies have been named as
defendants in class action lawsuits relating to life insurance pricing and
sales practices, and a number of these lawsuits have resulted in
substantial settlements. AMFLIC is a defendant in such purported class
action lawsuits. In December 1998, AGC announced that certain of its life
insurance subsidiaries had entered into agreements to resolve all of the
material pending market conduct class action lawsuits. The settlements are
not final until approved by the courts and any appeals have been 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.
F-30
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. LEGAL PROCEEDINGS (CONTINUED)
In conjunction with the proposed settlements, AMFLIC recorded an $8 million
charge in 1998. The charge covers the cost of additional policyholder
benefits and other anticipated expenses resulting from the proposed
settlement, as well as other administrative and legal costs. To offset the
market conduct charge, AMFLIC recorded an $8 million capital contribution
from FLIC at December 31, 1998. The proposed settlements will not have a
material impact on AMFLIC's financial condition or business operations
after considering the contribution.
AMFLIC is 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, AMFLIC 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 its 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 of 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.
In addition to the charges recorded in 1998, AMFLIC will incur additional
expenses for claim administration, outside counsel and actuarial services,
and regulatory expenses, related to the resolution of the litigation, which
will be recorded as incurred. Given AGC's commitment to maintaining
adequate capital levels in support of AMFLIC's business, the proposed
settlements and related expenses are not expected to have a material
adverse effect on AMFLIC's financial condition or business operations.
12. YEAR 2000 (UNAUDITED)
INTERNAL SYSTEMS. AMFLIC's ultimate parent, 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 AMFLIC, 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 AMFLIC's information technology and
non-information technology systems; (2) assess which items in the inventory
may expose AMFLIC 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 AMFLIC'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. AMFLIC will continue to test its
systems throughout 1999 to maintain Year 2000 readiness.
THIRD PARTY RELATIONSHIPS. AMFLIC 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) AMFLIC and include
organizations with which AMFLIC 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 AMFLIC exercises less, or no, control over Year 2000
readiness. AMFLIC has developed a plan to assess and attempt to mitigate
the
F-31
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. YEAR 2000 (UNAUDITED) (CONTINUED)
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 AMFLIC. A
more detailed evaluation has been completed during the first quarter of
1999 as part of AMFLIC's contingency planning efforts. Due to the various
stages of third parties' Year 2000 readiness, AMFLIC's testing activities
will extend through 1999.
CONTINGENCY PLANS. AMFLIC and its affiliates have 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 plan to complete contingency plans for those processes
that rank high in consequence and probability of failure; and (4) complete
the applicable action plans. AMFLIC 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, AMFLIC 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
AMFLIC's future results of operations, liquidity, or financial condition.
However, due to the magnitude and complexity of this project, risks and
uncertainties exist and AMFLIC is not able to predict a most reasonably
likely worst case scenario. If Year 2000 readiness is not achieved due to
non-performance by significant third party vendors, AMFLIC's failure to
maintain critical systems as Year 2000 ready, failure of critical third
parties to achieve Year 2000 readiness on a timely basis, or other
unforeseen circumstances in completing AMFLIC's plans, the Year 2000 issues
could have a material adverse impact on AMFLIC's operations following the
turn of the century.
COSTS. Through December 31, 1998, AGC and certain of its subsidiaries have
incurred, and will continue to incur, costs for internal staff, third party
vendors, and other expenses to achieve Year 2000 readiness. The cost of
activities related to Year 2000 readiness has not had a material adverse
effect on AGC's or AMFLIC's results of operations or financial condition.
F-32
<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 87 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.
1-A(8)(a)(1) Participation Agreement among American Franklin, Variable
Insurance Products Fund ("VIP") and Fidelity Distributors
Corporation ("FDC"), dated July 18, 1991.
II-2
<PAGE>
1-A(8)(a)(2) Amendment No. 1 to Participation Agreement among American
Franklin, 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).
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
II-3
<PAGE>
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 is incorporated herein by reference to
similarly designated exhibit to Post-Effective Amendment No. 11
on Form S-6 of Separate Account VUL-2 of The American Franklin
Life Insurance Company, filed March 1, 1999 (Reg. No. 33-41838).
**8 Description of American Franklin's Issuance, Transfer and
Redemption Procedures for Policies pursuant to Rule
6e-3(T)(b)(12)(iii) under the Investment Company Act of 1940.
9 Notice of Cancellation Right Pursuant to Rule
6e-3(T)(b)(13)(viii) under the Investment Company Act of 1940.
II-4
<PAGE>
* 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 certifies
that it meets all of the requirements for effectiveness of this registration
statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly
caused this Post-Effective Amendment No. 12 to the Registration Statement on
Form S-6 to be signed on its behalf by the undersigned, thereunto duly
authorized, and its seal to be hereunto affixed and attested, all in the City of
Springfield, and State of Illinois on the 23rd day of April, 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 23rd day of April, 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 April 23, 1999
- ------------------------
Robert M. Beuerlein
/s/ Brady W. Creel* Director April 23, 1999
- -------------------
Brady W. Creel
Director _______, 1999
- ----------------------
Rodney O. Martin, Jr.
Director ______, 1999
- --------------
Jon P. Newton
/s/ Michael M. Nicholson* Director April 23, 1999
- -------------------------
Michael M. Nicholson
/s/ Philip K. Polkinghorn* Executive Vice President and April 23, 1999
- -------------------------- Chief Financial Officer
Philip K. Polkinghorn
Director ______, 1999
- -------------------------
Gary D. Reddick
/s/ William A. Simpson* Chairman of the Board and April 23, 1999
- ------------------------- Chief Executive Officer
William A. Simpson
/s/ Elizabeth E. Arthur
- -----------------------------------------
*By Elizabeth E. Arthur, Attorney-in-Fact
II-7
<PAGE>
EXHIBIT INDEX
1-A(1) Certified resolutions regarding organization of Separate Account
VUL-2.
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(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(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)(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)(d) Reinsurance Agreement between American Franklin and The Franklin
Life Insurance Company ("The Franklin"), effective as of January
1, 1988.
1-A(8)(d)(1) Amendment No. 1 effective as of January 1, 1990 to Reinsurance
Agreement between American Franklin and The Franklin.
1-A(8)(d)(2) Amendment No. 2 effective as of January 1, 1990 to Reinsurance
Agreement between American Franklin and The Franklin.
1-A(9) Administrative Service Agreement between The Franklin and
American Franklin, dated May 16, l988.
3(a) Opinion and Consent of Stephen P. Horvat, Jr., Esq., Senior Vice
President, General Counsel and Secretary of American Franklin.
II-8
<PAGE>
3(b) Opinion and Consent of Robert M. Beuerlein, Senior Vice President
- Actuarial/Financial and Treasurer of American Franklin.
6(a) Consent of Ernst & Young LLP.
6(b) Consent of Sutherland Asbill & Brennan LLP.
9 Notice of Cancellation Right Pursuant to Rule
6e-3(T)(b)(13)(viii) under the Investment Company Act of 1940.
II-9
<PAGE>
EXHIBIT 1-A(1)
THE AMERICAN FRANKLIN LIFE
INSURANCE COMPANY
I, Stephen P. Horvat, Jr., Secretary of The American Franklin Life
Insurance Company, do hereby certify that attached hereto marked Exhibit A is a
true and correct copy of resolutions adopted by the Board of Directors of said
Corporation at a meeting held on April 9,. 1991, at which meeting a quorum was
present and acting throughout; that said resolutions have not been amended,
annulled, rescinded, or revoked; and that the same resolutions are still in full
force and effective.
IN WITNESS WHEREOF, I have hereunto set my hand and have caused to be
affixed the Corporate Seal of The American Franklin Life Insurance Company, this
day of July 15, 1991.
/s/ Stephen P. Horvat, Jr.
--------------------------
Stephen P. Horvat, Jr.
Secretary
[SEAL}
<PAGE>
EXHIBIT A
On motion duly made and seconded, the following resolution was unanimously
adopted:
WHEREAS, Integrity Life Insurance Company, the principal underwriter
for the Hudson River Trust, has informed the Company of its intent to
terminate its distribution agreement with the Trust effective October
1, 1991 and to enter into an arrangement with the Variable Insurance
Products Fund or another suitable mutual fund applicable to variable
life insurance policies issued by the Company on that date and in the
future; and
WHEREAS, the Board of Directors finds such substitution of underlying
investment media to be in the best interests of the Company; and
WHEREAS, in order to implement such substitution of investment media,
the Board finds it is necessary and in the best interests of The
American Franklin Life
<PAGE>
- 373 -
Insurance Company (the "Company") that, in addition to Separate
Account VUL, the Company also have a second Separate Account as a
funding vehicle for its flexible premium variable life insurance
policies; and
WHEREAS, Article XIV-1/2 of the Illinois Insurance Code permits the
establishment of one or more separate accounts to provide for
variable life insurance; NOW THEREFORE, BE IT
RESOLVED, That, pursuant to Article XIV-1/2 of the Illinois
Insurance Code, a separate account designated "Separate Account
VUL-2 of The American Franklin Life Insurance Company" ("Separate
Account VUL-2") is hereby established and empowered to do the
following:
(a) REGISTRATION UNDER THE INVESTMENT COMPANY ACT OF 1940
To the extent required by the Investment Company Act of 1940 (the
"1940 Act"), prepare, execute and file with the Securities and
Exchange Commission a Notification of Registration on Form N-8A and
a Registration Statement on Form N-8B-2, including financial
statements, exhibits and other documents relating thereto, and any
amendments to the foregoing;
(b) APPLICATIONS FOR EXEMPTIONS AND NO-ACTION REQUESTS UNDER THE
1940 ACT
Prepare, execute and file with the Securities and Exchange
Commission, from time to time applications, and any amendments
thereto, for such exemptions from or orders under, and requests for
no-action or interpretive letters with respect to, and any other
relief from, provisions of the 1940 Act or any rules and regulations
thereunder;
(c) PERIODIC REPORTING UNDER THE 1940 ACT
Prepare, execute and file with the Securities and Exchange
Commission such reports and all such other reports and documents as
may be required of Separate Account VUL-2 by the 1940 Act;
(d) REGISTRATION UNDER THE SECURITIES ACT OF 1933
Effect such registration with the Securities and Exchange Commission
under the Securities Act of 1933 (the "1933 Act") as may be
necessary or appropriate to
<PAGE>
- 374 -
permit any policies or other funding arrangements issued and
administered by the Company which the Company from time to time may
propose to offer to provide for allocations of amounts to Separate
Account VUL-2;
(e) FILING REGISTRATION STATEMENTS UNDER THE 1933 ACT
To the extent required by the 1933 Act, prepare, execute and file
with the Securities and Exchange Commission a Registration Statement
or Statements on Form S-6 or on such other form as may be
appropriate, including prospectuses, financial statements,
supplements, exhibits and other documents relating thereto, and any
amendments to the foregoing;
(f) APPLICATION FOR ADDITIONAL EXEMPTIONS AND NO-ACTION REQUESTS
Prepare, execute and file with the Securities and Exchange
Commission from time to time applications, and any amendments
thereto, for exemptions from or orders under, and requests for
no-action or interpretive letters with respect to, and any other
relief from the 1933 Act, the Securities Exchange Act of 1934 (the
"1934 Act"), the Trust Indenture Act of 1939 or the Investment
Advisers Act of 1940;
(g) PERIODIC REPORTING UNDER THE 1934 ACT
Prepare, execute and file with the Securities and Exchange
Commission such reports and documents as may be required of Separate
Account VUL-2 by the 1934 Act;
(h) STATE SECURITIES AND INSURANCE LAW PROCEEDINGS
Prepare, execute and file all such registrations, filings and
qualifications under blue sky or other applicable securities laws
and regulations and under insurance securities laws and insurance
laws and regulations of such states and other jurisdictions as may
be necessary or appropriate, and in connection therewith, prepare,
execute, acknowledge and file all such applications, applications
for exemptions, certificates, affidavits, covenants, consents to
service of process and other instruments and to take all such action
as the Officers of the Company may deem necessary or appropriate;
(i) AGENT FOR SERVICE OF PROCESS
Appoint the General Counsel of the Company or his
<PAGE>
- 375 -
designee as agent for service under any such registration statement
duly authorized to receive communications and notices from the
Securities and Exchange Commission with respect thereto, and to
exercise powers given such agent by the 1933 Act and any Rules
thereunder and any other necessary Acts;
(j) CUSTODIAL ARRANGEMENTS
Provide for custodial or depository arrangements for assets
allocated to Separate Account VUL-2 as the officers of the Company
may deem necessary and appropriate;
(k) FISCAL YEAR
Conclude the fiscal year for Separate Account VUL-2 on the
thirty-first day of December in each year;
(1) INDEPENDENT PUBLIC ACCOUNTANTS
Select an independent public account to audit the books and records
of Separate Account VUL-2;
(m) RULES AND REGULATIONS
Delegate the authority to the Chief Executive officer or the
President of the Company to adopt Rules and Regulations for Certain
Operations of Separate Account VUL-2 in such form as the officer
executing the same may deem necessary or appropriate;
(n) INVESTMENT MANAGEMENT SERVICES
Provide for investment management service as the Officers of the
Company may deem necessary and appropriate;
(o) SALES OF POLICIES
Provide for the sale of policies issued and administered by the
Company as the Officers of the Company may deem necessary and
appropriate, to the extent such policies provide for allocation of
amounts to Separate Account VUL-2;
(p) INVESTMENT OF ASSETS IN REGISTERED INVESTMENT COMPANIES
Invest or reinvest the assets of Separate Account VUL-2
<PAGE>
- 376 -
in securities issued by one or more investment companies registered
under the 1940 Act as the Company's Board of Directors may
designate;
(q) DIVISIONS OF THE SEPARATE ACCOUNT
Divide Separate Account VUL-2 into divisions and subdivisions with
each division or subdivision investing in shares of designated
classes of designated investment companies or other appropriate
securities;
(r) UNIT VALUE
Provide for units to represent interests in Separate Account VUL-2
and to value such units in a manner deemed necessary and appropriate
by the Officers of the Company; and
(s) GENERAL AUTHORITY
Perform such additional functions and take such additional action as
may be necessary or desirable to carry out the foregoing and the
intent and purpose thereof.
on motion duly made and seconded, the following resolution was unanimously
adopted:
(a) REGISTRATION UNDER THE INVESTMENT COMPANY ACT OF 1940
RESOLVED, That the officers of the Company be, and each of them
hereby is, authorized, with the assistance of accountants, legal
counsel and other consultants, to take all actions necessary to
register Separate Account VUL-2 as a unit investment trust under the
1940 Act and to take such related actions as they deem necessary and
appropriate to carry out the foregoing;
(b) APPLICATIONS FOR EXEMPTIONS AND NO-ACTION REQUESTS UNDER THE 1940
ACT
FURTHER RESOLVED, That the Officers of the Company be, and each of
them hereby is, authorized, with the assistance of accountants,
legal counsel and other consultants, to prepare, execute, and file
with the Securities and Exchange Commission applications, and any
amendments thereto, for such exemptions from or orders under, and
requests for no-action or interpretive letters with respect to, and
any other relief from provisions of the 1940 Act or any rules and
regulations
<PAGE>
- 377 -
thereunder, as they may from time to time deem necessary or
appropriate;
(c) PERIODIC REPORTING UNDER THE 1940 ACT
FURTHER RESOLVED, That the Officers of the Company be, and each of
them hereby is, authorized, with the assistance of accountants,
legal counsel and other consultants, to prepare, execute and file
with the Securities and Exchange Commission such reports and
documents as may be required by the 1940 Act;
(d) REGISTRATION UNDER THE SECURITIES ACT OF 1933
FURTHER RESOLVED, That the Company may register under the 1933 Act
units of interest in Separate Account VUL-2 relating to variable
life insurance policies under which amounts will be allocated by the
Company to Separate Account VUL-2 to support reserves for such
policies;
(e) FILING REGISTRATION STATEMENTS UNDER THE 1933 ACT
FURTHER RESOLVED, That, to the extent required by the 1933 Act, the
Officers of the Company be, and each of them hereby is, authorized,
with the assistance of accountants, legal counsel and other
consultants, to prepare, execute and file with the Securities and
Exchange Commission a Registration Statement or Statements on Form
S-6 or on such other form as may be appropriate for any policies,
including prospectuses, supplements, any exhibits and other
documents relating thereto, and amendments to the foregoing;
(f) Applications for Additional Exemptions and NO ACTION REQUESTS
FURTHER RESOLVED, That the Officers of the Company be, and each of
them hereby is, authorized, with the assistance of accountants,
legal counsel and other consultants to prepare, execute and file
with the Securities and Exchange Commission from time to time
applications, and any amendments thereto, for exemptions from or
orders under, and requests for no-action or interpretive letters
with respect to any other relief from the 1933 Act, the 1934 Act,
the Trust Indenture Act of 1939 and the Investment Advisers Act of
1940;
(g) PERIODIC REPORTING UNDER THE 1934 ACT
FURTHER RESOLVED, That the Officers of the Company be, and each of
them hereby is, authorized, with the
<PAGE>
- 378 -
assistance of accountants, legal counsel and other consultants to
prepare, execute and file with the Securities and Exchange
Commission such reports and documents as may be required of Separate
Account VUL-2 by the 1934 Act;
(h) State SECURITIES AND INSURANCE LAW PROCEEDINGS
FURTHER RESOLVED, That the officers of the Company be, and each of
them hereby is, authorized, with the assistance of accountants,
legal counsel and other consultants, to effect all such
registrations, filings and qualifications under blue sky or other
applicable securities laws and regulations and under insurance
securities laws and insurance laws and regulations of such states
and other jurisdictions as they may deem necessary or appropriate,
with respect to the Company, and with respect to any units of
interest in Separate Account VUL-2 relating to variable life
insurance policies; such authorization to include registration,
filing and qualification of the Company and of said units, as well
as registration, filing and qualification of officers, employees and
agents of the Company as brokers, dealers, agents, salesmen, or
otherwise; and such authorization shall also include, in connection
therewith, authority to prepare, execute, acknowledge and file all
such applications, applications for exemptions, certificates,
affidavits, covenants, consents to service of process and other
instruments and to take all such action as the Officers of the
Company may deem necessary or appropriate;
FURTHER RESOLVED, That this Board of Directors hereby adopts the
form of any resolution required to be adopted by state, or any other
jurisdiction, blue sky or other applicable securities laws and
regulations and by insurance securities laws and insurance laws and
regulations in connection with an application for qualification and
registration, renewal or qualification or registration of the
Company and with respect to any units of interest in Separate
Account VUL-2 relating to variable life insurance policies, or any
consent to service of process or other requisite paper or document
required to be filed in connection therewith, if (i) in the opinion
of the Officers of the Company the adoption of such resolution is
necessary or advisable, and (ii) the Secretary or Assistant
Secretary of the Company evidences such adoption by inserting in the
minutes a copy of such resolution, which will thereupon be deemed to
be adopted by this Board of Directors, with the same
<PAGE>
- 379 -
force and effect as if specifically adopted at this or any
subsequent meeting;
(i) AGENT FOR SERVICE OF PROCESS
FURTHER RESOLVED, That the General Counsel of the Company is hereby
appointed as agent for service under any such registration statement
duly authorized to receive communications and notices from the
Securities and Exchange Commission with respect thereto and to
exercise powers given to such agent by the Securities Act of 1933
and the Rules thereunder, and any other necessary Acts; and
(j) POWER OF ATTORNEY
FURTHER RESOLVED, That the Company hereby appoints the President,
and Vice President and the Secretary, and each of them, (with full
power to each of them to act alone), its true and lawful attorney
and agent, with full power of substitution to each, to execute in
its name, place and stead registration statements and amendments
thereto under the Securities Act of 1933 and all instruments
necessary or appropriate in connection therewith, and to file the
same with the Securities and Exchange Commission, each of said
attorneys and agents, and their substitutes, to have full power and
authority to do or cause to be done in the name and on behalf of
separate Account VUL-2 every act or thing with respect thereto as
fully and to all intents and purposes as any director or officer of
the Company might or could do with respect thereto, hereby ratifying
and confirmating any and all action taken by said attorneys and
agents with respect thereto.
on motion duly made, seconded and unanimously adopted, it was
RESOLVED, that the net asset unit value of Separate Account VUL-2
shall be computed on each day during which the New York Stock
Exchange is open for trading; and
FURTHER RESOLVED, that such computation shall be based on the net
asset value of the shares of the Variable Insurance Products Fund or
shares of such other registered investment companies as the officers
of the Company may designate as investments for Separate Account
VUL-2, at the net asset values provided by such investment
companies, as of the time of the closing of the composite tape
reporting daily transactions on the national securities exchanges.
<PAGE>
- 380 -
on motion duly made, seconded and unanimously adopted, it was
RESOLVED, that Separate Account VUL-2 shall constitute a funding
medium to support reserves under such variable life insurance
policies issued by the Company as the Chief Executive officer or
President may from time to time designate for such purpose; and
FURTHER RESOLVED, that the income, gains and losses (whether or not
realized) from assets allocated to Separate Account VUL-2 shall, in
accordance with any variable life insurance policies issued by the
Company providing for allocations to separate Account VUL-2, be
credited to or charged against such Separate Account without regard
to the other income, gains or losses of the Company; and
FURTHER RESOLVED, that the officers of the Company be, and each of
them hereby is, authorized to assess charges for mortality and
expense risks relating to policies funded through Separate Account
VUL-2, at effective annual rates of up to 0.75%, against the assets
of each of the investment divisions of Separate Account VUL-2.
on motion duly made, seconded and unanimously adopted, it was
RESOLVED, that the fundamental investment policy of separate Account
VUL-2 shall be to invest or reinvest the assets of Separate Account
VUL-2 in securities issued by the Variable Insurance Products Fund
or such other investment companies registered under the 1940 Act as
the officers of the Company may designate;
FURTHER RESOLVED, that Separate Account VUL-2 be divided into such
divisions corresponding to the divisions of the Variable Insurance
Products Fund, on such other mutual fund as is selected;
FURTHER RESOLVED, that the Finance Committee be, and it hereby is,
authorized in its discretion as it may deem appropriate from time to
time in accordance with applicable laws and regulations (a) to
divide Separate Account VUL-2 into one or more additional divisions
or subdivisions, (b) to modify or eliminate any such divisions or
subdivision, (c) to change the designation of Separate Account VUL
to another designation, (d) to change the designation of any such
divisions or subdivision, and (3) to designate any further divisions
or subdivisions thereof.
<PAGE>
- 381 -
on motion duly made, seconded and unanimously adopted it was
RESOLVED, that the officers of the Company be, and each of them
hereby is, authorized to execute and deliver all such documents and
papers and to do or cause to be done all such acts and things as
they may deem necessary or desirable to carry out the foregoing
resolutions and the intent And purpose thereof.
on motion duly made, seconded and unanimously adopted, it was
RESOLVED, that the following which expresses the policy of the
Company with respect to determining the suitability for applicants
be adopted: No recommendation shall be made to a potential applicant
to purchase a variable life insurance policy and no variable life
insurance policy shall be issued in the absence of reasonable
grounds to believe that the purchase of such policy is not
unsuitable for such applicant on the basis of information furnished
after reasonable inquiry of such applicant concerning the
applicant's insurance and investment objectives, financial situation
and needs, and any other information known to the Company or to the
agent making the recommendation.
on motion duly made and seconded and unanimously adopted, it was
RESOLVED, that the officers of the Company be, and each of them
hereby is, authorized to invest cash in Separate Account VUL-2 or in
any division thereof as may be deemed necessary or appropriate to
facilitate the commencement of Separate Account VUL-2's operations
or to meet any minimum capital requirements under the 1940 Act and
to transfer cash or securities from time to time between the
Company's general account and Separate Account VUL-2, as deemed
necessary or appropriate so long as such transfers are not
prohibited by law and are consistent with the terms of the variable
life insurance policies issued by the Company providing for
allocations to Separate Account VUL-2.
On motion duly made, seconded and unanimously adopted, it was
RESOLVED, that Coopers & Lybrand are hereby selected as the
independent auditors to audit the books and records of Separate
Account VUL-2 for the year 1991 and each year thereafter until
replaced by action of the Board of Directors.
<PAGE>
EXHIBIT I-A(3)(a)
SALES AGREEMENT
AGREEMENT dated as of January 31, 1995, by and between Separate
Account VUL-2, established pursuant to Article XIV-1/2 of the Illinois
Insurance Code (the "Separate Account"), of The American Franklin Life
Insurance Company, an Illinois legal reserve stock life insurance corporation
("American Franklin"), and Franklin Financial Services Corporation, a
Delaware corporation ("Franklin Financial");
W I T N E S S E T H :
WHEREAS, pursuant to a Sales Agreement of even date herewith,
Franklin Financial has been appointed the exclusive principal underwriter of
the Separate Account in respect of interests in the Separate Account issued
under American Franklin's EquiBuilder II-TM- flexible premium variable life
insurance policies; and
WHEREAS, the Separate Account and Franklin Financial desire to enter
into an agreement setting forth the terms on which Franklin Financial will
act as principal underwriter for the Separate Account in respect of interests
in the Separate Account issued under American Franklin's EquiBuilder III-TM-
flexible premium variablE life insurance policies (the "Policies");
NOW, THEREFORE, it is hereby agreed as follows:
1. SERVICES TO BE PROVIDED AND EXPENSES TO BE ASSUMED BY FRANKLIN
FINANCIAL. Franklin Financial will act as the exclusive principal underwriter
(as that term is defined in the Investment Company Act of 1940, as amended (the
"1940 Act")) for the Separate Account in respect of interests in the Separate
Account issued under the Policies. Until the termination of the employment of
Franklin Financial as principal underwriter for the Separate Account pursuant to
the terms hereof, Franklin Financial will provide, or provide for, in its
offices all services and will assume all expenses required for the sale of those
Policies of American Franklin that depend in whole or in part on the investment
performance of the Separate Account and are sold prior to such termination.
<PAGE>
In the event that the employment of Franklin Financial as principal
underwriter for the Separate Account is terminated, Franklin Financial will
thereafter continue to assume any continuing sales expense and to provide any
continuing sales service required in connection with such Policies.
Notwithstanding anything to the contrary in the foregoing, however,
Franklin Financial shall not be obligated to pay, and the Separate Account shall
pay, (i) taxes, if any, based on the income of, capital gains of assets in, or
existence of, the Separate Account, (ii) taxes, if any, in connection with the
acquisition, disposition or transfer of assets of the Separate Account, (iii)
commissions, sales charges or other capital items payable in connection with the
purchase or sale of the Separate Account's investments, and (iv) interest on
account of any borrowings by the Separate Account.
The services of Franklin Financial to the Separate Account under this
Agreement are not to be deemed exclusive and Franklin Financial shall be free to
render similar services to others, including without limitation such other
separate accounts as are now or may hereafter be established by American
Franklin or any of its affiliates.
2. COMPENSATION TO BE PAID TO FRANKLIN FINANCIAL. For providing the
services set forth above, Franklin Financial shall receive and accept as full
compensation therefor the amounts described as sales expense deductions from
premiums and as contingent deferred sales charges in the prospectus (the
"Prospectus") forming a part of the Registration Statement filed by the Separate
Account under the Securities Act of 1933, as amended, with respect to the
Policies.
3. INTERESTED AND AFFILIATED OFFICERS. It is understood that members of
the Board of Directors, officers, employees or agents of American Franklin and
its affiliates may also be directors, officers, employees or agents of Franklin
Financial.
4. FORM OF CONTRACTS. As long as Franklin Financial is acting as
principal underwriter for the Separate Account hereunder, Franklin Financial and
American Franklin will have the exclusive right as between them and the Separate
Account to determine the form and substance of the Policies, subject to all
applicable provisions of federal and state law.
5. LIABILITY OF FRANKLIN FINANCIAL. In the absence of gross negligence
or willful misconduct in the performance of its duties, or of reckless disregard
of its obligations and duties under this
<PAGE>
Agreement, neither Franklin Financial nor any of its officers, directors,
employees or agents shall be subject to liability for any act or omission in the
course of, or connected with, rendering services or performing its obligations
hereunder.
6. TERM OF AGREEMENT. The employment of Franklin Financial as principal
underwriter for the Separate Account pursuant to the terms of this Agreement
shall continue in effect from year to year from the date hereof unless
terminated as provided below. The employment of Franklin Financial as principal
underwriter for the Separate Account pursuant to the terms hereof as well as the
provisions of this Agreement relating to such employment shall immediately
terminate in the event of the assignment of this Agreement (within the meaning
of the 1940 Act), and the employment of Franklin Financial as principal
underwriter for the Separate Account pursuant to the terms hereof as well as the
provisions of this Agreement relating to such employment may be terminated at
any time by either party without the payment of any penalty on not more than 60
days' nor less than 30 days, notice to the other. Such notice shall be given in
writing, addressed and delivered, or mailed postpaid, to the other party at the
principal office of such party.
IN WITNESS WHEREOF, the parties hereto have caused this Sales Agreement
to be executed as of the day and year first above written.
SEPARATE ACCOUNT VUL-2 OF THE
AMERICAN FRANKLIN LIFE INSURANCE
COMPANY
By: THE AMERICAN FRANKLIN LIFE
INSURANCE COMPANY, Depositor
By:
--------------------------------------
Name: Stephen P. Horvat, Jr.
Title: Senior Vice President
General Counsel and Secretary
FRANKLIN FINANCIAL SERVICES
CORPORATION
By:
--------------------------------------
Name: Thomas J. Byerly
Title: President
<PAGE>
EXHIBIT 1-A(3)(b(i)
REGIONAL MANAGER
REGISTERED
REPRESENTATIVE
AGREEMENT
TODAY
IS YESTERDAY'S TOMORROW!
1
<PAGE>
This Agreement entered into this _____ day of __________, 19__ by and
between FRANKLIN FINANCIAL SERVICES CORPORATION (FFSC), a Delaware corporation
registered as a broker-dealer under the Securities and Exchange Act of 1934,
and..................................................("REPRESENTATIVE"):
1. Subject to the terms and conditions herein, FFSC authorizes REPRESENTATIVE to
solicit and remit to the appropriate office applications and orders for cash
purchases of shares of mutual fund investment companies and other securities
with respect to which FFSC acts as broker-dealer or underwriter.
2. REPRESENTATIVE may solicit and remit applications for mutual funds or
securities only while registered as a "Registered Representative" with the
National Association of Securities Dealers and only after successfully
completing an examination specified by the NASD and after supplying to the
satisfaction of FFSC information required by forms prescribed by the NASD.
REPRESENTATIVE may solicit applications only while authorized to sell mutual
funds or securities in accordance with the laws of the state in which the
Registered Representative will offer such contracts and only upon delivery to
the offeree of a prospectus for such mutual funds or securities conforming to
the Securities Acts of 1933.
3. REPRESENTATIVE expressly agrees to comply with such other rules and
regulations as the Securities and Exchange Commission, the National Association
of Securities Dealers, the regulatory authority of the jurisdiction or
jurisdictions in which the REPRESENTATIVE is authorized to represent FFSC, or as
FFSC may establish presently or in the future under requirements of applicable
federal or state law or regulation and to submit to such supervision as may be
necessary to insure compliance with such laws and regulations. Such rules and
regulations will include (but are not limited to) the following:
(a) REPRESENTATIVE shall adhere to high standards of commercial honor
and just and equitable principles of trade in the course of soliciting
applications under this contract.
(b) REPRESENTATIVE shall not utilize advertising media other than items
furnished by FFSC for such purposes.
(e) REPRESENTATIVE shall not utilize supplemental sales materials other
than those supplied by FFSC.
(d) REPRESENTATIVE shall not dispatch any item of correspondence unless
a copy of it has been sent to the home office of FFSC for review and approval.
(e) REPRESENTATIVE shall fully explain the terms of the mutual fund or
security being sold, and shall not make any untrue statement or fail to state
any material fact to a prospective purchaser.
(f) REPRESENTATIVE shall take steps to acquaint himself with
prospective customers, including such inquiries as may be necessary to satisfy
himself that the offering
2
<PAGE>
contemplated is not unsuitable having in view the customer's resources,
investment objectives and other investments.
(g) REPRESENTATIVE shall not make any agreement with any person for the
repurchase or resale of stock other than mutual fund shares or other securities
authorized by FFSC, nor shall he directly or indirectly, solicit, purchase, or
traffic in any security of other issuers nor resort to "twisting" or "switching"
of securities of any other company or of insurance policies.
4. REPRESENTATIVE shall promptly report and remit to FFSC all monies received on
behalf of FFSC without commingling the same with his own funds. Purchase
payments will be the property of and will be promptly paid to FFSC and all such
monies or other settlements received by REPRESENTATIVE for or on behalf of FFSC
shall be received by the Representative in a fiduciary capacity.
5. For all sales made by Representative, FFSC will pay commissions to
Representative based on 85% of the commission paid to FFSC less any commissions
paid to subordinate Representatives.
Commissions will be paid monthly on the first of each month and will be
based on all confirmed business received by FFSC as of the cut-off date of the
previous month. Confirmed business is that business which has been accepted by
the appropriate mutual fund and acknowledged to Franklin Financial Services
Corporation. Should total commissions fall below $10.00 in any given month,
commission payments will be accumulated and paid when the total reaches $10.00.
6. Each payment on an existing customer's account for the purchase of mutual
funds or other securities shall be deemed a new application under this
Agreement. The REPRESENTATIVE OR REPRESENTATIVES who obtain an original
application will be entitled to commissions on subsequent payments only as long
as that portion of that account or the customer is assigned to him by FFSC and
he is a licensed REPRESENTATIVE of FFSC within the territory in which the
customer resides at the time such payment is made. In the event the customer's
residence is not within the territory assigned to the original REPRESENTATIVE or
REPRESENTATIVES, or if the customer or account is no longer assigned to the
original REPRESENTATIVE or REPRESENTATIVES, the commissions on such subsequent
payments shall thereafter be paid in accordance with the applicable rules and
policies of FFSC. Any commissions paid or credited to the REPRESENTATIVE by FFSC
may be charged back to the REPRESENTATIVE or REPRESENTATIVES to the extent that
such commissions are attributable to the uncompleted portion of a pre-authorized
or pre-dated check or draft plan or to a dishonored check or draft or to an
uncompleted military allotment or payroll deduction or similar plan for the
systematic purchase of a mutual fund or other security.
7. REPRESENTATIVE has the right to designate the person or persons to whom any
commissions due him under the provisions of this contract will be paid after his
death. FFSC must have notice of such designation before any commissions will be
paid to the designated recipient after the death of the REPRESENTATIVE. In the
absence of any designation,
3
<PAGE>
commissions will be paid to the representative's estate or legal representative
after his death. All commissions payable under this section are subject to the
provisions of Section 6 above and will be payable only so long as the customer's
account is assigned to the designated person or the representative's estate or
legal representative by Franklin Financial Services Corporation.
8. FFSC reserves the right to modify the commission rates set forth herein
during the period of time in which commissions may be paid under the provisions
of this Agreement.
9. Should REPRESENTATIVE wrongfully withhold any funds, receipts or other
property belonging to FFSC, or to one of its customers or applicants, or violate
any governing law or regulation relating to the sale of securities, this
Agreement may be terminated forthwith and all rights and claims of
REPRESENTATIVE hereunder, including the claim for payment of any further sums of
money or commissions are likewise terminated and he shall not be entitled to
receive any further commissions or sums of money whatsoever from FFSC.
REPRESENTATIVE shall reimburse FFSC for any costs, expenses or legal fees that
it may incur in recovering funds wrongfully withheld or any property belonging
to FFSC or its customer or its customers or applicants, or for the defense of
any action wherein FFSC and REPRESENTATIVE or either of them is charged with a
violation of any government law or regulation relating to the subject of
securities as a consequence of the alleged conduct of REPRESENTATIVE.
10. REPRESENTATIVE shall be responsible for the fidelity and honesty of all
subordinate REPRESENTATIVES or agents under him, and shall be jointly and
severally liable to FFSC for all monies collected by or passing into the hands
of said subordinate REPRESENTATIVES and jointly and severally liable to FFSC or
any Regional Manager of FFSC, as the case may be, for any indebtedness of the
REPRESENTATIVE or subordinate REPRESENTATIVES, with interest payable thereon at
the rate of 6% per annum, and agrees to indemnify FFSC or such Regional Manager,
as the case may be, for any fees or expenses that either may incur in the
collection of any indebtedness owing either of them by REPRESENTATIVE or any
subordinate REPRESENTATIVES, or the withholding of any, funds collected or
passing into the hands of any REPRESENTATIVE or any subordinate REPRESENTATIVES,
or for any legal action brought by or against REPRESENTATIVE or any subordinate
REPRESENTATIVES in which FFSC may be a party therein, and it is agreed by
REPRESENTATIVE that FFSC may, if it so desires, employ its own counsel in
defense of any legal proceeding to which it may be made a party and may employ
counsel for the purpose of prosecuting its respective rights violated herein and
all expenses of such litigation, including costs and attorney's fees, shall be
paid by REPRESENTATIVE. Any claim for commissions which said subordinate
REPRESENTATIVE may have shall be limited to his written contract with FFSC.
11. All books of account, documents of any kind, vouchers, notices, lists of
customers and books and papers and sales literature of any kind used from time
to time by REPRESENTATIVE in connection with this Agreement, shall be and remain
the property of FFSC and shall at all times be subject to inspection by FFSC and
upon demand at the termination of this Agreement, shall be delivered to FFSC.
4
<PAGE>
12. FFSC may offset against any commissions or other claims due and to become
due to REPRESENTATIVE under this Agreement any debts owing at any time by the
REPRESENTATIVE to FFSC and The Franklin Life Insurance Company or either of them
and any such debt or debts shall be a first lien against said commissions and
other claims.
13. REPRESENTATIVE will pay all fees relating to his qualification or licensing
as a securities salesman AS well as taxes and licenses required by municipal or
state laws in the territory in which he is licensed tinder this Agreement. At
the option of FFSC, REPRESENTATIVE will furnish a good and sufficient bond.
14. Either party hereto may terminate this Agreement without cause by sending
the other at his last known address, by mail, ten days' notice in writing to
that effect or by delivery of such notice in person.
The power and authority, of REPRESENTATIVE to act for and on behalf of
FFSC is strictly limited to the terms and provisions of this Agreement and
nothing herein contained shall be construed to grant to REPRESENTATIVE by
implication or otherwise any right, power, authority or privilege that is not
herein specifically set forth. This Agreement shall constitute the entire
agreement between the parties hereto and shall be effective as of and cannot be
modified by any prior or subsequent statement by whomsoever made.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date and year first above written.
FRANKLIN FINANCIAL SERVICES CORPORATION
BY:
------------------------------------------
REPRESENTATIVE
BY:
------------------------------------------
5
<PAGE>
Exhibit 1-A(3)(b)(ii)
REGISTERED
REPRESENTATIVE
AGREEMENT
TODAY
IS YESTERDAY'S TOMORROW!
<PAGE>
This Agreement entered into this _____ day of __________ 19____ by and between
FRANKLIN FINANCIAL SERVICES CORPORATION (FFSC), a Delaware corporation
registered as a broker-dealer under the Securities and Exchange Act of 1934, and
______________________________ ("REPRESENTATIVE"):
1. Subject to the terms and conditions herein, FFSC authorizes REPRESENTATIVE
to solicit and remit to the appropriate office applications and orders for cash
purchases of shares of mutual fund investment companies and other securities
with respect to which FFSC acts as broker-dealer or underwriter.
2. REPRESENTATIVE may solicit and remit applications for mutual funds or
securities only while registered as a "Registered Representative" with the
National Association of Securities Dealers and only after successfully
completing an examination specified by the NASD and after supplying to the
satisfaction of FFSC information required by forms prescribed by the NASD.
REPRESENTATIVE may solicit applications only while authorized to sell mutual
funds or securities in accordance with the laws of the state in which the
Registered Representative will offer such contracts and only upon delivery to
the offerree of a prospectus for such mutual funds or securities conforming to
the Securities Acts of 1933.
3. REPRESENTATIVE expressly agrees to comply with such other rules and
regulations as the Securities and Exchange Commission, the National Association
of Securities Dealers, the regulatory authority of the jurisdiction or
jurisdictions in which the REPRESENTATIVE is authorized to represent FFSC, or as
FFSC may establish presently or in the future under requirements of applicable
federal or state law or regulation and to submit to such supervision as may be
necessary, to insure compliance with such laws and regulations. Such rules and
regulations will include (but are not limited to) the following:
(a) REPRESENTATIVE shall adhere to high standards of commercial honor and just
and equitable principles of trade in the course of soliciting applications under
this contract.
(b) REPRESENTATIVE shall not utilize advertising media other than items
furnished by FFSC for such purposes.
(c) REPRESENTAITVE shall not utilize supplemental sales materials other than
those supplied by FFSC.
(d) REPRESENTATIVE shall not dispatch any item of correspondence unless a copy
of it has been sent to the home office of FFSC for review and approval.
(e) REPRESENTATIVE shall fully explain the terms of the mutual fund or security
being sold, and shall not make any untrue statement or fail to state any
material fact to a prospective purchaser.
2
<PAGE>
(f) REPRESENTATIVE shall take steps to acquaint himself with prospective
customers, including such inquiries as may be necessary to satisfy himself that
the offering contemplated is not unsuitable having in view the customer's
resources, investment objectives and other investments.
(g) REPRESENTATIVE shall not make any agreement with any person for the
repurchase or resale of stock other than mutual fund shares or other securities
authorized by FFSC, nor shall he directly or indirectly, solicit, purchase, or
raffle in any security of other issuers nor resort to "twisting" or "switching"
of securities of any other company or of insurance policies.
4. REPRESENTATIVE shall promptly report and remit to FFSC all monies received
on behalf of FFSC without commingling the same with his own funds. Purchase
payments will be the property of and will be promptly paid to FFSC and all such
monies or other settlements received by REPRESENTATIVE for or on behalf of FFSC
shall be received by the Representative in a fiduciary capacity.
5. For all sales made by Representative, FFSC will pay commissions to
Representative based on 61% of the commission paid to FFSC less any commissions
paid to subordinate Representatives.
Commissions will be paid monthly on the first of each month and will be based on
all confirmed business received by FFSC as of the cut-off date of the previous
month. Confimed business is that business which has been accepted by the
appropriate mutual fund and acknowledged to Franklin Financial Services
Corporation. Should total commissions fall below $10.00 in any given month,
commission payments will be accumulated and paid when the total reaches $10.00.
6. Each payment on an existing customer's account for the purchase of mutual
funds or other securities shall be deemed a new application under this
Agreement. The REPRESENTATIVE OR REPRESENTATIVES who obtain an original
application will be entitled to commissions on subsequent payments only as long
as that portion of that account or the customer is assigned to him by FFSC and
he is a licensed REPRESENTATIVE of FFSC within the territory in which the
customer resides at the time such payment is made. In the event the customer's
residence is not within the territory assigned to the original REPRESENTATIVE or
REPRESENTATIVES, or if the customer or account is no longer assigned to the
original REPRESENTATIVE or REPRESENTATIVES, the commissions on such subsequent
payments shall thereafter be paid in accordance with the applicable rules and
policies of FFSC. Any commissions paid or credited to the REPRESENTATIVE by
FFSC may be charged back to the REPRESENTATIVE or REPRESENTATIVES to the extent
that such commissions are attributable to the uncompleted portion of a
pre-authorized or pre-dated check or draft plan or to a dishonored check or
draft or to an uncompleted military allotment or payroll deduction or similar
plan for the systematic purchase of a mutual fund or other security.
7. REPRESENTATIVE has the right to designate the person or persons to whom any
commissions due him under the provisions of this contract will be paid after his
death. FFSC must have notice of such designation before any commissions will be
paid to the designated
3
<PAGE>
recipient after the death of the REPRESENTATIVE. In the absence of any
designation, commissions will be paid to the representative's estate or legal
representative after his death. All commissions payable under this section are
subject to the provisions of Section 6 above and will be payable only so long as
the customer's account is assigned to the designated person or the
representatives estate or legal representative by Franklin Financial Services
Corporation.
8. FFSC reserves the right to modify the commission rates set forth herein
during the period of time in which commissions may be paid under the provisions
of this Agreement.
9. Should REPRESENTATIVE wrongfully withhold any funds, receipts or other
property belonging to FFSC, or to one of its customers or applicants, or violate
any governing law or regulation relating to the sale of securities, this
Agreement may be terminated forthwith and all rights and claims of
REPRESENTATIVE hereunder, including the claim for payment of any further sums of
money or commissions are likewise terminated and he shall not be entitled to
receive any further commissions or sums of money whatsoever from FFSC.
REPRESENTATIVE shall reimburse FFSC for any costs, expenses or legal fees that
it may incur in recovering funds wrongfully withheld or any property belonging
to FFSC or its customer or its customers or applicants, or for the defense of
any action wherein FFSC and REPRESENTATIVE or either of them is charged with a
violation of any government law or regulation relating to the subject of
securities as a consequence of the alleged conduct of REPRESENTATIVE.
10. REPRESENTATIVE shall be responsible for the fidelity and honesty of all
subordinate REPRESENTATIVES or agents under him and shall be jointly and
severally liable to FFSC for all monies collected by or passing into the hands
of said subordinate REPRESENTATIVES and jointly and severally liable to FFSC or
any Regional Manager of FFSC, as the case may be, for any indebtedness of the
REPRESENTATIVE or subordinate REPRESENTATIVES, with interest payable thereon at
the rate of 6% per annum, and agrees to indemnify FFSC or such Regional Manager,
as the case may be, for any fees or expenses that either may incur in the
collection of any indebtedness owing either of them by REPRESENTATIVE or any
subordinate REPRESENTATIVES, or the withholding of any funds collected or
passing into the hands of any REPRESENTATIVE or any subordinate REPRESENTATIVES,
or for any legal action brought by or against REPRESENTATIVE or any subordinate
REPRESENTATIVES in which FFSC may be a party therein, and it is agreed by
REPRESENTATIVE that FFSC may, if it so desires, employ its own counsel in
defense of any legal proceeding to which it may be made a party and may employ
counsel for the purpose of prosecuting its respective rights violated herein and
all expenses of such litigation, including costs and attorney's fees, shall be
paid by REPRESENTATIVE. Any claim for commissions which said subordinate
REPRESENTATIVE may have shall be limited to his written contract with FFSC.
11. All books of account, documents of any kind, vouchers, notices, lists of
customers and books and papers and sales literature of any kind used from time
to time by REPRESENTATIVE in connection with this Agreement, shall be and remain
the property of FFSC and shall at all times be subject to inspection by FFSC and
upon demand at the termination of this Agreement, shall be delivered to FFSC.
4
<PAGE>
12. FFSC may offset against any commissions or other claims due and to become
due to REPRESENTATIVE under this Agreement any debts owing at any time by the
REPRESENTATIVE to FFSC and The Franklin Life Insurance Company or either of them
and any such debt or debts shall be a first lien against said commissions and
other claims.
13. REPRESENTATIVE will pay all fees relating to his qualification or licensing
as a securities salesman as well as taxes and licenses required by municipal or
state laws in the territory in which he is licensed under this Agreement. At
the option of FFSC, REPRESENTATIVE will furnish a good and sufficient bond.
14. Either party hereto may terminate this Agreement without cause by sending
the other at his last known address, by mail, ten days' notice in writing to
that effect or by delivery of such notice in person.
The power and authority of REPRESENTATIVE to act for and on behalf of FFSC
is strictly limited to the terms and provisions of this Agreement and nothing
herein contained shall be construed to grant to REPRESENTATIVE by implication or
otherwise any right, power, authority or privilege that is not herein
specifically set forth. This Agreement shall constitute the entire agreement
between the parties hereto and shall be effective as of __________________ and
cannot be modified by any prior or subsequent statement by whomsoever made.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date and year first above written.
Franklin Financial Services Corporation
By______________________________
Representative
By_______________________________
5
Form FF640 1-D
<PAGE>
EXHIBIT 1-A(4)
AGREEMENT BETWEEN FRANKLIN FINANCIAL SERVICES CORPORATION AND
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
THIS AGREEMENT dated July 15, 1991 by and between The American Franklin
Life Insurance Company, an Illinois legal reserve stock life insurance
corporation, having its principal office at Franklin Square, Springfield,
Illinois (the "Company"), and Franklin Financial Services Corporation, a
Delaware corporation, having its principal office at Franklin Square,
Springfield, Illinois ("Franklin Financial");
WITNESSETH:
WHEREAS, the Company is engaged in the issuance of life insurance
policies and annuity contracts, pursuant to insurance laws in several of the
states, territories and possessions of the United States except New York through
its licensed life insurance agents, and desires to issue and sell flexible
premium variable life insurance policies (the "Policies") through all or some
of' the said agents; and
WHEREAS, the Policies may be deemed to be securities under the
Securities Exchange of 1934 (the "Act"), and applicable state laws, and the sale
of such securities may be deemed to be through an instrumentality of interstate
Commerce within the meaning of Section 15(a) of the Act; and
WHEREAS, Franklin Financial is an affiliate of the Company and Franklin
Financial is registered as a broker-dealer under Section 15(b) of the Act and
also is registered as a member of the National Association of Securities
Dealers, Inc. ("NASD"); and
WHEREAS, it is the desire of the parties to enter into an agreement
pursuant to which certain agents of the Company ("Agents") who are to be
authorized to sell the Policies will be registered representatives of Franklin
Financial, which will be responsible for selecting, training and supervising
them for that purpose, all as more particularly described herein;
NOW, THEREFORE, it is hereby agreed as follows:
1. The Company will advise Franklin Financial of the names of the Agents who are
to be authorized by the Company to sell the Policies. Franklin Financial will
then select the Agents and train them in the sale of variable life policies and
will use its best efforts to qualify such agents under applicable federal and
state laws to engage in the sale of the Policies. Agents so trained and
qualified will be registered representatives of Franklin Financial under
applicable requirements of the NASD and, in addition to all other requirements
for such qualification, will be required to
1
<PAGE>
comply with applicable examination requirements before being permitted to engage
in the sale of the Policies.
2. Franklin Financial will regularly advise the company of the qualifications of
each Agent under applicable federal and state law.
3. Before any Agent will be authorized to offer or sell the Policies, the
Company, Franklin Financial and the Agent will enter into a mutually
satisfactory agreement pursuant, to which the Agent will acknowledge that he
will be a registered representative of Franklin Financial in connection with his
selling activities related to the Policies, that such activities will be under
the supervision and control of Financial and the supervisor or supervisors
designated by Franklin Financial, and that the Agent's right to convince sell
the Policies is subject to his continued-compliance with such agreement and all
rules, procedures and standards established by Franklin Financial.
4. Franklin Financial will maintain its registration under the Act and its
membership in the NASD and of applicable law and will establish such rules and
procedures as may be necessary adequately to supervise the selling activities of
the Agents. Upon request by Franklin Financial, the Company will furnish or
require the Agents to furnish such appropriate records as may be necessary to
insure such supervision.
5. In the event any Agent fails or refuses to submit to such supervision of
Franklin Financial, or otherwise fails to meet the rules, procedures and
standards imposed by Franklin Financial on its registered representatives,
Franklin Financial shall promptly advise the Company thereof and shall notify
such Agent that he is no longer authorized to offer or sell the Policies, and
Franklin Financial and the Company shall take whatever additional action may be
necessary to terminate the sales activities of such Agent relating to the
Policies.
6. It is contemplated that all or some of the home office supervisors, Regional
Managers, or General Agents of the Company will become qualified as registered
representatives of Franklin Financial and in that capacity will, subject to the
policies of Franklin Financial, supervise the selling activities of Agents
relating to the Policies. In the event any such person shall fail or refuse to
provide such supervision to Franklin Financial's satisfaction, Franklin
Financial (with the cooperation of the Company) shall furnish a qualified person
to perform such supervision or, if Franklin Financial is unable to furnish such
supervision, the authority of the unsupervised Agents to sell the Policies shall
be withdrawn forthwith.
7. Commissions payable to Agents in connection with sales of the Policies shall
be paid by the Company to the Agents through the General Agents or otherwise
under the Company's usual agency contracts and nothing contained herein shall
obligate Franklin Financial to pay any commissions or other remuneration to the
Agents or to reimburse any such Agents for expenses incurred by them, nor shall
Franklin Financial have any interest whatsoever in any commissions or
remuneration payable to Agents by the Company. All deductions from premiums for
sales charges and all contingent deferred sales charges received by Franklin
Financial under the Sales Agreement dated the date hereof between Franklin
Financial and Separate Account VUL-2 of The
2
<PAGE>
American Franklin Life Insurance Company, a separate account established by the
Company pursuant to Article XIV-1/2 of the Illinois Insurance Code (the "Fund"),
in excess of amounts necessary to pay other sales or promotional expenses
incurred BY Franklin Financial, shall be remitted to the Company to the extent
necessary to reimburse the Company for such commissions or other remuneration to
the Agents paid by the Company. The amount of such commissions and other
remuneration to the Agents not so reimbursed shall be deemed to have been
contributed to the capital of Franklin Financial and all such commissions so
paid by the Company shall be appropriately reflected in the books and records
maintained by or on behalf of Franklin Financial.
8. Franklin Financial will assume full responsibility for the sales activities
of the Agents relating to the Policies and for initial and continued compliance
by itself and Agents with applicable rules of NASD and federal and state
securities laws, and in connection therewith may demand and receive such
assurances from the Company as it deems appropriate demonstrating compliance
with the Act, the Securities Act of 1933, as amended, and the Investment Company
Act of 1940, as amended.
9. Franklin Financial may request that all or some of the notices and the books
and records required to be prepared, sent, and/or maintained by it, as a
registered broker-dealer or as a member of the NASD, in connection with the sale
of the Policies, be prepared, sent and/or maintained by the Company, at the
Company's expense, as agent for Franklin Financial. The Company agrees that such
books and records are the property of Franklin Financial, will be made and
preserved in accordance with Rules 17a-3 and 17a-4 under the Act, and will be
subject to examination by the Securities and Exchange Commission in accordance
with Section 17(a) of the Act.
10. Franklin Financial will provide such prospectuses and such other material as
the Company and Franklin Financial may mutually determine to be necessary or
desirable, and which are authorized by applicable law, for use in connection.
with the offering or sale of the Policies. The Company, at its own expense, will
qualify or register the Policies in all jurisdictions where such qualification
or registration is required and will obtain all necessary approvals of the
offering and sale of the Policies in accordance with the requirements of the
NASD and applicable federal and state law.
11. This Agreement may not be assigned by either party except by mutual consent
and shall continue for a period of one year and from year to year thereafter
subject to termination by either party at any time upon 30 days' written notice
to the other party and to the Securities and Exchange Commission.
3
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
THE AMERICAN FRANKLIN LIFE
INSURANCE COMPANY
By:
-----------------------
Name: John C. Watson
Title: President
FRANKLIN FINANCIAL SERVICES
CORPORATION
By:
------------------------
Name: Stephen P. Horvat, Jr.
Title: Secretary
4
<PAGE>
EXHIBIT 1-A(5)(a)
<TABLE>
<S> <C> <C>
INSURED PERSON [BENJAMIN FRANKLIN]
THE AMERICAN FRANKLIN
POLICY OWNER [BENJAMIN FRANKLIN] LIFE INSURANCE COMPANY
FACE AMOUNT OF INSURANCE $[50,000]
DEATH BENEFIT OPTION [A] (SEE PAGE 6) VARIABLE LIFE INSURANCE
POLICY NUMBER [123456789] POLICY
</TABLE>
We agree to pay the insurance benefits and to provide the other rights and
benefits of this policy in accordance with its provisions.
This is a Flexible Premium Variable Life Plan. You Can
(1) increase or decrease the face amount of insurance;
(2) make premium payments at any time and, within limits, in any amount;
(3) change the death benefit option;
(4) change the allocations of net premiums and deductions among your investment
options; and
(5) transfer amounts, within limits, among your investment options.
All of these rights and benefits are subject to the terms and conditions of this
policy. All requests for policy changes are subject to our approval and may
require evidence of insurability.
After certain deductions described in this policy are subtracted from your
premiums, the balance remaining is placed in a policy account that is maintained
for you. You may allocate amounts in your Policy Account either to our VUL
separate account ("SA") or to our Guaranteed Interest Division ("GID"). The
value of the portion of your Policy Account that is in an investment division of
our SA vrill vary up or down depending on the unit value of such investment
division, which in turn depends on the investment performance of the
corresponding portfolio of a designated investment company. There are no minimum
guarantees as to the portion of your Policy Account in an investment division of
our SA.
The portion of your Policy Account that is in our GID will accumulate, after
deductions, at rates of interest we determine. Such rates will not be less that
4-1/2% a year.
The amount of the death benefit, or the duration of insurance coverage, or both,
may be variable or fixed as described on Pages 5 and 6.
This is a non-participating policy.
RIGHT TO EXAMINE POLICY: You may examine this policy and if for any reason you
are not satisfied with it, you may cancel it by returning the policy with a
written request for cancellation to our Administrative Office by the 10th day
after you receive it. If you do this, we will refund the premiums that were paid
under this policy.
Signed for the Company at Springfield, Illinois.
Stephen P. Horvat, Jr., Secretary Howard C. Humphrey, President
Page l
Form T1735
<PAGE>
Administrative Office
The address of our Administrative Office is shown on Page 3. You should send
premium payments and requests to that address unless instructed otherwise.
In this policy
"We ", " our " , and "us" mean The American Franklin Life Insurance Company.
"You" and "Your" mean the owner of the policy at the time an owner's right is
exercised. References to amounts and values include all adjustments provided by
this policy
POLICY PROVISIONS
<TABLE>
<S> <C> <C> <C>
Policy Information Page 3
Table of Guaranteed Maximum How a Loan Can be Made Page 13
Insurance Cost Rates Page 4
Our Annual Report to You Page 16
The Insurance Benefits We Pay Page 5
Settlement Options Page 19
The Premiums You Pay Page 7
Application Follows Page 21
The Value of Your Policy
Account Page 10
</TABLE>
INTRODUCTION
The premiums you pay, after deductions are made in accordance with the Table of
Expense Charges, are put into your Policy Account. Amounts in your Policy
Account a-re allocated at your direction to one or more investment divisions of
our SA and to our GID as described in "Your Investment Options" on Page 9 of
this policy.
The investment divisions of our SA are invested in securities and other
investments whose value is subject to market fluctuations and investment risk.
There is no guarantee of principal or investment experience regarding any amount
allocated to any investment division of our SA.
Our GID earns interest at rates we declare in advance of each policy year. The
rates are guaranteed for each policy year. The principal, after deductions and
charges, is also guaranteed.
The duration of life insurance coverage depends upon the amount in your Policy
Account.
If death benefit Option A is in effect, the death benefit is the Face Amount of
Insurance, and the amount of the death benefit is fixed except when it is a
percentage of your Policy Account. If death benefit Option B is in effect, the
death benefit is the Face Amount of Insurance plus the amount in your Policy
Account. The amount of the death benefit is variable under option B.
Under either option the death benefit will never be less than a percentage of
the Policy Account as stated on Page 6.
We make monthly charges against your Policy Account to cover the cost of the
benefits provided by this policy and the cost of any benefits provided by riders
to this policy. If you give up this policy for its Net Cash Surrender Value or
reduce the Face Amount of Insurance during the first ten policy years, we may
subtract a surrender charge from the Policy Account.
This is only a summary of what the policy provides. You should read all of the
policy carefully. Its terms govern your rights and our obligations.
<PAGE>
POLICY INFORMATION
INSURED PERSON [ENJAMIN FRANKLIN]
POLICY OWNER [BENJAMIN FRANKLIN
FACE AMOUNT
OF INSURANCE $[50,000]
DEATH BENEFIT OPTION [A] (SEE PAGE 6)
POLICY NUMBER [1234567891]
BENEFICIARY (DEBORAH FRANKLIN, WIFE]
REGISTER DATE [JANUARY 4,1993] ISSUE AGE [35]
DATE OF ISSUE [JANUARY 4,1993] SEX [MALE]
[NONSMOKER]
PARTIAL NET CASH
SURRENDER VALUE
WITHDRAWAL MINIMUM WITHDRAWAL IS $[500]
POLICY LOAN MINIMUM LOAN IS $[500]
TRANSFER MINIMUM TRANSFER AMOUNT IS $[500]
STATE OF RESIDENCE [SPECIMEN]
AN INITIAL PREMIUM PAYNENT OF $[500.00] IS DUE ON OR BEFORE DELIVERY OF THE
POLICY.
THE PLANNED PERIODIC PREMIUM PAYMENT OF $[500.00] IS PAYABLE [ANNUALLY].
PREMIUM PAYMENTS ARE FOR THE INSURANCE BENEFITS AND ANY ADDITIONAL BENEFIT
RIDERS LISTED BELOW.
FINAL POLICY DATE: THIS POLICY PROVIDES LIFE INSURANCE COVERAGE ON TBE INSURED
PERSON UNTIL THE FINAL POLICY DATE, WHICH IS THE POLICY ANNIVERSARY NEAREST THE
INSURED PERSONS 95TH BIRTHDAY, PROVIDED THE POLICY ACCOUNT IS SUFFICIENT TO
COVER THE DEDUCTIONS FOR THE COST TO THAT DATE OF THE BENEFITS OF THIS POLICY
AND OF ANY RIDERS TO TIUS POLICY. YOU MAY HAVE TO PAY MORE THAN THE PREMIUMS
SI40WN ABOVE TO KEEP THIS POLICY AND COVERAGE IN FORCE TO THAT DATE, AND TO KEEP
ANY ADDITIONAL BENEFIT RIDERS IN FORCE.
PAGE 3
<PAGE>
POLICY INFORMATION CONTINUED - POLICY NUMBER 123456789
TABLE OF EXPENSE CHARGES
CHARGES FOR APPLICABLE TAXES (OTHER THAN TAXES DISCUSSED ON PAGE 17):
[2.000%] OF EACH PREMIUM PAYMENT. THIS AMOUNT IS SUBTRACTED FROM EACH PREMIUM
PAYMENT. WE RESERVE THE RIGHT TO CHANGE THIS PERCENTAGE TO CONFORM TO CHANGES IN
THE LAW OR TO CHANGES IN THE STATE OF RESIDENCE OF THE POLICY OWNER-
FIRST YEAR MONTHLY ADMINISTRATIVE CHARGE:
$[30] DEDUCTED MONTHLY FOR THE FIRST 12 MONTHS FROM THE POLICY
ACCOUNT. THIS CHARGE IS DEDUCTED ONLY IN THE FIRST POLICY YEAR-
RENEWAL YEAR MONTHLY ADMINISTRATIVE CHARGE-
$[6] DEDUCTED MONTHLY FROM THE POLICY ACCOUNT BEGINNING IN THE SECOND POLICY
YEAR. WE RESERVE THE RIGHT TO CHANGE TIES CHARGE BUT IT WILL NEVER BE MORE THAN
$12 A MONTH. CHARGES WILL BE AS DESCRIBED IN"CHANGES IN POLICY COST FACTORS' ON
PAGE 17.
SALES CHARGE:
[5%l OF THE FIRST $[455] IN PREMIUM PAYMENTS RECEIVED IN EACH POLICY YEAR. THIS
AMOUNT IS SUBTRACTED FROM EACH PREMIUM PAYMENT. THIS PERCENTAGE IS FIXED FOR THE
LIFETIME OF THE POLICY.
FOR PARTIAL WITHDRAWAL OF NET CASH SURRENDER VALUE:
$[25], OR 2% OF THE AMOUNT WITHDRAWN IF LESS, DEDUCTED FROM THE POLICY ACCOUNT
WHENEVER THERE IS A PARTIAL NET CASH SURRENDER VALUE WITHDRAWAL.
FOR AN INCREASE YOU ASK FOR IN THE FACE AMOUNT OF INSURANCE:
$[1.50] FOR EACH $1,000 OF INCREASE (BUT NOT MORE THAN $300) IS DEDUCTED FROM
THE POLICY ACCOUNT.
FOR TRANSFERS:
AFTER THE FIRST FOUR TRANSFERS OF AMOUNTS IN A POLICY YEAR AMONG YOUR INVESTMENT
OPTIONS, WE MAY CHARGE UP TO $[25] FOR EACH ADDITIONAL TRANSFER IN THAT POLICY
YEAR.
PAGE 3-CONTINUED
<PAGE>
POLICY INFORMATION CONTINUED - POLICY NUMBER 123456789
- -----TABLE OF EXPENSE CHARGES-----
SURRENDER CHARGES
TABLE
<TABLE>
<CAPTION>
Policy Policy
Year Charge Year Charge
---- ------ ---- ------
<S> <C> <C> <C>
1 $227.50 6 $227.50
2 227.50 7 182.00
3 227-50 8 136.50
4 227.50 9 91.00
5 227.50 10 45.50
</TABLE>
A SURRENDER CHARGE WILL BE SUBTRACTED FROM YOUR POLICY ACCOUNT IF THE POLICY IS
GIVEN UP FOR ITS NET CASH SURRENDER VALUE IN THE FIRST TEN POLICY YEARS. THE
SURRENDER CHARGE AT ANY TIME IN A POLICY YEAR IS EQUAL TO THE LESSER OF (1) THE
CHARGE SHOWN IN THE TABLE ABOVE FOR THAT YEAR; OR (2) AN AMOUNT EQUAL TO (A) IS
(B), WHERE (A) IS [25%] OF THE FIRST $[455] IN PREMIUM PAYMENTS RECEIVED DURING
THE FIRST POLICY YEAR, PLUS [9%] OF ALL OTHER PREMIUM PAYMENTS RECEIVED TO SUCH
TIME; AND (B) IS THE AMOUNT OF ANY PRO RATA SURRENDER CHARGE PREVIOUSLY MADE
UNDER THIS POLICY.
IF THE FACE AMOUNT OF INSURANCE IS REDUCED AT ANY TIME IN THE FIRST TEN POLICY
YEARS, A PRO RATA SHARE OF THE APPLICABLE SURRENDER CHARGE AT THAT TIME MAY BE
DEDUCTED FROM THE POLICY ACCOUNT. SEE PAGE 12 FOR A DESCRIPTION OF THE PRO PATA
SURRENDER CHARGE.
THERE ARE NO SURRENDER CHARGES AFTER THE TENTH POLICY YEAR.
***ADMINSTIVE OFFICE: THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY***
200 EAST WILSON BRIDGE ROAD
WORTHINGTON. OH 43085
PAGE 3-CONTINUED
<PAGE>
POLICY INFORMATION CONTINUED - POLICY NUMBER 123456789
TABLE OF GUARANTEED MAXIMUM INSURANCE COST RATES
GUARANTEED MAXIMUM MONTHLY RATES PER $1,000
OF NET AMOUNT AT RISK (SEE PAGE 9)
<TABLE>
<CAPTION>
- -------------------- ------------------------ ----------------- -----------------
INSURED MONTHLY RATE INSURED MONTHLY
PERSON'S PERSON'S RATE
ATTAINED AGE ATTAINED
AGE
- -------------------- ------------------------ ----------------- -----------------
<S> <C> <C> <C>
35 $000.17583 70 $003.35333
36 000.18667 71 003.68167
37 000.20000 72 004.06000
38 000.21500 73 004.49583
39 000.23250 74 004.98333
43 000.25167 75 005.51333
41 000.27417 76 006.07667
42 000.29750 77 006.66583
43 000.32333 78 007.27583
44 000.35000 79 037.91417
45 000.38000 80 008.63500
46 000.41083 81 009.43083
47- 000.44417 82 010.33917
48 000.48000 83 011.37333
49 000.51917 84 012.51417
50 000.56083 85 013.73750
51 000.61000 86 015.02167
52 000.66583 87 016.35667
53 000.72833 88 017.73833
54 000.80000 89 019.17167
55 000.87667 90 020.67750
56 000.96000 91 022.28750
57 001.04657 92 024.06333
58 001.14000 93 026.12000
59 001.23917 94 028.81333
60 001.35003
61 001.47333
62 001.61333
63 001.77250
64 001.94917
65 002.14333
66 002.35083
67 002.57250
68 002.80917
69 003.06500
</TABLE>
PAGE 4
<PAGE>
WHO BENEFITS FROM THIS POLICY?
Owner. The Owner of this policy is the Insured Person unless stated otherwise in
the application, or later changed.
If the Insured Person is living on the Final Policy Date defined in the Policy
Information section, we will pay you the amount in the Policy Account on that
date minus any outstanding loan and loan interest. This policy will then end.
As the Owner, you are entitled to exercise all the rights of this policy while
the Insured Person is living. To exercise a right, you do not need the consent
of anyone who has only a conditional or future ownership interest in this
policy.
BENEFICIARY. The Beneficiary to receive the death benefit will be as stated on
page 3 unless later changed. The relationship of the Beneficiary is to the
Insured Person unless otherwise stated.
When any benefit becomes due by reason of the Insured Person's death, the
benefit will be paid equally to the Beneficiaries then living in the following
order (unless otherwise provided):
(1) the primary Beneficiaries;
(2) the first contingent Beneficiaries, if any, provided none of the primary
Beneficiaries are living;
(3) the second contingent Beneficiaries, if any, provided none of the primary
and first contingent Beneficiaries are living.
If no Beneficiary is living when the Insured Person dies, the death benefit will
be paid to the Owner, or to the executors or administrators of the Owner.
Changing the Owner or Beneficiary. While the Insured Person in living, you may
change the Owner or Beneficiary by written notice in a form satisfactory to us.
(You can get such form from our agent or by writing to us.) The change will take
effect on the date you sign the notice. But, it will not apply to any payment we
make or other action we take before we receive the notice. If you change the
Beneficiary, any previous arrangement you made as to a payment option for
benefits is cancelled. You may choose a payment option for the new Beneficiary
in accordance with "Settlement Options" on Page 19.
Assignment. You can assign this policy, but we will not be bound by an
assignment unless we have received it in writing. Your rights and those of any
other person referred to in this policy will be subject to the assignment. We
assume no responsibility for the validity of an assignment. An absolute
assignment will be considered as a change of ownership to the assignee.
THE INSURANCE BENEFITS WE PAY
We will pay the insurance benefit of this policy to the Beneficiary when we
receive at our Administrative Office (1) proof that the Insured Person died
before the Final Policy Date; and (2) all other requirements deemed necessary
before such payment may be made. The insurance benefit includes the following
amounts, which we will determine as of the date of the Insured Person's death:
(1) The death benefit described on Page 6;
(2) plus any other benefits then due from riders to this policy;
(3) minus any unpaid loan (and loan interest) on the policy-,
(4) minus any overdue charges if the Insured Person dies during the grace period
described on page 8.
Page 5
<PAGE>
THE INSURANCE BENEFITS WE PAY (Continued)
We will add interest to the resulting amount for the period from the date of
death to the date of payment. We will compute the interest at a rate we
determine, but not less than the greater of (a) the rate we are paying on the
date of payment under Settlement Option 3 on Page 19, or (b) the rate required
by any applicable law
Payment of these benefits may also be affected by other provisions of this
policy. See Page 17, where we specify our right to contest the policy, the
suicide exclusion, and what happens if age or sex has been misstated. Special
exclusions or limitations (if any) are listed in the Policy Information section.
Death benefit. The death benefit will be determined at any time under either
Option A or Option B below, whichever you have chosen and is in effect at such
time.
Under Option A, the death benefit is the greater of the Face Amount of
Insurance, or a percentage (see below) of the amount in your Policy Account.
Under this option, the amount of the death benefit is fixed, except when it is
determined by such percentage.
Under Option B, the death benefit is the greater of the Face Amount of Insurance
plus the amount in your Policy Account, or a percentage (see below) of the
amount in your. Policy Account. Under this option the amount of the death
benefit is variable.
Under either option, the duration of insurance coverage depends upon the amount
in your Policy Account.
The percentage referred to above is the applicable percentage from the following
table for the Insured Person's age (as of his or her nearest birthday) at the
beginning of the policy year of determination,
TABLE OF APPLICABLE PERCENTAGES
FOR AGES NOT SHOWN, THE APPLICABLE PERCENTAGE SHALL DECREASE
BY A RATABLE PORTION FOR EACH FULL YEAR
<TABLE>
<CAPTION>
-------------------- ------------------- -------------------- -------------------
INSURED INSURED
PERSON'S AGE PERCENTAGE PERSON'S AGE PERCENTAGE
-------------------- ------------------- -------------------- -------------------
<S> <C> <C> <C>
40 and under 250% 65 120%
-------------------- ------------------- -------------------- -------------------
45 215 70 115
-------------------- ------------------- -------------------- -------------------
50 185 75 thru 90 105
-------------------- ------------------- -------------------- -------------------
55 150 95 100
-------------------- ------------------- -------------------- -------------------
60 130
-------------------- ------------------- -------------------- -------------------
</TABLE>
CHANGING THE FACE AMOUNT OF INSURANCE OR
THE DEATH BENEFIT OPTION
During the first policy year the death benefit option and the Face Amount of
Insurance will be as you chose on the application for this policy. The death
benefit option and the Face Amount of Insurance are shown on Page 3. At any time
after the first policy year while this policy is in force, you may change the
death benefit option or the Face Amount of Insurance by written request to us at
our Administrative Office, subject to our approval and the following:
Page 6
<PAGE>
CHANGING THE FACE AMOUNT OF INSURANCE
OR THE DEATH BENEFIT OPTION (Continued)
(1) You may ask us to increase the Face Amount of Insurance if you provide
evidence satisfactory to us of the insurability of the Insured Person. If the
Face Amount of Insurance is increased, then the cost of insurance rate for the
amount of the increase will be based on the rating class of the Insured Person
on the date of the increase, and the Insured Person's sex and attained age. Any
increase you ask for must be at least $10,000. There is a charge for such
increase that is shown in the table of Expense Charges in the Policy Information
section. We will subtract the charge from your Policy Account as of the date the
increase takes effect. Such charge will be made in accordance with the
"Allocations" provision on Page 9.
(2) You may ask us to reduce the Face Amount of Insurance, but not to less than
the minimum amount for which we would then issue this policy under our rules. If
you do this in the first ten policy years, we may subtract from your Policy
Account a pro rate share of the applicable surrender charge (see Page 12).
Reductions will first be applied against the most recent increase in the Face
Amount of Insurance. They will then be applied to prior increases in the Face
Amount of Insurance in the reverse order in which such increases took place, and
then to the original Face Amount of Insurance.
(3) You can change your death benefit option. If you ask us to change from
Option A to Option B, we will decrease the Face Amount of Insurance by the
amount in your Policy Account on the date the change takes effect. However, we
reserve the right to decline such change if it would reduce the Face Amount of
Insurance below the minimum amount for which we would then issue this policy
under our rules. If you ask us to change from Option B to Option A, we will
increase the Face Amount of Insurance by the amount in your Policy Account on
the effective date of the change. Such decreases and increases in the Face
Amount of Insurance are made so that the death benefit remains the same on the
date the change takes effect. We de not require evidence of insurability, nor do
we subtract surrender charges or the charge for increases in the Face Amount of
Insurance, for such changes.
(4) Any change will take effect at the beginning of the policy month that
coincides with or next follows the date we approve the request.
(5) We reserve the right to decline to make any change that we determine would
cause this policy to fail to qualify as life insurance under applicable tax law
as interpreted by us (see Page 17).
(6) You may ask for a change by completing an application for change, which you
can get from our agent or by writing to us. A copy of your application for
change will be attached to the new Policy Information section that we will issue
when the change is made. The new section and the application for change will
become part of this policy. We may require you to return the policy to our
Administrative Office to make a policy change.
THE PREMIUMS YOU PAY
The initial premium payment shown in the Policy Information section is due on or
before delivery of the policy. No insurance will take effect before the initial
premium payment is paid. Other premiums may be paid at any time at our
Administrative Office while the policy is in force and before the Final Policy
Date. Premiums may be in any amount subject to the limits described below.
Page 7
<PAGE>
THE PREMIUMS YOU PAY (Continued)
We will send premium reminder notices to you for the planned periodic premium
shown in the Policy Information section, unless you ask us not to in the
application for this policy or later by written notice to our Administrative
Office. You may skip planned premium payments or change their frequency and
amount.
Limits. Each premium payment after the initial one must be at least $100. We may
increase this minimum limit 90 days after we send you written notice of such
increase.
We reserve the right not to accept premium payments (in a policy year) that we
determine would cause this policy to fail to qualify as life insurance under
applicable tax law as interpreted by us (see Page 17).
Grace Period. The duration of insurance coverage depends upon the Net Cash
Surrender Value being sufficient to cover the monthly charges described below.
If the Net Cash Surrender Value at the beginning of any policy month is less
than such charges for that month, we will send a written notice to you and to
any assignee on our records at last known addresses, stating that a grace period
of 61 days has begun, starting with the beginning of that policy month. The
notice will also state the amount of the premium payment sufficient to cover
monthly charges for three months.
If we do not receive such amount at our Administrative Office before the end
of the grace period, we will then (1) withdraw the amount in your Policy
Account, including any applicable surrender charge; and (2) send a written
notice to you and to any assignee on our records at last known addresses,
stating that this policy has ended without value.
If the Insured Person dies during the grace period, we will pay the insurance
benefits as described on Page 5.
Reinstatement. If this policy has ended without value, you may reinstate it
while the Insured Person is alive if you:
(1) Ask for reinstatement within 3 years after the end of the grace period;
and
(2) Provide evidence of insurability satisfactory to us; and
(3) Make a premium payment of an amount sufficient to keep the policy in
force for at least 3 months after the date of reinstatement.
The effective date of the reinstated policy will be the beginning of the policy
month which coincides with or next follows the date we approve your
reinstatement application.
YOUR POLICY ACCOUNT AND HOW IT WORKS
Premium Payments. When we receive your premium payments, we subtract the
deductions shown in the table in the Policy Information section. We put the
balance (the net premium) in your Policy Account as of the date we receive the
premium payment at our Administrative Office, and before any charges against
your Policy Account due on that date are made. However, we will put the first
net premium payment in your Policy Account as of the Register Date if later than
the date of receipt.
Page 8
<PAGE>
YOUR POLICY ACCOUNT AND HOW IT WORKS (Continued)
Monthly Charges. At the beginning of each policy month we subtract from your
Policy Account an amount sufficient to cover monthly administrative charges and
to provide insurance coverage, subject to the grace period provision, above. The
charge for any policy month is the sum of the following amounts determined as of
the beginning of that month.
(1) The monthly administrative charges shown in the Table of Expense Charges in
the Policy Information section.
(2) The monthly cost of any benefits provided by riders to this policy, as
determined in accordance with such riders.
(3) The monthly cost of insurance for the Insured Person that we determined as
described below.
The monthly cost of insurance is the sum of (a) our current monthly cost of
insurance rate times the "net amount at risk" (current death benefit minus the
amount in your Policy Account) at the beginning of the policy month divided by
$1,000, plus (b) any extra charge per $1,000 of Face Amount of Insurance shown
in the Policy Information section, times the Face Amount of Insurance at the
beginning of the policy month divided by $1,000. For this purpose the amount in
your Policy Account is determined before the monthly cost of insurance charge,
but after all other charges due on that date have been made. The cost of
insurance rate is based on the sex, attained age, and rating class of the
Insured Person. ("Attained age" means age on the birthday nearest to the
beginning of the then current policy year.)
We will determine cost of insurance rates from time to time. Any change in the
cost of insurance rates we use will be as described in "Changes in Policy Cost
Factors" on Page 17. These rates will never be more than those shown in the
Table of Guaranteed Maximum Insurance Cost Rates on Page 4, plus any extra
charge stated in the Policy Information section.
Other Charges. We also subtract the following other charges from your Policy
Account as they occur:
(1) We subtract a charge if you make a partial withdrawal of the Net Cash
Surrender Value (see Page 13).
(2) We subtract a surrender charge if, during the first ten policy years, you
give up the policy for its Net Cash Surrender Value, or you reduce the
Face Amount of Insurance, or this policy ends without value at the end of
a grace period (see Page 12).
(3) We subtract a charge if you increase the Face Amount of Insurance (see
Page 6).
(4) We subtract a charge for certain transfers (see Page 10) and certain
policy illustrations (see Page 18).
YOUR INVESTMENT OPTIONS
Allocations. This policy provides investment options for the amount in your
Policy Account. Amounts put into your Policy Account and charges against it are
allocated to the invest3nent divisions of our SA and to the unloaned portion of
our GID at your direction. You specified your initial premium allocation and
deduction allocation percentages in your application for this policy, a copy of
which is at the back of this policy.
However, any amounts which are put into your Policy Account prior to the
Allocation Date, which is the first business day (as defined on Page 11) fifteen
days after the Date of Issue, will initially be allocated to the Money Market
Division of our SA.
Page 9
<PAGE>
YOUR INVESTMENT OPTIONS (Continued)
On the Allocation Date, any such amounts in your Policy Account will be
allocated to the investment division of our SA and our GID based upon the
premium allocation percentages specified in your application for this policy.
Unless you change them, such percentages shall also apply to subsequent premiums
and in general, to subsequent deduction allocations.
Allocation percentages must be zero or a whole number not greater than 100. The
sum of the premium allocation percentages and the deduction allocation
percentages must each equal 100.
You may change such allocation percentages by written notice to our
Administrative Office. A change will take effect on the date we receive it at
our Administrative Office.
If we cannot make a monthly charge on the basis of the deduction allocation
percentages then in effect, we will make that charge based on the proportion
that your unloaned value in our GID and your values in the investment divisions
of our SA bear to the total unloaned value in your Policy Account.
Transfers. At your written request, we will transfer amounts you have in any
investment division of our SA to one or more other divisions of our SA or to our
GID. Any such transfer will take effect on the date we receive your written
request at our Administrative Office.
Once each policy year you may ask us to transfer an amount you specify from your
unloaned value in our GID to one or more investment divisions of our SA.
However, we will make such transfer only if (1) we receive your request for it
on a policy anniversary or within 30 days after such policy anniversary; and (2)
the amount you request is not more than the greater of 25% of your unloaned
value in our GID as of the date the transfer takes effect or the minimum amount
shown on Page 3. In no event will we transfer more than your unloaned value in
our GID.
The minimum amount that we will transfer from your value in an investment
division of our SA on any date is the lesser of the minimum transfer amount
shown on Page 3 or your value in that investment division on that date, except
as stated in the next paragraph. The minimum amount that we will transfer from
your value in our GID on any policy anniversary is the lesser of the minimum
transfer amount shown on Page 3 or your unloaned value in our GID on that date,
except as stated in the next paragraph.
We will waive the minimum amount limitations set forth in the immediately
preceding paragraph if the total amount being transferred on that date is at
least the minimum transfer amount shown on Page 3.
Four transfers may be made in a policy year without charge. We may make an
expense charge for additional transfers in a policy year (see Page 3). If we
make such charge, it will be subtracted equally among the divisions from which
the transfers were made.
THE VALUE OF YOUR POLICY ACCOUNT
The amount in your Policy Account at any time is equal to the sum of the amounts
you then have in our GID and in the investment divisions of our SA under this
policy.
Your Value in our Guaranteed Interest Division (GID). The amount you have in our
GID at any time is equal to the amounts allocated and transferred to it under
this policy, plus the interest credited to it, minus amounts deducted,
transferred and withdrawn from it under this policy.
Page 10
<PAGE>
THE VALUE OF YOUR POLICY ACCOUNT (Continued)
We will credit the amount in our GID with interest at effective annual rates we
determine. We will determine such interest rates annually in advance for
unloaned and loaned amounts in our GID. The rates may be different for unloaned
and loaned amounts. The interest rates we determine each year will apply to the
policy year that follows the date of determination. Any change in the interest
rates we determine will be as described in "Changes in Policy Cost Factors" on
Page 17. Such effective annual interest rates will not be less than 4-1/2%.
At the end of each policy month we will credit interest on amounts in our GID as
follows:
(1) On amounts that remain in our GID for the entire policy month, from
the beginning to the end of the month.
(2) On amounts allocated to our GID during a policy month that are net
premium payments or loan repayments, from the date we receive them
to the end of the policy month. However, we will credit interest on
the amount derived from the initial premium payment from the
Allocation Date.
(3) On amounts transferred to our GID during a policy month, from the
date of the transfer to the end of the policy month.
(4) On amounts charged against or withdrawn from our GID during a policy
month, from the beginning of the policy month to the date of the charge
or withdrawal.
On each policy anniversary or at the time of a full loan repayment, interest
credited to the loaned portion of our GID will be allocated to the unloaned
portion of our GID.
YOUR VALUE IN THE INVESTMENT DIVISIONS OF OUR SEPARATE ACCOUNT (SA). The amount
you have in an investment division of our SA under this policy at any time is
equal to the number of units this policy then has in that division multiplied by
the division's unit value at that time.
Amounts allocated, transferred or added to an investment division of our SA are
used to purchase units of that division; units are redeemed when amounts are
subtracted, transferred or withdrawn. These transactions are called "policy
transactions."
The number of units a policy has in an investment division at any time is equal
to the number of units purchased minus the number of units redeemed in that
division up to that time. The number of units purchased or redeemed in a policy
transaction is equal to the dollar amount of the policy transaction divided by
the division's unit value on the date of the policy transaction. Policy
transactions may be made on any business day. The unit value that applies to a
transaction made on a business day will be the unit value for that day. The unit
value that applies to a transaction made on a non-business day will be the unit
value for the next business day.
We determine unit values for the investment divisions of our SA at the end of
each business day. Generally, a business day is any day we are open and the New
York Stock Exchange is open for trading. A business day immediately preceded by
one or more non-business calendar days will include those non-business days as
part of that business day. For example, a business day which falls on a Monday
will consist of a Monday and the immediately preceding Saturday and Sunday.
The unit value of an investment division of our SA on any business day is equal
to the unit value for that division on the immediately preceding business clay,
multiplied by the net investment factor for that division on that business day.
Page 11
<PAGE>
THE VALUE OF YOUR POLICY ACCOUNT (Continued)
The net investment factor for an investment division of our SA on any business
day is (a) divided by (b), minus (c), where:
(a) is the net asset value of the shares in designated investment companies
that belong to the investment division at the close of business on such
business day before any policy transactions are made on that day, plus
the amount of any dividend or capital gain distribution paid by the
investment companies on that day;
(b) is the value of the assets in that investment division at the close of
business on the immediately preceding business day after all policy
transactions were made for that day; and
(c) is a charge not exceeding .00002063 for each day in that "business
day", as defined above, corresponding to a charge not exceeding .75%
per year for mortality and expense risks, plus any charge for that day
for taxes or amounts set aside as a reserve for taxes.
The net asset value of an investment company's shares held in each investment
division shall be the value reported to us by that investment company.
THE CASH SURRENDER VALUE OF THIS POLICY
Cash Surrender Value. The Cash Surrender Value on any date is equal to the
amount in the Policy Account on that date, minus any applicable surrender
charges.
Net Cash Surrender Value. The Net Cash Surrender Value is equal to the Cash
Surrender Value minus any loan and loan interest. You may give up this policy
for its Net Cash Surrender Value at any time while the Insured Person is living.
You may do this by sending a written request for it and this policy to our
Administrative Office. We will compute the Net Cash Surrender Value as of the
date we receive your request for it and this policy at our Administrative
Office. All insurance coverage under this policy ends on such date.
Surrender Charges. During the first ten policy years, if you give up this policy
for its Net Cash Surrender Value or it ends without value at the end of a grace
period, we will subtract a surrender charge from the Policy Account. A
description of surrender charges is in the Policy Information section.
If the Face Amount of Insurance is reduced during any of the first ten policy
years because you ask us to reduce it, we may also subtract from the Policy
Account a pro rate surrender charge. Such charge will be made in accordance with
the "Allocations" provision on Page 9. The amount of the pro rata surrender
charge will be determined by the following formula:
(A / B) X C
where A - Represents the decrease in the Face Amount of Insurance to which
a surrender charge will be applied. The amount of the decrease
is the difference between the Face Amount of Insurance
immediately before the reduction and the new Face Amount of
Insurance. However, this amount will be reduced by (1) the sum
of all requested and approved prior increases in the Face Amount
of Insurance; less (2) the sum of all requested and approved
prior reductions in the Face Amount of Insurance (as described
in sections I and 2 of "Changing the Face Amount of Insurance or
the Death Benefit Option" on Page 6) minus the portion of such
prior reductions on which a pro rata surrender charge was
previously made.
Page 12
<PAGE>
THE CASH SURRENDER VALUE OF THS POLICY (Continued)
where B - Is the initial Face Amount of Insurance.
where C - Is the applicable surrender charge immediately before the reduction.
If a pro rata surrender charge is made, the surrender charges shown in the
"Table of Expense Charges" on Page 3 are reduced proportionately, and we will
send you a new table which reflects such changes.
PARTIAL NET CASH SURRENDER VALUE WITHDRAWAL. After the first policy year you may
ask for a partial Net Cash Surrender Value withdrawal, subject to our approval,
based on our rules in effect when we receive your request, and to the MINIMUM
withdrawal amount shown in the Policy Information section. A partial withdrawal
will result in a reduction in the Death Benefit, in the Cash Surrender Value and
in your Policy Account equal to the amount requested plus the expense charge
shown in the Table of Expense Charges in the Policy Information section. If you
have selected death benefit Option A, the Face Amount of insurance will also be
reduced, but no surrender charge will be subtracted in connection with any such
reduction.
Your request for a partial Net Cash Surrender Value withdrawal must be in
writing to our Administrative Office. You may tell us how much of each partial
withdrawal is to come from your unloaned value in our GID and from your values
in each of the investment divisions of our SA. If you do not tell us, we will
make the withdrawal on the basis of your monthly deduction allocation
percentages then in effect. The expense charge will be allocated equally among
the divisions from which the requested amounts were withdrawn. If we cannot make
the withdrawal or deduct the expense charge as indicated above, we will make the
withdrawal and deduction based on the proportion that your unloaned value in our
GID and your values in the investment divisions of our SA bear to the total
unloaned value in your Policy Account.
Such withdrawal and resulting reduction in the Death Benefit, in the Cash
Surrender Value and in your Policy Account will take effect on the date we
receive it at our Administrative Office. We will send you a new Policy
Information section that reflects the changes. It will become part of this
policy. We may require you to return the policy to our Administrative Office to
make a change.
We reserve the right to decline a request for a partial Net Cash Surrender Value
withdrawal if- (a) the Death Benefit would be reduced below the minimum amount
for which we would then issue this policy under our rules; or (b) we determine
that the withdrawal would cause this policy to fail to qualify as life insurance
under applicable tax laws as i7aterpreted by us (see Page 17).
HOW A LOAN CAN BE MADE
Policy Loans. You can get a loan on this policy while it has a loan value. This
policy will be the only security for the loan. The initial loan and each
additional loan must be for at least the minimum loan amount shown in the Policy
Information section. Any amount on loan is part of your Policy Account (see Page
10).
Loan Value. The loan value on any day is 90% of the Cash Surrender Value on that
date.
The amount of the loan may not be more than the loan value. Any existing loan
and loan interest will be subtracted from the loan value available for a new
loan.
Page 13
<PAGE>
HOW A LOAN CAN BE MADE (Continued)
Your request for a policy loan must be in writing to our Administrative Office.
You may tell us how much of the loan is to be allocated to your unloaned value
in our GID and your value in each investment division of our SA. Such values
will be determined as of the date we receive your request. If you do not tell
us, we will allocate the loan on the basis of your monthly deduction allocation
percentages then in effect. If we cannot allocate the loan on the basis of your
direction or those percentages, we will allocate it based on the proportion that
your unloaned value in our GID and your values in the investment divisions of
our SA bear to the total unloaned value in your Policy Account.
The loaned portion of your Policy Account will be maintained as a part of our
GID. Thus, when a loaned amount is allocated to an investment division of our
SA, we will redeem units of that investment division sufficient in value to
cover the amount of the loan so allocated and transfer that amount to our GID.
Loan Interest. Interest on a loan accrues daily, at an adjustable loan interest
rate. We will determine the interest rate at the beginning of each policy year,
subject to the following paragraphs. It will apply to any new or outstanding
loan under the policy during the policy year next following the date of
determination.
The maximum loan interest rate for a policy year shall be the greater of: (1)
the "Published Monthly Average," as defined below, for the calendar month that
ends two months before the date of determination; or (2) 5-1/2%. "Published
Monthly Average" means the Monthly Average Corporates yield shown in Moody's
Corporate Bond Yield Averages published by Moody's Investors Service, Inc., or
any successor thereto. If such averages are no longer published, we will use
such other averages as may be established by regulation by the insurance
supervisory official of the jurisdiction in which the policy is delivered. In no
event will the loan interest rate for a policy year be greater than the maximum
rate permitted by applicable law. We reserve the right to establish a rate lower
than the maximum.
No change in the rate shall be less than 1/2 of 1% a year. We may increase the
rate whenever the maximum rate as determined by clause (1) of the preceding
paragraph increases by 1/2 of 1% or more. We will reduce the rate to below the
maximum rate as determined by clause (1) of the preceding paragraph if such
maximum is lower than the rate being charged by 1/2 of 1% or more.
We will notify you of the initial loan interest rate when you make a loan. We
will also give you advance written notice of any increase in the interest rate
of any outstanding loan.
Loan interest is due on each policy anniversary. If the interest is not paid
when due, it will be added to your outstanding loan and allocated on the basis
of the deduction allocation percentages then in effect. If we cannot make the
allocation on the basis of these percentages, we will make it based on the
proportion that your unloaned value m our GID and your values in the investment
divisions of our SA bear to the total unloaned value in your Policy Account. The
unpaid interest will then be treated as part of the loaned amount and will bear
interest at the loan rate.
When unpaid loan interest is allocated to an investment division of our SA, we
will redeem units of that investment division sufficient in value to cover the
amount of the interest so allocated and transfer that amount to the loaned
portion of our GID.
Loan Repayment. You may repay all or part of a policy loan at any time while the
Insured Person is alive and this policy is in force. We will assume that any
payment you make to us while you have a loan is a loan repayment, unless you
tell us in writing that it is an additional premium payment.
Page 14
<PAGE>
HOW A LOAN CAN BE MADE (Continued)
Repayment will first be allocated to our GID until you have repaid any loaned
amounts that were allocated to our GID. You may tell us how to allocate
repayment to above that amount among our GID and the investment divisions of our
SA. If You do not tell us, we will make the allocation on the basis of the
premium allocation Percentages then in effect.
Failure to repay a policy loan or to pay loan interest will not terminate this
policy unless the Net Cash Surrender Value is less than the monthly charges due
on a monthly policy anniversary. In that case, the grace period provision will
apply (see Page 8).
A policy loan will have a permanent effect on your benefits under this policy
even if it is repaid.
OUR SEPARATE ACCOUNT (SA)
The Separate Account (SA) is our Separate Account (V'UL-2). We established it
and we maintain it under the laws of Illinois. Realized and unrealized gains and
losses and investment income from the assets of our SA are credited or charged
against it without regard to our other income, gains or losses. Assets are put
in our SA to support this policy and other variable life insurance policies.
Assets may be put in our SA for other purposes, but not to support contracts or
policies other than variable contracts.
The assets of our SA are our property. The portion of its assets equal to the
reserves and other policy liabilities with respect to our SA will not be
chargeable with liabilities arising out of any other business we conduct. We may
transfer assets of an investment division in excess of the reserves and other
liabilities with respect to that division to another investment division or to
our General Account.
INVESTMENT DIVISIONS. Our SA consists of "investment divisions." Each division
may invest its assets in a separate class of shares of a designated investment
company or companies. The investment divisions of our SA that you chose for your
initial allocations are shown on the application for this policy, a copy of
which is at the back of this policy. ,We may from time to time make other
investment divisions available to you. We provide you with written notice of all
material details including investment objectives and all charges.
We have the right to change or add designated investment companies. We have the
right to add or remove investment divisions. We have the right to withdraw
assets of a class of policies to which this policy belongs from an investment
division and put them in another investment division. We also have the right to
combine any two or more investment divisions. The term "investment division" in
this policy shall then refer to any other investment division in which the
assets of a class of policies to which this policy belongs were placed.
We have the right to:
(1) register or deregister our SA under the Investment Company Act of 1940,
(2) run our SA under the direction of a committee, and discharge such
committee at any time;
(3) restrict or eliminate any voting rights of policy owners, or other
persons who have voting rights as to our SA; and
Page 15
<PAGE>
OUR SEPARATE ACCOUNT (SA) (Continued)
(4) operate our SA or one or more of the investment divisions by making
direct investments or in any other form. If we do so, we may invest the
assets of our SA or one or more of the investment divisions in any legal
investments. We will rely upon our own or outside counsel for advice in
this regard. Also, unless otherwise required by law or regulation, an
investment adviser or any investment policy may not be changed without
our consent. If required by law or regulation, the investment policy of
an investment division of our SA will not be changed unless approved by
the Director of Insurance of Illinois or deemed approved in accordance
with such law or regulation. If so required, the process for obtaining
such approval is filed with the insurance supervisory official of the
jurisdiction in which this policy is delivered
If any of these changes result in a material change in the underlying
investments of an investment division of our SA, we will notify you of such
change, as required by law. If you have value in that investment division, we
will transfer it at your written direction from that division (without charge)
to another division of our SA or to the unloaned portion of our GID, and you may
then change your premium and deduction allocation percentages.
OUR ANNUAL REPORT TO YOU
For each policy year we will send you a report for this policy that shows the
current death benefit, the value you have in our GID, the number of units, the
unit value and the total value you have in each investment division of our SA,
the Cash Surrender Value and any outstanding policy loan with the current loan
interest rate. It will also show the premium a paid and pohcy transactions for
the year. For the invest3nent clivisions of our SA it will show the dollar
amount of each transaction, the number of units involved in the transaction and
the unit value on the date of the transaction. The report will also show such
other information as may be required by the insurance supervisory official of
the jurisdiction in which this policy is delivered.
OTHER IMPORTANT INFORMATION
Your Contract with Us. This policy is issued in consideration of payment of the
initial premium payment shown in the Policy Information section.
This policy, and the attached copy of the initial application and all subsequent
applications to change the policy, and all additional Policy Information
sections added to this policy, make up the entire contract. The rights conferred
by this policy are in addition to those provided by applicable federal and state
laws and regulations.
Only our President or Secretary can modify this contract or waive any of our
rights or requirements under it. The person making these changes must put them
in writing and sign them,
Page 16
<PAGE>
OTHER IMPORTANT INFORMATION (Continued)
POLICY CHANGES - Applicable Tax Law. For you and the Beneficiary to receive the
tax treatment accorded to life insurance under federal law, this policy must
qualify initially and continue to qualify as life insurance under the Internal
Revenue Code or successor law. Therefore, to assure this qualification for you
we have reserved earlier in this policy the right to decline to accept premium
payments, to decline to change death benefit options, or to decline to make
partial withdrawals that would cause the policy to fail to qualify as life
insurance under applicable tax law as interpreted by us. Further, we reserve the
right to make changes in this policy or its riders (for example in the
percentages on Page 6) or to make distributions from the policy to the extent we
deem it necessary to qualify this policy as life insurance. Any such changes
will apply uniformly to all policies that are affected. You win be given advance
written notice of such changes.
CHANGES IN POLICY COST FACTORS. Changes in policy cost factors (interest rates
we credit, cost of insurance charges, and expense charges) will be by class and
based upon changes in future expectations for such elements as: investment
earnings, mortality, persistency, expenses and taxes. Any change in policy cost
factors will be determined in accordance with procedures and standards on file,
if required, with the insurance supervisory official of the jurisdiction in
which this policy is delivered.
When the Policy is Incontestable. We have the right to contest the validity of
this policy based on material misstatements made in the initial application for
this policy. We also have the right to contest the validity of any policy change
based on material misstatements made in any application for that change.
However, we will not contest the validity of this policy after it has been in
effect during the lifetime of the Insured Person for two years from the Date of
Issue shown in the Policy Information section. We will not contest any policy
change that requires evidence of insurability, or any reinstatement of this
policy, after the change or reinstatement has been in effect for two years
during the Insured Person's lifetime.
No statement shall be used to contest a claim unless contained in an application
All statements made in an application are representations and not warranties.
See any additional benefit riders for modifications of this provision that apply
to them.
What if Age or Sex Has Been Misstated? If the Insured Person's age or sex has
been misstated on any application, the death benefit and any benefits provided
by riders to this policy shall be those which would be purchased by the most
recent deduction for the cost of insurance, and the cost of any benefits
provided by riders, at the correct age and sex.
How the Suicide Exclusion Affects Benefits. If the Insured Person commits
suicide (while sane or insane) within two years after the Date of Issue shown in
the Policy Information section, our liability will be limited to the payment of
a single sum. This sum will be equal to the premiums paid, minus any loan and
loan interest end minus any partial withdrawal of the net cash surrender value.
If the Insured Person commits suicide (while sane or insane) within two years
after the effective date of a change that you asked for that increases the death
benefit, then our liability as to the increase in amount will be limited to the
payment of a single sum equal to the monthly cost of insurance deductions made
for such increase. This will include the expense charge deducted for the
increase (see Page 7).
How We Measure Policy Periods and Anniversaries. We measure policy years, policy
months and policy anniversaries from the Register Date shown in the Policy
Information section. Each policy month begins on the same clay in each calendar
month as the day of the month of the Register Date.
Page 17
<PAGE>
OTHER IMPORTANT INFORMATION (Continued)
How, When and What We May Defer. We may not be able to obtain the value of the
assets of the investment divisions of our SA if: (1) the New York Stock Exchange
is closed; or (2) the Securities and Exchange Commission requires trading to be
restricted or declares an emergency; or (3) the Securities and Exchange
Commission by order permits us to defer payments for the protection of our
policy owners. During such times, as to amounts allocated to the investment
divisions of our SA, we may defer:
(1) Determination and payment of Net Cash Surrender Value withdrawals;
(2) Determination and payment of any death benefit in excess of the Face
Amount of Insurance;
(3) Payment of loans;
(4) Determination of the unit values of the investment divisions of our SA;
and
(5) Any requested transfer.
As to amounts allocated in our GID, we may defer payment of any Net Cash
Surrender Value withdrawal or loan amount for up to six months after we receive
a request for it. We will allow interest, at a rate of at least 3% a year, on
any Net Cash Surrender Value withdrawal payment derived from our GID that we
defer for 30 days or more.
THE BASIS WE USE FOR COMPUTATION. We provide Cash Surrender Values that are at
least equal to or more than those required by law. If required to do so, we have
filed with the insurance supervisory official of the jurisdiction in which this
policy is delivered a detailed statement of our method of computing such values.
We compute reserves under this policy by the Commissioners Reserve Valuation
Method.
We base minimum cash surrender values and reserves on the "Commissioners 1980
Standard Ordinary Male and Female Mortality Tables." We also use these tables as
the basis for determining maximum insurance costs, taking account of sex,
attained age and rating class of the Insured Person. We use interest compounded
annually at 4-1/2%.
POLICY ILLUSTRATIONS. Upon request we will give you an illustration of the
future benefits under this policy based upon both guaranteed and current cost
factor assumptions. However, if you ask us to do this more than once in any
policy year, we reserve the right to charge you a fee for this service.
POLICY CHANGES. You may change this policy to another available plan of
insurance or add additional benefit riders or make other changes, subject to our
rules at the time of change.
Page 18
<PAGE>
SETTLEMENT OPTIONS
You can have insurance benefits, Net Cash Surrender Value withdrawals, and the
Policy Account payable on the Final Policy Date paid immediately in one sum. Or,
You ran choose a settlement option for all or part of them. If you do not
arrange for a specific choice before the Insured Person dies, the Beneficiary
will have this right when the Insured Person dies. If you do make an
arrangement, however, the Beneficiary cannot change it after the Insured Person
dies.
Payments under the following settlement options will not be affected by the
investment experience of any investment division of our SA after proceeds are
applied under such options.
OPTIONAL METHODS OF SETTLEMENT: All or part of the net proceeds of this policy
may be paid under one of the options below. We must also agree to the election,
if-.
(1) the net proceeds are less than $1,000; or
(2) the installment or interest payment is less than $20.00; or
(3) the Beneficiary is one of the following: a corporation; or a
partnership; or an association; or a trustee; or an assignee; or an
estate.
Before an option becomes effective, this policy must be exchanged for a
supplementary contract. Such contract will set forth the terms and conditions of
the option elected.
OPTION 1. INCOME PAYMENTS FOR A FIXED PERIOD: Paid out as a definite number of
equal payments. The first payment is payable on the date proceeds are settled
under the option. The amount of each payment is determined from the Table on the
next page. The Table is band on a guaranteed interest rate of 3% per year.
OPTION 2. LIFE INCOME WITH PAYMENTS GUARANTEED FOR A FIXED TERM OF YEARS:
Paid out as a definite number of equal payments, and as long thereafter as
the Beneficiary lives. The first payment is payable on the date proceeds are
settled under the option. The amount of each payment is determined from the
Table on the next page. The Table is based on the Beneficiary's sex and age
at his or her nearest birthday on the date the first payment is made. The
Table is also based on a guaranteed interest rate of 3% per year.
OPTION 3. PROCEEDS AT INTEREST: We will retain the proceeds while the
Beneficiary is alive. For each $1,000 of proceeds so retained we will pay not
less than:
<TABLE>
<CAPTION>
---------------------------- -----------------
PAYMENT INTERVAL AMOUNT
---------------------------- -----------------
<S> <C>
Annually $30.00
---------------------------- -----------------
Semiannually 14.89
---------------------------- -----------------
Quarterly 7.42
---------------------------- -----------------
Monthly 2.47
---------------------------- -----------------
</TABLE>
These amounts are based on 9L guaranteed interest rate of 3% per year. Interest
will begin on the date proceeds are settled under the option.
OPTION 4. INCOME PAYMENTS OF A FIXED AMOUNT. Paid out in equal payments until
the proceeds, with interest thereon, are exhausted. Payments may be made
annually, semiannually, quarterly or monthly. The first payment in payable on
the date proceeds are settled under this option. The sum of the payments each
year must equal at least 5% of the original proceeds. Interest is based on a
guaranteed rate of 3% per year.
Page 19
<PAGE>
SETTLEMENT OPTIONS (Continued)
AMOUNT OF EACH MONTHLY INCOME PAYMENT PER $1,000 OF PROCEEDS
<TABLE>
<CAPTION>
- -------------------------- ---------------------------------------------------------------------------------------------------------
OPTION 1 OPTION 2
FIXED PERIOD LIFE INCOME WITH PAYMENTS GUARANTEED FOR A FIXED TERM OF YEARS
---------------------------------------------------------------------------------------------------------
MALE BENEFICIARY FEMALE BENEFICIARY
---------------------------------------------------------------------------------------------------------
FIXED TERM OF YEARS FIXED TERM OF YEARS
- -------------- ----------- ---------------------------------------------------------------------------------------------------------
NUMBER AGE
OF MONTHLY OF 5 10 15 20 5 10 15 20
YEARS INCOME PAYEE YEARS YEARS YEARS YEARS YEARS YEARS YEARS YEARS
- -------------- ----------- ----------- ----------- ------------ ----------- ----------- ----------- ----------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $84.87 0 to 26 $ 3.02 $ 3.01 $ 3.01 $ 3.01 $ 2.90 $ 2.90 $ 2.90 $ 2.89
2 42.86 27 3.04 3.04 3.03 3.03 2.92 2.91 2.91 2.91
3 28.99 28 3.06 3.06 3.05 3.05 2.93 2.93 2.93 2.93
4 22.06 29 3.08 3.08 3.08 3.07 2.95 2.95 2.95 2.95
5 17..91 30 3.11 3.11 3.10 3.10 2.97 2.97 2.97 2.97
6 15.14 31 3.14 3.13 3.13 3.12 2.99 2.99 2.99 2.99
7 13.16 32 3.16 3.16 3.16 3.15 3.01 3.01 3.01 3.01
8 11.68 33 3.19 3.19 3.19 3.18 3.04 3.04 3.03 3.03
9 10.53 34 3.23 3.22 3.21 3.20 3.06 3.06 3.06 3.05
10 9.61 35 3.26 3.26 3.25 3.23 3.09 3.08 3.08 3.08
11 8.86 36 3.29 3.29 3.28 3.27 3.11 3.11 3.11 3.10
12 8.24 37 3.33 3.32 3.31 3.30 3.14 3.14 3.13 3.13
13 7.71 38 3.37 3.36 3.35 3.33 3.17 3.17 3.16 3.15
14 7.26 39 3.41 3.40 3.39 3.37 3.20 3.20 3.19 3.18
15 6.87 40 3.45 3.44 3.43 3.41 3.23 3.23 3.22 3.21
16 6.53 41 3.49 3.48 3.47 3.44 3.26 3.26 3.25 3.24
17 6.23 42 3.54 3.53 3.51 3.48 3.30 3.30 3.29 3.28
18 5.96 43 3.59 3.58 3.56 3.53 3.34 3.33 3.32 3.31
19 5.73 44 3.64 3.52 3.60 3.57 3.38 3.37 3.36 3.35
20 5.51 45 3.69 3.68 3.65 3.62 3.42 3.41 3.40 3.39
21 5.32 46 3.75 3.73 3.70 3.66 3.46 3.45 3.44 3.42
22 5.15 47 3.81 3.79 3.75 3.71 3.50 3.50 3.48 3.47
23 4.99 48 3.87 3.85 3.81 3.76 3.55 3.54 3.53 3.51
24 4.84 49 3.93 3.91 3.87 3.81 3.60 3.59 3.58 3.58
25 4.71 50 4.00 3.97 3.97 3.87 3.66 3.65 3.63 3.60
26 4.59 51 4.07 4.04 3.99 3.92 3.71 3.70 3.68 3.65
27 4.47 52 4.14 4.11 4.06 3.98 3.77 3.76 3.73 3.70
28 4.37 53 4.22 4.19 4.13 4.04 3.83 3.82 3.79 3.75
29 4.27 54 4.31 4.26 4.20 4.10 3.90 3.88 3.85 3.81
30 4.18 55 4.39 4.35 4.27 4.17 3.97 3.95 3.92 3.87
56 4.49 4.44 4.35 4.23 4.04 4.02 3.98 3.93
57 4.59 4.53 4.43 4.30 4.12 4.10 4.05 3.99
58 4.69 4.63 4.52 4.36 4.20 4.18 4.13 4.05
59 4.80 4.73 4.61 4.43 4.29 4.26 4.20 4.12
60 4.92 4.84 4.70 4.50 4.39 4.35 4.29 4.19
61 5.05 4.95 4.79 4.57 4.49 4.44 4.37 4.27
62 5.19 5.08 4.89 4.64 4.60 4.55 4.46 4.33
63 5.33 5.20 4.99 4.71 4.71 4.65 4.55 4.41
64 5.49 5.34 5.09 4.78 4.83 4.76 4.65 4.48
65 5.65 5.48 5.20 4.85 4.96 4.88 4.75 4.56
66 5.83 5.62 5.30 4.91 5.10 5.01 4.86 4.64
67 6.02 5.78 5.41 4.98 5.25 5.14 4.96 4.71
68 6.21 5.94 5.52 5.04 5.41 5.28 5.08 4.79
69 6.42 6.10 5.63 5.09 5.58 5.54 5.19 4.86
70 6.65 6.27 5.73 5.15 5.76 5.59 5.31 4.94
71 6.88 6.44 5.83 5.20 5.96 5.76 5.43 5.01
72 7.13 6.62 5.94 5.24 6.17 5.93 5.55 5.07
73 7.39 6.80 6.03 5.28 6.40 6.11 5.67 5.13
74 7.67 6.98 6.13 5.32 6.64 6.30 5.78 5.19
75 7.97 7.17 6.22 5.35 6.91 6.50 5.90 5.24
76 8.27 7.35 6.30 5.38 7.19 6.70 6.01 5.29
77 8.60 7.54 6.38 5.41 7.49 6.91 6.12 5.33
78 8.94 7.72 6.45 5.43 7.80 7.12 6.22 5.36
79 9.29 7.90 6.51 5.45 8.15 7.33 6.31 5.39
80 9.66 8.07 6.57 5.46 8.51 7.54 6.39 5.42
81 10.04 8.23 6.62 5.48 8.89 7.74 6.47 5.44
82 10.42 8.39 6.66 5.48 9.29 7.94 6.54 5.46
83 10.82 8.53 6.70 5.49 9.71 8.13 6.60 5.47
84 11.22 8.67 6.74 5.50 10.15 8.31 6.65 5.48
85 or over 11.62 8.80 6.77 5.50 10.60 8.48 6.69 5.49
</TABLE>
Annual, Semiannual and Quarterly income payments under Options 1 and 2 are
11.839, 5.963 and 2.993, respectively, times the monthly income payments.
Page 20
<PAGE>
SETTLEMENT OPTIONS (Continued)
PAYMENT OF REMAINING VALUE-. At the death of the Beneficiary, the remaining
value of the option, if any, will be paid in one sum. This sum will be paid to
the executors or administrators of such Beneficiary. We may, however, agree to
another method of paying the remaining value. The remaining value is:
Option 1: the present value of any unpaid payments for the balance of
the fixed period.
Option 2: the present value of any unpaid payments, if any, for the
balance of the fixed term of years.
Option 3: the proceeds, with accrued interest to the date of death.
Option 4: the balance of the proceeds, with accrued interest to the date
of death.
The present value of any unpaid payments in always less than the sum of those
payments.
EXCESS INTEREST- Excess interest may be paid or credited on the supplementary
contract from time to time. Such excess interest is determined solely by us. It
is paid or credited in the manner determined by us. Under Option 2, it will not
be paid on the part of the proceeds used to provide payments beyond the fixed
term of years. Excess interest on the supplementary contract is in addition to
the guaranteed payments under any Settlement Option.
Page 21
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
IMPORTANT
Do not surrender your policy or allow it to lapse for any reason without
consulting us or one of our representatives. Your policy is a valuable asset.
Advice to surrender it or to allow it to lapse should be viewed with suspicion.
For your own protection, allow us to answer any arguments which may be presented
to induce you to cause its surrender or lapse.
A Brief Description of This Policy
This is a Flexible Premium Variable Life Insurance Policy. Insurance benefits
are payable upon death before the Final Policy Date. The Policy Account is
payable on the Final Policy Date. This policy provides an adjustable death
benefit. Values provided by this policy are based on declared interest rates and
on the investment experience of the investment divisions of a separate account
which in turn depends on the investment performance of the corresponding
portfolios of investment companies or both. Values based on the separate account
are not guaranteed as to dollar amount. Investment options are described on Page
9. This is a non-participating policy.
<PAGE>
EXHIBIT 1-A(5)(b)
ACCIDENTAL DEATH BENEFIT RIDER
IN THIS RIDER, "WE," "OUR" AND "US" MEAN THE AMERICAN FRANKLIN LIFE
INSURANCE COMPANY, "YOU" AND "YOUR" MEAN THE OWNER OF THE POLICY AT THE TIME AN
OWNER'S RIGHT IS EXERCISED.
THIS RIDER'S BENEFIT. We will pay, the Accidental Death Benefit of this
rider to the beneficiary when we receive proof that the insured person's death
resulted from accidental bodily injury, directly and independently of all other
causes, and that death occurred:
1. Within 120 days after the injury and while this rider was in
effect; and
2. After the insured person's first birthday and before the
policy anniversary nearest the insured person's 70th birthday.
THE AMOUNT OF THE BENEFIT AND ITS COST. The Policy Information section
of the policy or the rider that adds this benefit shows the amount of the
Accidental Death Benefit. You may ask us to change such amount subject to our
rules then in effect. We will send you a written notice showing each change. The
notice is to be attached to and made part of this rider and the policy. The
information in it will supersede the corresponding information in the Policy
Information section of the policy or the rider that adds this benefit. We may
require you to return the policy and this rider to us to make a change.
While this rider is in effect. its cost will be a part of the monthly
deduction from the Policy Account. The monthy cost of this benefit for each
$1,000 of Accidental Death Benefit is shown in the Table of Costs For Accidental
Death Benefit on Page 4-Continued of the policy.
WHAT IS NOT COVERED? No Accidental Death Benefit will be paid if the
insured person's death is caused or contributed to by:
1. Any disease or illness of any kind, physical or mental
infirmity, or medical or surgical treatment of these;
2. suicide, while sane or insane;
3. Any drug, unless administered by a physician or taken as
prescribed by a physician;
4. Poison, gas or fumes voluntarily taken, administered or
inhaled, except from an occupational accident;
<PAGE>
5. Travel in or descent from any aircraft. while the insured
person is receiving training or acting in any capacity other
than as a passenger; or
6. Declared or undeclared war, or any act incident to war. or any
conflict involving the armed forces of one or more countries.
We will have the right to make an autopsy unless prohibited by law.
WHEN THIS RIDER WILL TERMINATE. This rider will not be in effect:
1. On and after the policy anniversary nearest the insured
person's 70th birthday; or
2. After the end of the grace period. if we have not received an
amount sufficient to cover at least 3 monthly deductions.
You may terminate this rider at the beginning of any policy month by
asking for this in advance in writing.
WHEN THIS RIDER IS INCONTESTABLE. This rider will become incontestable
only after it been in effect during the lifetime of the insured person, for two
years from the later of: (a) the Date of Issue of the policy; or (b) the date as
of which this rider becomes effective if added after issue of the policy. Any
increase in the amount of the Accidental Death Benefit will be incontestable
after it has been in effect during the lifetime of the insured person for two
years.
HOW THIS RIDER RELATES TO THE POLICY. This rider is a part of the
policy. Its benefit is subject to all the terms of this rider and the policy.
This rider has no cash or loan value. It does not affect any reserve
referred to in the policy.
The American Franklin Life Insurance Company
- --------------------------------- ----------------------------------
Stephen P. Horvat, Jr., Secretary John C. Watson, President
Form T0110
<PAGE>
EXHIBIT 1-A(5)(c)
TERM INSURANCE RIDER ON THE ADDITIONAL INSURED PERSON
In this rider, "we," our" and "us" mean The American Franklin Life
Insurance Company. "You" and "your" mean the owner of the policy at the time an
owner's right is exercised.
THIS RIDER'S BENEFIT AND ITS COST. We will pay to the Beneficiary the
amount of term insurance in effect under this rider at the additional insured
person's death, when we receive proof that the additional insured person died
before this rider's Expiry Date. The Expiry Date is the policy anniversary
nearest the additional insured person's 70th birthday.
The Policy Information section of the policy or the rider that adds
this benefit shows the name of the additional insured person and the amount of
term insurance on the additional insured person. You may ask us to change the
amount of term insurance on the additional insured person subject to our rules
then in effect. We will send you a written notice showing each change. The
notice is to be attached to and made part of this rider and the policy The
information in it will supersede the corresponding information in the Policy
Information section of the policy or the rider that adds this benefit. We may
require you to return the policy and this rider to us to make a change.
While this rider is in effect. its cost will be a part of the monthly
deduction from the Policy Account. The monthly cost of this benefit for each
$1,000 of term insurance in effect order this rider will be determined by. us
from time to time. The cost is based on the additional insured person's sex
attained age and rating class. It will never be more than the cost shown in the
table of Guaranteed Maximum Costs For Term Insurance On The Additional Insured
Person on Page 4-Continued of the policy. Any change in the cost of insurance
rates we use for this benefit will apply to all individuals of the same class as
the additional insured person. If the additional insured person dies during the
grace period, we will deduct from the benefits of this rider any overdue monthly
deductions for it.
THE BENEFICIARY FOR THIS BENEFIT. The term "Beneficiary" in this rider
means only the Beneficiary for the benefit payable at the additional insured
person's death. The term "beneficiary" in other provisions of the policy means
only the beneficiary for the benefits payable at the insured person's death.
You will be the Beneficiary for the benefit payable at the additional
insured person s death. unless another Beneficiary for it has been named in the
application or by any later change and is living at the additional insured
persons death.
While the additional insured person is living, you may change the
Beneficiary by written notice in a form satisfactory to us. The change will take
effect on the date you sign the notice, except that it will not apply to any
payment we make or other action we take before we receive the notice.
1
<PAGE>
If two or more persons are named Beneficiary, those surviving the
additional insured person will share equally unless otherwise stated.
HOW YOU MAY EXCHANGE THIS RIDER FOR A NEW POLICY. While this rider is
in effect you may exchange it for a new policy on the life of the additional
insured person. You may do this at the beginning of any policy month that is on
or before the policy anniversary nearest the additional insured person's 62nd
birthday. We will not ask for evidence of insurability, except as stated below
for additional benefit riders.
The new policy will have an insurance amount equal to the amount of
term insurance in effect on this rider on the date of exchange. Or, you may
choose a lower amount allowed by your rules then in effect.
The Register Date of the new policy will be the date of exchange.
Premiums for the new Policy will be based on our rates in effect on that date.
They will be for the additional insured person's then attained insurance age and
for the same class of risk as for this rider. You may choose that the new policy
be on any level premium plan of insurance for which it qualifies under our rules
then in effect as to plan, amount, age and class or risk.
You may ask that additional benefit riders be included in the new
policy. The issue of any rider will require our consent and evidence of the
additional insured person's insurability satisfactory to us.
The first premium for the new policy must be received by us on or
within 31 days before the date of exchange. We will tell you the amount of the
first premium for the new policy on request.
WHEN THIS RIDER WILL TERMINATE. This rider will not be in effect:
1. On and after its Expiry Date;
2. After the end of the grace period, if we have not received an
amount sufficient to cover at least 3 monthly deductions;
3. If this rider is exchanged for a new policy; or
4. If the insurance under the policy terminates. (However, if
this is because the insured person died, the terms of the
Survivor's Insurance Option and Temporary Insurance Benefit
shall apply.)
You may terminate this rider at the beginning of any policy month by
asking for this in advance in writing.
2
<PAGE>
HOW YOU MAY REINSTATE THIS RIDER. If you reinstate the policy, you may
reinstate it with this rider in accordance with the section of the policy
entitled "Reinstatement." You must also provide evidence of the additional
insured person's insurability satisfactory to us.
WHAT IF AGE OR SEX HAS BEEN MISSTATED? If the additional insured
person's age or sex has been misstated on any application, we will adjust any
benefits of this rider to reflect the correct age and sex.
SUICIDE EXCLUSION. If the additional insured person commits suicide,
while sane or insane. within two years after the later of: (a) the Date of Issue
of the policy; or (b) the date as of which this rider becomes effective if added
after issue of the policy, our liability under this rider will be limited to the
payment of a single sum equal to the monthly deductions made for it.
If the insured person commits suicide while this rider is in effect,
the Survivor's Insurance Option and Temporary Insurance Benefit will apply.
WHEN THIS RIDER IS INCONTESTABLE. We have the right to contest the
validity of this rider based on material misstatements made in the application
for it. However, this rider will become incontestable after it has been in
effect during the lifetime of the additional insured person for two years from
the later of: (a) the Date of Issue of the policy; or (b) the date as of which
this rider becomes effective if added after issue of the policy. All statements
made in such application are representations and not warranties.
HOW THIS RIDER RELATES TO THE POLICY. This rider is a part of the
policy. Its benefit is subject to all the terms of this rider and the policy.
This rider has no cash or loan value. It does not affect any reserve
referred to in the policy.
You may choose while the additional insured person is living that any
amount to be paid under this rider be applied to the benefit of the Beneficiary
under the payment options described in the section of the policy entitled "How
Benefits Are Paid." If you have not done this, the Beneficiary will have this
right when the additional insured person dies. If you change the Beneficiary,
any previous choice of payment options under this rider is cancelled. You may
choose a payment option for the new Beneficiary in accordance with such section
of the policy.
SURVIVOR'S INSURANCE OPTION AND TEMPORARY INSURANCE BENEFIT
If the insured person dies while this rider is in effect, the following
option and benefit are applicable subject to the Suicide Exclusion of this
rider.
THE SURVIVOR'S INSURANCE OPTION. If the insured person dies before the
policy anniversary nearest the additional insured person's 62nd birthday, this
rider may be exchanged for a new policy on the life of the additional insured
person in accordance with the exchange
3
<PAGE>
provision of this rider. The exchange must be made within 90 days after the
insured person's death. This may be done by you or, if you are not living, by
the additional insured person. The new policy will take effect and have a
Register Date on the 90th day after the insured person's death. All other terms
and conditions of the exchange provision shall apply.
THE SURVIVOR'S TEMPORARY INSURANCE BENEFIT. If the additional insured
person dies before the 90th day after the insured person's death, we will pay to
the Beneficiary the amount of term insurance in effect under this rider on the
additional insured person at the insured person's death. The payment will be
made subject to the terms of this rider, including our receiving proof that the
additional insured person died before that 90th day. We will pay any benefit for
which there is no stated Beneficiary living at the death of the additional
insured person to the children of the additional insured person who then
survive, in equal shares. If none survive, we will pay the estate of the
additional insured person.
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
- ----------------------------------- --------------------------------
Stephen P. Horvat, Jr., Secretary John C. Watson, President
4
Form T0113
<PAGE>
EXHIBIT 1-A(5)(d)
CHILDREN'S TERM INSURANCE RIDER
IN THIS RIDER, "WE," "OUR" AND "US" MEAN THE AMERICAN FRANKLIN LIFE
INSURANCE COMPANY. "YOU" AND "YOUR" MEAN THE OWNER OF THE POLICY AT THE TIME AN
OWNER'S RIGHT IS EXERCISED.
THIS RIDER'S BENEFIT AND ITS COST. We will pay. to the Beneficiary the
amount of term insurance in effect on an Insured Child under this rider. upon
receiving proof that died on or before the earlier of: (a) the child's 25th
birthday; or (b) the Expiry Date of this rider, which is the policy anniversary
nearest the insured person's 65th or any earlier termination of the insurance
under the policy.
The amount of term insurance on each Insured Child is $1,000 for each
unit of coverage.
The Policy Information section of the policy or the rider that adds
this benefit shows the number of units of coverage. You may ask us to change the
number of units subject to our rules then in effect. We will send you a written
notice showing each change. The notice is to be attached to and made a part of
this rider and the policy. The information in it will supersede the
corresponding information in the Policy Information section of the policy or the
rider that adds this benefit. We may require you to return the policy and this
rider to us to make a change.
While this rider is in effect, its cost will be a part of the monthly
deduction from the Policy Account. its cost is $0.50 a unit per month. If an
Insured Child dies during the grace period. we will deduct from the benefits of
this rider the part of any overdue monthly deductions for it.
INSURED CHILD. An Insured Child under this rider is any child at least
15 days old who is:
- - a child, stepchild, or legally adopted child of the insured person who
is named for coverage in the application for this rider and had not
reached his or her 18th birthday on the date of applications or
- - a child born to the insured person after the date of the application
for this rider; or
- - a child legally adopted by the insured person after the date of the
application for this rider but before the child's 18th birthday
BENEFICIARY FOR THIS BENEFIT. The term "Beneficiary" in this rider means
only the Beneficiary for the benefit payable at the death of an Insured Child.
The term "beneficiary" in other provisions of the policy means only the
beneficiary for the benefits payable at the insured person's death.
1
<PAGE>
The Beneficiary for the benefit payable at the death of an Insured Child
will be the insured person, if living; if not living, the surviving children of
the insured person, unless another Beneficiary for this benefit has been named
in the application (or by any later change) and is living at the death of that
child. If no Beneficiary under this arrangement is living at an Insured Child's
death, the benefit will be paid to that child's estate.
"SURVIVING CHILDREN OF THE INSURED PERSON" as used in this rider means: (1)
surviving children, including legally adopted children) or the insured person,
whether or not insured under this rider; and (2) surviving stepchildren who are
or have been insured under this rider. If there are two or more surviving
children of the insured person, they will share equally.
You may change the Beneficiary for insurance on an Insured Child while that
child is living by written notice in a form satisfactory to us. The change will
take effect on the date you sign the notice, except that it will not apply to
any payment we make or other action we take before we receive the notice.
PAID-UP INSURANCE. If the insured person dies while this rider is in
effect, we will issue a paid-up term insurance policy on the life of each
surviving Insured Child then insured under this rider. subject to the Suicide
Exclusion of this rider. The policy will provide the same term insurance
benefits as this rider. Unless otherwise stated in the application or later
changed: (1) the owner of the policy will be the Insured Child; and (2) the
beneficiary of the policy will be the surviving children of the insured person.
You have the right to obtain the net cash value of such paid-up insurance.
We will furnish information on the available cash value upon your written
request.
CONVERSION PRIVILEGE. You may convert expiring term insurance on an Insured
Child to a new policy on the life of that child if all monthly deductions from
the Policy have been duly made. You may do this as of the day following the
earlier of: the child's 25th birthday; or (b) the Expiry Date of this rider. We
will not ask for evidence of insurability, except as stated herein for
additional benefit riders.
The new policy will have an insurance amount equal to the amount of
expiring term insurance on the child. Or, if the conversion date is determined
by (a) of the paragraph above, you may choose that the insurance amount be up to
five times the amount of term insurance on the child. Or, you may choose a lower
amount allowed by our rules in effect on the conversion date.
The Register Date of the new policy will be the conversion date. Premiums
for the new policy will be based on our standard rates in effect on that date.
They will be for the Insured Child's then attained insurance age. You may choose
that the new policy be on any plan of insurance for which it qualifies under our
rules then in effect as to plan, amount, age and class of risk.
You may ask that additional benefit riders be included in the new policy.
The issue of any rider will require our consent and evidence of the Insured
Child's insurability satisfactory to us.
2
<PAGE>
The first premium for the new policy must be received by us on or within 31
days before the conversion date. We will tell you the amount of the first
premium for the new policy on request.
WHEN THIS RIDER WILL TERMINATE. This rider will not be in effect:
1. after its Expiry Date;
2. after the end of the grace period, if we have not received an amount
sufficient to cover at east 3 monthly deductions; or
3. if the insurance under this rider is replaced by paid-up insurance.
You may terminate this rider at the beginning of any policy month by
asking for this in advance in writing.
HOW YOU MAY REINSTATE THIS RIDER. If you reinstate the policy, you may
reinstate it with this rider in accordance with the section of the policy
entitled "Reinstatement." You must also provide evidence satisfactory to us of
the insurability of each child who will be insured under this reinstated rider.
No benefit will be payable for any Insured Child who died between the end of the
grace period and the date of reinstatement.
SUICIDE EXCLUSION. If the insured person commits suicide, while sane or
insane, within two years after the later of: (a) the Date of Issue of the
policy; or (b) the date as of which this rider becomes effective if added after
issue of the policy, our liability under this rider will be limited to the
payment of a single sum equal to the monthly deductions made for it.
However, the expiring term insurance on each Insured Child covered by
this rider may be converted to a new policy with an insurance amount equal to
such term insurance, in accordance with the Conversion Privilege of this rider.
This conversion may be made within 31 days after the insured person dies.
WHEN THIS RIDER IS INCONTESTABLE. We have the right to contest the
validity of this rider based on material misstatements made in the application
for it. However, the insurance as to each Insured Child included for coverage in
the application for this rider will become incontestable after it has been in
effect during the lifetime of that child for two years from the later of: (a)
the Date of Issue of the policy; or (b) the date as of which this rider becomes
effective if added after issue of the policy. All statements made in such
application are representations and not warranties.
HOW THIS RIDER RELATES TO THE POLICY. This rider is a part of the
policy. Its benefits are subject to all the terms of this rider and the policy.
This rider has no cash or loan value. It does not affect any reserve
referred to in the policy.
3
<PAGE>
You may choose while an Insured Child is living that any amount to be
paid under this rider at the child's death be applied for the benefit of the
Beneficiary in accordance with the payment options described in the section of
the policy entitled "How Benefits are Paid." If you have not done this, the
Beneficiary will have this right upon the death a' fit Insured Child. If you
change the Beneficiary, any previous choice of payment options under this rider
is cancelled. You may choose a payment option for the new Beneficiary in
accordance with such section of the policy.
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
- --------------------------------- ------------------------------
Stephen P. Horvat, Jr., Secretary John C. Watson, President
4
Form T0111
<PAGE>
EXHIBIT 1-A(5)(e)
DISABILITY RIDER-WAIVER OF MONTHLY DEDUCTIONS
In this rider, "we," "our" and "us" mean The American Franklin Life
Insurance Company. "You" and "your" mean the owner of the policy at the time an
owner's right is exercised.
THIS RIDER'S BENEFIT. We will waive the monthly deductions from the
Policy Account described in the policy when we receive proof that total
disability of the insured person has existed continuously for at least six
months, as provided in this rider.
If total disability begins on or after the insured person's fifth
birthday and before the age 60 anniversary, we will waive all such deductions
while total disability continues.
If total disability begins at or after the age 60 anniversary, we will
waive only such actions due to be made before the age 65 anniversary while total
disability continues.
In this rider, "age 60 anniversary" and "age 65 anniversary" mean the
policy anniversaries nearest the insured person's 60th and 65th birthdays,
respectively.
While such deductions are being waived:
l. Insurance under the policy and under any additional benefit
riders will be provided in accordance with their terms; and
2. You may not increase the Face Amount of Insurance; and
3. If your death benefit option under the policy is Option A when
we start to waive deductions, we will then change the death
benefit option to Option B. You may not change the death
benefit option while deductions are being waived; and
4. Except for the waiver of monthly deductions, your Policy
Account will continue to operate as if monthly deductions were
not being waived; and
5. You may continue to pay premiums under the policy except as
stated below. Expense charges will be deducted from them as
described in the policy. We will put the balance in the Policy
Account. You may not pay premiums while the death benefit
under the policy is a percentage of the amount in the Policy
Account, as described the policy.
Monthly deductions made from your Policy Account during total
disability that are later waived will be refunded as credits to your Policy
Account as of the dates they were subtracted. Such credits will be allocated to
your value in the unloaned portion of our Guaranteed Interest Division and to
your values in the investment divisions of our Separate Account on the basis of
1
<PAGE>
your monthly deduction allocation percentages in effect on the date the
deductions were made. The value of your Policy Account will determined as if
such deductions had never been made.
WHAT IS TOTAL DISABILITY? Total disability means the insured person's
complete inability, because of bodily injury or disease. to perform all of the
substantial and material duties of his or her regular occupation. However, after
24 consecutive months of such disability, total disability will mean the insured
person's complete inability to engage in any gainful occupation for which he or
she is reasonably fitted by education, training, or experience.
We will also recognize the complete and irrecoverable loss of sight of
both eyes, the use of both hands or both feet, or of one hand and one foot as
total disability. We will presume any such loss to be total disability even if
the insured person engages in any occupation.
WHAT IS NOT COVERED? We will not waive such monthly deductions:
1. For a total disability that begins before the insured person's
fifth birthday, or that begins while this rider is not in
effect; or
2. if total disability results from:
a. Intentionally self-inflicted injury; or
b. Service in the armed forces of any country at war,
including declared and undeclared war and resistance
to armed aggression.
YOU MUST GIVE US PROOF OF DISABILITY. Before we waive any monthly
deductions, we must be given written notice of claim, and proof that total
disability of the insured has existed continuously for at least six months. This
must be done while total disability continues and while the insured person is
still living, or as soon as reasonably possible.
We may require proof at reasonable intervals that total disability
continued. After disability has continued for two years we will not require
proof more than once. We will not require proof after the age 65 anniversary if
monthly deductions have been waived for the five preceding years.
We may require examination of the insured person by our medical
representative at our expense as part of any proof of total disability.
We will not waive monthly deductions if proof is not furnished as
required.
COST OF RIDER. While this rider is in effect, its cost will be a part
of the monthly deduction from the Policy Account. The monthly cost is a
percentage of the total monthly deduction from the Policy Account as described
in the policy.
2
<PAGE>
Such percentage will be determined by us from time to time, based on
the insured person's sex, attained age and rating class. It will never be more
that the percentage shown in the Table of Guaranteed Maximum Costs For
Disability on Page 4-Continued policy. Any change in the cost of insurance
percentage we use for this benefit will apply to all individuals of the same
class as the insured person.
While this rider is in effect, the amount in the Policy Account
referred to in determining the "net amount as risk" described on Page 9 of the
policy is the amount determined before the monthly cost of insurance deduction
and the part of the deduction for this that is for the monthly cost of insurance
are made, but after all other deductions due on that date have been made
WHEN THIS RIDER WILL TERMINATE. This rider will not be in effect:
1. At and after the age 65 anniversary; or
2. After the end of the grace period, if we have not received an
amount sufficient to cover at least three monthly deductions.
You may terminate this rider as of the beginning of any policy month by
asking in advance in writing.
A claim based on total disability that begins before termination of
this rider will not be affected by the termination.
WHEN THIS RIDER IS INCONTESTABLE. This rider will become incontestable
only after it has been in effect, during the lifetime of the insured person and
without the occurrence of total disability of the insured person, for two years
from the later of: (a) the Date of Issue of the Policy; or (b) the date as of
which this rider becomes effective if added after issue of the policy.
HOW THIS RIDER RELATES TO THE POLICY. This rider is a part of the
policy. Its benefit are subject to all the terms of this rider and the policy.
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
- --------------------------------- -------------------------------
Stephen P. Horvat, Jr., Secretary John C. Watson, President
3
Form T0112
<PAGE>
EXHIBIT 1-A(5)(F)
ENDORSEMENT TO EQUIBUILDER II FLEXIBLE
PREMIUM LIFE INSURANCE POLICIES
ISSUED TO POLICY OWNERS IN THE STATE OF TEXAS
DISCLOSURE OF GUARANTY FUND NON-PARTICIPATION. In the event the insurer is
unable to fulfill its contractual obligation under this policy or contract or
application or certificate or evidence of coverage, the policyholder or
certificateholder is not protected by an insurance guaranty fund or other
solvency protection arrangement.
<PAGE>
EXHIBIT 1-A(8)(a)(1)
PARTICIPATION AGREEMENT
Among
VARIABLE INSURANCE PRODUCTS FUND,
FIDELITY DISTRIBUTORS CORPORATION
and
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
THIS AGREEMENT, made and entered into this l8th day of July, 1991 by and
among THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY, (hereinafter the "Company"),
an Illinois legal reserve, stock life insurance company, on its own behalf and
on behalf of each segregated asset account of the Company set forth on Schedule
A hereto as may be amended from time to time (each such account hereinafter
referred to as the "Account"), and the VARIABLE INSURANCE PRODUCTS FUND, an
unincorporated business trust organized under the laws of the Commonwealth of
Massachusetts (hereinafter the "Fund") and FIDELITY DISTRIBUTORS CORPORATION
(hereinafter the "Underwriter"), a Massachusetts corporation.
WHEREAS, the Fund engages in business as an open-end management investment
company and is available to act as the investment vehicle for separate accounts
established for variable life insurance policies and variable annuity contracts
(collectively, the "Variable Insurance Products")
<PAGE>
to be offered by insurance companies which have entered into participation
agreements with the Fund and the Underwriter (hereinafter "Participating
Insurance Companies"); and
WHEREAS, the beneficial interest in the Fund is divided into several
series of shares, each designated a "Portfolio", and representing the interest
in a particular managed portfolio of securities and other assets; and
WHEREAS, the Fund has obtained an order from the Securities and Exchange
Commission, dated October 15, 1985 (File No. 812-6102), granting Participating
Insurance Companies and variable annuity and variable life insurance separate
accounts exemptions from the provisions of sections 9(a), 13(a), 15(a), and
15(b) of the Investment Company Act of 1940, as amended, (hereinafter the "1940
Act") and Rules 6e-2(b) (15) and 6e-3(T) (b) (15) thereunder, to the extent
necessary to permit shares of the Fund to be sold to and held by variable
annuity and variable life insurance separate accounts of both affiliated and
unaffiliated life insurance companies (hereinafter the "Shared Funding Exemptive
Order"), and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, Fidelity Management & Research Company (the "Adviser") is duly
registered as an investment adviser under the federal Investment Advisers Act of
1940 and any applicable state securities law; and
WHEREAS, the Company has registered or will register certain variable life
and variable annuity contracts under the 1933 Act; and
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution of the Board of Directors of the
Company, on the date shown for such Account on Schedule A hereto, to set aside
and invest assets attributable to one or more of the aforesaid variable life and
annuity contracts (hereinafter the "Contracts"); and
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act; and
WHEREAS, the Underwriter is registered as a broker dealer with the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended, (hereinafter the "1934 Act"), and is a member in good standing of the
National Association of Securities Dealers, Inc. (hereinafter "NASD");
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios on behalf
of each Account to fund certain of the aforesaid variable life and variable
annuity contracts and the Underwriter is authorized to sell such shares to unit
investment trusts such as each Account at net asset value;
2
<PAGE>
WHEREAS, the Underwriter serves as principal underwriter for Fund shares
pursuant to a distribution agreement dated November 13, 1981 between the
Underwriter and the Fund; and
WHEREAS, the Company has entered into a servicing agreement dated June 15,
1989, as amended, with Integrity Life Insurance Company pursuant to which
Integrity Life Insurance Company will provide administrative services to support
the Account and the Contracts;
NOW, THEREFORE, in consideration of their mutual promises, the Company,
the Fund and the Underwriter agree as follows:
ARTICLE I. SALE OF FUND SHARES
1.1. The Fund and the Underwriter each agrees to sell to the Company those
shares of the Fund which each Account orders, executing such orders on a daily
basis at the net asset value next computed after receipt by the Fund or its
designee of the order for the shares of the Fund. For purposes of this Section
1.1, the Company or its designee shall be the designee of the Fund for receipt
of such orders from each Account and receipt by such designee shall constitute
receipt by the Fund; provided that the Fund receives notice of such order by
9:30 a.m. Boston time on the next following Business Day. "Business Day" shall
mean any day on which the New York Stock Exchange is open for trading and on
which the Fund calculates its net asset value pursuant to the rules of the
Securities and Exchange Commission. Integrity Life Insurance Company shall be
the designee of the Company for purposes of this Section.
1.2. The Fund agrees to make its shares available indefinitely for
purchase at the applicable net asset value per share by the Company and its
Accounts on those days on which the Fund calculates its net asset value pursuant
to rules of the Securities and Exchange Commission and the Fund shall use
reasonable efforts to calculate such net asset value on each day which the New
York Stock Exchange is open for trading. Notwithstanding the foregoing, the
Board of Trustees of the Fund (hereinafter the "Board") may refuse to sell
shares of any Portfolio to any person, or suspend or terminate the offering of
shares of any Portfolio if such action is required by law or by regulatory
authorities having jurisdiction or is, in the sole discretion of the Board
acting in good faith and in light of their fiduciary duties under federal and
any applicable state laws, necessary in the best interests of the shareholders
of such Portfolio.
1.3. The Fund and the Underwriter agree that shares of the Fund will be
sold only to Participating Insurance companies and their separate accounts. No
shares of any Portfolio will be sold to the general public. To the extent
permitted by law or regulation, the Fund and the Underwriter agree to make
available to the Account shares of all Portfolios of the Fund.
1.4. The Fund and the Underwriter will not sell Fund shares to any
insurance company or separate account unless an agreement containing provisions
substantially the same as Articles I, III, V, VII and Sections 2.5 and 2.12 of
Article II of this Agreement is in effect to govern such sales.
3
<PAGE>
1.5. The Fund agrees to redeem for cash, on the Company's request,
any full or fractional shares of the Fund held by the Company, executing such
requests on a daily basis at the net asset value next computed after receipt
by the Fund or its designee of the request for redemption without charge. For
purposes of this Section 1.5, the Company or its designee shall be the
designee of the Fund for receipt of requests for redemption from each Account
and receipt by such designee shall constitute receipt by the Fund; provided
that the Fund receives notice of such request for redemption on the next
following Business Day. Integrity Life Insurance Company shall be the
designee of the Company for purposes of this Section.
1.6. The Company agrees to purchase and redeem the shares of each
Portfolio offered by the then current prospectus of the Fund and in accordance
with the provisions of such prospectus. The Company agrees that all net
amounts available under the Separate Accounts listed on Schedule A shall be
invested in the Fund, in such other Funds advised by the Adviser as may be
mutually agreed to in writing by the parties hereto, or in the Company's
general account, provided that such amounts may also be invested in an
investment company other than the Fund if (a) such other investment company,
or series thereof, has investment objectives or policies that are
substantially different from the investment objectives and policies of all the
Portfolios of the Fund (excluding any Portfolios for which the Company has
terminated this Agreement pursuant to Section 10.1(b)); or (b) the Company
gives the Fund and the Underwriter 45 days written notice of its intention to
make such other investment company available as a funding vehicle for the
Contracts; or (c) such other investment company was available as a funding
vehicle for the Contracts prior to the date of this Agreement and the Company
so informs the Fund and Underwriter prior to their signing this Agreement; or
(d) the Fund or Underwriter consents to the use of such other investment
company.
1.7. The Company shall pay for Fund shares on the next Business Day
after an order to purchase Fund shares is made in accordance with the
provisions of Section 1.1 hereof. Payment shall be in federal funds
transmitted by wire. For purpose of Section 2.10 and 2.11, upon receipt by the
Fund of the federal funds so wired, such funds shall cease to be the
responsibility of the Company and shall become the responsibility of the Fund.
1.8. Issuance and transfer of the Fund's shares will be by book entry
only. Stock certificates will not be issued to the Company or any Account.
Shares ordered from the Fund will be recorded in an appropriate title for each
Account or the appropriate subaccount of each Account.
1.9. The Fund shall furnish same day notice (by wire or telephone,
followed by written confirmation) to the Company or its designee of any
income, dividends or capital gain distributions payable on the Fund's shares.
The Company hereby elects to receive all such income, dividends and capital
gain distributions as are payable on the Portfolio shares in additional shares
of that Portfolio. The Company reserves the right with respect to each
Portfolio to revoke this election and to receive all such income, dividends
and capital gain distributions in cash. The Fund shall notify the Company or
its designee of the number of shares so issued as payment of such dividends
and distributions. Integrity Life Insurance Company shall be the designee of
the Company for purposes of this Section.
4
<PAGE>
1.10. The Fund shall make the net asset value per share for each
Portfolio available to the Company or its designee on a daily basis as soon as
reasonably practical after the net asset value per share is calculated and shall
use its best efforts to make such net asset value per share available by 7 p.m.
Boston time.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1. The Company represents and warrants that the Contracts are or will
be registered under the 1933 Act; that the Contracts will be issued and sold in
compliance in all material respects with all applicable Federal and State laws
and that the sale of the Contracts shall comply in all material respects with
state insurance suitability requirements. The Company further represents and
warrants that it is an insurance company duly organized and in good standing
under applicable law and that it has legally and validly established each
Account prior to any issuance or sale thereof as a segregated asset account
under Article XIV-1/2 of the Illinois Insurance Code and has registered or,
prior to any issuance or sale of the Contracts, will register each Account as a
unit investment trust in accordance with the provisions of the 1940 Act to serve
as a segregated investment account for the Contracts.
2.2. The Fund represents and warrants that Fund shares sold pursuant to
this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in compliance with the laws of the State of Illinois and all
applicable federal and state securities laws and that the Fund is and shall
remain registered under the 1940 Act. The Fund shall amend the Registration
Statement for its shares under the 1933 Act and the 1940 Act from time to time
as required in order to effect the continuous offering of its shares. The Fund
shall register and qualify the shares for sale in accordance with the laws of
the various states only if and to the extent deemed advisable by the Fund or the
Underwriter.
2.3. The Fund represents that it is currently qualified as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code of 1986, as
amended, (the "Code") and that it will make every effort to maintain such
qualification (under Subchapter M or any successor or similar provision) and
that it will notify the Company immediately upon having a reasonable basis for
believing that it has ceased to so qualify or that it might not so qualify in
the future.
2.4. The Company represents that the Contracts are currently treated as
endowment, annuity or life insurance contracts, under applicable provisions of
the code and that it will make every effort to maintain such treatment and that
it will notify the Fund and the Underwriter immediately upon having a reasonable
basis for believing that the Contracts have ceased to be so treated or that they
might not be so treated in the future.
2.5. The Fund currently does not intend to make any payments to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act or otherwise,
although it may make such payments in the future. The Fund has adopted a "no
feel' or "defensive" Rule 12b-I Plan under which it makes no payments for
distribution expenses. To the extent that it decides to finance distribution
expenses pursuant to Rule 12b-1, the Fund undertakes to have a board of
trustees, a
5
<PAGE>
majority of whom are not interested persons of the Fund, formulate and approve
any plan under Rule 12b-1 to finance distribution expenses.
2.6. The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of the various states
except that the Fund represents that the Fund's investment policies, fees and
expenses are and shall at all times remain in compliance with the laws of the
State of Illinois and the Fund and the Underwriter represent that their
respective operations are and shall at all times remain in material compliance
with the laws of the State of Illinois to the extent required to perform this
Agreement.
2.7. The Underwriter represents and warrants that it is a member in good
standing of the NASD and is registered as a broker-dealer with the SEC. The
Underwriter further represents that it will sell and distribute the Fund shares
in accordance with the laws of the State of Illinois and all applicable state
and federal securities laws, including without limitation the 1933 Act, the 1934
Act, and the 1940 Act.
2.8. The Fund represents that it is lawfully organized and validly
existing under the laws of the Commonwealth of Massachusetts and that it does
and will comply in all material respects with the 1940 Act.
2.9. The Underwriter represents and warrants that the Adviser is and shall
remain duly registered in all material respects under all applicable federal and
state securities laws and that the Adviser shall perform its obligations for the
Fund in compliance in all material respects with the laws of the State of
Illinois and any applicable state and federal securities laws.
2.10. The Fund and Underwriter represent and warrant that all of their
directors, officers, employees, investment advisers, and other
individuals/entities dealing with the money and/or securities of the Fund are
and shall continue to be at all times covered by a blanket fidelity bond or
similar coverage for the benefit of the Fund in an amount not less than the
minimal coverage as required currently by Rule 17g-(l) of the 1940 Act or
related provisions as may be promulgated from time to time. The aforesaid Bond
shall include coverage for larceny and embezzlement and shall be issued by a
reputable bonding company.
2.11. The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals/entities dealing
with the money and/or securities of the Fund are and shall continue to be at all
times covered by a blanket fidelity bond or similar coverage for the benefit of
the Fund, in an amount not less than the minimal coverage as required currently
by entities subject to the requirements of Rule 17g-1 of the 1940 Act or related
provisions as may be promulgated from time to time. The aforesaid Bond shall
include coverage for larceny and embezzlement and shall be issued by a reputable
bonding company.
2.12. The Company represents and warrants that it will not purchase Fund
shares with Account assets derived from the sale of Contracts to deferred
compensation plans with respect to service for state and local governments which
qualify under Section 457 of the federal Internal
6
<PAGE>
Revenue Code, as may be amended. The Company may purchase Fund shares with
Account assets derived from any sale of a Contract to any other type of
tax-advantaged employee benefit plan; PROVIDED however that such plan has no
more than 500 employees who are eligible to participate at the time of the first
such purchase hereunder by the Company of Fund shares derived from the sale of
such contract.
2.13 The Fund and the Underwriter each represents that neither it nor
any person employed in any material connection with respect to the services
provided pursuant to this Agreement:
(i) Within the last 10 years has been convicted of any felony or
misdemeanor arising out of conduct involving embezzlement,
fraudulent conversion, or misappropriation of funds or
securities, or involving violations of Section 1341,
Section 1342 or 1343 of Title 18, United States Code; or
(ii) Within the last ten years has been found by any state
regulatory authority to have violated or has acknowledged
violation of any provision of any state insurance law
involving fraud, deceit or knowing misrepresentation; or
(iii) within the last ten years has been found by any federal or
state regulatory authorities to have violated or have
acknowledged violation of any provision of federal or state
securities laws involving fraud, deceit or knowing
misrepresentation.
ARTICLE III. PROSPECTUSES, STATEMENTS OF ADDITIONAL INFORMATION AND PROXY
STATEMENTS; VOTING
3.1. The Underwriter shall provide the Company (at the Company's
expense) with as many copies of the Fund's current prospectus and any
supplements thereto as the Company may reasonably request. If requested by the
Company in lieu thereof, the Fund shall provide such documentation (including a
camera ready final copy of the new prospectus or supplement as set in type at
the Fund's expense) and other assistance as is reasonably necessary in order for
the Company once each year (or more frequently if the prospectus for the Fund is
amended) to have the prospectus for the Contracts and the Fund's prospectus
printed together in one document (such printing to be at the Company's expense).
3.2. The Fund's prospectus shall state that the Statement of Additional
Information for the Fund is available from the Underwriter (or in the Fund's
discretion, the Prospectus shall state that such Statement is available from the
Fund), and the Underwriter (or the Fund), at its expense, shall print and
provide such Statement free of charge to the Company and to any owner of a
Contract or prospective owner who requests such Statement.
3.3 The Fund shall promptly notify the Company of any anticipated
amendments to the Fund's registration statement or supplement to the prospectus.
7
<PAGE>
3.4. The Fund, at its expense, shall provide the Company with copies of
its proxy material, reports to stockholders and other communications to
stockholders in such quantity as the Company shall reasonably require for
distributing to Contract owners. At the request of the Company, the Fund shall
provide a camera ready copy of such communication to the Company, which may
combine such communication with a communication of the Company or the Accounts,
which communications may be bound together. In such case the printing expenses
of the combined communications shall be borne by the Company and the Fund in
proportion to the number of pages for which they are respectively responsible.
3.5. If and to the extent required by law the Company shall:
(i) solicit voting instructions from Contract Owners;
(ii) vote the Fund shares in accordance with instructions received
from Contract owners; and
(iii) vote Fund shares for which no instructions have been received
in the same proportion as Fund shares of such Portfolio for
which instructions have been received;
so long as and to the extent that the Securities and Exchange Commission
continues to interpret the 1940 Act to require pass-through voting privileges
for variable contract owners. The Company reserves the right to vote Fund shares
held in any segregated asset account in its own right, to the extent permitted
by law. Participating Insurance Companies shall be responsible for assuring that
each of their separate accounts participating in the Fund calculates voting
privileges in a manner consistent with the standards set forth on Schedule B
attached hereto and incorporated herein by this reference, which standards will
also be provided to the other Participating Insurance Companies and the
requirements of the 1940 Act.
3.6. The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, and in particular the Fund will either provide for
annual meetings or comply with Section 16(c) of the 1940 Act (although the Fund
is not one of the trusts described in Section 16(c) of that Act) as well as with
Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will act in
accordance with the Securities and Exchange Commission's interpretation of the
requirements of Section 16(a) with respect to periodic elections of trustees and
with whatever rules the Commission may promulgate with respect thereto.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee, the text and to the extent relevant the graphic component
of each piece of sales literature or other promotional material in which the
Fund or its investment adviser or the Underwriter is named, at least fifteen
Business Days prior to its use. No such material shall be used if the Fund or
its designee objects to such use within fifteen Business Days after receipt of
8
<PAGE>
such material. The Fund or its designee will use its best efforts to review such
materials within a shorter time period as the Company will have requested in
writing.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Contracts other than the information or
representations contained in the registration statement or prospectus for the
Fund shares, as such registration statement and prospectus may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund or its
designee or by the Underwriter, except with the permission of the Fund or the
Underwriter or the designee of either.
4.3. The Fund, Underwriter, or its designee shall furnish, or shall cause
to be furnished, to the Company or its designee, each piece of sales literature
or other promotional material in which the Company and/or its separate
account(s), is named at least fifteen Business Days prior to its use. No such
material shall be used if the company or its designee object to such use within
fifteen Business Days after receipt of such material.
4.4. The Fund and the Underwriter shall not give any information or make
any representations on behalf of the Company or concerning the Company, each
Account, or the Contracts other than the information or representations
contained in a registration statement or prospectus for the Contracts, as such
registration statement and prospectus may be amended or supplemented from time
to time, or in published reports for each Account which are in the public domain
or approved by the Company for distribution to Contract owners, or in sales
literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
4.5. The Fund will provide to the Company at least one complete copy of
all registration statements, prospectuses, Statements of Additional information,
reports, proxy statements, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to the Fund or its shares, contemporaneously
with the filing of such document with the Securities and Exchange commission or
other regulatory authorities.
4.6. The Company will provide to the Fund at least one complete copy of
all registration statements, prospectuses, Statements of Additional Information,
reports, solicitations for voting instructions, sales literature and other
promotional materials, applications for exemptions, requests for no action
letters, and all amendments to any of the above, that relate to the Contracts or
each Account, contemporaneously with the filing of such document with the
Securities and Exchange Commission.
4.7. For purposes of this Article IV, the phrase "sales literature or
other promotional material" includes, but is not limited to, advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other public media), sales
literature (i.e., any written communication distributed or made generally
available to customers or
9
<PAGE>
the public, including brochures, circulars, research reports, market letters,
form letters, seminar texts, reprints or excerpts of any other advertisement,
sales literature, or published article), educational or training materials or
other communications distributed or made generally available to some or all
agents or employees, and registration statements, prospectuses, Statements of
Additional Information, shareholder reports, and proxy materials.
ARTICLE V. FEES AND EXPENSES
5.1. The Fund and Underwriter shall pay no fee or other compensation to
the Company under this agreement, except that if the Fund or any Portfolio
adopts and implements a plan pursuant to Rule 12b-1 to finance distribution
expenses, then the Underwriter may make payments to the Company or to the
underwriter for the Contracts if and in amounts agreed to by the Underwriter in
writing and such payments will be made out of existing fees other-wise payable
to the Underwriter, past profits of the Underwriter or other resources available
to the Underwriter. No such payments shall be made directly by the Fund.
Currently, no such payments are contemplated.
5.2. All expenses incident to performance by the Fund under this
Agreement shall be paid by the Fund. The Fund shall see to it that all its
shares are registered and authorized for issuance in accordance with applicable
federal law and, if and to the extent deemed advisable by the Fund, in
accordance with applicable state laws prior to their sale. The Fund shall bear
the expenses for the cost of registration and qualification of the Fund's
shares, preparation and filing of the Fund's prospectus and registration
statement, proxy materials and reports, setting the prospectus in type, setting
in type and printing the proxy materials and reports to shareholders (including
the costs of printing a prospectus that constitutes an annual report), the
preparation of all statements and notices required by any federal or state law,
and all taxes on the issuance or transfer of the Fund's shares.
5.3. The Company shall bear the expenses of printing and distributing
the Fund's prospectus to owners of Contracts issued by the Company and of
distributing the Fund's proxy materials and reports to such Contract owners.
ARTICLE VI. DIVERSIFICATION
6.1. The Fund will at all times invest money from the Contracts in
such a manner as to ensure that the Contracts will be treated as variable
contracts under the Code and the regulations issued thereunder. Without
limiting the scope of the foregoing, the Fund will at all times comply with
Section 817(h) of the Code and Treasury Regulation Section 1817-5, relating
to the diversification requirements for variable annuity, endowment, or life
insurance contracts and any amendments or other modifications to such Section
or Regulations. The Fund shall promptly notify the Company of any breach by
any Portfolio of this Article 6.
10
<PAGE>
ARTICLE VII. POTENTIAL CONFLICTS
7.1. The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict may
arise for a variety of reasons, including: (a) an action by any state insurance
regulatory authority; (b) a change in applicable federal or state insurance,
tax, or securities laws or regulations, or a public ruling, private letter
ruling, no-action or interpretative letter, or any similar action by insurance,
tax, or securities regulatory authorities; (c) an administrative or judicial
decision in any relevant proceeding; (d) the manner in which the investments of
any Portfolio are being managed; (e) a difference in voting instructions given
by variable annuity contract and variable life insurance contract owners; or (f)
a decision by an insurer to disregard the voting instructions of contract
owners. The Board shall promptly inform the Company if it determines that an
irreconcilable material conflict exists and the implications thereof.
7.2. The Company will report any potential or existing conflicts of
which it is aware to the Board. The company will assist the Board in carrying
out its responsibilities under the Shared Funding Exemptive order, by providing
the Board with all information reasonably necessary for the Board to consider
any issues raised. This includes, but is not limited to, an obligation by the
Company to inform the Board whenever contract owner voting instructions are
disregarded.
7.3. If it is determined by a majority of the Board, or a majority of
its disinterested trustees, that a material irreconcilable conflict exists, the
Company and other Participating Insurance Companies shall, at their expense and
to the extent reasonably practicable (as determined by a majority of the
disinterested trustees), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1),
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a vote
of all affected Contract owners and, as appropriate, segregating the assets of
any appropriate group (i.e., annuity contract owners, life insurance contract
owners, or variable contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
contract owners the option of making such a change; and (2), establishing a new
registered management investment company or managed separate account.
7.4. If a material irreconcilable conflict arises because of a decision
by the Company to disregard contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw the affected Account's
investment in the Fund and terminate this Agreement with respect to such
Account; provided, however that such withdrawal and termination shall be limited
to the extent required by the foregoing material irreconcilable conflict as
determined by a majority of the disinterested members of the Board. Any such
withdrawal and termination must take place within six (6) months after the Fund
gives written notice that this provision is being implemented,
11
<PAGE>
and until the end of that six month period the Underwriter and Fund shall
continue to accept and implement orders by the Company for the purchase (and
redemption) of shares of the Fund.
7.5. If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's investment in the Fund and terminate this Agreement with
respect to such Account within six months after the Board informs the Company in
writing that it has determined that such decision has created an irreconcilable
material conflict; provided, however, that such withdrawal and termination shall
be limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested members of the Board.
Until the end of the foregoing six month period, the Underwriter and Fund shall
continue to accept and implement orders by the Company for the purchase (and
redemption) of shares of the Fund.
7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a
majority of the disinterested members of the Board shall determine whether any
proposed action adequately remedies any irreconcilable material conflict, but in
no event will the Fund be required to establish a new funding medium for the
Contracts. The Company shall not be required by Section 7.3 to establish a new
funding medium for the Contracts if an offer to do so has been declined by vote
of a majority of Contract owners materially adversely affected by the
irreconcilable material conflict. In the event that the Board determines that
any proposed action does not adequately remedy any irreconcilable material
conflict, then the Company will withdraw the Account's investment in the Fund
and terminate this Agreement within six (6) months after the Board informs the
Company in writing of the foregoing determination, provided, however, that such
withdrawal and termination shall be limited to the extent required by any such
material irreconcilable conflict as determined by a majority of the
disinterested members of the Board.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended,
or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the
Act or the rules promulgated thereunder with respect to mixed or shared
funding (as defined in the Shared Funding Exemptive Order) on terms and
conditions materially different from those contained in the shared Funding
Exemptive Order, then (a) the Fund and/or the Participating Insurance
Companies, as appropriate, shall take such steps as may be necessary to comply
with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the
extent such rules are applicable; and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3,
7.4, and 7.5 of this Agreement shall continue in effect only to the extent
that terms and conditions substantially identical to such Sections are
contained in such Rule(s) as so amended or adopted.
ARTICLE VIII. INDEMNIFICATION
8.1. INDEMNIFICATION BY THE COMPANY
8.1(a). The Company agrees to indemnify and hold harmless the Fund and
each of the members of the Board and officers and each person, if any, who
controls the Fund within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of
12
<PAGE>
this Section 8.1) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the Company)
or litigation (including legal and other expenses), to which the Indemnified
Parties may become subject under any statute, regulation, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof) or settlements are related to the sale or
acquisition of the Fund's shares or the Contracts and:
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the
Registration Statement or prospectus for the Contracts or
contained in the Contracts or sales literature for the
Contracts (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission or
the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements
therein not misleading, provided that this agreement to
indemnify shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission
was made in reliance upon and in conformity with information
furnished to the Company by or on behalf of the Fund for use
in the Registration Statement or prospectus for the Contracts
or in the Contracts or sales literature (or any amendment or
supplement) or otherwise for use in connection with the sale
of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
Registration Statement, prospectus or sales literature of the
Fund not supplied by the Company, or persons under its
control) or wrongful conduct of the Company or persons under
its control, with respect to the sale or distribution of the
Contracts or Fund Shares; or
(iii) arise out of any untrue statement or alleged untrue statement
of a material fact contained in a Registration Statement,
prospectus, or sales literature of the Fund or any amendment
thereof or supplement thereto or the omission or alleged
omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, if such a statement or omission was made in
reliance upon information furnished to the Fund by or on
behalf of the Company; or
(iv) arise as a result of any failure by the Company to provide the
services and furnish the materials under the terms of this
Agreement; or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Company, as limited by and in
accordance with the provisions of Sections 8.1(b) and 8.1(c)
hereof.
8.1(b). The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or
litigation incurred or assessed against an
13
<PAGE>
Indemnified Party as such may arise from such Indemnified Party's willful
misfeasance, bad faith, or gross negligence in the performance of such
Indemnified Party's duties or by reason of such Indemnified Party's reckless
disregard of obligations or duties under this Agreement or to the Fund,
whichever is applicable.
8.1(c). The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Company in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Company of any
such claim shall not relieve the Company from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Company shall be entitled to participate,
at its own expense, in the defense of such action. The Company also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action and to settle the claim at its own expense provided,
however, that no such settlement shall, without the Indemnified Parties' written
consent, include any factual stipulations referring to the Indemnified Parties
or their conduct. After notice from the Company to such party of the Company's
election to assume the defense thereof, the Indemnified Party shall bear the
fees and expenses of any additional counsel retained by it, and the Company will
not be liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation.
8.1(d). The Indemnified Parties will promptly notify the Company of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of the Fund Shares or the Contracts or the operation of the
Fund.
8.2. INDEMNIFICATION BY THE UNDERWRITER
8.2(a). The Underwriter agrees to indemnify and hold harmless the Company,
the principal underwriter for the Contracts and each of their directors and
officers and each person, if any, who controls the Company or the principal
underwriter for the Contracts within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.2)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the Underwriter) or litigation
(including legal and other expenses) to which the Indemnified Parties may become
subject under any statute, regulation, at common law or otherwise, insofar as
such losses, claims, damages, liabilities or expenses (or actions in respect
thereof) or settlements are related to the sale or acquisition of the Fund's
shares or the Contracts and:
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the
Registration Statement or prospectus or sales literature of
the Fund (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission or
the alleged omission to state therein a material fact required
to be stated therein or necessary to make the
14
<PAGE>
statements therein not misleading, provided that this
agreement to indemnify shall not apply as to any Indemnified
Party if such statement or omission or such alleged statement
or omission was made in reliance upon and in conformity with
information furnished to the Underwriter or Fund by or on
behalf of the Company for use in the Registration Statement or
prospectus for the Fund or in sales literature (or any
amendment or supplement) or otherwise for use in connection
with the sale of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
Registration Statement, prospectus or sales literature for the
Contracts not supplied by the Fund, Underwriter or persons
under its control) or wrongful conduct of the Fund, Adviser or
Underwriter or persons under their control, with respect to
the sale or distribution of the Contracts or Fund shares; or
(iii) arise out of any untrue statement or alleged untrue statement
of a material fact contained in a Registration Statement,
prospectus, or sales literature covering the Contracts, or any
amendment thereof or supplement thereto, or the omission or
alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein
not misleading, if such statement or omission was made in
reliance upon information furnished to the Company by or on
behalf of the Fund or the Underwriter; or
(iv) arise as a result of any failure by the Fund or the
Underwriter to provide the services and furnish the materials
under the terms of this Agreement (including a failure,
whether unintentional or in good faith or otherwise, to comply
with the diversification requirements specified in Article VI
of this Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Underwriter in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Underwriter; as limited by and
in accordance with the provisions of Sections 8.2(b) and
8.2(c) hereof.
8.2(b). The Underwriter shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
each Company or the Account, whichever is applicable.
8.2(c). The Underwriter shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Underwriter in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on
15
<PAGE>
any designated agent), but failure to notify the Underwriter of any such claim
shall not relieve the Underwriter from any liability which it may have to the
Indemnified Party against whom such action is brought otherwise than on account
of this indemnification provision. In case any such action is brought against
the Indemnified Parties, the Underwriter will be entitled to participate, at its
own expense, in the defense thereof. The Underwriter also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party named in the
action and to settle the claim at its own expense provided, however, that no
such settlement shall, without the Indemnified Parties' written permission,
include any factual stipulations referring to the Indemnified Parties or their
conduct. After notice from the Underwriter to such party of the Underwriter's
election to assume the defense thereof, the Indemnified Party shall bear the
fees and expenses of any additional counsel retained by it, and the Underwriter
will not be liable to such party under this Agreement for any legal or other
expenses subsequently incurred by such party independently in connection with
the defense thereof other than reasonable costs of investigation.
8.2(d). The Company agrees promptly to notify the Underwriter of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Contracts or the
operation of each Account.
8.3. INDEMNIFICATION BY THE FUND
8.3(a). The Fund agrees to indemnify and hold harmless the Company, the
principal underwriter for the Contracts and each of their directors and officers
and each person, if any, who controls the Company or the principal underwriter
for the Contracts within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.3)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the Fund) or litigation (including
legal and other expenses) to which the Indemnified Parties may become subject
under any statute, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof) or settlements
result from the gross negligence, bad faith or willful misconduct of the Board
or any member thereof, are related to the operations of the Fund and:
(i) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this
Agreement (including a failure to comply with the
diversification requirements specified in Article VI of this
Agreement);or
(ii) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Fund; as limited by and in
accordance with the provisions of Sections 8.3(b) and 8.3(c)
hereof.
8.3(b). The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
16
<PAGE>
Party's reckless disregard of obligations and duties under this Agreement or to
the Company, the Fund, the Underwriter or each Account, whichever is applicable.
8.3(c) The Fund shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
indemnified Party shall have notified the Fund in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon such Indemnified Party (or after
such Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify the Fund of any such claim shall not
relieve the Fund from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against the
Indemnified Parties, the Fund will be entitled to participate, at its own
expense, in the defense thereof. The Fund also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party named in the action and
to settle the claim at its own expense provided, however, that no such
settlement shall, without the Indemnified Parties' written permission, include
any factual stipulations referring to the Indemnified Parties or their conduct.
After notice from the Fund to such party of the Fund's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Fund will not be liable to such party
under this Agreement for any legal or other expenses subsequently incurred by
such party independently in connection with the defense thereof other than
reasonable costs of investigation.
8.3(d). The Company and the Underwriter agree promptly to notify the
Fund of the commencement of any litigation or proceedings against it or any of
its respective officers or directors in connection with this Agreement, the
issuance or sale of the Contracts, with respect to the operation of either
Account, or the sale or acquisition of shares of the Fund.
ARTICLE IX. APPLICABLE LAW
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
9.2. This Agreement shall be subject to the provisions of the 1933, 1934
and 1940 acts, and the rules and regulations and rulings thereunder, including
such exemptions from those statutes, rules and regulations as the Securities and
Exchange Commission may grant (including, but not limited to, the Shared Funding
Exemptive Order) and the terms hereof shall be interpreted and construed in
accordance therewith.
ARTICLE X. TERMINATION
10.1. This Agreement shall terminate:
(a) at the option of any party upon one year advance written
notice to the other parties; provided, however such notice
shall not be given earlier than one year following the date of
this Agreement; or
17
<PAGE>
(b) at the option of the Company to the extent that shares of
Portfolios are not reasonably available to meet the
requirements of the Contracts as determined by the Company,
provided however, that such termination shall apply only to
the Portfolio(s) not reasonably available. Prompt notice of
the election to terminate for such cause shall be furnished by
the Company; or
(c) at the option of the Fund in the event that formal
administrative proceedings are instituted against the Company
by the NASD, the Securities and Exchange Commission, any state
securities or insurance department or any other regulatory
body regarding the Company's duties under this Agreement or
related to the sale of the Contracts, with respect to the
operation of any Account, or the purchase of the Fund shares,
provided, however, that the Fund determines in its sole
judgment exercised in good faith, that any such administrative
proceedings will have a material adverse effect upon the
ability of the Company to perform its obligations under this
Agreement; or
(d) at the option of the Company in the event that formal
administrative proceedings are instituted against the Fund or
Underwriter by the NASD, the Securities and Exchange
Commission, or any state securities or insurance department or
any other regulatory body, provided, however, that the Company
determines in its sole judgment exercised in good faith, that
any such administrative proceedings will have a material
adverse effect upon the ability of the Fund or Underwriter to
perform its obligations under this Agreement; or
(e) with respect to any Account, upon requisite vote of the Contract owners
having an interest in such Account (or any subaccount) to substitute
the shares of another investment company for the corresponding
Portfolio shares of the Fund in accordance with the terms of the
Contracts for which those Portfolio shares had been selected to serve
as the underlying investment media. The Company will give 30 days'
prior written notice to the Fund of the date of any proposed vote to
replace the Fund's shares; or
(f) at the option of the Company, in the event any of the Fund's shares are
not registered, issued or sold in accordance with applicable state
and/or federal law or such law precludes the use of such shares as the
underlying investment media of the Contracts issued or to be issued by
the Company; or
(g) at the option of the Company, if the Fund ceases to qualify as a
Regulated Investment Company under Subchapter M of the Code or under
any successor or similar provision, or if the Company reasonably
believes that the Fund may fail to so qualify; or
(h) at the option of the Company, if the Fund fails to meet the
diversification requirements specified in Article VI hereof; or
18
<PAGE>
(i) at the option of either the Fund or the Underwriter, if (1) the Fund or
the Underwriter, respectively, shall determine, in their sole judgment
reasonably exercised in good faith, that the Company has suffered a
material adverse change in its business or financial condition or is
the subject of material adverse publicity and such material adverse
change or material adverse publicity will have a material adverse
impact upon the business and operations of either the Fund or the
Underwriter, (2) the Fund or the Underwriter shall notify the Company
in writing of such determination and its intent to terminate this
Agreement, and (3) after considering the actions taken by the Company
and any other changes in circumstances since the giving of such notice,
such determination of the Fund or the Underwriter shall continue to
apply on the sixtieth (60th) day following the giving of such notice,
which sixtieth day shall be the effective date of termination, or
(j) at the option of the Company, if (1) the Company shall determine, in
its sole judgment reasonably exercised in good faith, that either the
Fund or the Underwriter has suffered a material adverse change in its
business or financial condition or is the subject of material adverse
publicity and such material adverse change or material adverse
publicity will have a material adverse impact upon the business and
operations of the Account or the Company's ability to market the
Contracts, (2) the Company shall notify the Fund and the Underwriter in
writing of such determination and its intent to terminate the
Agreement, and (3) after considering the actions taken by the Fund
and/or the Underwriter and any other changes in circumstances since the
giving of such notice, such determination shall continue to apply on
the sixtieth (60th) day following the giving of such notice, which
sixtieth day shall be the effective date of termination; or
(k) at the option of either the Fund or the Underwriter, if the Company
gives the Fund and the Underwriter the written notice specified in
Section 1.6(b) hereof and at the time such notice was given there was
no notice of termination outstanding under any other provision of this
Agreement; provided, however any termination under this Section
10.1(k). shall be effective forty five (45) days after the notice
specified in Section 1.6(b) was given.
10.2. It is understood and agreed that the right of any party hereto to
terminate this Agreement pursuant to Section 10.1(a) may be exercised for any
reason or for no reason.
10.3. NOTICE REQUIREMENT. No termination of this Agreement shall be
effective unless and until the party terminating this Agreement gives prior
written notice to all other parties to this Agreement of its intent to terminate
which notice shall set forth the basis for such termination. Furthermore,
(a) In the event that any termination is based upon the provisions
of Article VII, or the provision of Section 10.1(a), 10.1(i),
10.1(j) or 10.1(k) of this Agreement, such prior written
notice shall be given in advance of the effective date of
termination as required by such provisions; and
(b) in the event that any termination is based upon the provisions
of Section l0.l(c) or l0.l(d) of this Agreement, such prior
written notice shall be given at least ninety (90) days before
the effective date of termination.
19
<PAGE>
10.4. EFFECT OF TERMINATION. Notwithstanding any termination of this
Agreement, the Fund and the Underwriter shall, at the option of the Company,
continue to make available additional shares of the Fund pursuant to the terms
and conditions of this Agreement, for all Contracts in effect on the effective
date of termination of this Agreement (hereinafter referred to as "Existing
Contracts"). Specifically, without limitation, the owners of the Existing
Contracts shall be permitted to reallocate investments in the Fund, redeem
investments in the Fund and/or invest in the Fund upon the making of additional
purchase payments under the Existing Contracts. The parties agree that this
Section 10.4 shall not apply to any terminations under Article VII and the
effect of such Article VII terminations shall be governed by Article VII of this
Agreement.
10.5. The company shall not redeem Fund shares attributable to the
Contracts (as opposed to Fund shares attributable to the Company's assets held
in either Account) except (i) as necessary to implement Contract Owner initiated
transactions, (ii) as required by state and/or federal laws or regulations or
judicial or other legal precedent of general application (hereinafter referred
to as a "Legally Required Redemption"), or (iii) as upon termination of this
Agreement with respect to one or more portfolios. Upon request, the Company will
promptly furnish to the Fund and the Underwriter the opinion of counsel for the
Company (which counsel shall be reasonably satisfactory to the Fund and the
Underwriter) to the effect that any redemption pursuant to clause (ii) above is
a Legally Required Redemption. Furthermore, except in cases where permitted
under the terms of the Contracts, the Company shall not prevent Contract owners
from allocating payments to a Portfolio that was otherwise available under the
Contracts without first giving the Fund or the Underwriter 90 days notice of its
intention to do so.
10.6 If for any reason the shares of any Portfolio are no longer to be
made available, then, at the request of the Company, the Fund and the
Underwriter shall cooperate with the Company so that the provisions of Section
26(b) of the 1940 Act will be complied with as soon as reasonably practicable
and substitution of an underlying funding medium accomplished without disruption
of sales of securities to the Account or a division thereof, as the case may be,
in connection with such Contracts.
10.7 Article II and VIII and Sections 12.1, 12.6 and 12.7 shall survive
termination of this Agreement.
ARTICLE XI.
NOTICES Any notice shall be sufficiently given when sent by
registered or certified mail to the other party at the address of such party
set forth below or at such other address as such party may from time to time
specify in writing to the other party. If to the Fund:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
If to the Company;
20
<PAGE>
The American Franklin Life Insurance Company
#1 Franklin Square
Springfield, Illinois 62713
Attention: President
If to the Underwriter:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
ARTICLE XII. MISCELLANEOUS
12.1 All persons dealing with the Fund must look solely to the property
of the Fund for the enforcement of any claims against the Fund as neither the
Board, officers, agents or shareholders assume any personal liability for
obligations entered into on behalf of the Fund.
12.2 Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Contracts and all information reasonably identified as
confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information until such time as it may come into
the public domain without the express written consent of the affected party.
12.3 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
12.4 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.5 If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
12.6 Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the
Securities and Exchange Commission, the NASD and state insurance regulators) and
shall permit such authorities reasonable access to its books and records in
connection with any investigation or inquiry relating to this Agreement or the
transactions contemplated hereby. Notwithstanding the generality of the
foregoing, each party hereto further agrees to furnish the California Insurance
Commissioner with any information or reports in connection with services
provided under this Agreement which such commissioner may request in order to
ascertain whether the variable life insurance operations of the Company are
being conducted in a manner consistent with the California Variable Life
Insurance Regulations and any other applicable law or regulations.
21
<PAGE>
12.7 The Fund and Underwriter agree that to the extent any advisory or
other fees received by the Fund, the Underwriter or the Adviser are determined
to be unlawful in legal or administrative proceedings under the 1973 NAIC model
variable life insurance regulation in the states of California, Colorado,
Maryland or Michigan, the Underwriter shall indemnify and reimburse the Company
for any out of pocket expenses and actual damages the Company has incurred as a
result of any such proceeding; provided however that the provisions of Section
8.2(b) of this and 8.2(c) shall apply to such indemnification and reimbursement
obligation. Such indemnification and reimbursement obligation shall be in
addition to any other indemnification and reimbursement obligations of the Fund
and/or the Underwriter under this Agreement.
12.8. The rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to under
state and federal laws.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date
specified below.
Company:
THE AMERICAN FRANKLIN LIFE INSURANCE
COMPANY
By its authorized off'icer
SEAL BY:
------------------------------------------
Title: Stephen P. Horvat, Jr.
Senior Vice President, General Counsel and
Secretary
Date:
Fund:
VARIABLE INSURANCE PRODUCTS FUND
By its authorized officer,
SEAL By:
-----------------------------------------
Title: Its: Sr. V.P.
Date: 10-1-91
22
<PAGE>
Underwriter:
FIDELITY DISTRIBUTORS CORPORATION
By its authorized officer,
By:
-----------------------------------------
Title: V.P.
--------------------------------------
Date: 10-3-91
---------------------------------------
23
<PAGE>
SCHEDULE A
ACCOUNTS
Name of Account Date of Resolution of Company's Board
which Established the Account
Separate Account VUL - 2 April 9, 1991
<PAGE>
SCHEDULE B
PROXY VOTING PROCEDURE
The following is a list of procedures and corresponding responsibilities for the
handling of proxies relating to the Fund by the Underwriter, the Fund and the
Company. The defined terms herein shall have the meanings assigned in the
Participation Agreement except that the term "Company" shall also include the
department or third party assigned by the Insurance Company to perform the steps
delineated below.
1. The number of proxy proposals is given to the Company by the
Underwriter as early as possible before the date set by the Fund for
the shareholder meeting to facilitate the establishment of tabulation
procedures. At this time the Underwriter will inform the Company of the
Record, Mailing and Meeting dates. This will be done verbally
approximately two months before meeting.
2. Promptly after the Record Date, the Company will perform a "tape run",
or other activity, which will generate the names, addresses and number
of units which are attributed to each contractowner/policyholder (the
"Customer") as of the Record Date. Allowance should be made for account
adjustments made after this date that could affect the status of the
Customers' accounts as of the Record Date.
Note: The number of proxy statements is determined by the
activities described in Step #2. The Company will use
its best efforts to call in the number of Customers
to Fidelity, as soon as possible, but no later than
two weeks after the Record Date.
3. The Fund's Annual Report must be sent to each Customer by the Company
either before or together with the Customers' receipt of a proxy
statement. Underwriter will provide at least one copy of the last
Annual Report to the Company.
4. The text and format for the Voting Instruction Cards ("Cards" or
"Card") is provided to the Company by the Fund. The company, at its
expense, shall produce and personalize the Voting Instruction Cards.
The Legal Department of the Underwriter or its affiliate ("Fidelity
Legal") must approve the Card before it is printed. Allow approximately
2-4 business days for printing information on the Cards. Information
commonly found on the Cards includes:
a. name (legal name as found on account registration)
b. address
c. Fund or account number
d. coding to state number of units
e. individual Card number for use in tracking and
verification of votes (already on Cards as printed by
the Fund)
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
<PAGE>
During this time, Fidelity Legal will develop, produce, and the Fund
will pay for the Notice of Proxy and the Proxy Statement (one
document). Printed and folded notices and statements will be sent to
Company for insertion into envelopes (envelopes and return envelopes
are provided and paid for by the Insurance Company). Contents of
envelope sent to Customers by company will include:
a. Voting Instruction Card(s)
b. one proxy notice and statement (one document)
c. return envelope (postage pre-paid by Company) addressed
to the Company or its tabulation agent
d. "urge buckslip" - optional, but recommended. (This is a
small, single sheet of paper that requests Customers to
vote as quickly as possible and that their vote is
important. One copy will be supplied by the Fund.)
e. cover letter - optional, supplied by Company and reviewed
and approved in advance by Fidelity Legal.
6. The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at company reviews
and approves the contents of the mailing package to ensure correctness
and completeness. Copy of this approval sent to Fidelity Legal.
7. Package mailed by the Company.
The Fund must allow at least a 15-day solicitation time to the
Company as the shareowner. (A 5-week period is recommended.)
solicitation time is calculated as calendar days from (but NOT
including) the meeting, counting backwards.
8. Collection and tabulation of Cards begins. Tabulation usually takes
place in another department or another vendor depending on process
used. An often used procedure is to sort Cards on arrival by proposal
into vote categories of all yes, no, or mixed replies, and to begin
data entry.
Note: Postmarks are not generally needed. A need for postmark
information would be due to an insurance company's internal
procedure and has not been required by Fidelity in the past.
9. Signatures on Card checked against legal name on account registration
which was printed on the Card.
Note: For Example, If the account registration is under "Bertram C.
Jones, Trustee," then that is the exact legal name to be
printed on the Card and is the signature needed on the Card.
10. If Cards are mutilated, or for any reason are illegible or are not
signed properly, they are sent back to Customer with an explanatory
letter, a new Card and return envelope. The mutilated or illegible card
is disregarded and considered to be NOT RECEIVED for purposes of vote
tabulation.
<PAGE>
Any Cards that have "kicked out" (e.g. mutilated, illegible) of the
procedure are "hand verified," i.e., examined as to why they did not
complete the system. Any questions on those Cards are usually remedied
individually.
11. There are various control procedures used to ensure proper tabulation
of votes and accuracy of that tabulation. The most prevalent is to sort
the Cards as they first arrive into categories depending upon their
vote; an estimate of how the vote is progressing may then be
calculated. If the initial estimates and the actual vote do not
coincide, then an internal audit of that vote should occur.
This may entail a recount.
12. The actual tabulation of votes is done in units which is then converted
to shares. (It is very important that the Fund receives the tabulations
stated in terms of a percentage and the number of SHARES.) Fidelity
Legal must review and approve tabulation format.
13. Final tabulation in shares is verbally given by the Company to Fidelity
Legal on the morning of the meeting not later than 10:00 a.m. Boston
time. Fidelity Legal may request an earlier deadline if required to
calculate the vote in time for the meeting.
14. A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final
vote. Fidelity Legal will provided a standard from for each
Certification.
15. The Company will be required to box and archive the Cards received from
the Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, Fidelity Legal
will be permitted reasonable access to such Cards.
16. All approvals and "signing-off" may be done orally, but must always be
followed up in writing.
<PAGE>
EXHIBIT 1-A(8)(a)(2)
AMENDMENT NO. 1
Amendment to the Participation Agreement among The American Franklin
Life Insurance Company (the "Company"), Variable Insurance Products Fund (the
"Fund") and Fidelity Distributors Corporation (the "Underwriter") dated July 18,
1991 (the "Agreement").
WHEREAS, each of the parties is desirous of expanding the ability of
Company to participate in the qualified markets, the Company, the Underwriter
and the Fund hereby agree to amend the Agreement by deleting from Section 1.4
the reference to Section 2.12 and by deleting Section 2.12 in its entirety.
In witness whereof, each of the parties has caused this Agreement to be
executed in its name and on its behalf by its duly authorized representative as
of November 1, 1991.
THE AMERICAN FRANKLIN FIDELITY DISTRIBUTORS CORPORATION
LIFE INSURANCE COMPANY
By: By:
----------------------------- -----------------------------
Name: Robert M. Beuerlein Name: Roger T. Servison
--------------------------- ---------------------------
Title: Executive Vice President Title: President
-------------------------- --------------------------
VARIABLE INSURANCE PRODUCTS FUND
By:
-----------------------------
Name: J. Gary Burkhead
---------------------------
Title: Senior Vice President
--------------------------
<PAGE>
EXHIBIT 1-A(8)(a)(3)
PARTICIPATION AGREEMENT
Among
VARIABLE INSURANCE PRODUCTS FUND II,
FIDELITY DISTRIBUTORS CORPORATION
and
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
THIS AGREEMENT, made and entered into this 18TH day of July, 1991 by and
among THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY, (hereinafter the "Company"),
an Illinois legal reserve, stock life insurance company, on its own behalf and
on behalf of each segregated asset account of the Company set forth on Schedule
A hereto as may be amended from time to time (each such account hereinafter
referred to as the "Account"), and the VARIABLE INSURANCE PRODUCTS FUND II, an
unincorporated business trust organized under the laws of the Commonwealth of
Massachusetts (hereinafter the "Fund") and FIDELITY DISTRIBUTORS CORPORATION
(hereinafter the "Underwriter"), a Massachusetts corporation.
WHEREAS, the Fund engages in business as an open-end management investment
company and is available to act as the investment vehicle for separate accounts
established for variable life insurance policies and variable annuity contracts
(collectively, the "Variable insurance Products") to be offered by insurance
companies which have entered into participation agreements with the Fund and the
Underwriter (hereinafter "Participating Insurance Companies"); and
WHEREAS, the beneficial interest in the Fund is divided into several
series of shares, each designated a "Portfolio" and representing the interest in
a particular managed portfolio of securities and other assets; and
WHEREAS, the Fund has obtained an order from the Securities and Exchange
Commission, dated September 17, 1986 (File No. 812-64222), granting
Participating Insurance Companies and variable annuity and variable life
insurance separate accounts exemptions from the provisions of sections 9(a),
13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended,
(hereinafter the "1940 Act") and Rules 6e-2(b) (15) and 6e-3(T) (b) (15)
thereunder, to the extent necessary to permit shares of the Fund to be sold to
and held by variable annuity and variable life insurance separate accounts of
both affiliated and unaffiliated life insurance companies (hereinafter the
"Shared Funding Exemptive Order"); and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
<PAGE>
WHEREAS, Fidelity Management & Research Company (the "Adviser") is duly
registered as an investment adviser under the federal Investment Advisers Act of
1940 and any applicable state securities law; and
WHEREAS, the Company has registered or will register certain variable life
and variable annuity contracts under the 1933 Act; and
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution of the Board of Directors of the
Company, on the date shown for such Account on Schedule A hereto, to set aside
and invest assets attributable to one or more of the aforesaid variable life and
annuity contracts (hereinafter the "Contracts"); and
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act; and
WHEREAS, the Underwriter is registered as a broker dealer with the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended, (hereinafter the "1934 Act"), and is a member in good standing of the
National Association of Securities Dealers, Inc. (hereinafter "NASD");
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios on behalf
of each Account to fund certain of the aforesaid variable life and variable
annuity contracts and the Underwriter is authorized to sell such shares to unit
investment trusts such as each Account at net asset value;
WHEREAS, the Underwriter serves as principal underwriter for Fund shares
pursuant to a distribution agreement dated November 13, 1981 between the
Underwriter and the Fund; and
WHEREAS, the Company has entered into a servicing agreement dated June 15,
1989, as amended, with Integrity Life Insurance Company pursuant to which
Integrity Life Insurance Company will provide administrative services to support
the Account and the Contracts;
NOW, THEREFORE, in consideration of their mutual promises, the Company,
the Fund and the Underwriter agree as follows:
ARTICLE I. SALE OF FUND SHARES
1.1. The Fund and the Underwriter each agrees to sell to the Company
those shares of the Fund which each Account orders, executing such orders on a
daily basis at the net asset value next computed after receipt by the Fund or
its designee of the order for the shares of the Fund. For purposes of this
Section 1.1, the Company or its designee shall be the designee of the Fund for
receipt of such orders from each Account and receipt by such designee shall
constitute receipt by the Fund; provided that the Fund receives notice of such
order by 9:30 a.m. Boston time on the next following Business Day. "Business
Day" shall mean any day on which the New York Stock Exchange is open for trading
and on which the Fund calculates its net asset value pursuant to the rules of
the Securities and Exchange Commission. Integrity Life Insurance Company shall
be the designee of the Company for purposes of this Section.
<PAGE>
1.2. The Fund agrees to make its shares available indefinitely for
purchase at the applicable net asset value per share by the Company and its
Accounts on those days on which the Fund calculates its net asset value pursuant
to rules of the Securities and Exchange Commission and the Fund shall use
reasonable efforts to calculate such net asset value on each day which the New
York Stock Exchange is open for trading. Notwithstanding the foregoing, the
Board of Trustees of the Fund (hereinafter the "Board") may refuse to sell
shares of any Portfolio to any person, or suspend or terminate the offering of
shares of any Portfolio if such action is required by law or by regulatory
authorities having jurisdiction or is, in the sole discretion of the Board
acting in good faith and in light of their fiduciary duties under federal and
any applicable state laws, necessary in the best interests of the shareholders
of such Portfolio.
1.3. The Fund and the Underwriter agree that shares of the Fund will be
sold only to Participating insurance Companies and their separate accounts. No
shares of any Portfolio will be sold to the general public. To the extent
permitted by law or regulation, the Fund and the Underwriter agree to make
available to the Account shares of all Portfolios of the Fund.
1.4. The Fund and the Underwriter will not sell Fund shares to any
insurance company or separate account unless an agreement containing provisions
substantially the same as Articles I, III, V, VII and Sections 2.5 and 2.12 of
Article II of this Agreement is in effect to govern such sales.
1.5. The Fund agrees to redeem for cash, on the Company's request,
any full or fractional shares of the Fund held by the company, executing such
requests on a daily basis at the net asset value next computed after receipt
by the Fund or its designee of the request for redemption without charge. For
purposes of this Section 1.5, the Company or its designee shall be the
designee of the Fund for receipt of requests for redemption from each Account
and receipt by such designee shall constitute receipt by the Fund; provided
that the Fund receives notice of such request for redemption on the next
following Business Day. Integrity Life Insurance Company shall be the
designee of the Company for purposes of this Section.
1.6. The Company agrees to purchase and redeem the shares of each
Portfolio offered by the then current prospectus of the Fund and in accordance
with the provisions of such prospectus. The Company agrees that all net amounts
available under the Separate Accounts listed on Schedule A shall be invested in
the Fund, in such other Funds advised by the Adviser as may be mutually agreed
to in writing by the parties hereto, or in the Company's general account,
provided that such amounts may also be invested in an investment company other
than the Fund if (a) such other investment company, or series thereof, has
investment objectives or policies that are substantially different from the
investment objectives and policies of all the Portfolios of the Fund (excluding
any Portfolios for which the Company has terminated this Agreement pursuant to
Section 10.1(b)); or (b) the Company gives the Fund and the Underwriter 45 days
written notice of its intention to make such other investment company available
as a funding vehicle for the Contracts; or (c) such other investment company was
available as a funding vehicle for the Contracts prior to the date of this
Agreement and the Company so informs the Fund and Underwriter prior to their
signing this Agreement; or (d) the Fund or Underwriter consents to the use of
such other investment company.
1.7. The Company shall pay for Fund shares on the next Business Day
after an order to purchase Fund shares is made in accordance with the provisions
of Section 1.1 hereof. Payment shall be in federal funds transmitted by wire.
For purpose of Section 2.10 and 2.11, upon receipt by the Fund of the federal
funds so wired, such funds shall cease to be the responsibility of the Company
and shall become the responsibility of the Fund.
<PAGE>
1.8. Issuance and transfer of the Fund's shares will be by book entry
only. Stock certificates will not be issued to the Company or any Account.
Shares ordered from the Fund will be recorded in an appropriate title for each
Account or the appropriate subaccount of each Account.
1.9. The Fund shall furnish same day notice (by wire or telephone,
followed by written confirmation) to the Company or its designee of any income,
dividends or capital gain distributions payable on the Fund's shares. The
Company hereby elects to receive all such income, dividends and capital gain
distributions as are payable on the Portfolio shares in additional shares of
that Portfolio. The Company reserves the right with respect to each Portfolio to
revoke this election and to receive all such income, dividends and capital gain
distributions in cash. The Fund shall notify the Company or its designee of the
number of shares so issued as payment of such dividends and distributions.
Integrity Life Insurance Company shall be the designee of the Company for
purposes of this Section.
1.10. The Fund shall make the net asset value per share for each
Portfolio available to the Company or its designee on a daily basis as soon as
reasonably practical after the net asset value per share is calculated and shall
use its best efforts to make such net asset value per share available by 7 p.m.
Boston time.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1. The Company represents and warrants that the Contracts are or will
be registered under the 1933 Act; that the Contracts will be issued and sold in
compliance in all material respects with all applicable Federal and State laws
and that the sale of the Contracts shall comply in all material respects with
state insurance suitability requirements. The Company further represents and
warrants that it is an insurance company duly organized and in good standing
under applicable law and that it has legally and validly established each
Account prior to any issuance or sale thereof as a segregated asset account
under Article XIV-1/2 of the Illinois Insurance Code and has registered or,
prior to any issuance or sale of the Contracts, will register each Account as a
unit investment trust in accordance with the provisions of the 1940 Act to serve
as a segregated investment account for the Contracts.
2.2. The Fund represents and warrants that Fund shares sold pursuant to
this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in compliance with the laws of the State of Illinois and all
applicable federal and state securities laws and that the Fund is and shall
remain registered under the 1940 Act. The Fund shall amend the Registration
Statement for its shares under the 1933 Act and the 1940 Act from time to time
as required in order to effect the continuous offering of its shares. The Fund
shall register and qualify the shares for sale in accordance with the laws of
the various states only if and to the extent deemed advisable by the Fund or the
Under-writer.
2.3. The Fund represents that it is currently qualified as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code of 1986, as
amended, (the "Code") and that it will make every effort to maintain such
qualification (under Subchapter M or any successor or similar provision) and
that it will notify the Company immediately upon having a reasonable basis for
believing that it has ceased to so qualify or that it might not so qualify in
the future.
2.4. The Company represents that the Contracts are currently treated as
endowment, annuity or life insurance contracts, under applicable provisions of
the Code and that it will make every effort to maintain such treatment and that
it will notify the Fund and the Underwriter immediately upon having a
<PAGE>
reasonable basis for believing that the Contracts have ceased to be so treated
or that they might not be so treated in the future.
2.5. The Fund currently does not intend to make any payments to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act or otherwise,
although it may make such payments in the future. The Fund has adopted a "no
feel' or "defensive" Rule 12b-1 Plan under which it makes no payments for
distribution expenses. To the extent that it decides to finance distribution
expenses pursuant to Rule 12b-1, the Fund undertakes to have a board of
trustees, a majority of whom are not interested persons of the Fund, formulate
and approve any plan under Rule 12b-1 to finance distribution expenses.
2.6. The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of the various states
except that the Fund represents that the Fund's investment policies, fees and
expenses are and shall at all times remain in compliance with the laws of the
State of Illinois and the Fund and the Underwriter represent that their
respective operations are and shall at all times remain in material compliance
with the laws of the State of Illinois to the extent required to perform this
Agreement.
2.7. The Under-writer represents and warrants that it is a member in good
standing of the NASD and is registered as a broker-dealer with the SEC. The
Underwriter further represents that it will sell and distribute the Fund shares
in accordance with the laws of the State of Illinois and all applicable state
and federal securities laws, including without limitation the 1933 Act, the 1934
Act, and the 1940 Act.
2.8. The Fund represents that it is lawfully organized and validly
existing under the laws of the Commonwealth of Massachusetts and that it does
and will comply in all material respects with the 1940 Act.
2.9. The Underwriter represents and warrants that the Adviser is and shall
remain duly registered in all material respects under all applicable federal and
state securities laws and that the Adviser shall perform its obligations for the
Fund in compliance in all material respects with the laws of the State of
Illinois and any applicable state and federal securities laws.
2.10. The Fund and Underwriter represent and warrant that all of their
directors, officers, employees, investment advisers, and other
individuals/entities dealing with the money and/or securities of the Fund are
and shall continue to be at all times covered by a blanket fidelity bond or
similar coverage for the benefit of the Fund in an amount not less than the
minimal coverage as required currently by Rule 17g-(l) of the 1940 Act or
related provisions as may be promulgated from time to time. The aforesaid Bond
shall include coverage for larceny and embezzlement and shall be issued by a
reputable bonding company.
2.11. The Company represents and warrants that all of its. directors,
officers, employees, investment advisers, and other individuals/entities dealing
with the money and/or securities of the Fund are and shall continue to be at all
times covered by a blanket fidelity bond or similar coverage for the benefit of
the Fund, in an amount not less than the minimal coverage as required currently
by entities subject to the requirements of Rule 17g-1 of the 1940 Act or related
provisions as may be promulgated from time to time. The aforesaid Bond shall
include coverage for larceny and embezzlement and shall be issued by a reputable
bonding company.
2.12. The Company represents and warrants that it will not purchase Fund
shares with Account assets derived from the sale of Contracts to deferred
compensation plans with respect to service for state
<PAGE>
and local governments which qualify under Section 457 of the federal Internal
Revenue Code, as may be amended. The Company may purchase Fund shares with
Account assets derived from any sale of a Contract to any other type of
tax-advantaged employee benefit plan; PROVIDED however that such plan has no
more than 500 employees who are eligible to participate at the time of the first
such purchase hereunder by the Company of Fund shares derived from the sale of
such Contract.
2.13 The Fund and the Underwriter each represents that neither it nor
any person employed in any material connection with respect to the services
provided pursuant to this Agreement:
(i) Within the last 10 years has been convicted of any felony or
misdemeanor arising out of conduct involving embezzlement,
fraudulent conversion, or misappropriation of funds or
securities, or involving violations of 1341, 1342 or 1343 of
Title 18, United States Code; or
(ii) Within the last ten years has been found by any state
regulatory authority to have violated or has acknowledged
violation of any provision of any state insurance law
involving fraud, deceit or knowing misrepresentation; or
(iii) Within the last ten years has been found by any federal or
state regulatory authorities to have violated or have
acknowledged violation of any provision of federal or state
securities laws involving fraud, deceit or knowing
misrepresentation
ARTICLE III. PROSPECTUSES, STATEMENTS OF ADDITIONAL INFORMATION AND PROXY
STATEMENTS; VOTING
3.1. The Underwriter shall provide the Company (at the Company's
expense) with as many copies of the Fund's current prospectus and any
supplements thereto as the Company may reasonably request. If requested by the
Company in lieu thereof, the Fund shall provide such documentation (including a
camera ready final copy of the new prospectus or supplement as set in type at
the Fund's expense) and other assistance as is reasonably necessary in order for
the Company once each year (or more frequently if the prospectus for the Fund is
amended) to have the prospectus for the Contracts and the Fund's prospectus
printed together in one document (such printing to be at the Company's expense).
3.2. The Fund's prospectus shall state that the Statement of Additional
Information for the Fund is available from the Underwriter (or in the Fund's
discretion, the Prospectus shall state that such Statement is available from the
Fund), and the Underwriter (or the Fund), at its expense, shall print and
provide such Statement free of charge to the Company and to any owner of a
Contract or prospective owner who requests such Statement.
3.3 The Fund shall promptly notify the Company of any anticipated
amendments to the Fund's registration statement or supplement to the prospectus.
3.4. The Fund, at its expense, shall provide the Company with copies of
its proxy material, reports to stockholders and other communications to
stockholders in such quantity as the Company shall reasonably require for
distributing to Contract owners. At the request of the Company, the Fund shall
provide a camera ready copy of such communication to the Company, which may
combine such communication with a communication of the Company or the Accounts,
which communications may be bound together. In such case the printing expenses
of the combined communications shall be borne by the Company and the Fund in
proportion to the number of pages for which they are respectively responsible.
<PAGE>
3.5. If and to the extent required by law the Company shall:
(i) solicit voting instructions from Contract Owners;
(ii) vote the Fund shares in accordance with instructions received
from Contract owners; and
(iii) vote Fund shares for which no instructions have been received
in the same proportion as Fund shares of such Portfolio for
which instructions have been received;
so long as and to the extent that the Securities and Exchange commission
continues to interpret the 1940 Act to require pass-through voting privileges
for variable contract owners. The Company reserves the right to vote Fund shares
held in any segregated asset account in its own right, to the extent permitted
by law. Participating Insurance Companies shall be responsible for assuring that
each of their separate accounts participating in the Fund calculates voting
privileges in a manner consistent with the standards set forth on Schedule B
attached hereto and incorporated herein by this reference, which standards will
also be provided to the other Participating Insurance Companies and the
requirements of the 1940 Act.
3.6. The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, and in particular the Fund will either provide for
annual meetings or comply with Section 16(c) of the 1940 Act (although the Fund
is not one of the trusts described in Section 16(c) of that Act) as well as with
Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will act in
accordance with the Securities and Exchange Commission's interpretation of the
requirements of Section 16(a) with respect to periodic elections of trustees and
with whatever rules the Commission may promulgate with respect thereto.
ARTICLE IV. Sales MATERIAL AND INFORMATION
4.1. The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee, the text and to the extent relevant the graphic component
of each piece of sales literature or other promotional material in which the
Fund or its investment adviser or the Underwriter is named, at least fifteen
Business Days prior to its use. No such material shall be used if the Fund or
its designee objects to such use within fifteen Business Days after receipt of
such material. The Fund or its designee will use its best efforts to review such
materials within a shorter time period as the Company will have requested in
writing.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Contracts other than the information or
representations contained in the registration statement or prospectus for the
Fund shares, as such registration statement and prospectus may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund or its
designee or by the Underwriter, except with the permission of the Fund or the
Underwriter or the designee of either.
4.3. The Fund, Underwriter, or its designee shall furnish, or shall cause
to be furnished, to the Company or its designee, each piece of sales literature
or other promotional material in which the Company and/or its separate
account(s), is named at least fifteen Business Days prior to its use. No such
material shall be used if the Company or its designee object to such use within
fifteen Business Days after receipt of such material.
<PAGE>
4.4. The Fund and the Underwriter shall not give any information or make
any representations on behalf of the Company or concerning the Company, each
Account, or the Contracts other than the information or representations
contained in a registration statement or prospectus for the Contracts, as such
registration statement and prospectus may be amended or supplemented from time
to time, or in published reports for each Account which are in the public domain
or approved by the Company for distribution to Contract owners, or in sales
literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
4.5. The Fund will provide to the Company at least one complete copy of
all registration statements, prospectuses, Statements of Additional Information,
reports, proxy statements, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to the Fund or its shares, contemporaneously
with the filing of such document with the Securities and Exchange Commission or
other regulatory authorities.
4.6. The Company will provide to the Fund at least one complete copy of
all registration statements, prospectuses, Statements of Additional Information,
reports, solicitations for voting instructions, sales literature and other
promotional materials, applications for exemptions, requests for no action
letters, and all amendments to any of the above, that relate to the Contracts or
each Account, contemporaneously with the filing of such document with the
Securities and Exchange Commission.
4.7. For purposes of this Article IV, the phrase "sales literature or
other promotional material" includes, but is not limited to, advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other public media), sales
literature (I.E., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts of
any other advertisement, sales literature, or published article), educational or
training materials or other communications distributed or made generally
available to some or all agents or employees, and registration statements,
prospectuses, Statements of Additional Information, shareholder reports, and
proxy materials.
ARTICLE V. Fees and EXPENSES
5.1. The Fund and Underwriter shall pay no fee or other compensation to
the Company under this agreement, except that if the Fund or any Portfolio
adopts and implements a plan pursuant to Rule 12b-1 to finance distribution
expenses, then the Underwriter may make payments to the Company or to the
underwriter for the Contracts if and in amounts agreed to by the Underwriter in
writing and such payments will be made out of existing fees otherwise payable to
the Underwriter, past profits of the Underwriter or other resources available to
the Underwriter. No such payments shall be made directly by the Fund. Currently,
no such payments are contemplated.
5.2. All expenses incident to performance by the Fund under this
Agreement shall be paid by the Fund. The Fund shall see to it that all its
shares are registered and authorized for issuance in accordance with applicable
federal law and, if and to the extent deemed advisable by the Fund, in
accordance with applicable state laws prior to their sale. The Fund shall bear
the expenses for the cost of registration and qualification of the Fund's
shares, preparation and filing of the Fund's prospectus and registration
statement, proxy materials and reports, setting the prospectus in type, setting
in type and printing the proxy materials and reports to shareholders (including
the costs of printing a prospectus that
<PAGE>
constitutes an annual report), the preparation of all statements and notices
required by any federal or state law, and all taxes on the issuance or transfer
of the Fund's shares.
5.3. The Company shall bear the expenses of printing and distributing
the Fund's prospectus to owners of Contracts issued by the Company and of
distributing the Fund's proxy materials and reports to such Contract owners.
ARTICLE VI. DIVERSIFICATION
6.1. The Fund will at all times invest money from the Contracts in such
a manner as to ensure that the Contracts will be treated as variable contracts
under the Code and the regulations issued thereunder. Without limiting the scope
of the foregoing, the Fund will at all times comply with Section 817(h) of the
Code and Treasury Regulation 1.817-5, relating to the diversification
requirements for variable annuity, endowment, or life insurance contracts and
any amendments or other modifications to such Section or Regulations. The Fund
shall promptly notify the Company of any breach by any Portfolio of this
Article 6.
ARTICLE VII. POTENTIAL CONFLICTS
7.1. The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict may
arise for a variety of reasons, including: (a) an action by any state insurance
regulatory authority; (b) a change in applicable federal or state insurance,
tax, or securities laws or regulations, or a public ruling, private letter
ruling, no-action or interpretative letter, or any similar action by insurance,
tax, or securities regulatory authorities; (c) an administrative or judicial
decision in any relevant proceeding; (d) the manner in which the investments of
any Portfolio are being managed; (e) a difference in voting instructions given
by variable annuity contract and variable life insurance contract owners; or (f)
a decision by an insurer to disregard the voting instructions of contract
owners. The Board shall promptly inform the Company if it determines that an
irreconcilable material conflict exists and the implications thereof.
7.2. The Company will report any potential or existing conflicts of
which it is aware to the Board. The Company will assist the Board in carrying
out its responsibilities under the Shared Funding Exemptive Order, by providing
the Board with all information reasonably necessary for the Board to consider
any issues raised. This includes, but is not limited to, an obligation by the
Company to inform the Board whenever contract owner voting instructions are
disregarded.
7.3. If it is determined by a majority of the Board, or a majority of
its disinterested trustees, that a material irreconcilable conflict exists, the
Company and other Participating Insurance Companies shall, at their expense and
to the extent reasonably practicable (as determined by a majority of the
disinterested trustees), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1),
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a vote
of all affected Contract owners and, as appropriate, segregating the assets of
any appropriate group (i.e., annuity contract owners, life insurance contract
owners, or variable contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
contract owners the option of making such a change; and (2), establishing a new
registered management investment company or managed separate account.
<PAGE>
7.4. If a material irreconcilable conflict arises because of a decision by
the Company to disregard contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw the affected Account's
investment in the Fund and terminate this Agreement with respect to such
Account; provided, however that such withdrawal and termination shall be limited
to the extent required by the foregoing material irreconcilable conflict as
determined by a majority of the disinterested members of the Board. Any such
withdrawal and termination must take place within six (6) months after the Fund
gives written notice that this provision is being implemented, and until the end
of that six month period the Underwriter and Fund shall continue to accept and
implement orders by the Company for the purchase (and redemption) of shares of
the Fund.
7.5. If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's investment in the Fund and terminate this Agreement with
respect to such Account within six months after the Board informs the company in
writing that it has determined that such decision has created an irreconcilable
material conflict; provided, however, that such withdrawal and termination shall
be limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested members of the Board.
Until the end of the foregoing six month period, the Underwriter and Fund shall
continue to accept and implement orders by the Company for the purchase (and
redemption) of shares of the Fund.
7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a
majority of the disinterested members of the Board shall determine whether any
proposed action adequately remedies any irreconcilable material conflict, but in
no event will the Fund be required to establish a new funding medium for the
Contracts. The Company shall not be required by Section 7.3 to establish a new
funding medium for the Contracts if an offer to do so has been declined by vote
of a majority of Contract owners materially adversely affected by the
irreconcilable material conflict. In the event that the Board determines that
any proposed action does not adequately remedy any irreconcilable material
conflict, then the Company will withdraw the Account's investment in the Fund
and terminate this Agreement within six (6) months after the Board informs the
Company in writing of the foregoing determination, provided, however, that such
withdrawal and termination shall be limited to the extent required by any such
material irreconcilable conflict as determined by a majority of the
disinterested members of the Board.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended,
or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the
Act or the rules promulgated thereunder with respect to mixed or shared funding
(as defined in the Shared Funding Exemptive Order) on terms and conditions
materially different from those contained in the Shared Funding Exemptive Order,
then (a) the Fund and/or the Participating Insurance Companies, as appropriate,
shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T),
as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable;
and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement shall
continue in effect only to the extent that terms and conditions substantially
identical to such Sections are contained in such Rule(s) as so amended or
adopted.
ARTICLE VIII. INDEMNIFICATION
8.1. INDEMNIFICATION BY THE COMPANY
<PAGE>
8.1(a). The Company agrees to indemnify and hold harmless the Fund and
each of the members of the Board and officers and each person, if any, who
controls the Fund within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.1)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the Company) or litigation (including
legal and other expenses), to which the Indemnified Parties may become subject
under any statute, regulation, at common law or otherwise, insofar as such
losses, claims, damages, liabilities or expenses (or actions in respect thereof)
or settlements are related to the sale or acquisition of the Fund's shares or
the Contracts and:
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the
Registration Statement or prospectus for the Contracts or
contained in the Contracts or sales literature for the
Contracts (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission or
the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements
therein not misleading, provided that this agreement to
indemnify shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission
was made in reliance upon and in conformity with information
furnished to the Company by or on behalf of the Fund for use
in the Registration Statement or prospectus for the Contracts
or in the Contracts or sales literature (or any amendment or
supplement) or otherwise for use in connection with the sale
of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or
representations(other than statements or representations
contained in the Registration Statement, prospectus or sales
literature of the Fund not supplied by the Company, or persons
under its control) or wrongful conduct of the Company or
persons under its control, with respect to the sale or
distribution of the Contracts or Fund Shares; or
(iii) arise out of any untrue statement or alleged untrue statement
of a material fact contained in a Registration Statement,
prospectus, or sales literature of the Fund or any amendment
thereof or supplement thereto or the omission or alleged
omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, if such a statement or omission was made in
reliance upon information furnished to the Fund by or on
behalf of the Company; or
(iv) arise as a result of any failure by the Company to provide the
services and furnish the materials under the terms of this
Agreement; or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Company, as limited by and in
accordance with the provisions of Sections 8.1(b) and 8.1(c)
hereof.
8.1(b). The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this Agreement or to
the Fund, whichever is applicable.
<PAGE>
8.1(c). The Company stall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the company in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Company of any
such claim shall not relieve the Company from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. in case any such action is brought
against the Indemnified Parties, the Company shall be entitled to participate,
at its own expense, in the defense of such action. The Company also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action and to settle the claim at its own expense provided,
however, that no such settlement shall, without the Indemnified Parties' written
consent, include any factual stipulations referring to the Indemnified Parties
or their conduct. After notice from the Company to such party of the Company's
election to assume the defense thereof, the Indemnified Party shall bear the
fees and expenses of any additional counsel retained by it, and the Company will
not be liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation.
8.1(d). The Indemnified Parties will promptly notify the Company of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of the Fund Shares or the Contracts or the operation of the
Fund.
8.2. INDEMNIFICATION BY THE UNDERWRITER
8.2(a). The Underwriter agrees to indemnify and hold harmless the
Company, the principal underwriter for the Contracts and each of their directors
and officers and each person, if any, who controls the Company or the principal
underwriter for the Contracts within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.2)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the Underwriter) or litigation
(including legal and other expenses) to which the Indemnified Parties may become
subject under any statute, regulation, at common law or otherwise, insofar as
such losses, claims, damages, liabilities or expenses (or actions in respect
thereof) or settlements are related to the sale or acquisition of the Fund's
shares or the Contracts and:
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the
Registration Statement or prospectus or sales literature of
the Fund (or any amendment or supplement to any of the
foregoing), or arise out of or are based upon the omission or
the alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements
therein not misleading, provided that this agreement to
indemnify shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission
was made in reliance upon and in conformity with information
furnished to the Underwriter or Fund by or on behalf of the
company for use in the Registration Statement or prospectus
for the Fund or in sales literature (or any amendment or
supplement) or otherwise for use in connection with the sale
of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
Registration Statement, prospectus or sales literature for the
Contracts not supplied by the Fund, Underwriter or persons
under its control) or
<PAGE>
wrongful conduct of the Fund, Adviser or Underwriter or
persons under their control, with respect to the sale or
distribution of the Contracts or Fund shares; or
(iii) arise out of any untrue statement or alleged untrue statement
of a material fact contained in a Registration Statement,
prospectus, or sales literature covering the Contracts, or any
amendment thereof or supplement thereto, or the omission or
alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein
not misleading, if such statement or omission was made in
reliance upon information furnished to the Company by or on
behalf of the Fund or the Underwriter; or
(iv) arise as a result of any failure by the Fund or the Underwriter
to provide the services and furnish the materials under the
terms of this Agreement (including a failure, whether
unintentional or in good faith or otherwise, to comply with the
diversification requirements specified in Article VI of this
Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Underwriter in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Underwriter; as limited by and
in accordance with the provisions of Sections 8.2(b) and 8.2(c)
hereof.
8.2(b). The Underwriter shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
each Company or the Account, whichever is applicable.
8.2(c). The Underwriter shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Under-writer in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Underwriter of
any such claim shall not relieve the Underwriter from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise than
on account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Underwriter will be entitled to
participate, at its own expense, in the defense thereof. The Underwriter also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action and to settle the claim at its own expense
provided, however, that no such settlement shall, without the Indemnified
Parties' written permission, include any factual stipulations referring to the
Indemnified Parties or their conduct. After notice from the Underwriter to such
party of the Underwriter's election to assume the defense thereof, the
Indemnified Party shall bear the fees and expenses of any additional counsel
retained by it, and the Underwriter will not be liable to such party under this
Agreement for any legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof other than reasonable costs
of investigation.
8.2(d). The Company agrees promptly to notify the Underwriter of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Contracts or the
operation of each Account.
8.3. INDEMNIFICATION BY THE FUND
<PAGE>
8.3(a). The Fund agrees to indemnify and hold harmless the Company, the
principal underwriter for the Contracts and each of their directors and officers
and each person, if any, who controls the Company or the principal underwriter
for the Contracts within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.3)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the Fund) or litigation (including
legal and other expenses) to which the Indemnified Parties may become subject
under any statute, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof) or settlements
result from the gross negligence, bad faith or willful misconduct of the Board
or any member thereof are related to the operations of the Fund and:
(i) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this
Agreement (including a failure to comply with the
diversification requirements specified in Article VI of this
Agreement);or
(ii) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Fund;
as limited by and in accordance with the provisions of Sections 8.3(b) and
8.3(c) hereof.
8.3(b). The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
the Company, the Fund, the Underwriter or each Account, whichever is applicable.
8.3(c). The Fund shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Fund in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Fund of any
such claim shall not relieve the Fund from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Fund will be entitled to participate, at
its own expense, in the defense thereof. The Fund also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party named in the
action and to settle the claim at its own expense provided, however, that no
such settlement shall, without the Indemnified Parties' written permission,
include any factual stipulations referring to the Indemnified Parties or their
conduct. After notice from the Fund to such party of the Fund's election to
assume the defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and the Fund will not be
liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation.
8.3(d). The Company and the Under-writer agree promptly to notify the
Fund of the commencement of any litigation or proceedings against it or any of
its respective officers or directors in connection with this Agreement, the
issuance or sale of the Contracts, with respect to the operation of either
Account, or the sale or acquisition of shares of the Fund.
<PAGE>
ARTICLE IX. APPLICABLE LAW
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
9.2. This Agreement shall be subject to the provisions of the 1933, 1934
and 1940 acts, and the rules and regulations and rulings thereunder, including
such exemptions from those statutes, rules and regulations as the Securities and
Exchange Commission may grant (including, but not limited to, the Shared Funding
Exemptive Order) and the terms hereof shall be interpreted and construed in
accordance therewith.
ARTICLE X. Termination
10.1. This Agreement shall terminate:
(a) at the option of any party upon one year advance written notice
to the other parties; provided, however such notice shall not be
given earlier than one year following the date of this
Agreement; or
(b) at the option of the Company to the extent that shares of
Portfolios are not reasonably available to meet the requirements
of the Contracts as determined by the Company, provided however,
that such termination shall apply only to the Portfolio(s) not
reasonably available. Prompt notice of the election to terminate
for such cause shall be furnished by the Company; or
(c) at the option of the Fund in the event that formal
administrative proceedings are instituted against the Company by
the NASD, the Securities and Exchange Commission, any state
securities or insurance department or any other regulatory body
regarding the Company's duties under this Agreement or related
to the sale of the Contracts, with respect to the operation of
any Account, or the purchase of the Fund shares, provided,
however, that the Fund determines in its sole judgment exercised
in good faith, that any such administrative proceedings will
have a material adverse effect upon the ability of the Company
to perform its obligations under this Agreement; or
(d) at the option of the Company in the event that formal
administrative proceedings are instituted against the Fund or
Underwriter by the NASD, the Securities and Exchange commission,
or any state securities or insurance department or any other
regulatory body, provided, however, that the Company determines
in its sole judgment exercised in good faith, that any such
administrative proceedings will have a material adverse effect
upon the ability of the Fund or underwriter to perform its
obligations under this Agreement; or
(e) with respect to any Account, upon requisite vote of the Contract
owners having an interest in such Account (or any subaccount) to
substitute the shares of another investment company for the
corresponding Portfolio shares of the Fund in accordance with
the terms of the Contracts for which those Portfolio shares had
been selected to serve as the underlying investment media. The
Company will give 30 days' prior written notice to the Fund of
the date of any proposed vote to replace the Fund's shares; or
<PAGE>
(f) at the option of the Company, in the event any of the Fund's
shares are not registered, issued or sold in accordance with
applicable state and/or federal law or such law precludes the
use of such shares as the underlying investment media of the
Contracts issued or to be issued by the Company; or
(g) at the option of the Company, if the Fund ceases to qualify as a
Regulated Investment Company under Subchapter M of the Code or
under any successor or similar provision, or if the Company
reasonably believes that the Fund may fail to so qualify; or
(h) at the option of the Company, if the Fund fails to meet the
diversification requirements specified in Article VI hereof; or
(i) at the option of either the Fund or the Underwriter, if (1) the
Fund or the Underwriter, respectively, shall determine, in their
sole judgment reasonably exercised in good faith, that the
Company has suffered a material adverse change in its business
or financial condition or is the subject of material adverse
publicity and such material adverse change or material adverse
publicity will have a material adverse impact upon the business
and operations of either the Fund or the Underwriter, (2) the
Fund or the Underwriter shall notify the Company in writing of
such determination and its intent to terminate this Agreement,
and (3) after considering the actions taken by the Company and
any other changes in circumstances since the giving of such
notice, such determination of the Fund or the Underwriter shall
continue to apply on the sixtieth (60th) day following the
giving of such notice, which sixtieth day shall be the effective
date of termination; or
(j) at the option of the Company, if (1) the Company shall
determine, in its sole judgment reasonably exercised in good
faith, that either the Fund or the Underwriter has suffered a
material adverse change in its business or financial condition
or is the subject of material adverse publicity and such
material adverse change or material adverse publicity will have
a material adverse impact upon the business and operations of
the Account or the Company's ability to market the Contracts,
(2) the Company shall notify the Fund and the Under-writer in
writing of such determination and its intent to terminate the
Agreement, and (3) after considering the actions taken by the
Fund and/or the Underwriter and any other changes in
circumstances since the giving of such notice, such
determination shall continue to apply on the sixtieth (60th) day
following the giving of such notice, which sixtieth day shall be
the effective date of termination; or
(k) at the option of either the Fund or the Underwriter, if the
Company gives the Fund and the Underwriter the written notice
specified in Section 1.6(b) hereof and at the time such notice
was given there was no notice of termination outstanding under
any other provision of this Agreement; provided, however any
termination under this Section 10.1(k) shall be effective forty
five (45) days after the notice specified in Section 1.6(b) was
given.
10.2. It is understood and agreed that the right of any party hereto to
terminate this Agreement pursuant to Section 10.1(a) may be exercised for any
reason or for no reason.
<PAGE>
10.3. NOTICE REQUIREMENT. No termination of this Agreement shall be
effective unless and until the party terminating this Agreement gives prior
written notice to all other parties to this Agreement of its intent to terminate
which notice shall set forth the basis for such termination. Furthermore,
(a) In the event that any termination is based upon the provisions
of Article VII, or the provision of section 10.1(a), 10.1(i),
10.1(j) or 10.1(k) of this Agreement, such prior written notice
shall be given in advance of the effective date of termination
as required by such provisions; and
(b) in the event that any termination is based upon the provisions
of Section 10.1(c) or 10.1(d) of this Agreement, such prior
written notice shall be given at least ninety (90) days before
the effective date of termination.
10.4. Effect OF TERMINATION. Notwithstanding any termination of this
Agreement, the Fund and the Underwriter shall, at the option of the Company,
continue to make available additional shares of the Fund pursuant to the terms
and conditions of this Agreement, for all Contracts in effect on the effective
date of termination of this Agreement (hereinafter referred to as "Existing
Contracts"). Specifically, without limitation, the owners of the Existing
Contracts shall be permitted to reallocate investments in the Fund, redeem
investments in the Fund and/or invest in the Fund upon the making of additional
purchase payments under the Existing Contracts. The parties agree that this
Section 10.4 shall not apply to any terminations under Article VII and the
effect of such Article VII terminations shall be governed by Article VII of this
Agreement.
10.5. The Company shall not redeem Fund shares attributable to the
Contracts (as opposed to Fund shares attributable to the Company's assets held
in either Account) except (i) as necessary to implement Contract owner initiated
transactions, (ii) as required by state and/or federal laws or regulations or
judicial or other legal '-precedent of general application (hereinafter referred
to as a "Legally Required Redemption"), or (iii) as upon termination of this
Agreement with respect to one or more portfolios. Upon request, the Company will
promptly furnish to the Fund and the Underwriter the opinion of counsel for the
Company (which counsel shall be reasonably satisfactory to the Fund and the
Underwriter) to the effect that any redemption pursuant to clause (ii) above is
a Legally Required Redemption. Furthermore, except in cases where permitted
under the terms of the Contracts, the Company shall not prevent Contract Owners
from allocating payments to a Portfolio that was otherwise available under the
Contracts without first giving the Fund or the Underwriter 90 days notice of its
intention to do so.
10.6 If for any reason the shares of any Portfolio are no longer to be
make available, then, at the request of the Company, the Fund and the
Underwriter shall cooperate with the Company so that the provisions of Section
26(b) of the 1940 Act will be complied with as soon as reasonably practicable
and substitution of an underlying funding medium accomplished without disruption
of sales of securities to the Account or a division thereof, as the case may be,
in connection with such Contracts.
10.7 Article II and VIII and Sections 12.1, 12.6 and 12.7 shall survive
termination of this Agreement.
ARTICLE XI. NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set
forth below or at such other address as such party may from time to
time specify in writing to the other party.
If to the Fund:
<PAGE>
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
If to the Company:
The American Franklin Life Insurance Company
#1 Franklin Square
Springfield, Illinois 62713
Attention: President
If to the Underwriter:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
ARTICLE XII. MISCELLANEOUS
12.1 All persons dealing with the Fund must look solely to the property
of the Fund for the enforcement of any claims against the Fund as neither the
Board, officers, agents or shareholders assume any personal liability for
obligations entered into on behalf of the Fund.
12.2 Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Contracts and all information reasonably identified as
confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information until such time as it may come into
the public domain without the express written consent of the affected party.
12.3 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
12.4 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.5 If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
12.6 Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the
Securities and Exchange Commission, the NASD and state insurance regulators) and
shall permit such authorities reasonable access to its books and records in
connection with any investigation or inquiry relating to this Agreement or the
transactions contemplated hereby. Notwithstanding the generality of the
foregoing, each party hereto further agrees to furnish the California Insurance
Commissioner with any information or reports in connection with services
provided under this Agreement which such Commissioner may request in order to
ascertain whether the variable life insurance operations of the Company are
being conducted in a manner consistent with the California Variable Life
Insurance Regulations and any other applicable law or regulations.
12.7 The Fund and Underwriter agree that to the extent any advisory or
other fees received by the Fund, the Underwriter or the Adviser are determined
to be unlawful in legal or administrative
<PAGE>
proceedings under the 1973 NAIC model variable life insurance regulation in the
states of California, Colorado, Maryland or Michigan, the Underwriter shall
indemnify and reimburse the Company for any out of pocket expenses and actual
damages the Company has incurred as a result of any such proceeding; provided
however that the provisions of Section 8.2(b) of this and 8.2(c) shall apply to
such indemnification and reimbursement obligation. Such indemnification and
reimbursement obligation shall be in addition to any other indemnification and
reimbursement obligations of the Fund and/or the Underwriter under this
Agreement.
12.8. The rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to under
state and federal laws.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement
to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date
specified below.
Company:
THE AMERICAN FRANKLIN LIFE INSURANCE
COMPANY
By its authorized officer
SEAL By:
Date:
Title:Senior Vice President, General
Counsel and Secretary
Fund:
VARIABLE INSURANCE PRODUCTS FUND II
By its authorized officer,
By:
SEAL Title: Senior V. P.
Date: 10/1/91
Underwriter:
FIDELITY DISTRIBUTORS CORPORATION
By its authorized officer,
SEAL By: Title: V.P.
Date: 10/3/91
<PAGE>
SCHEDULE A
ACCOUNTS
Name of Account Date of Resolution of Company's Board
which Established the Account
Separate Account VUL - 2 April 9, 1991
<PAGE>
SCHEDULE B
PROXY VOTING PROCEDURE
The following is a list of procedures and corresponding
responsibilities for the handling of proxies relating to the Fund by the
Underwriter, the Fund and the Company. The defined terms herein shall have the
meanings assigned in the Participation Agreement except that the term
"Company" shall also include the department or third party assigned by the
Insurance Company to perform the steps delineated below.
1. The number of proxy proposals is given to the Company by the Underwriter
as early as possible before the date set by the Fund for the shareholder
meeting to facilitate the establishment of tabulation procedures. At
this time the Underwriter will inform the Company of the Record, Mailing
and Meeting dates. This will be done verbally approximately two months
before meeting.
2. Promptly after the Record Date, the Company will perform a "tape run",
or other activity, which will generate the names, addresses and number
of units which are attributed to each contractowner/policyholder (the
"Customer") as of the Record Date. Allowance should be made for account
adjustments made after this date that could affect the status of the
Customers' accounts as of the Record Date.
Note: The number of proxy statements is determined by the
activities described in Step #2. The Company will use
its best efforts to call in the number of Customers
to Fidelity, as soon as possible, but no later than
two weeks after the Record Date.
3. The Fund's Annual Report must be sent to each Customer by the Company
either before or together with the Customers' receipt of a proxy
statement. Underwriter will provide at least one copy of the last Annual
Report to the Company.
4. The text and format for the Voting Instruction Cards ("Cards" or "Card")
is provided to the Company by the Fund. The Company, at its expense,
shall produce and personalize the Voting instruction Cards. The Legal
Department of the Underwriter or its affiliate ("Fidelity Legal") must
approve the Card before it is printed. Allow approximately 2-4 business
days for printing information on the Cards. Information commonly found
on the Cards includes:
a. name (legal name as found on account registration)
b. address
C. Fund or account number
d. coding to state number of units
e. individual card number for use in tracking and
verification of votes (already on Cards as printed by
the Fund)
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
5. During this time, Fidelity Legal will develop, produce, and the Fund
will pay for the Notice of Proxy and the Proxy Statement (one document).
Printed and folded notices and statements will be sent to
<PAGE>
Company for insertion into envelopes (envelopes and return envelopes are
provided and paid for by the Insurance Company). Contents of envelope
sent to Customers by Company will include:
a. Voting Instruction Card(s)
b. One proxy notice and statement (one document)
C. return envelope (postage pre-paid by Company) addressed
to the Company or its tabulation agent
d. "urge buckslip" - optional, but recommended. (This is a
small, single sheet of paper that requests Customers to
vote as quickly as possible and that their vote is
important. One copy will be supplied by the Fund.)
e. cover letter - optional, supplied by Company and
reviewed and approved in advance by Fidelity Legal.
6. The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at Company reviews
and approves the contents of the mailing package to ensure correctness
and completeness. Copy of this approval sent to Fidelity Legal.
7. Package mailed by the Company.
The Fund MUST allow at least a 15-day solicitation time to the
Company as the shareowner. (A 5-week period is recommended.)
Solicitation time is calculated as calendar days from (but NOT
including) the meeting, counting backwards.
8. Collection and tabulation of Cards begins. Tabulation usually takes
place in another department or another vendor depending on process used.
An often used procedure is to sort Cards on arrival by proposal into
vote categories of all yes, no, or mixed replies, and to begin data
entry.
Note: Postmarks are not generally needed. A need for postmark
information would be due to an insurance company's internal
procedure and has not been required by Fidelity in the past.
9. Signatures on Card checked against legal name on account registration
which was printed on the Card.
Note: For Example, If the account registration is under "Bertram
C.Jones, Trustee," then that is the exact legal name to be
printed on the Card and is the signature needed on the Card.
10. If Cards are mutilated, or for any reason are illegible or are not
signed properly, they are sent back to Customer with an explanatory
letter, a new Card and return envelope. The mutilated or illegible Card
is disregarded and considered to be NOT RECEIVED for purposes of vote
tabulation. Any Cards that have "kicked out" (e.g. mutilated, illegible)
of the procedure are "hand verified," i.e., examined as to why they did
not complete the system. Any questions on those Cards are usually
remedied individually.
11. There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort the
Cards as they first arrive into categories depending upon their vote; an
estimate of how the vote is progressing may then be calculated. If the
initial estimates and the actual vote do not coincide, then an internal
audit of that vote should occur. This may entail a recount.
<PAGE>
12. The actual tabulation of votes is done in units which is then converted
to shares. (It is very important that the Fund receives the tabulations
stated in terms of a percentage and the number of SHARES.) Fidelity
Legal must review and approve tabulation format.
13. Final tabulation in shares is verbally given by the Company to Fidelity
Legal on the morning of the meeting not later than 10:00 a.m. Boston
time. Fidelity Legal may request an earlier deadline if required to
calculate the vote in time for the meeting.
14. A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
Fidelity Legal will provided a standard from for each Certification.
15. The Company will be required to box and archive the Cards received from
the Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, Fidelity Legal
will be permitted reasonable access to such Cards.
16. All approvals and "signing-off" may be done orally, but must always be
followed up in writing.
<PAGE>
EXHIBIT 1-A-(8)(a)(4)
AMENDMENT NO. 1
Amendment to the Participation Agreement among The American Franklin
Life Insurance Company (the "Company"), Variable Insurance Products Fund II (the
"Fund") and Fidelity Distributors Corporation (the "Underwriter") dated July 18,
1991 (the Agreement").
WHEREAS, each of the parties is desirous of expanding the ability of
Company to participate in the qualified markets, the Company, the Underwriter
and the Fund hereby agree to amend the Agreement by deleting from Section 1.4
the reference to Section 2.12 and by deleting Section 2.12 in its entirety.
In witness whereof, each of the parties has caused this Amendment to be
executed in its name and on its behalf by its duly authorized representative as
of November 1, 1991.
THE AMERICAN FRANKLIN FIDELITY DISTRIBUTORS CORPORATION
LIFE INSURANCE COMPANY
By: By:
----------------------------- -----------------------------
Name: Robert M. Beuerlein Name: Roger T. Servison
Title: Exec V.P. Title: President
VARIABLE INSURANCE PRODUCTS FUND II
By:
-----------------------------
Name: J. Gary Burkhead
Title: Senior V.P.
<PAGE>
Exhibit 1-A(8)(a)(5)
SUB-LICENSE AGREEMENT
Agreement effective as of this 18th day of July, 1991 by and between
Fidelity Distributors Corporation (hereinafter called "Fidelity"), a corporation
organized and existing under the laws of the Commonwealth of Massachusetts, with
a principal place of business at 82 Devonshire Street, Boston, Massachusetts,
and The American Franklin Life Insurance Company (hereinafter called "Company"),
a company organized and existing under the laws of the State of Illinois, with a
principal place of business at #1 Franklin Square, Springfield, Illinois 62713.
WHEREAS, FMR Corp., a Massachusetts corporation, the parent company of
Fidelity, is the owner of the trademark and the tradename "FIDELITY INVESTMENTS"
and is the owner of a trademark in a pyramid design (hereinafter, collectively
the "Fidelity Trademarks"), a copy of each of which is attached hereto as
Exhibit "A;" and
WHEREAS, FMR Corp. has granted a license to Fidelity (the "Master
License Agreement") to sub-license the Fidelity Trademarks to third parties for
their use in connection with Promotional Materals as hereinafter defined; and
WHEREAS, Company is desirous of using the Fidelity Trademarks in
connection with distribution of "sales literature and other promotional
material" with information, including the Fidelity Trademarks, printed in said
material (such material hereinafter called the Promotional Material). For the
purpose of this Agreement, "sales literature and other promotional material"
shall have the same meaning as in the certain Participation Agreement dated as
of the ____ day of July, 1991, among Fidelity, Company and Variable Insurance
Products Fund (hereinafter "Participation Agreement"); and
WHEREAS, Fidelity is desirous of having the Fidelity Trademarks used in
connection with the Promotional Material.
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the receipt and adequacy whereof is hereby
acknowledged, and of the mutual promises hereinafter set forth, the parties
hereby agree as follows:
1. Fidelity hereby grants to Company a non-exclusive, non-transferrable
license to use the Fidelity Trademarks in connection with the promotional
distribution of the Promotional Material and Company accepts said license,
subject to the terms and conditions set forth herein.
2. Company acknowledges that FMR Corp. is the owner of all right, title
and interest in the Fidelity Trademarks and agrees that it will do nothing
inconsistent with the ownership of the Fidelity Trademarks by FMR Corp., and
that it will not, now or hereinafter, contest any registration or application
for registration of the Fidelity Trademarks by FMR Corp., nor will it, now or
hereafter, aid anyone in contesting any registration or application for
registration of the Fidelity Trademarks by FMR Corp.
3. Company agrees to use the Fidelity Trademarks only in the form and
manner approved by Fidelity and not to use any other trademark, service mark or
registered trademark in combination with any of the Fidelity Trademarks without
approval by Fidelity.
1
<PAGE>
4. Company agrees that it will place all necessary and proper
notices and legends in order to protect the interests of FMR Corp. and
Fidelity therein pertaining to the Fidelity Trademarks on the Promotional
Material including, but not limited to, symbols indicating trademarks,
service marks and registered trademarks. Company will place such symbols and
legends on the Promotional Material as requested by Fidelity or FMR Corp.
upon receipt of notice of same from Fidelity or FMR Corp.
5. Company agrees that the nature and quality of all of the Promotional
Material distributed by Company bearing the Fidelity Trademarks shall conform to
standards set by, and be under the control of, Fidelity.
6. Company agrees to cooperate with Fidelity in facilitating Fidelity's
control of the use of the Fidelity Trademarks and of the quality of the
Promotional Material to permit reasonable inspection of samples of same by
Fidelity and to supply Fidelity with reasonable quantities of samples of the
Promotional Material upon request.
7. Company shall comply with all applicable laws and regulations and
obtain any and all licenses or other necessary permits pertaining to the
distribution of said Promotional Material.
8. Company agrees to notify Fidelity of any unauthorized use of the
Fidelity Trademarks by others promptly as it comes to the attention of Company.
Fidelity or FMR Corp. shall have the sole right and discretion to commence
actions or other proceedings for infringement, unfair competition or the like
involving the Fidelity Trademarks and Company shall cooperate in any such
proceedings if so requested by Fidelity or FMR Corp.
9. This agreement shall continue in force until terminated by Fidelity.
This agreement shall automatically terminate upon termination of the Master
License Agreement. In addition, Fidelity shall have the right to terminate this
agreement at any time upon notice to Company, with or without cause. Upon any
such termination, Company agrees to cease immediately all use of the Fidelity
Trademarks and shall destroy, at Company's expense, any and all materials in its
possession bearing the Fidelity Trademarks, and agrees that all rights in the
Fidelity Trademarks and in the goodwill connected therewith shall remain the
property of FMR Corp. Unless so terminated by Fidelity, or extended by written
agreement of the parties, this agreement shall expire on the termination of that
certain Participation Agreement.
10. Company shall indemnify Fidelity and FMR Corp. and hold each of
them harmless from and against any loss, damage, liability, cost or expense of
any nature whatsoever, including without limitation, reasonable attorneys' fees
and all court costs, arising out of use of the Fidelity Trademarks by Company
except such use that has been permitted under the terms of this Agreement.
2
<PAGE>
11. In consideration for the promotion and advertising of Fidelity as a
result of the distribution by Company of the Promotional Material, Company shall
not pay any monies as a royalty to Fidelity for this license.
12. This agreement is not intended in any manner to modify the terms
and conditions of the Participation Agreement. In the event of any conflict
between the terms and conditions herein and thereof, the terms and conditions of
the Participation Agreement shall control.
13. This agreement shall be interpreted according to the laws of the
Commonwealth of Massachusetts.
IN WITNESS WHEREOF, the parties hereunto set their hands and seals,
and hereby execute this agreement, as of the date first above written.
FIDELITY DISTRIBUTORS CORPORATION
By: _________________________________
Title: V.P.
Date: 10/3/91
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
By: __________________________________
Title: Senior Vice President, General Counsel &
Secretary
Date:
3
<PAGE>
INT. CL.: 36
PRIOR U.S. CLS.: 101 AND 102
REG. NO. 1,481,040
UNITED STATES PATENT AND TRADEMARK OFFICE REGISTERED MAR. 15, 1988
- --------------------------------------------------------------------------------
SERVICE MARK
PRINCIPAL REGISTER
Fidelity
Investments
FMR CORP. (MASSACHUSETTS CORPORATION) FIRST USE 2-22-1984; IN COMMERCE
82 DEVONSHIRE STREET 2-22-1984.
BOSTON, MA 02109, ASSIGNEE OF FIDELITY
DISTRIBUTORS CORPORATION (MASSA- NO CLAIM IS MADE TO THE EXCLUSIVE
CHUSETTS CORPORATION) BOSTON, MA RIGHT TO USE "INVESTMENTS", APART
02109 FROM THE MARK AS SHOWN.
SER. NO. 641,707, FILED 1-28-1987
FOR: MUTUAL FUND AND STOCK BRO-
KERAGE SERVICES, IN CLASS 36 (U.S. CLS.
101 AND 102). RUSS HERMAN, EXAMINING ATTORNEY
<PAGE>
Exhibit 1-A(8)(a)(6)
AMENDMENT NO. 2 TO PARTICIPATION AGREEMENT AMONG
VARIABLE INSURANCE PRODUCTS FUND
FIDELITY DISTRIBUTORS CORPORATION
and
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
WHEREAS, THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY (the "Company"),
VARIABLE INSURANCE PRODUCTS FUND (the "Fund") and FIDELITY DISTRIBUTORS
CORPORATION have previously entered into a Participation Agreement (the
"Agreement") containing certain arrangements concerning prospectus costs; and
WHEREAS, the Trustees of the Fund have approved certain changes to the
expense structure of the Fund; and
NOW, THEREFORE, the parties do hereby agree to amend the Agreement by
substituting the following arrangement in place of any inconsistent language in
the Participation Agreement, wherever found:
1. The Fund will provide to the Company each year, at the Fund's cost,
such number of prospectuses and Statements of Additional Information as are
actually distributed to the Company's then-existing variable life and/or
variable annuity contract owners.
2. If the Company takes camera-ready film or computer diskettes containing
the Fund's prospectus and/or Statement of Additional Information in lieu of
receiving hard copies of these documents, the Fund will reimburse the Company in
an amount computed as follows. The number of prospectuses and Statements of
Additional Information actually distributed to existing contract owners by the
Company will be multiplied by the Fund's actual per-unit cost of printing the
documents.
3. The Company agrees to provide the Fund or its designee with such
information as may be reasonably requested by the Fund in order to verify that
the prospectuses and Statements of Additional Information provided to the
Company, or the reimbursement made to the Company, are or have been used only
for the purposes set forth hereinabove.
IN WITNESS WHEREOF we have set our hand as of the 18 day of January, 1995.
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
BY: ________________________________
Robert M. Beuerlein
Senior Vice President - Actuarial
VARIABLE INSURANCE PRODUCTS FUND FIDELITY DISTRIBUTORS CORPORATION
By: _______________________________ By: _______________________________
J. Gary Burkhead Kurt A. Lange
<PAGE>
Exhibit 1-A(8)(a)(7)
AMENDMENT NO 2 TO PARTICIPATION AGREEMENT AMONG
VARIABLE INSURANCE PRODUCTS FUND II
FIDELITY DISTRIBUTORS CORPORATION
and
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
WHEREAS, THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY (the "Company"),
VARIABLE INSURANCE PRODUCTS FUND II (the "Fund") and FIDELITY DISTRIBUTORS
CORPORATION have previously entered into a Participation Agreement (the
"Agreement") containing certain arrangements concerning prospectus costs; and
WHEREAS, the Trustees of the Fund have approved certain changes to the
expense structure of the Fund; and
NOW, THEREFORE, the parties do hereby agree to amend the Agreement by
substituting the following arrangement in place of any inconsistent language in
the Participation Agreement, wherever found:
1. The Fund will provide to the Company each year, at the Fund's cost,
such number of prospectuses and Statements of Additional Information as are
actually distributed to the Company's then-existing variable life and/or
variable annuity contract owners.
2. If the Company takes camera-ready film or computer diskettes containing
the Fund's prospectus and/or Statement of Additional Information in lieu of
receiving hard copies of these documents, the Fund will reimburse the Company in
an amount computed as follows. The number of prospectuses and Statements of
Additional Information actually distributed to existing contract owners by the
Company will be multiplied by the Fund's actual per-unit cost of printing the
documents.
3. The Company agrees to provide the Fund or its designee with such
information as may be reasonably requested by the Fund in order to verify that
the prospectuses and Statements of Additional Information provided to the
Company, or the reimbursement made to the Company, are or have been used only
for the purposes set forth hereinabove.
IN WITNESS WHEREOF we have set our hand as of the 18 day of January, 1995.
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
BY:_____________________________
Robert M. Beuerlein
Senior Vice President - Actuarial
VARIABLE INSURANCE PRODUCTS FIDELITY DISTRIBUTORS CORPORATION
FUND II
By:_____________________________ By: __________________________________
J. Gary Burkhead Kurt A. Lange
<PAGE>
Exhibit 1-A(8)(c)
MODIFIED COINSURANCE
AGREEMENT
BETWEEN
AMERICAN FRANKLIN LIFE INSURANCE COMPANY
OF
SPRINGFIELD, ILLINOIS
AND
INTEGRITY LIFE INSURANCE COMPANY
OF
PHOENIX, ARIZONA
2/17/89
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
SECTION ITEM PAGE
- ------- ---- ----
<S> <C> <C>
A Reinsurance Coverage 1
B Placing Reinsurance in Effect 2
C Payments by Reinsured 3
D Payments by Reinsurer 5
E Terms of Reinsurance 8
F Unusual Expenses and Adjustments 10
G Policy Changes 11
H Oversights 12
I Reductions 12
J Inspection of Records 12
K Arbitration 13
L Insolvency 14
M Parties to Agreement 15
N Effective Date 16
O Payments upon Termination of Agreement 16
P Duration of Agreement 17
Q Execution 19
SCHEDULE
- --------
I Policies Subject to Reinsurance 20
II Amount of Reinsurance 21
III Periodic Report 22
IV Annual Reports 23
V Administration Charges 24
VI Underwriting Expenses 25
</TABLE>
<PAGE>
REINSURANCE AGREEMENT
between
AMERICAN FRANKLIN LIFE INSURANCE COMPANY
of
Springfield, Illinois,
hereinafter referred to as "REINSURED," and
INTEGRITY LIFE INSURANCE COMPANY
of
Phoenix, Arizona
hereinafter referred to as the "REINSURER"
A. REINSURANCE COVERAGE
1. The insurance policies issued by the REINSURED as listed in Schedule I
shall be reinsured with the REINSURER on a modified coinsurance basis.
2. The reinsurance shall cover the portion of the risk under the policies as
specified in Schedule II.
3. The liability of the REINSURER shall begin simultaneously with that of the
REINSURED, but in no event prior to the effective date of this Agreement.
Reinsurance with respect to any policy shall not be in force unless
issuance and delivery of the policy constituted the doing of business in a
state of the United States of America, the District of Columbia, or a
country in which the REINSURED was properly licensed.
- 1 -
<PAGE>
4. Reinsurance hereunder shall be on a calendar year basis, as follows:
(a) with respect to a policy on any of the forms listed in Schedule I
(including policy forms hereafter added by mutual agreement)
which is issued by the REINSURED on or after the effective date
of this Agreement, the reinsurance with respect to such policy
shall cover the period commencing with the effective date of the
policy and ending at midnight at the end of the last day of the
calendar year in which such policy was issued;
(b) all reinsurance hereunder shall automatically renew for each
succeeding calendar year annually as of midnight at the beginning
of January 1.
4. The reinsurance under this Agreement with respect to any policy shall be
maintained in force without reduction so long as the liability of the
REINSURED under such policy reinsured hereunder remains in force without
reduction, unless reinsurance is terminated or reduced as provided herein.
B. PLACING REINSURANCE IN EFFECT
1. Reinsurance with respect to policies issued after the effective date of
this Agreement shall become effective simultaneously with the liability of
the REINSURED, provided, however, that the REINSURED shall give
notification of such reinsurance to the REINSURER simultaneously with the
quarterly reconciliation prescribed in Section E, paragraph 5.
- 2 -
<PAGE>
C. PAYMENTS BY REINSURED
1. REINSURANCE PREMIUMS
The REINSURED shall pay the REINSURER each day, as reinsurance premiums,
the gross contributions or premiums the REINSURED receives after the
effective date of this Agreement with respect to the portions of policies
reinsured hereunder.
2. DISBURSEMENTS AND DEDUCTIONS FROM POLICYHOLDER ACCOUNT VALUES
The REINSURED shall pay the REINSURER each day with respect to the
portions of policies reinsured hereunder the following amounts:
(a) Monthly deductions for the costs of insurance and rider and
benefit charges.
(b) Any monthly administrative charges, including such charges made
only for the first policy year.
(c) Charges instituted at policyholders request, e.g., for partial
withdrawals, increases and decreases in face amount and transfers
among investment options.
(d) Surrender charges made upon surrender or decreases in face amount.
(e) Any deductions waived under a waiver of monthly deduction benefit.
(f) Any other amounts deducted from policyholder account values.
3. REDUCTION IN POLICYHOLDER ACCOUNT VALUES FOR BENEFITS PAID
The REINSURED shall pay the REINSURER each day with respect to the
portions of policies reinsured hereunder the amounts of policyholder cash
values paid as surrender benefits and partial withdrawal benefits and the
amounts of account values included in death benefits.
- 3 -
<PAGE>
4. CHARGES FOR MORTALITY AND EXPENSE RISKS
The REINSURED shall pay the REINSURER each day with respect to the
portions of policies reinsured hereunder, the charge made against the
Separate Accounts of the REINSURED for mortality and expense risks under
the policies.
5. MISCELLANEOUS GAINS AND LOSSES
The REINSURED shall pay the REINSURER each day with respect to the
portions of the policies reinsured hereunder, the net gains (or
"breakage") caused by delays in moving funds to and from the Separate
Account of the REINSURED. If such amounts are net losses, then they shall
be paid by the REINSURER to the REINSURED.
6. MISCELLANEOUS INCOME
The REINSURED shall pay the REINSURER each day with respect to the
portions of the policies reinsured hereunder, the amounts of any
miscellaneous income not included elsewhere in this Agreement.
7. GROSS INVESTMENT INCOME AND NET REALIZED AND UNREALIZED CAPITAL GAINS AND
LOSSES
Gross investment income and net capital gains and losses, determined in
accordance with the REINSURED's investment year method (or such other
method as agreed upon by the REINSURED and REINSURER) used to allocate
such income and capital gains and losses derived from the assets of the
REINSURED held in relation to the reserves established in and other funds
held in the general account of the REINSURED on the portions of the
policies reinsured hereunder, shall be paid at the end of each year by the
REINSURED to the REINSURER, as a part of the consideration for the
reinsurance hereunder. This payment shall be reduced by the amounts of
interest credited to the
- 4 -
<PAGE>
policyholder account values or any items in the nature of interest paid
under the policies on the portions of the policies reinsured hereunder.
8. RESERVE ADJUSTMENT ALLOWANCE
The REINSURED shall provide an allowance to the REINSURER at the end of
each accounting period to reflect the change in surrender charges, if any,
used to calculate reserves on the portions of the policies reinsured
hereunder. Such allowance shall be ceded to the REINSURER, but will
continue to be settled on a cash basis.
9. MODIFICATION OF RESERVE BASIS
If the REINSURED shall modify the basis used in computing its reserve
liability with respect to the portion of any policy reinsured hereunder
after the effective date of this Agreement, reinsurance amounts paid to
the REINSURER under this section in the year of the modification shall be
adjusted by adding any increase or deducting any decrease in reserves due
to such modification.
D. PAYMENTS BY REINSURER
1. DISTRIBUTION ALLOWANCE
The REINSURER shall pay the REINSURED each day a distribution allowance
equal to 5% of the reinsurance premiums plus 85% of such premiums which
are for the first policy year and which are not greater than the amounts
defined as commissionable "target" premiums by the REINSURED with regard
to the portions of the policies reinsured hereunder.
The REINSURER shall pay the REINSURED each day an additional
distribution allowance equal to any commissions paid by the REINSURED
on increases in face amount, with respect to the portions of policies
reinsured hereunder.
- 5 -
<PAGE>
2. CONTRIBUTIONS TO POLICYHOLDER ACCOUNT VALUES
The REINSURER shall pay the REINSURED each day the portion of
contributions or premiums which after deductions are deposited to the
Policy Accounts with respect to the portions of policies reinsured
hereunder.
3. BENEFITS
The REINSURER shall pay the REINSURED each day with respect to the
portions of the policies reinsured hereunder:
(a) the gross amounts of all death benefits paid by the REINSURED
(i.e., without deduction for reserves);
(b) the cash surrender values and withdrawal benefits paid by the
REINSURED
(c) interest paid on claims;
(d) monthly deductions waived by the REINSURED under a waiver of
monthly deduction benefit.
Benefits that may be paid in more than one sum or under another form of
payment (i.e. a settlement option), shall, for the purposes of the
reinsurance agreement, be deemed to be paid in one sum.
4. ADMINISTRATIVE CHARGES
The REINSURER shall pay the REINSURED issue, underwriting and
administrative charges with respect to the portion of policies reinsured
hereunder in the amounts defined in Schedule V for each reinsured policy.
5. EXPENSE ALLOWANCE
The REINSURER shall pay the REINSURED, as an expense allowance a
reimbursement for certain fees for service paid by the REINSURED under the
Servicing Agreement with respect to the portions of policies reinsured
hereunder in the amounts defined in to Schedule VI for each reinsured
policy.
- 6 -
<PAGE>
6. INVESTMENT EXPENSES AND FEDERAL INCOME TAXES
The REINSURER shall be obligated for and shall pay to the REINSURED the
investment expenses incurred in each accounting period in respect of the
gross investment income payable to the REINSURER in accordance with Section
C, paragraph 7. The REINSURER shall be obligated for and shall pay federal
income taxes imposed on the REINSURER.
7. STATE PREMIUM TAXES
When the REINSURER is not required to pay state premium taxes upon the
reinsurance premiums received from the REINSURED, the REINSURER shall pay
the REINSURED an a quarterly basis any such taxes the REINSURED may be
required to pay with respect to that part of the contributions or premiums
received under the REINSURED'S original policies which are paid to the
REINSURER as reinsurance premiums.
8. MISCELLANEOUS DISBURSEMENTS
The REINSURER shall pay the REINSURED each day with respect to the
portions of the policies reinsured hereunder the amounts of any
miscellaneous disbursements not included elsewhere in this agreement.
9. ANNUAL RESERVE ADJUSTMENTS - WAIVER
(a) Annual reserve adjustments for disabled life reserves under waiver
of monthly deduction riders shall be computed by deducting (i) the
total amount of such reserves on the last day of the preceding
accounting period an the portions of the policies reinsured
hereunder from (ii) the total amount of such reserves on the last
day of the current accounting period on the portions of the
policies reinsured hereunder and then in force under this
Agreement. Such reserves shall be calculated on the same basis
used by the REINSURED in computing its reserve
- 7 -
<PAGE>
liability. With respect, however, to the accounting period during
which the effective date of this Agreement occurs, the reference
in "(i)" above, to "the last day of the preceding accounting
period" shall refer to the effective date of this Agreement. With
respect, however, to the accounting period during which the
termination of this Agreement occurs, the reference in (ii) above,
to "the last day of the current accounting period" shall refer to
the day immediately prior to the terminal accounting date.
(b) For any accounting period in which "(ii)" exceeds "(i)" in (a),
above, the REINSURER shall pay the REINSURED such excess. For any
accounting period in which "(i)" exceeds "(ii)", the REINSURED
shall pay the REINSURER such excess.
10. MISCELLANEOUS LIABILITIES AND ACCRUAL ITEMS
The REINSURER shall be responsible for miscellaneous reserves and accrual
items on the portions of the policies reinsured hereunder; e.g. unearned
premium reserves, incurred but unreported claims, etc., incurred by the
REINSURED at the end of each accounting period. Such liabilities shall be
ceded to the REINSURER, but such ceded amounts will continue to be settled
on a cash basis.
E. TERMS OF REINSURANCE
1. OWNERSHIP OF ASSETS
The REINSURED shall retain ownership of all of the assets held in relation
to the reserves on the portions of the policies reinsured hereunder, and
the REINSURER shall have no legal, equitable, or security interest in such
assets.
- 8 -
<PAGE>
2. CAPITAL GAINS AND LOSSES
The REINSURER shall not participate in capital gains and losses of the
REINSURED except as specified in Section C, paragraph 7. No part of the
gains and losses of the REINSURED from, or considered as from, sales and
exchanges of capital assets shall be treated as gains and losses from
sales and exchanges of capital assets of the REINSURER.
3. AMOUNTS DUE REINSURER OR REINSURED
Except as otherwise specifically provided herein, all amounts, other than
those paid daily, due to be paid to either the REINSURER or the REINSURED
shall be determined or estimated on a net basis as of the last day of the
month preceding the end of each accounting period and shall be due and
payable as of such date. If such amounts cannot be determined at such
later date on an exact basis, such payments may be paid on an estimated
basis and any final adjustments are to be made within 3 months after the
end of such accounting period.
4. ACCOUNTING PERIOD
The accounting period for this Agreement shall be a calendar year, except
that the first accounting period hereunder shall run from the effective
date of this Agreement through December 31 of the calendar year in which
the effective date of this Agreement falls. The REINSURED and the
REINSURER, however, shall each reconcile the reinsurance transactions
hereunder as prescribed in Schedule III at the end of each calendar
quarter.
- 9 -
<PAGE>
5. REPORTS
(a) Annual Statement information as prescribed in Schedule IV,
paragraph A shall be provided by the REINSURED to the REINSURER
not later than 30 working days after the end of each accounting
period.
(b) Periodic Reports as prescribed in Schedule III shall be provided
by the REINSURED to the REINSURER not later than 30 working days
after the end of each calendar quarter.
F. UNUSUAL EXPENSES AND ADJUSTMENTS
1. Any unusual expenses incurred by the REINSURED in defending or
investigating a claim for policy liability or rescinding a policy
reinsured hereunder shall be participated in by the REINSURER in the same
proportion as its reinsurance bears to the total insurance under such
policy.
2. For purposes of this Agreement (but not as a limitation on the REINSURER'S
liability under paragraph 1), it is agreed that penalties, attorney's
fees, and interest imposed automatically by statute against the REINSURED
and arising solely out of a judgment rendered against the REINSURED in a
suit for policy benefits reinsured hereunder shall be considered unusual
expenses.
3. In no event, however, shall the following categories of expenses or
liabilities be considered for purposes of this Agreement as "unusual
expenses":
(a) routine investigative or administrative expenses;
- 10 -
<PAGE>
(b) expenses incurred in connection with a dispute or contest arising
out of conflicting claims of entitlement to policy proceeds or
benefits which the REINSURED admits are payable;
(c) expenses, fees, settlements, or judgments arising out of or in
connection with claims against the REINSURED for punitive or
exemplary damages; and
(d) expenses, fees, settlements, or judgments arising out of or in
connection with claims made against the REINSURED and based on
alleged or actual bad faith, failure to exercise good faith, or
tortuous conduct.
4. In the event that the amount of liability provided by a policy or
policies reinsured hereunder is increased or reduced because of a
misstatement of age or sex, the reinsurance liability of the REINSURER
shall increase or reduce in the proportion that the reinsurance
liability of the REINSURER bore to the sum of the retained liability of
the REINSURED and the liability of other reinsurers immediately prior to
the discovery of such misstatement of age or sex.
G. POLICY CHANGES
1. If a change is made in the terms and conditions of a policy issued by the
REINSURED which affects the risk reinsured hereunder in respect of such
policy, and which is evidenced by the issuance of a new policy form, the
REINSURED shall notify the REINSURER promptly of such change.
- 11 -
<PAGE>
2. For purposes of this Agreement, any such change shall be deemed to be the
issuance of a new policy form by the REINSURED. The REINSURER shall inform
the REINSURED whether the REINSURER will include such new policy form
under this Agreement, or will terminate or modify the reinsurance
hereunder in respect of such policy.
H. OVERSIGHTS
It is understood and agreed that, if failure to comply with any terms of this
Agreement is shown to be unintentional and the result of misunderstanding or
oversight on the part of either the REINSURED or the REINSURER, both the
REINSURED and the REINSURER shall be restored to the positions they would have
occupied had no such misunderstanding or oversight occurred.
I. REDUCTIONS
If a portion of the insurance issued by the REINSURED on a life reinsured
hereunder is terminated, reinsurance on that life hereunder shall be reduced.
J. INSPECTION OF RECORDS
The REINSURER and the REINSURED each shall have the right at any reasonable time
to inspect, at the office of the other, all books and documents relating to the
reinsurance under this Agreement.
- 12 -
<PAGE>
K. ARBITRATION
1. It is the intention of the parties that customs and usages of the business
of reinsurance shall be given full effect in the interpretation of this
Agreement. The parties shall act in all things with the highest good
faith. A dispute or difference between the parties with respect to the
operation or interpretation of this Agreement on which an amicable
understanding cannot be reached shall be decided by arbitration. The
arbitrators are empowered to decide all questions or issues and shall be
free to reach their decision from the standpoint of equity and customary
practices of the insurance and reinsurance industry rather than from that
of the strict law.
2. The court of arbitration shall be held in the city where the Home Office
of the REINSURER is located and shall consist of three arbitrators who
must be officers of life insurance companies other than the parties to
this Agreement or their affiliates or subsidiaries. The REINSURED shall
appoint one arbitrator and the REINSURER the second. These two arbitrators
shall then select the third before arbitration begins. Should one of the
parties decline to appoint an arbitrator or should the two arbitrators be
unable to agree upon the choice of a third, such appointment shall be left
to the president of the American Council of Life Insurance or its
successor organization.
3. The arbitrators shall decide by a majority of votes, and from their
written decision there can be no appeal. The cost of arbitration,
including the fees of the arbitrators, shall be borne by the losing party
unless the arbitrators decide otherwise.
- 13 -
<PAGE>
L. INSOLVENCY
1. In the event of the insolvency of the REINSURED, all reinsurance shall be
payable directly to the liquidator, receiver, or statutory successor of
the REINSURED, without diminution because of the insolvency of the
REINSURED.
2. In the event of insolvency of the REINSURED, the liquidator, receiver, or
statutory successor shall give the REINSURER written notice of the
pendency of a claim on a policy reinsured within a reasonable time after
such claim is filed in the insolvency proceeding. During the pendency of
any such claim, the REINSURER may investigate such claim and interpose in
the name of the REINSURED (its liquidator, receiver, or statutory
successor), but at its own expense, in the proceeding where such claim is
to be adjudicated any defense or defenses which the REINSURER may deem
available to the REINSURED or its liquidator, receiver, or statutory
successor.
3. The expense thus incurred by the REINSURER shall be chargeable, subject to
court approval, against the REINSURED as part of the expense of
liquidation to the extent of a proportionate share of the benefit which
may accrue to the REINSURED solely as a result of the defense undertaken
by the REINSURER. Where two or more reinsurers are participating in the
same claim and a majority in interest elect to interpose a defense or
defenses to any such claim, the expense shall be apportioned in accordance
with the terms of the reinsurance agreement as though such expenses had
been incurred by the REINSURED.
- 14 -
<PAGE>
4. In the event that (a) the REINSURER shall execute and file articles of
dissolution as provided in Arizona Revised Statutes Section 10-092, or (b)
the Arizona Insurance Department shall be directed to rehabilitate or
liquidate the REINSURER pursuant to an order of rehabilitation or
liquidation issued as provided in Arizona Revised Section 20-620 and 621,
reinsurance hereunder shall, at the option of the REINSURED, be terminated
as of a date concurrent with or subsequent to the filing of the articles
of dissolution or issuance of the order of liquidation, as selected by the
Reinsured. Written notification of such termination and date shall be
given by the REINSURED to the REINSURER. Termination under this paragraph
shall be subject to the provisions of the Arizona Insurance Code. The
scope of this paragraph and the option of the REINSURED to terminate
pursuant hereto shall not be limited or otherwise affected by any other
provision of this Agreement.
M. PARTIES TO AGREEMENT
This is an Agreement for indemnity reinsurance solely between the REINSURED and
the REINSURER. The acceptance of reinsurance hereunder shall not create any
right or legal relation whatever between the REINSURER and the insured or the
beneficiary under any policy reinsured hereunder, and the REINSURED shall be and
remain solely liable to such insured or beneficiary under any such policy.
- 15 -
<PAGE>
N. EFFECTIVE DATE
The effective date of this Agreement is April 1, 1989.
O. PAYMENTS UPON TERMINATION OF AGREEMENT
1. In the event that this Agreement is terminated pursuant to any provision
hereof, a terminal accounting and settlement shall take place.
2. The terminal accounting date for the termination shall be the effective
date of termination pursuant to any notice of termination given under this
Agreement or such other date as shall be mutually agreed to in writing.
3. The terminal accounting period shall be the period commencing on January 1
of the calendar year in which the termination is effective and ending on
the terminal accounting date.
4. The terminal accounting and settlement shall consist of a terminal reserve
adjustment by the REINSURED, as described in paragraph 5 below; and an
amount paid by the REINSURER, as described in paragraph 6 below.
5. The REINSURED shall pay to the REINSURER a terminal reserve adjustment in
an amount equal to the reserves established in the general account of the
REINSURED on the day immediately prior to the terminal accounting date on
the portions of the policies reinsured hereunder.
- 16 -
<PAGE>
6. The REINSURER shall pay to the REINSURER an amount equal to the reserves
established in the general account of the REINSURED on the day immediately
prior to the terminal accounting date on the portions of the policies
reinsured hereunder.
P. DURATION OF AGREEMENT
1. Except as otherwise provided herein, this Agreement shall be unlimited in
duration.
2. This Agreement may be terminated at any time by either party giving
two-years written notice of termination or by the REINSURED giving
one-year written notice accompanied by a payment of $500,000. In addition,
if the REINSURED terminates during the initial three years of this
Agreement, the Reinsured shall pay the Reinsurer $500,000 less $10 for
each policy reinsured on the effective date of the termination, but not
less than $0. The date of delivery of the notice to the other party's Home
Office, which delivery shall be made by a mail or express service that
uses a return receipt, shall be the day of notice.
3. During the one-year or two-year period, as the case may be, this Agreement
shall continue to operate in accordance with its terms.
4. The Reinsurer and the Reinsured shall remain liable after termination, in
accordance with the terms and conditions of this Agreement, with respect
to all reinsurance ceded to the Reinsurer prior to termination of this
Agreement.
- 17 -
<PAGE>
5. In the event that any amounts become payable upon termination in
accordance with paragraph 1 of this section and similar payments are
provided for in other agreements between the parties, the REINSURED and
the REINSURER agree that it is their intention that such termination fees
shall be payable only once. It is not the intention of the parties to
create multiple or offsetting penalties in the event that other related
agreements between the parties are terminated.
- 18 -
<PAGE>
Q. EXECUTION
IN WITNESS WHEREOF the said
AMERICAN FRANKLIN LIFE INSURANCE COMPANY OF Springfield, Illinois,
and the said
INTEGRITY LIFE INSURANCE COMPANY of Phoenix, Arizona,
have by their respective officers executed this Agreement in duplicate on the
dates shown below.
AMERICAN FRANKLIN LIFE INSURANCE
COMPANY
By: By:
---------------------------------- -----------------------------------
Title Senior Vice President, General Title Senior Vice President & Actuary
Counsel and Secretary
Date 3/10/89 Date 3/10/89
INTEGRITY LIFE INSURANCE COMPANY
By: By:
------------------------------ -----------------------------------
Title President Title Vice President & Actuary
Date 2/23/89 Date 2/23/89
1337y
- 19 -
<PAGE>
SCHEDULE I
POLICIES SUBJECT TO REINSURANCE
Policies on Policy Form T1755 sold by registered representatives of Franklin
Financial Services Corporation, are subject to reinsurance hereunder, except as
provided in Schedule II. Riders, by whomever sold, attached to such policies are
also subject to reinsurance hereunder.
- 20 -
<PAGE>
SCHEDULE II
AMOUNT OF REINSURANCE
The portion of the risk reinsured under this Agreement shall be 30% on any
policy to the extent reinsured hereunder, as provided in Schedule I, except that
there shall be no reinsurance on any benefit under this Agreement where the
REINSURED does not retain its normal retention of risk on a policy hereunder.
- 21 -
<PAGE>
SCHEDULE III
PERIODIC REPORT
Period Beginning:
Period Ending:
INDIVIDUAL INSURANCE
Reserves in the General Account
Beg. of Period
End of Period
Receipts
Premiums
lst Yr.
Renewal
SIA Transfers
Others
Disbursements of Insurance Death Benefits
Death Benefit Payments
SIA Transfers
Premium Taxes
Policy Expense Allowances
Commissions
1st Yr.
Renewal
Allowance
Investment Expense Allowances
Other
Life Insurance Issued (Number and face amount)
Life Insurance in Force (Number and face amount)
Term Insurance Riders Inforce (face amount)
ADB Inforce (face amount)
Waiver Benefit in Force
- 22 -
<PAGE>
SCHEDULE IV
ANNUAL REPORTS
A. ANNUAL STATEMENT
All the appropriate entries for the following parts of the REINSURER'S
NAIC blank shall be furnished to the REINSURER by the REINSURED:
Page 5 Analysis of operations by lines of business
Page 6 Analysis of increase in reserves during the year
Exhibit 1 Premiums and annuity considerations
Exhibit 6 Taxes, licenses and fees
Exhibit 11 Policy and contract claims
Page 15 Exhibit of Life Insurance
Schedule T Premiums and annuity considerations
B. TAX RETURN INFORMATION
All information used in preparing the REINSURED'S Federal Income Tax
Return (Form 1120L) and which is necessary for the REINSURER to complete
each item in its Federal Income Tax Return with respect to the reinsurance
hereunder shall be furnished to the REINSURER by the REINSURED on a timely
basis.
- 23 -
<PAGE>
SCHEDULE V
ADMINISTRATION CHARGES
1. For each policy issued and reinsured during a calendar year, the REINSURER
shall pay the REINSURED $30.00 (30% of $100.00) to cover issue and
underwriting expenses incurred by the REINSURED.
2. The REINSURER shall pay the REINSURED each year an amount to cover
administrative expenses incurred by the REINSURED. This amount shall be
calculated by multiplying $3.00 (30% of $10.00) by .5 times the following:
(a) the number of reinsured policies in force at the end of the prior
calendar year, plus
(b) the number of policies in force at the end of the current calendar
year, plus
(c) the number of policies issued and reinsured during the current
calendar year.
The above unit charges will apply during the first year of this agreement
and will subsequently be redetermined to follow future experience.
- 24 -
<PAGE>
SCHEDULE VI
EXPENSE ALLOWANCE
1. For each policy issued and reinsured during a calendar year, the REINSURER
shall pay the REINSURED $54.00 (30% of $180.00) as an expense allowance to
cover service fees for issue and acquisition incurred by the REINSURED.
2. The REINSURER shall pay the REINSURED each year an expense allowance to
cover administrative service fees incurred by the REINSURED. This
allowance shall be calculated by multiplying $18.00 (30% of $60.00) by .5
times the following:
(a) the number of reinsured policies in force at the end of the prior
calendar year, plus
(b) the number of policies in force at the end of the current calendar
year, plus
(c) the number of policies issued and reinsured during the current
calendar year.
The above unit charges will apply during the first year of this agreement
and will subsequently be redetermined to follow future experience.
- 25 -
<PAGE>
Exhibit 1-A(8)(c)(1)
AMENDMENT NO. 1
The Modified Coinsurance Agreement between American Franklin Life Insurance
Company of Springfield, Illinois and Integrity Life Insurance Company of
Phoenix, Arizona, effective April 1, 1989, is amended by replacing the first
paragraph of section D.1. with the following paragraph:
The REINSURER shall pay the REINSURED each day a distribution allowance
equal to 5% of the reinsurance premiums plus 80% of such premiums which
are for the first policy year and which are not greater than the
amounts defined as commissionable "target" premiums by the REINSURED
with regard to the portions of the policies reinsured hereunder.
AMERICAN FRANKLIN LIFE INSURANCE COMPANY
By: ____________________________ By: ____________________________
Title: Sr. V.P., General Counsel & Title: Sr. V. P. & Actuary
Secretary
Date: 7/29/89 Date: 7/27/89
INTEGRITY LIFE INSURANCE COMPANY
By: ____________________________ By: ____________________________
Title: Vice President & Actuary Title: Vice President
Date: 7/25/89 Date: 7/25/89
<PAGE>
Exhibit 1-A(8)(d)
REINSURANCE AGREEMENT
Between
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
and
THE FRANKLIN LIFE INSURANCE COMPANY
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Reinsurance Coverage 1
Reinsurance Limits 2
Placing Reinsurance in Effect 3
Computation of Reinsurance Premiums 3
Payment of Reinsurance Premiums 4
Settlement of Claims 5
Experience Refunds 6
Premium Tax Reimbursement 6
Policy Changes 6
Reinstatements 6
Expenses 7
Reductions 7
Inspection of Records 7
Increase in Limit of Retention 7
Oversights 8
Arbitration 8
Choice of Law and Forum 9
Insolvency 9
Parties to Agreement 9
Agreement 9
Execution and Duration of Agreement 10
Insurance Subject to Reinsurance under
this Agreement Appendix I
Retention Limits of the REINSURED Schedule A
Maximum Amounts which the REINSURED
may cede Automatically Schedule B
Application for Reinsurance Schedule C, Part I
Reinsurance Cession Form Schedule C, Part II
Premium Tables Schedule D
</TABLE>
<PAGE>
R E I N S U R A N C E A G R E E M E N T
between
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
of
Springfield, Illinois,
hereinafter referred to as the "REINSURED," and
THE FRANKLIN LIFE INSURANCE COMPANY
of
Springfield, Illinois
hereinafter referred to as the "FRANKLIN."
REINSURANCE COVERAGE
1. On the basis hereinafter stated, the REINSURED'S excess of
individual ordinary Life insurance issued by the REINSURED on the policy forms
listed in Appendix I shall be reinsured with the FRANKLIN automatically, shall
be submitted to the FRANKLIN on a facultative basis, or shall be reinsured with
the FRANKLIN as continuations. A continuation is a new policy replacing a policy
issued earlier by the REINSURED ("original policy") or a change in an existing
policy issued or made either (a) in compliance with the terms of the original
policy or (b) without the same new underwriting information the REINSURED would
obtain in the absence of the original policy, without a suicide exclusion period
or a contestable period as long as those contained in new issues by the
REINSURED, or without the payment of the same commissions in the first year that
the REINSURED would have paid in the absence of the original policy.
2. Subject, in the case of facultative submissions for reinsurance, to
the REINSURED'S accepting the FRANKLIN'S offer to reinsure, the liability of the
FRANKLIN shall begin simultaneously with that of the REINSURED. In no event
shall the reinsurance be in force and binding unless the insurance issued
directly by the REINSURED is in force and unless the issuance and delivery of
such insurance constituted the doing of business in a jurisdiction in which the
REINSURED was properly licensed.
3. Life reinsurance under this agreement shall be term insurance for
the amount at risk that exceeds the REINSURED's retention. The amount of
reinsurance shall be the death benefit less the cash value less the retention.
The amount of reinsurance will be determined on each anniversary of the policy.
For Charter One policies in the first year, the amount of reinsurance will be
the Specified Amount (Initial Death Benefit) less the Initial premium less the
retention.
4. Life reinsurance in amounts less than the amount at risk upon $5,000
of insurance shall not be placed in effect under this agreement. Accidental
Death reinsurance in amounts less than $5,000 shall not be placed in effect
under this agreement.
<PAGE>
5. If the REINSURED issues a policy as a continuation of a policy
reinsured under this agreement, reinsurance of the continuation shall continue
with the FRANKLIN. Such reinsurance shall be in effect under the reinsurance
agreement between the REINSURED and the FRANKLIN which provides reinsurance of
the policy form issued as a continuation if there is such an agreement in effect
on the effective date of the continuation; otherwise, reinsurance shall be in
effect under the terms of this agreement.
6. The amount of reinsurance under this agreement shall be maintained
in force without reduction so long as the amount of insurance carried by the
REINSURED on the life remains in force without reduction, except as provided in
the "PAYMENT OF REINSURANCE PREMIUMS" and "INCREASE IN LIMIT OF RETENTION"
articles.
REINSURANCE LIMITS
1. If the following conditions are met, reinsurance may be ceded
automatically under this agreement in amounts not to exceed those specified in
Schedule B.
(a) The REINSURED shall retain its limit of retention.
(b) The sum of the amount of insurance already in force on that
life in the REINSURED and the amount applied for from the
REINSURED on the current application shall not exceed the sum
of the appropriate automatic limit shown in Schedule B, and
the REINSURED'S maximum limit of retention for the mortality
class, plan of insurance, and age at issue on the current
application.
(c) The sum of the amount of insurance already in force on the
life and the amount applied for currently, in all companies,
shall not exceed the following amounts.
<TABLE>
<CAPTION>
<S> <C>
Standard $300,000
Substandard $200,000
through Table D
Accidental Death Benefit $100,000
</TABLE>
(d) The REINSURED has not made facultative application for
reinsurance of the current application.
(e) The policy was issued in accordance with the REINSURED'S
normal individual ordinary life underwriting rules and
practices.
(f) The policy is not a continuation.
2. If the requirements in paragraph I of this article are not met or if
the reinsured prefers to do so, it shall make an application for reinsurance
under this agreement on a facultative basis for all issues specified in Appendix
I other than continuations; the REINSURED may, at its option, make application
for reinsurance under this agreement on a facultative basis for other issues.
-2-
<PAGE>
3. The FRANKLIN shall have no liability under facultative applications
for reinsurance unless the REINSURED has accepted the FRANKLIN'S offer to
reinsure.
4. Continuations shall be reinsured under this agreement only if the
original policy was reinsured with the FRANKLIN; the amount of reinsurance under
this agreement shall not exceed the amount of the reinsurance of the original
policy with the FRANKLIN immediately prior to the new issue or change.
PLACING REINSURANCE IN EFFECT
1. To effect automatic reinsurance, the REINSURED shall, send to the
FRANKLIN a preliminary application of reinsurance in substantial accord with
Schedule C, Part I. The cession (Schedule C, Part II) shall be completed by the
FRANKLIN and one copy sent to the REINSURED. Upon request, the REINSURED shall
furnish the FRANKLIN with copies of any underwriting information in the
REINSURED'S files.
2. When the REINSURED submits a risk to the FRANKLIN for reinsurance
upon a facultative basis, a facultative application for such reinsurance shall
be made on a form in substantial accord with Schedule C. Copies of the original
applications, all medical examinations, microscopical reports, inspection
reports, and all other information which the REINSURED may have pertaining to
the insurability of the risk shall accompany the application. Upon receipt of
such application, the FRANKLIN shall immediately examine the papers and shall
notify the REINSURED of its underwriting action as soon as possible.
3. All offers of reinsurance made by the FRANKLIN under this agreement
shall, unless otherwise terminated by the FRANKLIN, automatically terminate on
the earlier of (a) the date the FRANKLIN receives notice from the REINSURED of
its withdrawal of its application and (b) the later of (i) the date 120 days
after the date the offer was made by the FRANKLIN and (ii) the date specified in
the FRANKLIN'S approval of a written request from the REINSURED to grant an
extension of the offer.
COMPUTATION OF REINSURANCE PREMIUMS
1. The premium to be paid to the FRANKLIN for Life reinsurance shall be
the sum of:
(a) the appropriate premium rate from the schedule of premiums in
Schedule D applied to the appropriate amount at risk
reinsured; plus
(b) any flat extra premium charged the insured on the face amount
initially reinsured less total allowances in the amount of
100% of any first year permanent flat extra premium and 25% of
any renewal permanent flat extra premium for nonsmoking issues
and 20% of any renewal flat extra premium for smoker issues
and 10% for any temporary flat extra premium for all years.
Permanent flat extra premiums are those that are payable for
five years or longer; temporary flat extra premiums are those
payable for fewer than five years.
-3-
<PAGE>
2. The portions of the reinsurance premiums described in the
subparagraphs of the preceding paragraph shall hereinafter be referred to as the
basic premium.
3. The premium charged the REINSURED for increases in reinsurance
hereunder described in paragraph 4 of the "REINSURANCE COVERAGE" article hereof
shall be computed using the age and date of issue of the policy if the increase
in face amount is not subject to approval of the REINSURED and using the age at
and date of the increase if the increase in face amount is subject to the
REINSURED'S approval.
4. For technical reasons relating to the uncertain status of deficiency
reserve requirements by the various state insurance departments, the Life
reinsurance rates cannot be guaranteed for more than one year. On all
reinsurance ceded at these rates, however, the FRANKLIN anticipates continuing
to accept premiums on the basis of the rates shown in SCHEDULE D.
PAYMENT OF REINSURANCE PREMIUMS
1. The FRANKLIN shall send the REINSURED each month a report in
substantial accord with Schedule C, Part II, showing all outstanding first-year
policies for which the FRANKLIN'S records have been completed, all renewal
reinsurance premiums on reinsurance policies having anniversaries in the
preceding month, and all renewal and first year adjustments being processed that
month.
2. The amount due the FRANKLIN shall accompany such report and be paid
within fifteen days of receipt of the report. If the amount is due the
REINSURED, the FRANKLIN shall remit such amount to the REINSURED within fifteen
days of receipt of the report. Premiums for reinsurance hereunder are payable at
the Home office of the FRANKLIN or any other location specified by the FRANKLIN
and shall be paid on an annual basis without regard to the manner of payment
stipulated in the policy issued by the REINSURED.
3. The payment of reinsurance premiums in accordance with the
provisions of the preceding paragraph shall be a condition precedent to the
liability of the FRANKLIN under reinsurance covered by this agreement. In the
event that reinsurance premiums are not paid as provided in the preceding
paragraph, the FRANKLIN shall have the right to terminate the reinsurance under
all policies having reinsurance premiums in arrears. If the FRANKLIN elects to
exercise its right of terminations, it shall give the REINSURED thirty days
notice of its intention to terminate such reinsurance. If all reinsurance
premiums in arrears, including any which may become in arrears during the
thirty-day period, are not paid before the expiration of such period, the
FRANKLIN shall thereupon be relieved of future liability under all reinsurance
for which premiums remain unpaid. Policies on which reinsurance premiums
subsequently fall due will automatically terminate if reinsurance premiums are
not paid when due as provided in paragraph 2 of this article. The reinsurance so
terminated may be reinstated at any time within sixty days of the date of
termination upon payment of all reinsurance premiums in arrears; but, in the
event of such reinstatement, the FRANKLIN shall have no liability in connection
with any
-4-
<PAGE>
claims incurred between the date of termination and the date of reinstatement of
the reinsurance. The FRANKLIN'S right to terminate reinsurance as herein
provided shall be without prejudice to its right to collect premiums for the
period reinsurance was in force prior to the expiration of the thirty-day notice
period.
4. Any payment which either the REINSURED or the FRANKLIN shall be
obligated to pay to the other may be paid net of any amount which is then due
and unpaid under this agreement.
5. Premiums for reinsurance hereunder shall be paid on an annual basis
without regard to the manner of payment stipulated in the policy issued by the
REINSURED.
SETTLEMENT OF CLAIMS
1. The REINSURED shall give the FRANKLIN prompt notice of any claim
submitted on a policy reinsured hereunder and prompt notice of the instigation
of any legal proceedings in connection therewith. Copies of proofs or other
documents bearing on such claim or proceeding shall be furnished to the FRANKLIN
when requested.
2. The FRANKLIN shall accept the good faith decision of the REINSURED
in settling any claim or suit and shall pay, at its Home Office, its share of
net reinsurance liability upon receiving proper evidence of the REINSURED'S
having settled with the claimant. Payment of net reinsurance liability on
account of death shall be made in one lump sum.
3. If the REINSURED should contest or compromise any claim or
proceeding, and the amount of net liability thereby be reduced, the FRANKLIN'S
reinsurance liability shall be reduced in the proportion that the net liability
of the FRANKLIN bore to the sum of the retained net liability of the REINSURED
and the net liability of other reinsurers existing as of the occurence of the
claim.
4. Any unusual expenses incurred by the REINSURED in defending or
investigating a claim for policy liability or in taking upon or rescinding a
policy reinsured hereunder shall be participated in by the FRANKLIN in the same
proportion as described in paragraph 3, above.
5. In no event shall the following categories of expenses or
liabilities be considered, for purposes of this agreement, as "unusual expenses"
or items of "net reinsurance liability:"
(a) routine investigative or administrative expenses;
(b) expenses incurred in connection with a dispute or contest
arising out of conflicting claims of entitlement to policy
proceeds or benefits which the REINSURED admits are payable;
(c) expenses, fees, settlements, or judgments, arising out of or
in connection with claims against the REINSURED for punitive
or exemplary damages;
-5-
<PAGE>
(d) expenses, fees, settlements, or judgements arising out of or
in connection with claims made against the REINSURED and based
on alleged or actual bad faith, failure to exercise good
faith, or tortious conduct.
6. For purposes of this agreement, penalties, attorney's fees, and
interest imposed automatically by statute against the REINSURED and arising
solely out of a judgment being rendered against the REINSURED in a suit for
policy benefits reinsured hereunder shall be considered "unusual expenses."
7. In the event that the amount of insurance provided by a policy or
policies reinsured hereunder is increased or reduced because of a misstatement
of age or sex established after the death of the insured, the net reinsurance
liability of the FRANKLIN shall increase or reduce in the proportion that the
net reinsurance liability of the FRANKLIN bore to the sum of the net retained
liability of the REINSURED and the net liability of other reinsurers immediately
prior to the discovery of such misstatement of age or sex. Reinsurance policies
in force with the FRANKLIN shall be reformed on the basis of the adjusted
amounts, using premiums and reserves applicable to the correct age and sex. Any
adjustment in reinsurance premiums shall be made without interest.
8. The FRANKLIN shall refund to the REINSURED any reinsurance premiums,
without interest, unearned as of the date of death of the life reinsured
hereunder.
EXPERIENCE REFUNDS
Reinsurance hereunder shall not be considered for experience refunds.
PREMIUM TAX REIMBURSEMENT
When the FRANKLIN is not required to pay state premium taxes upon
reinsurance premiums received from the REINSURED, it shall reimburse the
REINSURED for any such taxes the latter may be required to pay with respect to
that part of the premiums received under the REINSURED'S original policies which
is remitted to the FRANKLIN as reinsurance premiums.
POLICY CHANGES
If a change is made in the policy issued by the REINSURED to the
insured which affects reinsurance hereunder, the REINSURED shall immediately
notify the FRANKLIN of such change.
REINSTATEMENTS
If a policy reinsured hereunder lapses for nonpayment of premium and is
reinstated in accordance with its terms and the rules of the REINSURED, the
FRANKLIN shall automatically reinstate its reinsurance under such policy The
REINSURED shall pay the FRANKLIN all reinsurance premiums in arrears in
connection with the reinstatement with interest at the same rate and in the same
manner as the REINSURED received under its policy.
-6-
<PAGE>
EXPENSES
The REINSURED shall bear the expense of all medical examinations,
inspection fees, and other charges incurred in connection with the original
policy.
REDUCTIONS
1. Except as otherwise provided in paragraph 3 of the "REINSURANCE
COVERAGE" article hereof, if a portion of the insurance issued by the REINSURED
on a life reinsured hereunder is terminated, reinsurance on that life hereunder
shall be reduced as hereinafter provided to restore, as far as possible, the
retention level of the REINSURED on the risk, provided, however, that the
REINSURED shall not assume on any policy being adjusted as provided in this
article an amount of insurance in excess of the higher of, for the retention
category of that policy, (a) its retention limit at the time of issue of that
policy and (b) the retention limit of that policy as already adjusted by the
provisions of the "INCREASE IN LIMIT OF RETENTION" article. The reduction in
reinsurance shall first be applied to the reinsurance, if any, of the specific
policy under which insurance terminated. The reinsurance of the FRANKLIN shall
be reduced by an amount which is the same proportion of the amount of reduction
so applied as the reinsurance of the FRANKLIN on the policy bore to the total
reinsurance of the policy. The balance, if any, of the reduction shall be
applied to reinsurance of other policies on the life, the further reduction, if
any, in the reinsurance of the FRANKLIN again being determined on a proportional
basis.
2. The FRANKLIN shall return to the REINSURED any basic life
reinsurance premiums, without interest thereon, paid to the FRANKLIN for any
period beyond the date of reduction of reinsurance hereunder.
INSPECTION OF RECORDS
The FRANKLIN shall have the right at say reasonable time to inspect, at
the office of the REINSURED, all books and documents relating to the reinsurance
under this agreement.
INCREASE IN LIMIT OF RETENTION
1. The REINSURED may increase its limit of retention and may elect,
subject to the other provisions of this article, to: (a) continue unchanged
reinsurance then in force under this agreement: (b) make reductions in both
standard and substandard reinsurance then in force under this agreement; or (c)
make reductions in standard reinsurance then in force under this agreement. The
increased limit of retention shall be effective with respect to new reinsurance
on the date specified by the REINSURED subsequent to written notice to the
FRANKLIN. Such written notice shall specify the new limit of retention, the
effective date thereof, and the election permitted by the first sentence of this
paragraph. If the REINSURED makes election (b) or (c), the amount of reinsurance
shall be reduced, except as hereinafter provided, to the excess, if any, over
the REINSURED'S new limit of retention.
-7-
<PAGE>
2. No reduction shall be made in the amount of any reinsurance policy
unless the REINSURED retained its maximum limit of retention for the plan, age,
and mortality classification at the time the policy was issued, nor shall
reductions be made unless held by the REINSURED at its own risk without benefit
of any proportional or nonproportional reinsurance other than catastrophe
accident reinsurance. No reduction shall be made in any class of reinsurance
fully reinsured. The plan, age, and mortality classification at issue shall be
used to determine the REINSURED'S new retention on any life on which reinsurance
policies are reduced in accordance with the provisions of this article.
3. The reduction in each reinsurance policy shall be effective upon the
reinsurance renewal date of that policy first following the effective date of
the increased limit of retention or upon the tenth reinsurance renewal date of
the reinsurance policy, if later. If there is reinsurance in other reinsurers on
a life on whom a reinsurance policy will be reduced hereunder, the FRANKLIN
shall share in the reduction in the proportion that the amount of reinsurance of
the FRANKLIN on the life bore to the amount of reinsurance of other reinsurers
on the life.
4. In the event the REINSURED overlooks any reduction in the amount of
a reinsurance policy which should have been made on account of an increase in
the REINSURED'S limit of retention, the acceptance by the FRANKLIN of
reinsurance premiums under such circumstances and after the effective date of
the reduction shall not constitute or determine a liability on the part of the
FRANKLIN for such reinsurance. The FRANKLIN shall be liable only for a refund of
premiums so received, without interest.
OVERSIGHTS
It is understood and agreed that, it failure to comply with any terms
of this agreement is shown to be unintentional and the result of
misunderstanding or oversight on the part of either the REINSURED or the
FRANKLIN, both the REINSURED and the FRANKLIN shall be restored to the positions
they would have occupied had no such misunderstanding or oversight occurred.
ARBITRATION
It is the intention of the REINSURED and the FRANKLIN that the customs
and practices of the insurance and reinsurance industry shall be given full
effect in the operation and interpretation of this agreement. The parties agree
to act in all things with the highest good faith. If the REINSURED and the
FRANKLIN cannot mutually resolve a dispute which arises out of or relates to
this agreement, however, the dispute shall be decided through arbitration as set
forth in the Schedule E. The arbitrators shall base their decision on the terms
and conditions of this agreement plus, as necessary, on the customs and
practices of the insurance and reinsurance industry rather than solely on a
strict interpretation of the applicable law; there shall be no appear from their
decision, and any court having jurisdiction of the subject matter and the
parties may reduce that decision to judgment.
-8-
<PAGE>
CHOICE OF LAW AND FORUM
Illinois law shall govern the terms and conditions of the agreement. In
the case of an arbitration, the arbitration hearing shall take place in
Springfield, Illinois, and the Illinois Uniform Arbitration Act shall control
except as provided in the "ARBITRATION" article.
INSOLVENCY
1. In the event of the insolvency of the REINSURED, all reinsurance
shall be payable directly to the liquidator, receiver, or statutory successor of
said REINSURED, without diminution because of the insolvency of the REINSURED.
2. In the event of insolvency of the REINSURED, the liquidator,
receiver, or statutory successor shall give the FRANKLIN written notice of the
pendency of a claim on a policy reinsured within a reasonable time after such
claim is filed in the insolvency proceeding. During the pendency of any such
claim, the FRANKLIN may investigate such claim and interpose, in the name of the
REINSURED (its liquidator, receiver, or statutory successor), but at its own
expense, in the proceeding where such claim is to be adjudicated, any defense or
defenses which the FRANKLIN may deem available to the REINSURED or its
liquidator, receiver, or statutory successor.
3. The expense thus incurred by the FRANKLIN shall be chargeable,
subject to court approval, against the REINSURED as part of the expense of
liquidation to the extent of a proportionate share of the benefit which may
accrue to the REINSURED solely as a result of the defense undertaken by the
FRANKLIN. Where two or more reinsurers are participating in the same claim and a
majority in interest elect to interpose a defense or defenses to any such claim,
the expense shall be apportioned in accordance with the terms of the reinsurance
agreement as though such expense had been incurred by the REINSURED.
4. Any debts or credits; matured or unmatured, liquidated or
unliquidated, in favor of or against either the REINSURED or the FRANKLIN with
respect to this agreement or with respect to any other claim of one party
against the other are deemed mutual debts or credits, as the case may be, and
shall be set off, and only the balance shall be allowed or paid.
PARTIES TO AGREEMENT
This is an agreement for indemnity reinsurance solely between the
REINSURED and the FRANKLIN. The acceptance of reinsurance hereunder shall not
create any right or legal relation whatever between the FRANKLIN and the insured
or the beneficiary under any policy reinsured hereunder.
AGREEMENT
This Agreement represents the entire contract between the REINSURED and
the FRANKLIN and supersedes, with respect to its subject, any prior oral or
written agreements.
-9-
<PAGE>
EXECUTION AND DURATION OF AGREEMENT
The provisions of this reinsurance agreement shall be effective with
respect to policies for which the date on which application was first made to
the REINSURED is on or after the first day of January, 1988, but in no event
shall this agreement become effective unless and until it has been duly executed
by two officers of the FRANKLIN at its Home Office in Springfield, Illinois.
This agreement shall be unlimited as to its duration but may be terminated at
any time, insofar as it pertains to the handling of new reinsurance thereafter,
by either party giving three months' notice of termination in writing. The
FRANKLIN shall continue to consider application for reinsurance during the three
months aforesaid and shall remain liable on all reinsurance granted under this
agreement until the termination or expiry of the insurance reinsured.
-10-
<PAGE>
IN WITNESS WHEREOF the said
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
of
Springfield, Illinois,
and the said
THE FRANKLIN LIFE INSURANCE COMPANY
of
Springfield, Illinois,
have by their respective officers executed and delivered these presents in
duplicate on the dates shown below.
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
Signed at Springfield, Illinois
By By
--------------------------------------- -------------------------------
Title President Title Sr. Vice President and
General Counsel
Date December 22, 1988 Date 12/22/88
THE FRANKLIN LIFE INSURANCE COMPANY
Signed at Springfield, Illinois
By By
--------------------------------------- -------------------------------
Senior Vice President - Actuarial Vice President and Actuary
Date December 19, 1988 Date December 19, 1988
-11-
<PAGE>
APPENDIX I
Insurance Subject to Reinsurance under this Agreement
Policy Form 1701 Flexible Premium Adjustable
Life Insurance (Charter One)
Policy Form T1702 (XL Plus) - Universal Life
<PAGE>
SCHEDULE A
Retention Limits of the REINSURED
LIFE
<TABLE>
<CAPTION>
Ages Standard-Table D
---- ----------------
<S> <C>
0-70 $50,000
</TABLE>
ACCIDENTAL DEATH BENEFIT
$50,000
WAIVER OF PREMIUM DISABILITY
Retain Entire Disability Risk
<PAGE>
SCHEDULE B
Maximum Amounts which the REINSURED may cede Automatically
LIFE
<TABLE>
<CAPTION>
Substandard
Ages Standard Through Table D
---- -------- ---------------
<S> <C> <C>
0-70 $300,000 on an $200,000 less
individual life REINSURED'S
less REINSURED'S retention
retention
</TABLE>
ACCIDENTAL DEATH BENEFITS
$100,000 less REINSURED'S Retention
<PAGE>
The American Franklin Life Insurance Company
Automatic ______ Springfield, Illinois Schedule C, Part I
Facultative _____ PRELIMINARY APPLICATION FOR REINSURANCE TO
THE FRANKLIN LIFE INSURANCE CO.
On the life of __________________________ Birthdate __________________ Age ____
PREVIOUS INSURANCE
LIFE DISABILITY A.D.B.
Insurance in force $_____________$_____________$_____________ Plan___________
Of which we retain $_____________$_____________$__________ Existing Pol.No(s).
Substandard ratings and dates___________________________________
CURRENT INSURANCE
LIFE DISABILITY A.D.B.
Insurance applied
for $_____________$_____________$_____________ Plan___________
Of which we New Policy No(s).
propose to retain $_____________$_____________$_____________
Aviation Exclusion Provision? / / Yes / / No
REINSURANCE APPLIED FOR
Life Reinsurance $______________________ Plan______________
Disability $______________________ __________________
(Face Amount) (Monthly Inc. or W.
or P. Only?)
Accidental Death Benefit $______________________ __________________
Juvenile Payor Benefits
corresponding to $______________________ __________________
(Face Amount) (Monthly Inc. or W.
or P. Only?)
A quotation on this risk / / has / / has not been requested.
MIB Codes:
Remarks:
Date ______________________________ ___________________________________
Name of Underwriter
<PAGE>
/ / MEDICAL
/ / NONMEDICAL FORMAL REINSURANCE CESSION
/ / AUTOMATIC To The Franklin Life Insurance Company Schedule C,
/ / FACULTATIVE Springfield, Illinois Part II
/ / AMENDED CESSION*
- --------------------------- --------------- -----------------------
NAME OF INSURED BIRTH DATE STATE OF RESIDENCE
- -------------- --------------- --------------- --------------------------
POLICY NUMBER POLICY DATE SHORT TERM FROM RESERVE BASIS:
MORT.TABLE,INT.RATE,
MODIFICATION
<TABLE>
<CAPTION>
ACCIDENTAL
LIFE DISABILITY DEATH BENEFIT PLAN
<S> <C> <C> <C> <C>
Previous insurance in force $_______________ $_________________ $_______________ _______________
of which we retain $_______________ $_________________ $_______________
Rating, if substandard $_______________ $_________________ $_______________
New insurance issued $_______________ $_________________ $_______________ _______________
of which we retain $_______________ $_________________ $_______________
Ratings, if substandard or PRD $_______________ $_______________
Reinsurance ceded to The Franklin $_______________ $_______________
</TABLE>
*Remarks
DATE______________ CEDING COMPANY The American Franklin Life Ins. Co.
DATED AT Springfield, Illinois BY________________________________________
AGE _________________ / / AGE NEAREST BIRTHDAY
SHORT TERM:
PREMIUM $___________ / / AGE LAST BIRTHDAY
DETAILS OF THE REINSURANCE
<TABLE>
<CAPTION>
PREMIUMS
RETENTION AMOUNT ----------------------------------------------
POLICY OR AT TABLE POLICY TOTAL
YEAR TERM.RESERVE RISK AGE STANDARD EXTRA ADB FEE PREMIUM
- ------------ ----- ------------ ------- --- -------- ------ ------------ ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
19
- ------------ ----- ------------ ------- --- -------- ------ ------------ ------- ------- -------
19
- ------------ ----- ------------ ------- --- -------- ------ ------------ ------- ------- -------
19
- ------------ ----- ------------ ------- --- -------- ------ ------------ ------- ------- -------
19
- ------------ ----- ------------ ------- --- -------- ------ ------------ ------- ------- -------
19
- ------------ ----- ------------ ------- --- -------- ------ ------------ ------- ------- -------
</TABLE>
SHOW NET AMOUNTS AT RISK FOR 5 YEARS SHOW ALL PREMIUMS NET OF COMMISSION
FRANKLIN POLICY NO. ___________________
-----------------------------------------------------
The above cession is accepted subject to the terms
and conditions of the contact of Indemnity
reinsurance now in force between the aforesaid Ceding
Company and THE FRANKLIN LIFE INSURANCE COMPANY
BY
Secretary
DATED AT SPRINGFIELD, ILLINOIS ___________ DAY OF ______________________, 19____
Form 6073-A
<PAGE>
Schedule D
Premium Tables
STANDARD
RPR Nonsmoker - Nonexperience Rated
RPR Smoker - Nonexperience Rated
10 Year Recapture
No Premium Tax Reimbursement
Policy Fees: $15.00 First Year
10.00 Renewal Years
SUBSTANDARD
RPR Composite - Nonexperience Rated
Extra Premiums for each Table of Rating
For Ratings Higher than Table One, Apply Appropriate Multiple
<PAGE>
Schedule D
RPR SCALE NONSMOKER - NONEXPERIENCE RATED
STANDARD ANB RATES PER $1000
<TABLE>
<CAPTION>
Issue Age Policy Year Attained Age
M F One Two Three Four Five Six Seven Eight Nine Ten 11+ M F
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 0 3.70 0.90 0.63 0.57 0.53 0.52 0.48 0.46 0.45 0.43 0.41 10 10
1 1 0.83 0.63 0.56 0.53 0.48 0.48 0.46 0.44 0.41 0.41 0.43 11 11
2 2 0.59 0.56 0.53 0.48 0.46 0.45 0.44 0.41 0.40 0.41 0.45 12 12
3 3 0.56 0.52 0.48 0.45 0.41 0.43 0.40 0.40 0.40 0.44 0.50 13 13
4 4 0.50 0.47 0.44 0.41 0.40 0.40 0.39 0.40 0.43 0.48 0.57 14 14
5 5 0.47 0.46 0.41 0.40 0.39 0.39 0.39 0.41 0.48 0.55 0.64 15 15
6 6 0.44 0.41 0.39 0.38 0.38 0.39 0.41 0.47 0.54 0.63 0.72 16 16
7 7 0.39 0.38 0.37 0.37 0.38 0.40 0.47 0.54 0.62 0.71 0.83 17 17
8 8 0.39 0.39 0.38 0.40 0.43 0.46 0.53 0.60 0.69 0.80 0.86 18 18
9 9 0.38 0.39 0.41 0.44 0.48 0.53 0.60 0.69 0.78 0.87 0.90 19 19
10 10 0.41 0.45 0.48 0.53 0.58 0.64 0.75 0.83 0.86 0.90 0.91 20 20
11 11-17 0.44 0.50 0.54 0.59 0.65 0.71 0.81 0.86 0.90 0.91 0.94 21 21-27
12 18 0.47 0.56 0.62 0.67 0.72 0.76 0.86 0.90 0.91 0.94 1.01 22 28
13 19 0.52 0.66 0.73 0.77 0.82 0.84 0.90 0.91 0.94 1.01 1.06 23 29
14 20 0.58 0.74 0.78 0.83 0.86 0.90 0.91 0.94 1.01 1.02 1.06 24 30
15 21 0.65 0.78 0.83 0.86 0.90 0.91 0.94 0.97 1.00 1.01 1.05 25 31
16 22 0.69 0.83 0.86 0.90 0.91 0.95 0.96 0.96 0.97 0.99 1.03 26 32
17 23 0.74 0.81 0.84 0.86 0.92 0.94 0.94 0.94 0.95 0.96 1.02 27 33
18 24 0.75 0.78 0.83 0.85 0.91 0.92 0.91 0.91 0.91 0.93 1.03 28 34
19 25 0.73 0.77 0.82 0.85 0.87 0.88 0.87 0.87 0.88 0.91 1.04 29 35
20 26 0.69 0.75 0.82 0.84 0.84 0.84 0.84 0.84 0.85 0.88 1.05 30 36
21 27 0.67 0.78 0.78 0.81 0.82 0.82 0.82 0.82 0.84 0.86 1.05 31 37
22 28 0.65 0.76 0.76 0.76 0.78 0.78 0.78 0.81 0.82 0.85 1.05 32 38
23 29 0.64 0.76 0.76 0.76 0.76 0.76 0.77 0.80 0.83 0.87 1.08 33 39
24 30 0.63 0.75 0.75 0.75 0.75 0.75 0.77 0.81 0.85 0.90 1.11 34 40
25 31 0.59 0.75 0.75 0.75 0.75 0.75 0.77 0.82 0.88 0.95 1.18 35 41
26 32 0.57 0.75 0.75 0.75 0.75 0.76 0.81 0.85 0.93 1.01 1.24 36 42
27 33 0.55 0.75 0.75 0.75 0.76 0.80 0.83 0.91 1.01 1.09 1.33 37 43
28 34 0.55 0.75 0.75 0.77 0.80 0.82 0.88 0.97 1.09 1.19 1.46 38 44
29 35 0.55 0.75 0.80 0.85 0.86 0.88 0.96 1.06 1.19 1.32 1.59 39 45
</TABLE>
<PAGE>
Schedule D
RPR SCALE NONSMOKER - NONEXPERIENCE RATED
STANDARD ANB RATES PER $1000
<TABLE>
<CAPTION>
Issue Age Policy Year Attained Age
M F One Two Three Four Five Six Seven Eight Nine Ten 11+ M F
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
30 36 0.56 0.80 0.85 0.90 0.93 0.95 1.04 1.18 1.31 1.46 1.76 40 46
31 37 0.57 0.85 0.90 0.96 1.00 1.03 1.14 1.28 1.46 1.62 1.94 41 47
32 38 0.58 0.90 0.96 1.03 1.09 1.13 1.25 1.41 1.61 1.80 2.14 42 48
33 39 0.59 0.96 1.03 1.10 1.19 1.23 1.38 1.57 1.77 1.99 2.36 43 49
34 40 0.63 1.03 1.10 1.19 1.28 1.36 1.51 1.71 1.94 2.20 2.61 44 50
35 41 0.65 1.09 1.19 1.28 1.40 1.49 1.68 1.88 2.13 2.42 2.87 45 51
36 42 0.68 1.19 1.28 1.40 1.52 1.65 1.86 2.07 2.34 2.65 3.14 46 52
37 43 0.71 1.28 1.40 1.52 1.66 1.80 2.05 2.30 2.58 2.92 3.43 47 53
38 44 0.73 1.33 1.52 1.66 1.80 1.98 2.26 2.54 2.86 3.23 3.75 48 54
39 45 0.78 1.42 1.64 1.80 1.95 2.18 2.51 2.81 3.16 3.55 4.10 49 55
40 46 0.84 1.50 1.77 1.95 2.11 2.40 2.77 3.10 3.48 3.91 4.48 50 56
41 47 0.88 1.58 1.93 2.11 2.27 2.62 3.05 3.42 3.82 4.27 4.91 51 57
42 48 0.96 1.67 2.05 2.27 2.48 2.87 3.34 3.74 4.18 4.65 5.36 52 58
43 49 1.04 1.75 2.16 2.48 2.69 3.10 3.64 4.08 4.50 5.01 5.88 53 59
44 50 1.13 1.84 2.31 2.69 2.91 3.35 3.95 4.41 4.86 5.38 6.44 54 60
45 51 1.22 1.95 2.50 2.91 3.16 3.64 4.31 4.78 5.24 5.78 7.07 55 61
46 52 1.34 2.08 2.68 3.15 3.40 3.95 4.69 5.19 5.66 6.24 7.77 56 62
47 53 1.46 2.24 2.90 3.38 3.70 4.31 5.12 5.64 6.14 6.76 8.49 57 63
48 54 1.58 2.43 3.11 3.67 4.02 4.77 5.63 6.19 6.73 7.44 9.32 58 64
49 55 1.69 2.61 3.37 3.98 4.38 5.24 6.17 6.76 7.36 8.14 10.21 59 65
50 56 1.79 2.82 3.66 4.30 4.76 5.75 6.74 7.37 8.03 8.89 11.17 60 66
51 57 1.92 3.05 3.96 4.65 5.14 6.26 7.34 8.00 8.71 9.69 12.19 61 67
52 58 2.08 3.26 4.27 5.01 5.52 6.73 7.91 8.60 9.37 10.45 13.26 62 68
53 59 2.24 3.44 4.56 5.33 5.87 7.10 8.42 9.13 9.91 11.11 14.39 63 69
54 60 2.37 3.63 4.88 5.69 6.24 7.48 8.95 9.68 10.49 11.80 15.64 64 70
55 61 2.51 3.84 5.24 6.12 6.68 7.90 9.52 10.25 11.12 12.59 16.95 65 71
56 62 2.69 4.08 5.62 6.59 7.18 8.39 10.12 10.91 11.86 13.47 18.22 66 72
57 63 2.90 4.36 6.07 7.18 7.81 8.98 10.79 11.67 12.77 14.55 19.60 67 73
58 64 3.12 4.70 6.59 7.95 8.64 9.78 11.50 12.60 13.92 15.90 21.06 68 74
59 65 3.39 5.08 7.13 8.78 9.54 10.65 12.31 13.63 15.20 17.40 22.68 69 75
</TABLE>
<PAGE>
Schedule D
RPR SCALE NONSMOKER - NONEXPERIENCE RATED
STANDARD ANB RATES PER $1000
<TABLE>
<CAPTION>
Issue Age Policy Year Attained Age
M F One Two Three Four Five Six Seven Eight Nine Ten 11+ M F
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
60 66 3.71 5.53 7.75 9.67 10.54 11.64 13.20 14.74 16.61 19.07 24.47 70 76
61 67 4.07 6.04 8.42 10.58 11.60 12.69 14.20 15.94 18.10 20.87 26.43 71 77
62 68 4.55 6.69 9.21 11.54 12.75 13.84 15.32 17.09 19.52 22.62 28.58 72 78
63 69 5.14 7.46 10.08 12.48 13.96 15.06 16.56 18.26 20.89 24.40 30.91 73 79
64 70 5.76 8.24 10.96 13.41 15.18 16.37 17.95 19.58 22.44 26.41 33.43 74 80
65 71 6.35 9.00 11.80 14.28 16.39 17.75 19.49 21.13 24.28 28.75 36.55 75 81
66 72 6.89 9.69 12.58 15.09 17.56 19.19 21.19 22.96 26.47 31.51 39.89 76 82
67 73 7.07 9.95 12.88 15.51 18.69 20.66 23.06 25.11 29.10 34.72 43.62 77 83
68 74 7.12 10.02 13.01 15.83 19.72 22.20 25.12 27.69 32.24 38.48 47.70 78 84
69 75 7.18 10.11 13.15 16.13 20.65 23.78 27.38 30.70 35.96 42.92 52.25 79 85
70 76 7.24 10.19 13.29 16.43 21.44 25.39 29.86 34.22 40.38 48.12 57.39 80 86
71 77 7.29 10.29 13.43 16.73 22.08 27.03 32.54 38.29 45.56 54.16 63.21 81 87
72 78 7.34 10.37 13.57 17.05 22.52 28.68 35.44 43.02 51.64 61.16 69.41 82 88
73 79 7.36 10.45 13.72 17.38 22.92 30.15 37.99 47.14 56.64 66.33 76.13 83 89
74 80 8.13 11.52 15.10 19.13 25.20 32.84 41.37 51.31 61.80 72.16 82.88 84 90
75 81 8.89 12.59 16.49 20.84 27.44 36.05 45.39 56.44 67.76 79.14 89.76 85 91
76 82 10.54 14.93 19.52 24.66 32.45 40.77 51.48 63.78 76.61 89.24 96.72 86 92
77 83 13.25 18.73 24.47 30.91 40.66 48.18 60.63 75.15 86.90 96.43 103.75 87 93
78 84 16.34 23.08 30.16 38.06 48.18 60.63 73.29 84.96 93.90 103.75 110.77 88 94
79 85 19.96 28.19 36.81 46.59 58.95 73.29 84.96 93.90 103.75 110.77 118.87 89 95
..
80 86 22.81 32.19 42.16 53.18 66.64 82.52 93.90 103.75 110.77 118.87 127.09 90 96
81 87 26.11 36.94 48.23 60.85 75.89 93.90 103.75 110.77 118.87 127.09 136.96 91 97
82 88 29.05 41.03 53.61 67.66 84.67 103.75 110.77 118.87 127.09 136.96 148.16 92 98
83 89 32.29 45.57 59.57 75.16 94.60 110.77 118.87 127.09 136.96 148.16 159.14 93 99
84 90 35.82 50.56 66.07 83.36 104.64 118.87 127.09 136.96 148.16 159.14 170.81 94
85 91 39.52 55.79 72.91 91.97 115.65 127.09 136.96 148.16 159.14 170.81 183.72 95
204.70 96
242.57 97
278.08 98
334.23 99
</TABLE>
<PAGE>
Schedule D
RPR SCALE SMOKER - NONEXPERIENCE RATED
STANDARD ANB RATES PER $1000
<TABLE>
<CAPTION>
Issue Age Policy Year Attained Age
M F One Two Three Four Five Six Seven Eight Nine Ten 11+ M F
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 0 5.71 1.38 0.97 0.87 0.82 0.80 0.75 0.72 0.68 0.66 0.65 10 10
1 1 1.28 0.97 0.86 0.82 0.75 0.74 0.71 0.67 0.65 0.64 0.66 11 11
2 2 0.92 0.86 0.81 0.75 0.71 0.69 0.67 0.64 0.63 0.64 0.69 12 12
3 3 0.86 0.80 0.74 0.69 0.65 0.66 0.63 0.62 0.63 0.67 0.78 13 13
4 4 0.77 0.73 0.67 0.65 0.63 0.62 0.60 0.62 0.66 0.75 0.88 14 14
5 5 0.73 0.71 0.65 0.63 0.60 0.60 0.60 0.65 0.74 0.85 0.99 15 15
6 6 0.67 0.64 0.60 0.59 0.58 0.60 0.64 0.73 0.84 0.96 1.11 16 16
7 7 0.60 0.59 0.57 0.57 0.59 0.63 0.73 0.83 0.95 1.10 1.29 17 17
8 8 0.60 0.60 0.59 0.62 0.66 0.72 0.82 0.94 1.08 1.23 1.33 18 18
9 9 0.58 0.60 0.64 0.67 0.74 0.81 0.93 1.08 1.22 1.34 1.38 19 19
10 10 0.64 0.69 0.74 0.81 0.90 0.99 1.15 1.29 1.33 1.38 1.40 20 20
11 11-17 0.67 0.77 0.84 0.92 1.01 1.09 1.24 1.33 1.38 1.40 1.46 21 21-27
12 18 0.73 0.86 0.85 1.04 1.11 1.18 1.33 1.38 1.40 1.46 1.56 22 28
13 19 0.80 1.02 1.12 1.19 1.25 1.30 1.38 1.40 1.46 1.56 1.65 23 29
14 20 0.90 1.14 1.22 1.29 1.33 1.38 1.40 1.46 1.56 1.58 1.64 24 30
15 21 1.00 1.22 1.29 1.33 1.38 1.40 1.46 1.51 1.53 1.56 1.62 25 31
16 22 1.08 1.29 1.33 1.38 1.41 1.47 1.49 1.49 1.50 1.52 1.59 26 32
17 23 1.14 1.24 1.30 1.33 1.42 1.44 1.46 1.46 1.47 1.49 1.58 27 33
18 24 1.15 1.22 1.28 1.32 1.41 1.42 1.40 1.40 1.41 1.43 1.59 28 34
19 25 1.12 1.19 1.25 1.32 1.36 1.37 1.36 1.36 1.37 1.40 1.61 29 35
20 26 1.08 1.16 1.25 1.30 1.30 1.30 1.30 1.30 1.31 1.37 1.62 30 36
21 27 1.04 1.22 1.22 1.24 1.27 1.27 1.27 1.25 1.30 1.33 1.62 31 37
22 28 1.01 1.18 1.18 1.18 1.21 1.21 1.22 1.24 1.27 1.32 1.62 32 38
23 29 0.99 1.18 1.18 1.18 1.18 1.18 1.19 1.23 1.28 1.36 1.66 33 39
24 30 0.97 1.16 1.16 1.16 1.16 1.16 1.19 1.24 1.31 1.38 1.71 34 40
25 31 0.92 1.16 1.16 1.16 1.16 1.16 1.20 1.27 1.37 1.47 1.81 35 41
26 32 0.88 1.16 1.16 1.16 1.16 1.18 1.24 1.31 1.43 1.56 1.92 36 42
27 33 0.85 1.16 1.16 1.16 1.18 1.23 1.29 1.40 1.56 1.68 2.06 38 43
28 34 0.85 1.16 1.16 1.20 1.23 1.27 1.37 1.51 1.68 1.84 2.25 38 44
29 35 0.85 1.16 1.23 1.31 1.33 1.37 1.49 1.65 1.84 2.04 2.26 39 45
</TABLE>
<PAGE>
Schedule D
RPR SCALE SMOKER - NONEXPERIENCE RATED
STANDARD ANB RATES PER $1000
<TABLE>
<CAPTION>
Issue Age Policy Year Attained Age
M F One Two Three Four Five Six Seven Eight Nine Ten 11+ M F
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
30 36 0.86 1.23 1.31 1.39 1.43 1.48 1.61 1.81 2.03 2.25 2.71 40 46
31 37 0.87 1.31 1.39 1.49 1.55 1.60 1.76 1.98 2.25 2.51 3.00 41 47
32 38 0.90 1.39 1.49 1.59 1.68 1.75 1.94 2.18 2.50 2.79 3.30 42 48
33 39 0.92 1.49 1.59 1.70 1.83 1.90 2.13 2.42 2.74 3.08 3.65 43 49
34 40 0.96 1.59 1.70 1.83 1.98 2.09 2.34 2.64 3.00 3.39 4.03 44 50
35 41 1.01 1.68 1.83 1.98 2.16 2.30 2.59 2.90 3.29 3.73 4.42 45 51
36 42 1.05 1.83 1.98 2.16 2.35 2.54 2.87 3.20 3.62 4.10 4.85 46 52
37 43 1.10 1.97 2.16 2.35 2.56 2.79 3.16 3.54 3.98 4.52 5.30 47 53
38 44 1.13 2.06 2.35 2.56 2.79 3.07 3.51 3.92 4.41 4.98 5.80 48 54
39 45 1.21 2.20 2.53 2.79 3.01 3.37 3.88 4.35 4.88 5.49 6.34 49 55
40 46 1.30 2.32 2.73 3.01 3.26 3.71 4.28 4.79 5.39 6.04 6.93 50 56
41 47 1.37 2.44 2.97 3.26 3.52 4.05 4.70 5.28 5.90 6.60 7.58 51 57
42 48 1.49 2.58 3.16 3.52 3.82 4.42 5.16 5.79 6.45 7.18 8.29 52 58
43 49 1.61 2.70 3.34 3.82 4.16 4.79 5.62 6.29 6.96 7.73 9.08 53 59
44 50 1.75 2.83 3.57 4.16 4.50 5.17 6.12 6.82 7.52 8.31 9.96 54 60
45 51 1.89 3.01 3.86 4.50 4.88 5.62 6.66 7.39 8.10 8.94 10.93 55 61
46 52 2.08 3.23 4.14 4.86 5.25 6.10 7.26 8.02 8.75 9.64 12.01 56 62
47 53 2.25 3.46 4.48 5.23 5.71 6.66 7.91 8.72 9.49 10.46 13.13 57 63
48 54 2.44 3.76 4.80 5.68 6.22 7.37 8.70 9.56 10.39 11.49 14.40 58 64
49 55 2.61 4.03 5.22 6.14 6.76 8.10 9.54 10.46 11.38 12.59 15.78 59 65
50 56 2.77 4.37 5.67 6.65 7.36 8.88 10.42 11.39 12.41 13.74 17.26 60 66
51 57 2.96 4.72 6.13 7.19 7.94 9.68 11.33 12.36 13.47 14.96 18.83 61 67
52 58 3.21 5.04 6.60 7.74 8.53 10.39 12.22 13.29 14.49 16.15 20.50 62 68
53 59 3.46 5.32 7.04 8.24 9.06 10.96 13.01 14.10 15.32 17.17 22.24 63 69
54 60 3.66 5.61 7.55 8.79 9.64 11.56 13.83 14.95 16.22 18.24 24.17 64 70
55 61 3.89 5.94 8.10 9.44 10.32 12.21 14.71 15.84 17.19 19.45 26.19 65 71
56 62 4.16 6.31 8.69 10.18 11.10 12.96 15.65 16.86 18.32 20.83 28.16 66 72
57 63 4.48 6.74 9.39 11.10 12.07 13.89 16.67 18.04 19.72 22.49 30.30 67 73
58 64 5.24 7.86 10.18 12.29 13.34 15.11 17.77 19.47 21.52 24.58 32.55 68 74
59 65 5.24 7.86 11.03 13.56 14.75 16.46 19.02 21.06 23.50 26.90 35.06 69 75
</TABLE>
<PAGE>
Schedule D
RPR SCALE SMOKER - NONEXPERIENCE RATED
STANDARD ANB RATES PER $1000
<TABLE>
<CAPTION>
Issue Age Policy Year Attained Age
M F One Two Three Four Five Six Seven Eight Nine Ten 11+ M F
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
60 66 5.72 8.55 11.97 14.94 16.28 17.99 20.41 22.77 25.67 29.48 37.82 70 76
61 67 6.28 9.33 13.01 16.35 17.93 19.61 21.95 24.63 27.98 32.24 40.85 71 77
62 68 7.02 10.33 14.22 17.83 19.70 21.39 23.68 26.42 30.17 34.97 44.17 72 78
63 69 7.95 11.52 15.58 19.29 21.56 23.28 25.60 28.21 32.28 37.71 47.77 73 79
64 70 8.89 12.73 16.95 20.72 23.45 25.31 27.75 30.25 34.69 40.82 51.68 74 80
65 71 9.81 13.91 18.24 22.08 25.32 27.43 30.12 32.66 37.53 44.44 56.48 75 81
66 72 10.64 14.97 19.43 23.32 27.14 29.65 32.75 35.48 40.90 48.69 61.66 76 82
67 73 10.93 15.38 19.90 23.98 28.88 31.93 35.64 38.81 44.97 53.66 67.42 77 83
68 74 11.01 15.49 20.12 24.46 30.48 34.31 38.82 42.80 49.84 59.48 73.72 78 84
69 75 11.10 15.62 20.33 24.93 31.91 36.75 42.32 47.44 55.57 66.34 80.75 79 85
70 76 11.18 15.76 20.54 25.39 33.13 39.23 46.14 52.88 62.40 74.36 88.69 80 86
71 77 11.27 15.90 20.75 25.86 34.12 41.76 50.28 59.18 70.41 83.70 97.70 81 87
72 78 11.33 16.03 20.98 26.34 34.81 44.33 54.77 66.48 79.81 94.53 107.26 82 88
73 79 11.38 16.15 21.21 26.87 35.44 46.60 58.72 72.84 87.53 102.51 117.66 83 89
74 80 12.57 17.81 23.33 29.56 38.94 50.75 63.94 79.30 95.51 111.52 128.08 84 90
75 81 13.74 19.45 25.48 32.21 42.40 55.71 70.16 87.21 104.72 122.30 138.71 85 91
76 82 16.28 23.07 30.17 38.11 50.15 63.00 79.55 98.58 118.40 137.93 149.49 86 92
77 83 20..47 28.94 37.82 47.78 62.83 74.46 93.70 116.14 134.30 149.03 160.34 87 93
78 84 25.26 35.67 46.61 58.82 74.46 93.70 113.30 131.30 145.12 160.34 171.19 88 94
79 85 30.84 43.57 56.90 72.00 91.10 113.28 131.30 145.12 160.34 171.19 183.70 89 95
80 86 35.26 49.74 65.15 82.19 102.98 127.53 145.12 160.34 171.19 183.70 196.40 90 96
81 87 40.34 57.09 74.54 94.04 117.29 145.12 160.34 171.19 183.70 196.40 211.67 91 97
82 88 44.90 63.40 82.86 104.56 130.85 160.34 171.19 183.70 196.40 211.67 228.97 92 98
83 89 49.90 70.44 92.06 116.16 146.19 171.19 183.70 196.40 211.67 228.97 245.95 93 99
84 90 55.35 78.13 102.11 128.82 161.73 183.70 196.40 211.67 228.97 245.95 263.98 94
85 91 61.08 86.22 112.68 142.14 178.74 196.40 211.67 228.97 245.95 263.98 283.93 95
316.36 96
374.88 97
429.77 98
516.54 99
</TABLE>
<PAGE>
Schedule D
RPR SCALE COMPOSITE - NONEXPERIENCE RATED
STANDARD ANB RATES PER $1000
<TABLE>
<CAPTION>
Issue Age Policy Year Attained Age
M F One Two Three Four Five Six Seven Eight Nine Ten 11+ M F
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
0 0 0.39 0.37 0.26 0.24 0.21 0.21 0.20 0.19 0.18 0.18 0.17 10 10
1 1 0.34 0.26 0.22 0.21 0.20 0.20 0.19 0.18 0.17 0.17 0.18 11 11
2 2 0.25 0.22 0.21 0.20 0.19 0.18 0.18 0.17 0.17 0.17 0.18 12 12
3 3 0.22 0.21 0.20 0.18 0.17 0.18 0.17 0.17 0.17 0.18 0.20 13 13
4 4 0.20 0.19 0.18 0.17 0.17 0.17 0.16 0.17 0.18 0.20 0.24 14 14
5 5 0.19 0.19 0.17 0.17 0.16 0.16 0.16 0.17 0.20 0.22 0.26 15 15
6 6 0.18 0.17 0.16 0.16 0.16 0.16 0.17 0.19 0.22 0.26 0.29 16 16
7 7 0.16 0.16 0.16 0.16 0.16 0.17 0.19 0.22 0.26 0.29 0.34 17 17
8 8 0.16 0.16 0.16 0.17 0.18 0.19 0.21 0.25 0.28 0.32 0.36 18 18
9 9 0.16 0.16 0.17 0.18 0.20 0.21 0.25 0.28 0.32 0.36 0.37 19 19
10 10 0.17 0.18 0.20 0.21 0.24 0.26 0.30 0.34 0.36 0.37 0.37 20 20
11 11-17 0.18 0.20 0.22 0.25 0.27 0.29 0.32 0.36 0.37 0.37 0.38 21 21-27
12 18 0.19 0.22 0.26 0.28 0.29 0.31 0.36 0.37 0.37 0.38 0.39 22 28
13 19 0.21 0.27 0.30 0.31 0.34 0.35 0.37 0.37 0.38 0.39 0.39 23 29
14 20 0.24 0.30 0.32 0.34 0.36 0.37 0.37 0.38 0.39 0.39 0.39 24 30
15 21 0.27 0.32 0.34 0.36 0.37 0.37 0.38 0.39 0.39 0.39 0.39 25 31
16 22 0.28 0.34 0.36 0.37 0.37 0.39 0.39 0.39 0.39 0.39 0.40 26 32
17 23 0.30 0.32 0.35 0.36 0.38 0.38 0.38 0.38 0.39 0.39 0.40 27 33
18 24 0.30 0.32 0.34 0.35 0.37 0.38 0.37 0.37 0.37 0.38 0.41 28 34
19 25 0.30 0.31 0.34 0.35 0.36 0.36 0.35 0.36 0.36 0.37 0.41 28 35
20 26 0.28 0.30 0.34 0.35 0.35 0.35 0.35 0.35 0.35 0.36 0.43 30 36
21 27 0.28 0.32 0.32 0.32 0.34 0.34 0.34 0.34 0.35 0.36 0.43 31 37
22 28 0.27 0.31 0.31 0.31 0.32 0.32 0.32 0.32 0.34 0.35 0.43 32 38
23 29 0.26 0.31 0.31 0.31 0.31 0.31 0.31 0.32 0.34 0.36 0.44 33 39
24 30 0.26 0.30 0.30 0.30 0.30 0.30 0.31 0.32 0.35 0.37 0.46 34 40
25 31 0.25 0.30 0.30 0.30 0.30 0.30 0.31 0.34 0.36 0.39 0.48 35 41
26 33 0.22 0.30 0.30 0.30 0.31 0.32 0.34 0.37 0.41 0.45 0.55 36 42
27 33 0.22 0.30 0.30 0.30 0.31 0.32 0.34 0.37 0.41 0.45 0.55 37 43
28 34 0.22 0.30 0.30 0.31 0.32 0.34 0.34 0.40 0.45 0.48 0.59 38 44
29 35 0.22 0.30 0.32 0.35 0.36 0.36 0.39 0.44 0.48 0.54 0.65 39 45
</TABLE>
<PAGE>
Schedule D
RPR SCALE COMPOSITE - NONEXPERIENCE RATED
STANDARD ANB RATES PER $1000
<TABLE>
<CAPTION>
Issue Age Policy Year Attained Age
M F One Two Three Four Five Six Seven Eight Nine Ten 11+ M F
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
30 36 0.22 0.32 0.35 0.37 0.38 0.39 0.43 0.48 0.54 0.59 0.72 40 46
31 37 0.24 0.35 0.37 0.39 0.40 0.43 0.47 0.53 0.59 0.66 0.80 41 47
32 38 0.24 0.37 .039 0.43 0.45 0.46 0.52 0.58 0.66 0.74 0.87 42 48
33 39 0.25 0.39 0.43 0.45 0.48 0.50 0.56 0.64 0.73 0.82 0.96 43 49
34 40 0.26 0.43 0.45 0.48 0.53 0.56 0.62 0.71 0.80 0.90 1.06 44 50
35 41 0.27 0.45 0.48 0.53 0.57 0.60 0.68 0.77 0.87 0.99 1.18 45 51
36 42 0.28 0.48 0.53 0.57 0.63 0.67 0.76 0.85 0.96 1.09 1.29 46 52
37 43 0.29 0.53 0.57 0.63 0.68 0.74 0.84 0.94 1.05 1.20 1.40 47 53
38 44 0.30 0.55 0.63 0.68 0.74 0.81 0.93 1.04 1.16 1.32 1.53 48 54
39 45 0.32 0.58 0.67 0.74 0.80 0.90 1.03 1.15 1.29 1.46 1.68 49 55
40 46 0.35 0.62 0.73 0.80 0.86 0.99 1.13 1.27 1.42 1.60 1.84 50 56
41 47 0.36 0.65 0.78 0.86 0.93 1.08 1.24 1.40 1.57 1.75 2.00 51 57
42 48 0.39 0.68 0.84 0.93 1.01 1.18 1.37 1.53 1.71 1.90 2.20 52 58
43 49 0.43 0.72 0.88 1.01 1.10 1.27 1.49 1.67 1.84 2.05 2.41 53 59
44 50 0.46 0.75 0.94 1.10 1.19 1.37 1.61 1.80 1.99 2.20 2.63 54 60
45 51 0.50 0.80 1.02 1.19 1.29 1.49 1.77 1.96 2.14 2.36 2.89 55 61
46 52 0.55 0.85 1.10 1.29 1.39 1.61 1.92 2.12 2.32 2.55 3.18 56 62
47 53 0.59 0.92 1.19 1.39 1.51 1.77 2.09 2.31 2.51 2.77 3.47 57 63
48 54 0.65 1.00 1.28 1.50 1.65 1.95 2.31 2.53 2.76 3.05 3.81 58 64
49 55 0.69 1.06 1.38 1.62 1.79 2.14 2.52 2.77 3.01 3.33 4.18 59 65
50 56 0.73 1.15 1.50 1.76 1.95 2.35 2.76 3.01 3.28 3.64 4.52 60 66
51 57 0.78 1.24 1.62 1.90 2.11 2.56 3.00 3.27 3.56 3.96 4.79 61 67
52 58 0.85 1.33 1.75 2.05 2.26 2.76 3.24 3.52 3.83 4.28 5.06 62 68
53 59 0.92 1.41 1.87 2.18 2.40 2.90 3.45 3.73 4.05 4.52 5.34 63 69
54 60 0.97 1.49 1.99 2.33 2.55 3.06 3.66 3.95 4.29 4.74 5.61 64 70
55 61 1.03 1.57 2.14 2.50 2.73 3.23 3.90 4.19 4.55 4.96 5.88 65 71
56 62 1.10 1.67 2.30 2.70 2.93 3.43 4.14 4.46 4.85 5.40 6.34 66 72
57 63 1.19 1.78 2.49 2.93 3.19 3.67 4.41 4.77 5.22 5.95 6.61 67 73
58 64 1.28 1.93 2.70 3.25 3.53 4.00 4.68 5.15 5.70 6.45 7.16 68 74
59 65 1.39 2.08 2.92 3.60 3.91 4.36 5.03 5.58 6.22 7.08 7.82 69 75
</TABLE>
<PAGE>
Schedule D
RPR SCALE COMPOSITE - NONEXPERIENCE RATED
STANDARD ANB RATES PER $1000
<TABLE>
<CAPTION>
Issue Age Policy Year Attained Age
M F One Two Three Four Five Six Seven Eight Nine Ten 11+ M F
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
60 66 1.51 2.26 3.17 3.95 4.31 4.76 5.40 6.03 6.80 7.81 8.66 70 76
61 67 1.67 2.48 3.45 4.27 4.75 5.20 5.81 6.52 7.40 8.53 9.48 71 77
62 68 1.86 2.73 3.76 4.57 5.22 5.67 6.27 6.99 7.99 9.25 10.47 72 78
63 69 2.11 3.05 4.12 5.11 5.71 6.16 6.78 7.47 8.55 9.98 11.52 73 79
64 70 2.35 3.37 4.49 5.49 6.20 6.70 7.35 8.01 9.18 10.81 12.71 74 80
65 71 2.60 3.68 4.83 5.85 6.71 7.26 7.97 8.65 9.93 11.76 13.72 75 81
66 72 2.82 3.96 5.14 6.17 7.18 7.85 8.67 9.40 10.83 12.89 14.04 76 82
67 73 2.89 4.07 5.26 6.35 7.65 8.46 9.43 10.27 11.91 13.72 14.36 77 83
68 74 2.91 4.10 5.32 6.47 8.06 9.08 10.28 11.32 13.19 14.24 14.67 78 84
69 75 2.93 4.13 5.38 6.60 8.44 9.73 11.20 12.56 14.21 14.74 15.00 79 85
70 76 2.96 4.17 5.44 6.72 8.77 10.38 12.22 14.00 14.94 15.25 15.31 80 86
71 77 2.98 4.21 5.50 6.84 9.03 11.05 13.31 14.48 15.02 15.27 15.31 81 87
72 78 3.00 4.24 5.56 6.98 9.22 11.74 14.16 14.68 15.09 15.28 15.31 82 88
73 79 3.01 4.28 5.61 7.11 9.37 12.33 14.68 15.09 15.28 15.31 15.31 83 89
74 80 3.33 4.72 6.17 7.83 10.30 13.43 15.09 15.28 15.31 15.31 15.31 84 90
75 81 3.64 5.15 6.74 8.52 11.22 14.75 15.28 15.31 15.31 15.31 15.31 85 91
76 82 4.31 6.10 7.99 10.09 13.27 15.28 15.31 15.31 15.31 15.31 15.31 86 92
77 83 5.42 7.66 10.01 12.64 15.28 15.31 15.31 15.31 15.31 15.31 15.31 87 93
78 84 6.69 9.44 12.34 15.28 15.31 15.31 15.31 15.31 15.31 15.31 15.31 88 94
79 85 8.16 11.54 15.06 15.31 15.31 15.31 15.31 15.31 15.31 15.31 15.31 89 95
80 86 9.33 13.17 15.31 15.31 15.31 15.31 15.31 15.31 15.31 15.31 15.31 90 96
81 97 10.68 15.11 15.31 15.31 15.31 15.31 15.31 15.31 15.31 15.31 15.31 91 97
82 88 11.88 15.31 15.31 15.31 15.31 15.31 15.31 15.31 15.31 15.31 15.31 92 98
83 89 13.20 15.31 15.31 15.31 15.31 15.31 15.31 15.31 15.31 15.31 15.31 93 99
84 90 14.65 15.31 15.31 15.31 15.31 15.31 15.31 15.31 15.31 15.31 15.31 94
85 91 15.31 15.31 15.31 15.31 15.31 15.31 15.31 15.31 15.31 15.31 15.31 95
15.31 96
15.31 97
15.31 98
15.31 99
</TABLE>
<PAGE>
Exhibit 1-A(8)(d)(1)
Amendment No. 1
TO THE REINSURANCE AGREEMENT
BETWEEN
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
OF
SPRINGFIELD, ILLINOIS
and
THE FRANKLIN LIFE INSURANCE COMPANY
OF
SPRINGFIELD, ILLINOIS
Except as hereinafter specified, all terms and conditions of the
Reinsurance Agreement dated January 1, 1988, amendments and addenda attached
thereto shall apply, and this amendment is to be attached to and made part of
the aforesaid agreement.
This Amendment is Effective January 1, 1990.
I. REINSURANCE COVERAGE
Paragraph 3. of the REINSURANCE COVERAGE provision is hereby replaced by
the following paragraphs.
3. Life reinsurance under this agreement shall be term insurance for the
amount at risk that exceeds the REINSURED's retention. The amount of
reinsurance shall be the death benefit less the cash value less the
retention. The amount of reinsurance will be determined on each
anniversary of the policy. For Charter One policies in the first year,
the amount of reinsurance will be the Specified Amount (Initial Death
Benefit) less the Initial premium less the retention. For Equibuilder
policies, the amount of reinsurance shall be further reduced by the
amount reinsured with another company.
Paragraph 5. of the REINSURANCE COVERAGE provision is hereby replaced by
the following paragraphs.
<PAGE>
5. If the REINSURED issues a policy as a continuation of a policy
reinsured under this agreement, reinsurance of the continuation shall
continue with the FRANKLIN. Such reinsurance shall be in effect under
the reinsurance agreement between the REINSURED and the FRANKLIN which
provides reinsurance of the policy form issued as a continuation if
there is such an agreement in effect on the effective date of the
continuation; otherwise, reinsurance shall be in effect under the terms
of this agreement.
If the REINSURED issues a policy as a continuation of a policy
not reinsured under this agreement, reinsurance shall be in effect under
this agreement only if all of the following is true:
(a) the original policy was issued by the FRANKLIN and is now a
continuation with the REINSURED.
(b) the FRANKLIN will reinsure the policies under the provisoins of
the Reinsurance Agreement in effect on the date of such
conversion; for purposes of calculating the premium for such
reinsurance, the date of issue of the converted policy shall be
considered the date of the original policy.
(c) if the original FRANKLIN policy was reinsured with other
companies, the appropriate amount of reinsurance will be
retroceded to the original reinsuring companies from the
FRANKLIN after the REINSURED has ceded to the FRANKLIN in
accordance with the continuation provisions of all agreements
II. APPENDIX I
The original Appendix I is hereby replaced by the attached Appendix I
(revised 1-1-90).
III. SCHEDULE B
The original Schedule B is hereby replaced by the attached Schedule B
(revised 1-1-90).
<PAGE>
APPENDIX I
(Revised January 1, 1990)
Insurance Subject to Reinsurance under this Agreement
Policy Form 1701 Flexible Premium Adjustable
Life Insurance (Charter One)
Policy Form T1702 (XL Plus) - Universal Life
Policy Form T1735 (Equibuilder) - Flexible Premium
Variable Universal Life
Policy Form T0113 Term Insurance Rider on the
Additional Insured Person
<PAGE>
In Witness Whereof, both parties have executed this Amendment No. 1 in duplicate
as follows:
AMERICAN FRANKLIN LIFE INSURANCE COMPANY
BY
TITLE President
DATE February 20, 1990
Witness:
BY
TITLE Sr. V.P. and Secretary
DATE February 20, 1990
THE FRANKLIN LIFE INSURANCE COMPANY
BY
TITLE Senior Vice President - Actuarial
DATE February 20, 1990
Witness:
BY
TITLE Vice President and Actuary
DATE February 20, 1990
<PAGE>
SCHEDULE B
Maximum Amounts which the REINSURED may cede Automatically
LIFE
<TABLE>
<CAPTION>
Substandard
Ages Standard Through Table P
---- -------- ---------------
<S> <C> <C>
0-70 $50,000 on an $50,000 on an
individual life individual life
</TABLE>
ACCIDENTAL DEATH BENEFITS
$50,000
<PAGE>
Exhibit 1-A(8)(d)(2)
Amendment No. 2
TO THE REINSURANCE AGREEMENT
BETWEEN
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
OF
SPRINGFIELD, ILLINOIS
and
THE FRANKLIN LIFE INSURANCE COMPANY
OF
SPRINGFIELD, ILLINOIS
Except as hereinafter specified, all terms and conditions of the
Reinsurance Agreement dated January 1, 1988, amendments and addenda attached
thereto shall apply, and this amendment is to be attached to and made part of
the aforesaid agreement.
This Amendment is Effective January 1, 1990.
I. APPENDIX I
The original Appendix I is hereby replaced by the attached
Appendix I (Second Revision 1-1-90).
II. SCHEDULE A
The original Schedule A is hereby replaced by the attached
Schedule A (revised 1-1-90).
III. SCHEDULE B
The original Schedule B is hereby replaced by the attached
Schedule B (Second Revision 1-1-90).
IV. SCHEDULE D
The Schedule for Accidental Death Benefit Rates is hereby added to
the current Schedule D.
<PAGE>
In Witness Whereof, both parties have executed this Amendment No. 2 in duplicate
as follows:
AMERICAN FRANKLIN LIFE INSURANCE COMPANY
BY _______________________________
TITLE President
DATE June 27, 1990
Witness:
BY _______________________________
TITLE Sr. Vice President, General Counsel,
and Secretary
DATE June 27, 1990
THE FRANKLIN LIFE INSURANCE COMPANY
BY ___________________________________
TITLE Sr. Vice President - Actuarial
DATE May 16, 1990
Witness:
BY _______________________________
TITLE Vice President and Actuary
DATE May 16, 1990
<PAGE>
APPENDIX I
(Second Revision 1-1-90)
Insurance Subject to Reinsurance under this Agreement
Policy Form 1701 Flexible Premium Adjustable
Life Insurance (Charter one)
Policy Form T1745 Universal Life
Policy Form T1735 (Equibuilder) - Flexible Premium
Variable Universal Life
Policy Form T0113 Term Insurance Rider on the
Additional Insured Person
Policy Form T0105 Covered Insured Term Rider
Policy Form T0102 Other Insured Term Rider
<PAGE>
SCHEDULE A
Retention Limits of the REINSURED*
<TABLE>
<CAPTION>
Ages Life Standard-Table P
---- ---- ----------------
<S> <C> <C>
0-70 $50,000
</TABLE>
ACCIDENTAL DEATH BENEFIT
------------------------
$50,000
WAIVER OF PREMIUM DISABILITY
----------------------------
Retain Entire Disability Risk
*Not applicable to policies defined in the second paragraph of I.
REINSURANCE COVERAGE, Section 5. American Franklin will not retain any of these
policies.
<PAGE>
SCHEDULE B
(Second Revision 1-1-90)
I. Maximum Amounts which the REINSURED may cede Automatically*
LIFE
<TABLE>
<CAPTION>
Substandard
Ages Standard Through Table P
- ---- -------- ---------------
<S> <C> <C>
0-70 $50,000 on an $50,000 on an
individual life individual life
</TABLE>
ACCIDENTAL DEATH BENEFITS
-------------------------
$200,000
*This applies to newly underwritten cases only.
II. Jumbo Limit
The maximum amount of insurance issued and applied for in all
companies on each risk must not exceed $3,000,000 for automatic
reinsurance to be offered.
<PAGE>
SCHEDULE D
ACCIDENTAL DEATH BENEFITS
Based on the classification of the occupational manual of the REINSURED:
RATES PER THOUSAND
------------------
<TABLE>
<CAPTION>
Classification First Year Renewal
-------------- ---------- -------
<S> <C> <C>
Standard $ .25 $ .90
1-1/2 x Standard .40 1.25
2 x Standard .50 1.60
3 x Standard .75 2.35
5 x Standard 1.25 3.80
</TABLE>
<PAGE>
EXHIBIT 1-A(9)
ADMINISTRATIVE SERVICE AGREEMENT
This ADMINISTRATIVE SERVICE AGREEMENT is entered into this 16th day of
May, 1988, by and between THE FRANKLIN LIFE INSURANCE COMPANY ("FRANKLIN") and
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY ("AMERICAN"), both Illinois
corporations. WITNESSETH:
WHEREAS, FRANKLIN has experienced and skilled administrators; and
WHEREAS, AMERICAN has no such resource and is desirous of obtaining
administration services from FRANKLIN; and
WHEREAS, FRANKLIN is willing and able to provide such services to AMERICAN
for an arms-length consideration.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained herein, the parties hereto agree as follows;
I. FRANKLIN'S DUTIES
A. FRANKLIN shall furnish AMERICAN legal, actuarial, accounting, data
processing, computer, printing and agency advisory and other
administrative services in the development and maintenance of
AMERICAN'S insurance businesses.
B. All services to be performed by FRANKLIN hereunder shall be at the
direction of and subject to the control of AMERICAN. In no event
shall the services performed by FRANKLIN hereunder relate to the
management of AMERICAN's business and affairs.
C. FRANKLIN shall cause its employees who are rendering services
hereunder to keep records of time spent on such services. Statements
of expenses in connection with such services shall be provided by
FRANKLIN to AMERICAN with such information that AMERICAN can report
all allocated costs as if the same had been incurred on a direct
basis.
D. FRANKLIN will bill AMERICAN on a monthly basis for the services to be
performed hereunder and payments for such services shall be made no
later than ten days after the receipt of such monthly billing.
II. AMERICAN'S DUTIES
A. AMERICAN will pay FRANKLIN for services performed hereunder on the
basis of an allocation of direct expenses including, but not limited
to, telephone charges, supplies, printing and mailing, and services
representing charges for the time of the employee of FRANKLIN
providing the services. Charges will include that portion of the
salaries of such individuals attributable to the services performed
hereunder and will cover the actual amount of such salaries plus the
costs of fringe benefits.
III. BREACH
This agreement shall be performed by FRANKLIN in a manner satisfactory and
acceptable to AMERICAN who shall be the sole judge of the quality of
performance. In the event of a material breach by FRANKLIN or nonpayment
by AMERICAN, either party will have the right to immediately
terminate-this Agreement and its obligations hereunder accruing to the
date of termination. In such case, upon receipt of due notice, FRANKLIN
will have a reasonable time to prepare and deliver any records, documents
or other property belonging to AMERICAN.
<PAGE>
This contract is subject to force majeure, and is contingent upon strikes,
acts of God, weather conditions, inability to secure labor, regulations or
restrictions imposed by any government or governmental agency, or other
delays beyond the control of the parties. If performance by FRANKLIN is
prevented by any cause of force majeure, then this contract shall be void
without penalty for such nonperformance.
The failure of AMERICAN or FRANKLIN to enforce at any time the provisions
of this agreement shall not be construed as waiver or otherwise affect the
validity of this agreement.
IV. ASSIGNMENT
This agreement and the obligations to be performed hereunder shall not be
assignable by FRANKLIN without the consent of AMERICAN. This provision
shall not prevent FRANKLIN from selling, assigning or transferring any
specific property acquired pursuant to this agreement.
V. NOTICE
All notices given hereunder shall be in writing and shall be sent by
certified mail to the parties at their respective home office addresses.
VI. AUDIT
AMERICAN shall have the right, at its own expense and at any reasonable
time, to make an audit of the services rendered and the amounts charged
hereunder.
VII. PURPOSE
It is understood and agreed that the sole purpose of this Agreement is to
allow FRANKLIN, acting through its employees, to furnish advisory and
technical services to AMERICAN. Nothing contained in this Agreement or in
the performance hereof shall in any manner be construed to imply any
agreement or mutual commitment whatsoever between FRANKLIN and AMERICAN to
engage in any common course of conduct or activity,
VIII. TERMINATION
Either party may terminate this Agreement by thirty days written notice to
that effect addressed to the other party at its home office.
IX. LAW
This Agreement shall be interpreted by and construed under the laws of the
state of Illinois.
IN WITNESS WHEREOF, THE UNDERSIGNED CERTIFY that they have read the
foregoing ADMINISTRATIVE SERVICE AGREEMENT, assent to the contents thereof, that
it is a true and accurate statement of their agreement and that they have the
requisite legal authority to bind the respective parties.
THE AMERICAN FRANKLIN LIFE
INSURANCE COMPANY
By: ____________________________________
THE FRANKLIN LIFE INSURANCE COMPANY
By: ____________________________________
<PAGE>
Exhibit 3(a)
#1 Franklin Square
Springfield, Illinois 62713-0001
217-528-1042
FAX 217-528-2238
THE AMERICAN FRANKLIN
LIFE INSURANCE COMPANY
July 15, 1991
The American Franklin Life
Insurance Company
Franklin Square
Springfield, Illinois 62713
Gentlemen:
As Senior Vice President, General Counsel and Secretary of The American Franklin
Life Insurance Company ("American Franklin"), I have supervised the corporate
proceedings relating to the creation of Separate Account VUL-2 of The American
Franklin Life Insurance Company (the "Separate Account") and the proposed
issuance in connection therewith of American Franklin's individual flexible
premium variable life insurance policies (the "Policies"). I have also
participated in the preparation of the Registration Statement on Form S-6 (the
"Registration Statement") of the Separate Account filed with the Securities and
Exchange Commission under the Securities Act of 1933, as amended. The
Registration Statement covers an indefinite number of units of interest in the
Separate Account. In addition, I have examined such other documents and such
question of law as in my judgment are necessary or appropriate for purposes of
this opinion. Based on the foregoing, it is my opinion that:
1. American Franklin is a stock life insurance corporation duly
organized and validly existing under the laws of the State of
Illinois and is duly authorized under such laws to issue and
sell life, accident and health insurance and annuity contracts,
including the Policies.
2. The Separate Account is a separate account of American Franklin
duly created and validly existing pursuant to the laws of the
State of Illinois, under which income, gains and losses of the
Separate Account will be credited to or charged against the
assets held in the Separate Account without regard to income,
gains or losses arising out of any other business American
Franklin may conduct.
<PAGE>
The American Franklin Life Insurance Company July 15, 1991
Page Two
3. The issuance and sale of the Policies have been duly
authorized by American Franklin. When issued and sold in the
manner stated in the Prospectus forming a part of the
Registration Statement, the Policies will be legal and binding
obligations of American Franklin in accordance with their
terms, except that administrative approval, qualification or
registration must be obtained, or the form of the policies
must be approved administratively, by or with regulatory
authorities prior to the issuance of the Policies in certain
jurisdictions. American Franklin intends to obtain all
necessary administrative approvals, qualifications or
registrations by or with regulatory authorities deemed by the
undersigned to be required by any jurisdiction prior to the
offering or sale of the Policies in that jurisdiction.
I hereby consent to the filing of this opinion as an exhibit to the Registration
Statement, and to the use of my name under the caption "Legal Matters" in the
Prospectus forming a part of the Registration Statement.
Very truly yours,
/s/ Stephen P. Horvat, Jr.
--------------------------
Stephen P. Horvat Jr.
Senior Vice President
General Counsel and Secretary
<PAGE>
Exhibit 3(b)
April 23, 1999
The American Franklin Life Insurance Company
#1 Franklin Square
Springfield, Illinois 62713
Gentlemen:
This opinion is furnished in connection with the filing of
Post-Effective Amendment No. 12 to the Registration Statement on Form S-6 (Reg.
No. 33-41838) by Separate Account VUL-2 of The American Franklin Life Insurance
Company (the "Separate Account") and The American Franklin Life Insurance
Company ("American Franklin") covering an indefinite number of units of
interests in the Separate Account. Net premiums received under American
Franklin's EquiBuilder II individual flexible premium variable life insurance
policies (the "Policies") to be offered by American Franklin may be allocated by
American Franklin to the Separate Account as described in the Prospectus forming
a part of the Registration Statement.
I participated in the preparation of the Policies and I am familiar
with their provisions. I am also familiar with the description contained in the
Prospectus. In my opinion:
1. The illustrations for the Policies set forth under
"Illustrations of Death Benefits, Policy Account and Cash
Surrender Values and Accumulated Premiums" in the Prospectus,
based on the assumptions stated in the illustrations, are
consistent with the provisions of the Policies. The rate
structure of the Policies has not been designed so as to make
the relationship between planned premiums and benefits, as
shown in the illustrations, appear to be correspondingly more
favorable to a prospective purchaser of Policies for males age
40 than to prospective purchasers of Policies for a male at
other ages or for a female.
2. The table of cost of insurance rates, set forth under
"Deductions and Charges - Charges Against the Policy Account -
Cost of Insurance Charge" in the Prospectus, contains both the
current and guaranteed rates to be used for these Policies for
males of illustrative ages. These rates have not been designed
so as to make the relationship between current and guaranteed
rates more favorable for males of the ages illustrated than
for a male at other ages or a female.
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of my name under the caption "Experts" in
the Prospectus forming a part of the Registration Statement.
Very truly yours,
/s/ Robert M. Beuerlein
ROBERT M. BEUERLEIN
SENIOR VICE PRESIDENT -
ACTUARIAL/FINANCIAL
<PAGE>
EXHIBIT 6(a)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 16, 1999, with respect to the financial
statements of Separate Account VUL-2 of The American Franklin Life Insurance
Company and our report dated February 16, 1999 with respect to the financial
statements of The American Franklin Life Insurance Company in this
Post-Effective Amendment No. 12 to the Registration Statement on Form S-6 (No.
33-41838) under the Securities Act of 1933 of Securities of Unit Investment
Trusts Registered on Form N-8B-2 and related Prospectus of Separate Account
VUL-2 of The American Franklin Life Insurance Company.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Chicago, Illinois
April 28, 1999
<PAGE>
Exhibit 6(b)
Letterhead of Sutherland Asbill & Brennan LLP
April 28, 1999
The American Franklin Life Insurance Company
#1 Franklin Square
Springfield, Illinois 62713
RE: CONSENT OF SUTHERLAND ASBILL & BRENNAN LLP
------------------------------------------
Gentlemen:
We hereby consent to the reference to our name under the caption "Legal
Matters" in the prospectus filed as part of the registration statement on Form
S-6 for Separate Account VUL-2 of The American Franklin Life Insurance Company
(File No. 33-41838). In giving this consent, we do not admit that we are in the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933.
Sincerely,
SUTHERLAND ASBILL & BRENNAN LLP
By: /s/ Kimberly J. Smith
---------------------------
Kimberly J. Smith, Esq.
<PAGE>
EXHIBIT 9
(THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY LETTERHEAD)
DATE OF MAILING:
SPECIMEN NOTICE OF WITHDRAWAL RIGHT
This notice is sent to you in accordance with the laws administered by the
United States Securities and Exchange Commission ("SEC"). Please read it
carefully and retain it with your important records.
You have recently purchased a flexible premium variable life insurance policy
from The American Franklin Life insurance Company ("American Franklin"), under
which benefits depend on the investment experience of American Franklin's
Separate Account VUL-2. You have, pursuant to requirements of the SEC and your
policy, the right to examine and return your policy for cancellation at any time
within 10 days from delivery of the policy or 45 days from the date of execution
of Part 1 of the application, whichever is later. But in any event you have
until 10 days from the date of mailing of this notice, as determined by its
postmark, to return the policy for cancellation. Upon cancellation, you will
receive a refund equal to the premium payments made under this policy.
SEE THE REVERSE SIDE OF THIS LETTER WHICH GIVES FURTHER DETAILS ON YOUR RIGHT OF
WITHDRAWAL.
Should you decide to exercise this right of cancellation, complete the enclosed
form and return your policy as outlined in the instructions on the form,
postmarked on or before the latest date permitted for cancellation as described
above.
THE AMERICAN FRANKLIN LIFE
INSURANCE COMPANY
[-------------------------------]
Name:
Title:
