<PAGE>
1933 Act Registration No. 33-77470
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF
SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM
N-8B-2
POST-EFFECTIVE AMENDMENT NO. 8
SEPARATE ACCOUNT VUL-2
of
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
(Exact Name of Trust)
<TABLE>
<CAPTION>
<S> <C>
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)
</TABLE>
Insurance Company's Telephone Number,
including Area Code: (800) 528-2011
Copy to:
STEPHEN E. ROTH, ESQ.
SUTHERLAND ASBILL & BRENNAN LLP
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
Title of Securities Being Registered: Units of Interest in Separate Account
VUL-2 issued under EquiBuilder III flexible premium variable life policies.
It is proposed that this filing will become effective (check appropriate box)
/ / immediately upon filing pursuant to paragraph (b)
/x/ on April 30, 1999 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a) (1)
/ / on ________, 1999 pursuant to paragraph (a) (1) of Rule 485
/ / this post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
<PAGE>
SEPARATE ACCOUNT VUL-2 OF
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
Post-Effective Amendment No. 8
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,................................................................ Variable Account Investment Choices - The Separate
Account and Its Investment Divisions.
7, 8................................................................. Inapplicable.
9.................................................................... Legal Proceedings.
10(a)................................................................ The Beneficiary; Assignment of A Policy.
10(b)................................................................ Policy Account Value - Determination of the Unit
Value; Dividends.
10(c), 10(d)......................................................... The Features of EquiBuilder III-TM- Policies - Death
Benefits, - Maturity Benefit, - Changing the Face
Amount of Insurance; Variable Account Investment
Choices - Right to Change Operations; Deductions and
Charges - Surrender Charge, - Other Transaction
Charges, - Allocation of Policy Account Charges;
Policy Account Transactions - Changing Premium and
Deduction Allocation Percentages, - Transfers of
Policy Account Value Among Investment Divisions, -
Borrowing from the Policy Account, - Withdrawing
Money from the Policy Account, - Surrendering the
Policy for Its Net Cash Surrender Value; Additional
Information About EquiBuilder III-TM- Policies - Right
To Examine; Payment of Proceeds; The Guaranteed
Interest Division - Transfers from the Guaranteed
Interest Division.
10(e)................................................................ Additional Information About EquiBuilder III-TM-
Policies - Lapse, - Reinstatement.
10(f)................................................................ Variable Account Investment Choices - The Funds, -
Right to Change Operations; Voting Rights of a Policy
Owner.
10(g)(1), 10(g)(2), 10(h)(1), 10(h)(2)............................... Variable Account Investment Choices - The Funds, -
Right to Change Operations; Deductions and Charges -
Charges Against the Policy Account - Changes in
Monthly Charges; Voting Rights of a Policy Owner.
10(g)(3), 10(g)(4), 10(h)(3), 10(h)(4)............................... Inapplicable.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Registration Item
of Form N-8B-2 Location in Prospectus
-------------- ----------------------
<S> <C>
10(i)................................................................ The Features of EquiBuilder III-TM- Policies - Changes
in EquiBuilder III-TM- Policies, - Flexible Premium
Payments, - Additional Benefits; Variable Account
Investment Choices; Policy Account Value; Payment
Options; Payment of Proceeds.
11................................................................... Variable Account Investment Choices - The Funds, -
Investment Policies of the Funds, - Ownership of the
Assets of the Separate Account.
12(a), 12(c), 12(d).................................................. Variable Account Investment Choices - The Funds.
12(b), 12(e)......................................................... Inapplicable.
13(a)................................................................ Summary - Investment Choices of EquiBuilder III-TM-
Policies, - Charges and Deductions.
13(b), 13(c), 13(d), 13(e), 13(g).................................... Inapplicable.
13(f)................................................................ Distribution of the Policies.
14................................................................... The Features of EquiBuilder III-TM- Policies - Policy
Issuance Information; Limits On American Franklin's
Rights To Challenge A Policy; Distribution of the
Policies - Applications.
15................................................................... The Features of EquiBuilder III-TM- Policies - Flexible
Premium Payments; Variable Account Investment Choices
(Introduction); Deductions and Charges - Deductions
from Premiums; Policy Account Transactions - Changing
Premium and Deduction Allocation Percentages.
16................................................................... Variable Account Investment Choices - (Introduction),
- The Separate Account and Its Investment Divisions,
- The Funds; Policy Account Value - Amounts in the
Separate Account; Policy Account Transactions -
Changing Premium and Deduction Allocation
Percentages, - Transfers of Policy Account Value
Among Investment Divisions, - Loan Requests, -
Repaying the Loan; The Guaranteed Interest Division -
Transfers from the Guaranteed Interest Division;
Additional Information About EquiBuilder III-TM-
Policies - Policy Periods, Anniversaries, Dates and
Ages.
17(a), 17(b), 17(c).................................................. The Features of EquiBuilder III-TM- Policies - Death
Benefits, - Maturity Benefit, - Changing the Face
Amount of Insurance, - Changes in EquiBuilder III-TM-
Policies, - Flexible Premium Payments, - Additional
Benefits; Variable Account Investment Choices - Right
to Change Operations; Policy Account Value; Policy
Account Transactions - Changing Premium and Deduction
Allocation Percentages, - Transfers of Policy Account
Value Among Investment Divisions, - Borrowing from
the Policy Account, - Withdrawing Money from the
Policy Account, - Surrendering the
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Registration Item
of Form N-8B-2 Location in Prospectus
-------------- ----------------------
<S> <C>
Policy for Its Net Cash Surrender Value; The
Guaranteed Interest Division Transfers from the
Guaranteed Interest Division; Additional Information
About EquiBuilder III-TM- Policies - Right To Examine
the Policy, Lapse, Reinstatement; Payment Options;
Payment of Proceeds.
18(a)................................................................ Policy Account Value - Determination of the Unit
Value.
18(b), 18(d)......................................................... Inapplicable.
18(c)................................................................ Summary; Variable 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)................................................................ Variable 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)................................................................ Variable 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.
22................................................................... Limits on American Franklin's Right To Challenge a
Policy.
23................................................................... Inapplicable.
24................................................................... The Features of EquiBuilder III-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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Registration Item
of Form N-8B-2 Location in Prospectus
- -------------- ----------------------
<S> <C>
29................................................................... The American Franklin Life Insurance Company;
Management.
30, 31, 32, 33, 34................................................... Inapplicable.
35................................................................... The American Franklin Life Insurance Company;
Distribution of the Policies.
36, 37............................................................... Inapplicable.
38, 39............................................................... Distribution of the Policies.
40................................................................... Inapplicable.
41(a)................................................................ Distribution of the Policies.
41(b), 41(c), 42, 43................................................. Inapplicable.
44(a)(1)............................................................. Policy Account Value - Determination of the Unit
Value.
44(a)(2), 44(a)(3)................................................... The Features of EquiBuilder III-TM- Policies - Death
Benefits, - Maturity Benefit, - Changes in
EquiBuilder III-TM- Policies; Variable Account
Investment Choices - (Introduction), - The Separate
Account and Its Investment Divisions, - The Funds, -
Right to Change Operations; Deductions and Charges;
Policy Account Value; Policy Account Transactions -
Changing Premium and Deduction Allocation
Percentages, - Transfers of Policy Account Value
Among Investment Divisions, - Borrowing from the
Policy Account, - Loan Requests, - Repaying the Loan,
- Withdrawing Money from the Policy Account, -
Surrendering the Policy for Its Net Cash Surrender
Value; The Guaranteed Interest Division - Transfers
from the Guaranteed Interest Division; Additional
Information About EquiBuilder III-TM- Policies - Right
To Examine, - 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 Variable Investment
Division, - Determination of the Unit Value.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Registration Item
of Form N-8B-2 Location in Prospectus
-------------- ----------------------
<S> <C>
44(b)................................................................ The Features of EquiBuilder III-TM- Policies - Death
Benefits, - Maturity Benefit, - Changes in
EquiBuilder III-TM- Policies; Variable Account
Investment Choices (Introduction), - The Separate
Account and Its Investment Divisions, - The Funds, -
Right to Change Operations; Deductions and Charges;
Policy Account Value; Policy Account Transactions -
Changing Premium and Deduction Allocation
Percentages, - Transfers of Policy Account Value
Among Investment Divisions, - Borrowing from the
Policy Account, - Loan Requests, - Repaying the Loan,
- Withdrawing Money from the Policy Account, -
Surrendering the Policy for Its Net Cash Surrender
Value; The Guaranteed Interest Division - Transfers
from the Guaranteed Interest Division; Additional
Information About EquiBuilder III-TM- Policies - Right
To Examine the Policy, - Policy Periods,
Anniversaries, Dates and Ages; Tax Effects; Payment
of Proceeds.
44(c)................................................................ The Features of EquiBuilder III-TM- Policies - Death
Benefits, Maturity Benefit, - Changes in EquiBuilder
III-TM- Policies, Flexible Premium Payments; Variable
Account Investment Choices (Introduction), - The
Separate Account and Its Investment Divisions, - The
Funds; Deductions and Charges; Policy Account Value;
Policy Account Transactions Changing Premium and
Deduction Allocation Percentages, Transfers of Policy
Account Value Among Investment Divisions, Borrowing
from the Policy Account, - Loan Requests, Repaying
the Loan, Withdrawing Money from the Policy Account,
Surrendering the Policy for Its Net Cash Surrender
Value; The Guaranteed Interest Division Transfers
from the Guaranteed Interest Division; Additional
Information About EquiBuilder III-TM- Policies - Right
To Examine, - Policy Periods, Anniversaries, Dates
and Ages; Payment of Proceeds.
45................................................................... Inapplicable.
46(a)................................................................ The Features of EquiBuilder III-TM- Policies - Death
Benefits, - Maturity Benefit, - Changes in
EquiBuilder III-TM- Policies; Variable Account
Investment Choices - (Introduction), - The Separate
Account and Its Investment Divisions, - the Funds, -
Right to Change Operations; Deductions and Charges;
Policy Account Value; Policy Account Transactions -
Changing Premium and Deduction Allocation
Percentages, - Transfers of Policy Account Value
Among Investment Divisions, - Borrowing from the
Policy Account, - Loan Requests, - Repaying the Loan,
- Withdrawing Money from the Policy Account, -
Surrendering the Policy for Its Net Cash Surrender
Value; The Guaranteed Interest Division - Transfers
from the Guaranteed Interest Division; Additional
Information About EquiBuilder III-TM- Policies - Right
To Examine, - Policy Periods, Anniversaries, Dates
and Ages; Payment of Proceeds.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Registration Item
of Form N-8B-2 Location in Prospectus
-------------- ----------------------
<S> <C>
46(b), 47, 48, 49, 50................................................ Inapplicable.
51(a) - (j).......................................................... Summary; Detailed Information About American Franklin
and EquiBuilder III-TM- Policies; Additional
Information.
52(a)................................................................ Variable Account Investment Choices - The Funds, -
Right to Change Operations.
52(b), 52(d)......................................................... Inapplicable.
52(c)................................................................ Variable 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 III-TM-
ISSUED BY
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
THROUGH SEPARATE ACCOUNT VUL-2
Prospectus Dated April 30, 1999
<TABLE>
<CAPTION>
<S> <C>
FIDELITY INVESTMENTS:
VARIABLE INSURANCE PRODUCTS FUND AND Principal Office of both Fidelity Funds located at:
VARIABLE INSURANCE PRODUCTS FUND II 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
</TABLE>
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 III is a trademark of The American Franklin Life Insurance Company
- --------------------------------------------------------------------------------
<PAGE>
EQUIBUILDER III-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 III-TM- flexible premium variable life
insurance policies issued by The American Franklin Life Insurance Company
("American Franklin"). EquiBuilder III-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 III-TM- is a
trademark of American Franklin.
EquiBuilder III-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
available portfolio, 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.
* 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 III-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.
-i-
<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 III-TM-Policies.............................. 6
The American Franklin Life Insurance Company............................................................ 6
The Features of EquiBuilder III-TM-Policies............................................................... 6
How EquiBuilder III-TM-Policies Differ from Whole Life Insurance........................................ 6
Death Benefits.......................................................................................... 6
Policy Issuance Information............................................................................. 8
Maturity Benefit........................................................................................ 8
Changes in EquiBuilder III-TM-Policies.................................................................. 8
Changing the Face Amount of Insurance................................................................... 9
Changing Death Benefit Options..........................................................................10
When Face Amount and Death Benefit Changes Go Into Effect...............................................10
Flexible Premium Payments...............................................................................11
Additional Benefits.....................................................................................12
Variable Investment Division Investment Choices...........................................................13
The Separate Account and Its Investment Divisions.......................................................13
The Funds...............................................................................................14
Investment Policies of the Funds........................................................................14
Ownership of the Assets of the Separate Account.........................................................17
Right to Change Operations..............................................................................17
Deductions and Charges....................................................................................18
Deductions From Premiums................................................................................18
Charges Against the Policy Account......................................................................19
Charges Against The Separate Account....................................................................19
Surrender Charge........................................................................................22
Other Transaction Charges...............................................................................24
Allocation of Policy Account Charges....................................................................24
Policy Account Value......................................................................................25
Amounts in the Variable Investment Divisions............................................................25
Determination of the Unit Value.........................................................................26
Policy Account Transactions...............................................................................27
Changing Premium and Deduction Allocation Percentages...................................................27
Transfers of Policy Account Value Among Investment Divisions............................................27
Borrowing from the Policy Account.......................................................................28
Loan Requests...........................................................................................28
Policy Loan Interest....................................................................................28
When Interest is Due....................................................................................29
Repaying the Loan.......................................................................................29
The Effects of a Policy Loan on the Policy Account......................................................30
Withdrawing Money from the Policy Account...............................................................31
Surrendering the Policy for Its Net Cash Surrender Value................................................32
The Guaranteed Interest Division..........................................................................32
Amounts in the Guaranteed Interest Division.............................................................33
-iii-
<PAGE>
Interest on Amounts in the Guaranteed Interest Division.................................................33
Transfers from the Guaranteed Interest Division.........................................................34
Additional Information About EquiBuilder III-TM-Policies..................................................34
Right to Examine........................................................................................34
Lapse...................................................................................................34
Reinstatement...........................................................................................35
Policy Periods, Anniversaries, Dates and Ages...........................................................35
Federal Tax Considerations................................................................................36
Introduction............................................................................................36
Tax Status of the Policy................................................................................36
Tax Treatment of Policy Benefits........................................................................37
Possible Charges for American Franklin's Taxes..........................................................38
Illustrations of Death Benefits, Policy Account andCash Surrender Values, and Accumulated Premiums........39
Additional Information....................................................................................46
Voting Rights of a Policy Owner...........................................................................46
Voting Privileges.......................................................................................46
Material Conflicts......................................................................................47
Reports To Policy Owners..................................................................................47
Limits On American Franklin's Right To Challenge A Policy.................................................48
Payment Options...........................................................................................49
The Beneficiary...........................................................................................50
Assignment of A Policy....................................................................................50
Employee Benefit Plans....................................................................................51
Payment of Proceeds.......................................................................................51
Dividends.................................................................................................51
Distribution of the Policies..............................................................................52
Administrative Services...................................................................................52
State Regulation..........................................................................................53
Year 2000 Transition......................................................................................53
Legal Matters.............................................................................................54
Legal Proceedings.........................................................................................55
Experts...................................................................................................55
Registration Statement....................................................................................55
Other Policies and Contracts..............................................................................56
-iv-
<PAGE>
Management................................................................................................56
</TABLE>
- --------------------------------------------------------------------------------
This prospectus generally describes only the variable portion of the policy,
except where the fixed account is specifically mentioned.
-v-
<PAGE>
DEFINITIONS
This is a glossary of certain terms used in this Prospectus:
ADMINISTRATIVE OFFICE-The address of the Administrative Office of American
Franklin is #1 Franklin Square, Springfield, Illinois 62713-0001.
AGE-The age of the Insured Person on his or her birthday nearest the date on
which a determination of the Insured Person's age is made.
AMERICAN FRANKLIN, WE, OUR-The American Franklin Life Insurance Company, an
Illinois stock life insurance company and the issuer of the EquiBuilder
III-TM-individual flexible premium variable life insurance policies described
in this Prospectus.
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.
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 a policy.
POLICY ACCOUNT-The sum of amounts allocated to the investment divisions of the
Separate Account and American Franklin's Guaranteed Interest Division for a
particular policy.
POLICY ANNIVERSARY-An anniversary of the Register Date of a policy while the
policy is in effect.
POLICY MONTH-A month-long period beginning on the Register Date and on the same
day in each subsequent calendar month while a policy is in effect.
POLICY OWNER, YOU-The person designated as Policy Owner 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 date we issue a policy or the date we receive a full initial
premium payment, whichever is earlier.
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 Funds.
TARGET PREMIUM-A hypothetical annual premium which is based on the age and
sex of the Insured Person, the initial Face Amount of the policy and the
types and amounts of any additional benefits included in the policy. The
Target Premium for each EquiBuilder III-TM- policy is shown on the Policy
Information page of the policy.
-vi-
<PAGE>
SUMMARY
This is a summary of some of the more important points that you should know
and consider before purchasing the EquiBuilder III-TM- variable life
insurance policy.
THE POLICY
The EquiBuilder III-TM- variable life insurance policy is an individual
flexible premium variable life insurance policy issued by The American
Franklin Life Insurance Company. Among other things, the policy:
(a) provides insurance protection on the life of the insured until the
policy's maturity date.
(b) allows you to vary the amount and timing of the premiums you pay,
within limits, and to change the amount of the death benefit payable
under the policy, within specified guidelines.
(c) provides the opportunity for cash value build-up on a tax-deferred
basis, depending on investment performance of the underlying mutual
fund portfolios (or Funds). However, there is no guaranteed policy
value and you bear the risk of poor investment performance.
(d) permits you to borrow against the policy value, to make partial
surrenders, or to surrender the policy completely. Loans and partial
surrenders will affect the policy value and may affect the death
benefit and termination of the policy.
In addition to providing life insurance, the policy provides a means of
investing for long-term purposes. Tax deferral allows the entire amount you have
invested (net of charges) to remain in the policy where it can continue to
produce an investment return. Therefore, your money could grow faster than in a
comparable taxable investment where current income taxes would be due each year.
You may divide account value among the guaranteed interest division and sixteen
variable investment divisions which invest in portfolios of the Variable
Insurance Products Fund, Variable Insurance Products Fund II, and MFS Variable
Insurance Trust. We guarantee the principal and a minimum interest rate you will
receive from the guaranteed interest division. However, the value of what you
allocate to the sixteen variable investment divisions is not guaranteed.
Instead, your investment in the variable investment divisions will go up or down
with the performance of the particular Funds you select (and the deduction of
charges). You will lose money on account value allocated to the variable
investment divisions if performance is not sufficiently positive to cover the
charges under the policy.
PAYMENT OF PREMIUMS
Although you select planned periodic premiums, you are not required to pay them.
(The minimum initial premium and planned periodic premium depend on age, sex,
and risk class of the insured, on the Face Amount of the policy, and on any
supplemental benefit riders to the policy.) Within limits, you can vary the
frequency and amount of premium payments and can skip planned periodic premiums.
HOWEVER, EXTRA PREMIUMS MAY BE REQUIRED TO PREVENT POLICY TERMINATION UNDER
CERTAIN CIRCUMSTANCES.
FUNDING CHOICES
We deduct a sales expense charge and 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
* 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
-1-
<PAGE>
* 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 a 5% sales expense charge (up to the "target" premium) and 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>
Fund Total Fund
- ---- Management Other Expenses
Fee Expenses(1) (2)(3)
--- ----------- ------
<S> <C> <C> <C>
Fidelity VIP 0.20% 0.10% 0.30%
---- ---- ----
Money Market
- ---------------------------------------------------------
Fidelity VIP 0.58% 0.12% 0.70%
---- ---- ----
High Income
- ---------------------------------------------------------
Fidelity VIP 0.49% 0.09% 0.58%
---- ---- ----
Equity-Income
- ---------------------------------------------------------
Fidelity VIP 0.59% 0.09% 0.68%
---- ---- ----
Growth
- ---------------------------------------------------------
Fidelity VIP 0.74% 0.17% 0.91%
---- ---- ----
Overseas
- ---------------------------------------------------------
Fidelity VIPII 0.43% 0.14% 0.57%
---- ---- ----
Investment Grade
Bond
- ---------------------------------------------------------
Fidelity VIPII 0.54% 0.10% 0.64%
---- ---- ----
Asset Manager
- ---------------------------------------------------------
Fidelity VIPII 0.24% 0.11% 0.35%
---- ---- ----
Index 500
- ---------------------------------------------------------
Fidelity VIPII 0.59% 0.14% 0.73%
---- ---- ----
Asset Manager:
Growth
- ---------------------------------------------------------
Fidelity VIPII 0.59% 0.11% 0.70%
---- ---- ----
Contrafund
- ---------------------------------------------------------
MFS Emerging 0.75% 0.10% 0.85%
---- ---- ----
Growth
- ---------------------------------------------------------
MFS Research 0.75% 0.11% 0.86%
---- ---- ----
- ---------------------------------------------------------
MFS Growth with 0.75% 0.13% 0.88%
---- ---- ----
Income
- ---------------------------------------------------------
MFS Total Return 0.75% 0.16% 0.91%
---- ---- ----
- ---------------------------------------------------------
MFS Utilities 0.75% 0.26% 1.01%
---- ---- ----
- ---------------------------------------------------------
MFS Capital 0.75% 0.36%(4) 1.11%(4)
---- ------- -------
Opportunities
- ---------------------------------------------------------
</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 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
-2-
<PAGE>
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 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.
-3-
<PAGE>
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 generally has its own charge. Among the benefits currently
available under the policy are:
(a) accelerated benefit settlement option rider;
(b) accidental death benefit rider;
(c) children's term insurance rider;
(d) additional insured term insurance rider; and
(e) 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
-4-
<PAGE>
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 III-TM- 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 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 American General
Corporation ("American General"), 2929 Allen Parkway, Houston, Texas 77019-2155.
American General is one of the largest diversified financial services
organizations in the United States. It is a publicly held company whose stock is
traded on the New York Stock Exchange.
THE FEATURES OF EQUIBUILDER III-TM- Policies
HOW EQUIBUILDER III-TM- POLICIES DIFFER FROM WHOLE LIFE INSURANCE
We designed EquiBuilder III-TM- policies to provide life insurance
coverage with flexibility in death benefits, premium payments and investment
choices. EquiBuilder III-TM- policies are different from traditional whole
life insurance in that you are not required to pay scheduled premiums and
may, within limits, choose the amount and frequency of premium payments.
EquiBuilder III-TM- policies also provide for two different types of death
benefit options, and you may change options. You generally have the ability
to increase or decrease the Face Amount without purchasing a new policy.
However, we may require evidence of insurability. In addition, you may direct
the investment of net premiums, which will determine, in part, the value of
the Policy Account.
DEATH BENEFITS
We will pay the death benefit (less any policy loan and loan interest
and any overdue charges) to your beneficiary when the Insured Person dies. You
may choose from two death benefit options: Option A and Option B. Option A pays
the Face Amount of the policy. Except as described below, the Option A benefit
is fixed. Option B pays the Face Amount of the policy plus the amount in the
Policy Account on the day the Insured Person dies. The value of the benefit
under Option B is variable and fluctuates with the amount in the Policy Account.
Insurance under Option B costs more per month than under Option A. The value of
the Policy Account and the net cash surrender value of the policy under Option B
will be lower than under Option A, 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
you selected. This benefit is a percentage multiple of the amount in your Policy
Account. The percentage declines as the
-6-
<PAGE>
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 proportionately for each
full year.
TABLE OF DEATH BENEFITS
BASED ON POLICY ACCOUNT VALUES
- --------------------------------------------------------------------------------
MINIMUM DEATH BENEFIT AS %
INSURED PERSON'S AGE OF THE POLICY ACCOUNT
- --------------------------------------------------------------------------------
40 or under 250%
45 215
50 185
55 150
60 130
65 120
70 115
75 to 90 105
95 100
For example, if the Insured Person is 40 years old and the amount in
the Policy Account is $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 we deduct the charges that maintain the policy from the Policy
Account, coverage will last as long as the net cash surrender value can cover
these deductions. (See "Additional Information about EquiBuilder
III-TM-Policies-Lapse of the Policy," below.) The investment experience
(which may be either positive or negative) of any amounts in the variable
investment divisions and the interest earned in the Guaranteed Interest
Division 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.
If you prefer to have insurance coverage that varies with the
investment experience of your Policy Account, you should choose Option B. The
death benefit under Option B will always be at least the Face Amount of the
policy or the alternate death benefit described above (in either case, less any
outstanding policy loan and loan interest), whichever is greater. If you prefer
to have insurance coverage that does not vary in amount and that has lower cost
of insurance charges, you should choose Option A.
-7-
<PAGE>
POLICY ISSUANCE INFORMATION
When you complete an application for a policy, it is submitted to us.
We make the decision to issue a policy based on the information in the
application and our standards for issuing insurance and classifying risks. If we
decide not to issue a policy, we will refund any premium paid.
We will not issue a new policy having a Face Amount that is less than
$50,000, nor will we issue a policy for an Insured Person who is older than 75.
No insurance under a policy will take effect: (a) until we deliver a
policy and you pay the full initial premium while the Insured Person is living
and (b) unless the information in the application continues to be true and
complete, without material change, as of the time you pay the premium.
See "The Features of EquiBuilder III-TM-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, we will pay you the Policy Account value net of any
outstanding loan and loan interest. The policy will then end.
CHANGES IN EQUIBUILDER III-TM- Policies
EquiBuilder III-TM- policies provide you flexibility to choose from
a variety of strategies, described in the sections that follow, that enable
you to increase or decrease your 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 III-TM- Policies-Changing the Face Amount of Insurance," below.
A partial withdrawal of net cash surrender value reduces the Policy
Account and death benefit and may reduce the policy's Face Amount, while
providing a cash payment. It 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
-8-
<PAGE>
unchanged. Under Option B, it will decrease the death benefit while leaving the
amount at risk and the cost of insurance charge unchanged. See "The Features of
EquiBuilder III-TM- Policies-Flexible Premium Payments," below.
Increases in the Face Amount emphasize insurance coverage by
increasing both the death benefit and the amount at risk. See "The Features
of EquiBuilder III-TM- Policies-Changing the Face Amount of Insurance," below.
Additional premium payments may increase the Policy Account, which
has the effect, under Option A, of reducing the amount at risk and cost of
insurance charge while leaving the death benefit unchanged, or, under Option
B, of increasing the death benefit while leaving the amount at risk and cost
of insurance charge unchanged. See "The Features of EquiBuilder III-TM-
Policies-Flexible Premium Payments," below.
CHANGING THE FACE AMOUNT OF INSURANCE
Any time after the first policy year while a policy is in force, you
may change your policy's Face Amount. You can do this by sending a written
request to us. Any change will be subject to our approval and the following
conditions:
For increases in the Face Amount, we must have satisfactory evidence
that the Insured Person is still insurable. Our current procedure if the Insured
Person has become a more expensive risk is to ask you to confirm that you will
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,
we will assess a one-time administrative charge for each increase 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.
You may not reduce the Face Amount below the minimum we require to
issue a policy at the time of the reduction. We will lower monthly charges
against the Policy Account for the cost of insurance if you reduce the Face
Amount. If you reduce the Face Amount during the first ten policy years, we will
assess a pro rata share of the applicable surrender charge against the Policy
Account. See "Deductions and Charges-Surrender Charge," below.
We currently disapprove a requested decrease in the Face Amount if
it would trigger the alternate death benefit requirement. (This is the
federal tax law provision that can require us to pay as a death benefit a
percentage multiple of the Policy Account.) Instead, we will ask you to make
a partial withdrawal of net cash surrender value from the Policy Account, and
then we decrease the Face Amount. See "The Features of EquiBuilder III-TM-
Policies-Death Benefits," above.
-9-
<PAGE>
Currently, if you request a Face Amount decrease when you have
previously increased the Face Amount, we will apply the decrease first against
the most recent increase in the Face Amount. We will then apply decreases 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
Any time after the first policy year while a policy is in force, you
may change the death benefit option by sending us a written request. If you
change the death benefit from Option A to Option B, the Face Amount will go down
by the amount in the Policy Account on the date of the change. We will not allow
this change if it would reduce the Face Amount below the minimum we require to
issue a policy at the time of the reduction. If you change the death benefit
from Option B to Option A, the Face Amount of insurance will go up by the amount
in the Policy Account on the date of the change. 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).
Changing the death benefit option may have adverse tax consequences.
You should consult a tax adviser before changing the death benefit option.
We will not require evidence of insurability for the increase in the
Face Amount when you change from Option B to Option A, nor will we charge for
this increase. We will not assess a surrender charge for the decrease in the
Face Amount when you change from Option A to Option B.
WHEN FACE AMOUNT AND DEATH BENEFIT CHANGES GO INTO EFFECT
Any change in the Face Amount or death benefit option of a policy is
effective at the beginning of the policy month following the date we approve the
request. After we approve the request, we will send you a written notice of the
approval showing each change. You should attach this notice to your policy. We
may also request that you return your policy to us so that we can make the
appropriate changes.
In some cases, we may not approve a change you request because it might
disqualify the policy as life insurance under applicable federal tax law. We
will send you a written notice of our decision to disapprove any requested
change for this reason. See "Federal Tax Considerations," below.
-10-
<PAGE>
FLEXIBLE PREMIUM PAYMENTS
You may choose the amount and frequency of your 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. You determine the planned premium, within limits we set
when you apply for a policy. Planned premiums may not equal the amount of
premiums that will keep your policy in effect. Planned premiums are generally
the amount you decide you want to pay and you can change them at any time.
You must pay a minimum initial premium on or before the date on
which we deliver the policy. The insurance will not go into effect until we
receive this minimum initial premium. We determine 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 you select.
Make the first premium payment by check or money order payable to "The
American Franklin Life Insurance Company." Pay any additional premiums by
check or money order payable to "The American Franklin Life Insurance
Company" and send them to our Administrative Office.
We will send you premium reminder notices based on your planned
premium unless you request that we not do so in your application, or by
writing to our Administrative Office. Nevertheless, you may make the planned
payment, skip the planned payment or change the frequency or the amount of
the payment.
Generally, you may pay other premiums at any time and in any amount,
as long as each payment is at least $100. (In some states, policies may have
different minimum premium payments.) We may increase this minimum upon 90
days' written notice. We 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 you stop paying premiums temporarily or permanently, the policy
will continue in effect until the net cash surrender value no longer covers
the monthly charges against the Policy Account for the benefits selected.
PLANNED PREMIUMS MAY NOT BE SUFFICIENT TO MAINTAIN A POLICY BECAUSE OF
INVESTMENT EXPERIENCE, POLICY CHANGES OR OTHER FACTORS.
The tables set forth below under "Illustrations of Death Benefits,
Policy Account and Cash Surrender Values, and Accumulated Premiums"
illustrate how the key financial elements of EquiBuilder III-TM- 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.
-11-
<PAGE>
ADDITIONAL BENEFITS
You may add additional benefits to your policy. We will assess a
monthly charge against the Policy Account for each additional benefit, other
than the accelerated benefit settlement option rider. You can cancel these
benefits at any time. Your policy will have more details if you select any of
these benefits. The following additional benefits are currently available:
DISABILITY WAIVER BENEFIT. With this benefit, we waive monthly
charges from the Policy Account 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, we will waive monthly
charges for life as long as the disability continues. If the disability
starts after that, we will waive monthly charges only up to the policy
anniversary nearest the Insured Person's 65th birthday (as long as the
disability continues).
ACCIDENTAL DEATH BENEFIT. We 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. Coverage lasts only until the Insured Person reaches age 65 or the
child reaches age 25, whichever happens first.
TERM INSURANCE ON AN ADDITIONAL INSURED PERSON. You may obtain term
insurance for another person, such as the Insured Person's spouse. We will
deduct a separate charge for each additional Insured Person.
ACCELERATED BENEFIT SETTLEMENT OPTION RIDER. This rider allows you
to receive an accelerated benefit in the event the Insured Person becomes
terminally ill or is confined to a nursing facility, as those terms are
defined in the rider. In determining the accelerated benefit, we will adjust
the death benefit to reflect the payment option you select, the Insured
Person's sex and age, the length of time the policy has been in force, our
current assumptions as to the Insured Person's life expectancy, interest
rates, cost of insurance rates, and administrative charges, and a processing
charge of not over $200.
This rider is available with EquiBuilder III-TM- policies in those
states where the rider has been approved. You can get information on approval
of this rider in a particular state from us or from a registered
representative authorized to sell the policies. There is no premium charge
for this rider, and you may not add the rider after we have issued a policy.
Receipt of an accelerated benefit may be subject to income tax; you should
seek assistance from your personal tax advisor before electing a payment
option under this rider.
-12-
<PAGE>
VARIABLE INVESTMENT DIVISION INVESTMENT CHOICES
After we deduct certain amounts from each premium, we put the
balance, called the "net premium," into the Policy Account established for
each policy. We credit the net premium to the Policy Account as of the date
we receive it, or, if later, the Register Date. We credit the net premium to
the Policy Account before deducting any charges against the Policy Account
due on that date. See "Deductions and Charges-Deductions from Premiums,"
below.
We will invest the Policy Account in the Money Market division until
the fifteenth day after we issue the policy, or if that is not a business
day, until the following business day. We will then allocate the Policy
Account to the Guaranteed Interest Division or to one or more of the variable
investment divisions or both, according to your directions in the policy
application. These instructions will apply to any subsequent premium until
you provide us with new instructions. Premium allocation percentages may be
any whole number from zero to 100, but the sum must equal 100.
THE SEPARATE ACCOUNT AND ITS INVESTMENT DIVISIONS
We established the Separate Account on April 9, 1991 under the
insurance law of the State of Illinois. It 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 variable 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. Currently, you may invest premium payments in
variable investment divisions investing in the following Funds:
<TABLE>
<CAPTION>
<S> <C>
Fidelity VIP Money Market Fidelity VIPII Asset Manager: Growth
Fidelity VIP High Income Fidelity VIPII Contrafund
Fidelity VIP Equity-Income MFS Emerging Growth
Fidelity VIP Growth MFS Research
Fidelity VIP Overseas MFS Growth With Income
Fidelity VIPII Investment Grade MFS Total Return
Bond MFS Utilities
Fidelity VIPII Asset Manager MFS Capital Opportunities
Fidelity VIPII Index 500
</TABLE>
-13-
<PAGE>
THE FUNDS
Each of the Funds is a portfolio of 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. Currently, you may invest amounts
in any combination of sixteen portfolios, each of which has different
investment objectives, policies and risks.
The Funds do not impose a sales charge or "load" for buying and
selling their shares. The Separate Account buys and sells the Funds' shares
at net asset value pursuant to agreements between us 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
we will take 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.
You can find out more about the Funds, their investment policies,
risks, expenses and all other aspects of their operations by reading their
Prospectuses, which are attached to this Prospectus, and their Statements of
Additional Information.
INVESTMENT POLICIES OF THE FUNDS
Each of the Funds has a different investment objective and separate
investment policies. The objectives and policies of each Fund will affect its
return and its risks. The investment experiences of the variable investment
divisions depend on the performances of the corresponding Funds. The
investment objectives and policies of certain of the Funds 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 Funds, however, may be
higher or lower than the results of such other funds. We make no assurance or
representation that the investment results of any of the Funds will be
comparable to the investment results of any other fund, even if the other
fund has the same investment adviser.
Following is a summary of the policies and objectives of the Funds
of the Variable Insurance Products Fund:
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,
-14-
<PAGE>
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 Annuity 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.
Following is a summary of the policies and objectives of the Funds
of the Variable Insurance Products Fund II:
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.
-15-
<PAGE>
Following is a summary of the policies and objectives of the Funds of
the MFS Variable Insurance Trust:
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.
We do not guarantee that any Fund will achieve its objective. In
addition, no single Fund or division, by itself, constitutes a balanced
investment plan.
Except for the VIP MONEY MARKET, VIPII INVESTMENT GRADE BOND, VIPII
INDEX 500 AND MFS GROWTH WITH INCOME Funds, the Funds can purchase
lower-quality bonds, also known as "junk bonds". Junk bonds are highly
speculative. They provide poor protection for payment of principal and
interest, and are often in default. Changes in an issuer's creditworthiness
can cause greater risks of default or price changes than the risks typically
associated with higher-rated securities. For a discussion of the risks of
-16-
<PAGE>
investing in junk bonds, see the Prospectuses for the Funds, which are
attached to this Prospectus.
BEFORE YOU SELECT ANY DIVISION, you should carefully read the Funds'
Prospectuses. To get more copies of the Funds' Prospectuses, contact us.
Affiliates of the Funds compensate us for administering the Funds as
variable funding options for the EquiBuilder III-TM- policies. Currently,
Massachusetts Financial Services Company ("MFS"), the investment adviser for
MFS Variable Insurance Trust, pays us a fee equal, on an annualized basis, to
a percentage of the aggregate net assets of each Fund of the MFS Variable
Insurance Trust attributable to the EquiBuilder III-TM- policies and certain
other variable contracts we issue. This fee will not be paid by the Funds,
their shareholders or the Policy Owners.
Affiliates of Fidelity Management & Research Company ("FMR"), the
investment adviser for the Variable Insurance Products Fund and the Variable
Insurance Products Fund II, may compensate us or an affiliate for
administrative, distribution, or other services relating to the Funds. Such
compensation is generally based on assets of the Funds attributable to the
EquiBuilder III-TM- policies and certain other variable contracts we issue.
THIS COMPENSATION WILL NOT BE PAID BY THE FUNDS, THEIR SHAREHOLDERS OR THE
POLICY OWNERS.
OWNERSHIP OF THE ASSETS OF THE SEPARATE ACCOUNT
Under Illinois law, we own the assets of the Separate Account and we
use them to support EquiBuilder III-TM- policies, other existing variable
life policies and other variable life policies we 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. In addition to premiums from EquiBuilder III-TM- policies,
we 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. We may also
permit charges owed us to stay in the Separate Account. Thus, we may also
participate proportionately in the Separate Account. These accumulated
amounts belong to us and we may transfer them from the Separate Account to
our General Account at any time.
RIGHT TO CHANGE OPERATIONS
We reserve the right to change or add investment companies in which
Policy Accounts will be invested and to modify how we operate or how the
Separate Account operates. We intend to comply with applicable law in making
any changes and, if necessary, will seek your approval. We have the right to:
- add variable investment divisions to, or remove variable
investment divisions from, the Separate Account, combine two or
more divisions within the
-17-
<PAGE>
Separate Account, or withdraw assets relating to EquiBuilder
III-TM- 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 "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;
and
- modify the provisions of the policies to assure qualification
under the pertinent provisions of federal income tax laws or to
comply with other applicable federal or state laws.
If any changes result in a material change in the underlying investments of
an investment division, you will be notified as required by law. We 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, you
then wish to transfer your Policy Account in one variable investment division
to another variable investment division or to the Guaranteed Interest
Division, you may do so without charge, by giving us written instructions. At
the same time, you may change the manner in which we allocate net premiums
and deductions.
DEDUCTIONS AND CHARGES
We deduct 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 cost of providing the services
or benefits indicated by the designation of the charge or associated with the
particular Policy. For example, the sales expense deduction and the surrender
charge may not fully cover all of the sales and distribution expenses we
actually incur, and we may use proceeds from other charges, including the
mortality and expense risk charge and the cost of insurance charge, to cover
such expenses.
DEDUCTIONS FROM PREMIUMS
We will treat any payment we receive before the final policy date as
a premium, unless a policy loan is outstanding and along with the payment we
receive written instructions that it is a 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. We
deduct applicable taxes, and a sales expense
-18-
<PAGE>
deduction (subject to limits) from all premiums. We place the balance of each
premium (the "net premium") 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%. We deduct the applicable tax from each premium
payment. This is a tax to American Franklin, so you cannot deduct it on your
income tax return. The amount of the tax will vary depending on where you
live. Since the tax deduction is a percentage of your premium, the amount of
the tax deduction will also vary with the amount of the premium. We will
increase or decrease this deduction to reflect any changes in the applicable
taxes. In addition, if you change your place of residence, we will change the
deduction to match the new tax rate. You should notify us if you move.
We deduct a sales expense of 5% of each premium paid during any
policy year until the total premiums for the policy year equal the Target
Premium. (See "Definitions," above, and "Deductions and Charges-Surrender
Charge," below, for more information on the Target Premium). We do not deduct
a sales expense charge for premiums above a Target Premium that you pay
during that policy year. During the next policy year, we will again deduct a
sales expense charge of 5% until total premiums paid during that policy year
equal the Target Premium. You can reduce aggregate sales expense deductions
by concentrating premium payments in a few policy years so that the premiums
paid in each of those years exceed a target premium. However, concentrating
premium payments during a policy's early policy years, and in particular
during the first policy year, may increase the contingent deferred sales
charge if you surrender your policy or, in some instances, if you reduce your
policy's Face Amount or let it lapse during the first ten policy years. See
"Deductions and Charges - Surrender Charge," below. In addition,
concentrating premium payments during the first seven policy years can
increase the likelihood that a policy will be considered a modified endowment
contract. See "Federal Tax Considerations - Policy Proceeds," below.
We deduct sales expenses to recover some expenses of distributing the
EquiBuilder III-TM- policies. These expenses include agents' commissions and
printing EquiBuilder III-TM- prospectuses and sales literature. We also
recover sales expenses through a contingent deferred sales charge, which we
impose if the policy is surrendered or, in some instances, if the Face Amount
of the policy is reduced or the policy is permitted to lapse during the first
ten policy years. The amount of sales expense deductions and contingent
deferred sales charges in any policy year might not equal the actual sales
expenses in that year. See "Deductions and Charges-Surrender Charge," and
"Distribution of the Policies," below.
CHARGES AGAINST THE POLICY ACCOUNT
At the beginning of each policy month, we deduct the following
charges from each Policy Account.
-19-
<PAGE>
ADMINISTRATIVE CHARGE. The current charge is $6 per month. We deduct
this charge to cover the continuing costs of maintaining the EquiBuilder
III-TM- policies, such as premium billing and collection, claim processing,
policy transactions, record keeping, communications with Policy Owners and
other expenses and overhead. We may raise this charge to reflect higher
costs, but we guarantee 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, we will also deduct an administrative charge of $24 per
month. We use this charge to recover costs of issuing and placing 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 our
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 rises due to the
requirements of federal tax law (see "The Features of EquiBuilder III-TM-
Policies-Death Benefits," above), the amount at risk for the month will also
rise.
For this purpose we determine the amount of each Policy Account
before deducting the cost of insurance charge, but after all other charges
due on that date. 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.
We base the cost of insurance rate on the Insured Person's sex, age
and risk class and the Face Amount size of the policy at the time of the
charge. We 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. We
base the maximum charges 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 various states legislatures 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. Employers and Employee
Organizations should consider the impact of Title VII of the Civil Rights Act
of 1964 on the purchase of an EquiBuilder III-TM- policy in connection with
an employment-related insurance or benefit plan. See "Employee Benefit
Plans," below. Where required, we will provide cost of insurance charges that
do not distinguish between males and females.
-20-
<PAGE>
ILLUSTRATIVE TABLE OF MONTHLY COST OF INSURANCE RATES FOR
MALE NON-TOBACCO (ROUNDED) PER $1,000 OF AMOUNT AT RISK
<TABLE>
<CAPTION>
$50,000 - $199,999 $200,000 AND OVER
FACE AMOUNT SIZE BAND FACE AMOUNT SIZE BAND
--------------------- ---------------------
ATTAINED GUARANTEED CURRENT GUARANTEED CURRENT
AGE MAXIMUM RATE RATE MAXIMUM RATE RATE
--- ------------ ---- ------------ ----
<S> <C> <C> <C> <C>
5 $.08 $.08 $.08 $.08
15 .11 .11 .11 .10
25 .15 .10 .15 .10
35 .18 .11 .18 .10
45 .38 .20 .38 .17
55 .88 .48 .88 .42
65 2.14 1.16 2.14 1.05
</TABLE>
For a male non-tobacco user, age 35, with a $100,000 Face Amount
Option A policy, an initial premium of $1,000, and a 2% premium tax, the cost
of insurance for the first month will be $10.90. This example reflects
deduction of a 5% sales expense and the current administrative charges ($6
per month plus the additional charge of $24 per month that applies for the
first 12 policy months) and uses the current cost of insurance rate ($.11 per
$1,000).
CHARGES FOR ADDITIONAL BENEFITS. We will deduct the cost of any
additional benefits on a monthly basis. We may change these charges, but each
policy contains tables showing the guaranteed maximum rates for all of these
insurance costs.
CHANGES IN MONTHLY CHARGES. We will make any changes in the cost of
insurance, charges for additional benefits or administrative charges by class
of Insured Person, and we will base them 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
MORTALITY AND EXPENSE RISKS. We deduct a charge from the variable
investment divisions for assuming mortality and expense risks. The mortality
risk that we assume is that insured persons will live for shorter periods
than estimated. When this happens, we have to pay a larger death benefit than
expected in relation to the cost of insurance charges we received. The
expense risk we assume is that the cost of issuing and administering policies
will be greater than we expected. We assess a daily charge for mortality and
expense risks at an effective annual rate of .75% of the value of the assets
in the Separate Account attributable to EquiBuilder III-TM- policies. This
charge affects the unit values for the variable investment divisions. See
"Policy Account Value-Determination of Unit Value", below.
-21-
<PAGE>
TAX RESERVE. We reserve the right to assess a charge for taxes or to
build reserves set aside for taxes. This will reduce the investment income of
the variable investment divisions. 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. See "Summary--Charges and
Deductions."
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 you totally surrender your policy or, in some instances, if you
reduce the Face Amount of your policy or let it lapse during the first ten
policy years, we assess a surrender charge to recover sales expenses. The
amount of the surrender charge will vary depending on the policy year in
which you surrender your policy and the amount of premium you have paid. We
will not assess any surrender charge after the tenth policy year.
We base surrender charges on Target Premiums. Target Premiums are
not the same thing as the "planned" premium you determine. See "The Features
Of EquiBuilder III-TM- Policies - Flexible Premium Payments." We base Target
Premiums 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. Paying the
Target Premium does not guarantee that the policy will remain in effect.
Your Policy Information page shows the maximum surrender charge,
which will equal 50% of one Target Premium. This maximum will not vary with
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 will decrease by 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, we calculate the surrender
charge based on actual premium payments. The surrender charge equals 25% of
premium payments you make during the first policy year up to the amount of
one Target Premium and 9% of any additional premiums you pay 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 you do not pay more than approximately
five Target Premiums 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
-22-
<PAGE>
lapse. In addition, paying less premiums may increase cost of insurance
charges (which are based on amount at risk).
Assume 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 PREMIUM CHARGE PREMIUM CHARGE PREMIUM CHARGE
YEAR
<S> <C> <C> <C> <C> <C> <C>
1 $3000 $ 635 $2280 $ 570 $1140 $ 285
2 3000 905 2280 775 3420 593
3 3000 1140 2280 980 2280 790
4 3000 1140 2280 1140 2280 1003
5 3000 1140 2280 1140 2280 1140
6 3000 1140 2280 1140 2280 1140
7 3000 912 2280 912 2280 912
8 3000 684 2280 684 2280 684
9 3000 456 2280 456 2280 456
10 3000 228 2280 228 2280 228
</TABLE>
We reduce the maximum surrender charge by the amount of any pro rata
surrender charge we previously imposed in connection with a decrease in the
Face Amount.
During the first ten policy years, we will treat a decrease in the
Face Amount of a policy as a partial surrender, and we will deduct a portion
of the surrender charge. If the Face Amount of a policy increases and then
decreases, a surrender charge will apply only to a decrease below the
original Face Amount (i.e., the Face Amount when we issue the policy).
Generally, we determine the pro rata surrender charge for a partial surrender
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 that would apply to a total
surrender.
For example, assume that we issue a policy for a male age 40 with a
Face Amount of $200,000. In the third policy year, you decide to decrease
this Face Amount by $100,000. Assume also that you paid an annual premium of
$3,000 for each of the first three policy years and that the maximum
surrender charge for the third policy year is $1,140. To determine the
portion of the surrender charge:
Divide the amount of the Face Amount decrease by the initial Face
Amount. ($100,000 divided by $200,000 = .5)
Then multiply this fraction by the maximum surrender charge in
effect before the decrease.
-23-
<PAGE>
Pro rata surrender charge = .5 x $1,140 = $570.
Thus, you 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 you might pay in the future would be reduced
proportionately. We would send you a new Policy Information page that shows
the new maximum charges. You will pay the maximum only if you surrender the
policy or let the policy lapse after you pay enough premiums to reach the
maximum.
OTHER TRANSACTION CHARGES
In addition to the deductions and charges described above, we charge
fees for certain policy transactions 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 you make a partial withdrawal. See "Policy
Account Transactions-Withdrawing Money from the Policy Account," below.
INCREASE IN THE FACE AMOUNT OF INSURANCE. There is an administrative
charge that is currently $1.50 for each $1,000 of increase up to a maximum
charge of $300. See "The Features of EquiBuilder III-TM- Policies-Changes in
EquiBuilder III-TM- Policies," above.
TRANSFERS. If you make more than four transfers of Policy Account
value in a policy year among variable investment divisions, we will charge up
to $25 for each additional transfer in that policy year. However, if you
transfer all of the assets to the Guaranteed Interest Division, we will not
impose any transfer charge. See "Policy Account Transactions-Transfers of
Policy Account Value Among Investment Divisions," below. We will consider a
request for transfer involving the simultaneous transfer of funds from or to
more than one investment division to be one transfer.
ILLUSTRATIONS. If, after a policy is issued, you request more than
one illustration of projected death benefits and Policy Account and cash
surrender values in a policy year, we may charge a fee. See "Illustrations of
Death Benefits, Policy Account and Cash Surrender Values and Accumulated
Premiums," below.
We guarantee that the fees for partial withdrawals, increases in
Face Amounts and for transfers will never exceed the amounts that we set out
above. See also "Deductions and Charges-Surrender Charge," above.
ALLOCATION OF POLICY ACCOUNT CHARGES
Generally, we allocate monthly charges or certain transaction fees
among the variable investment divisions and the unloaned portion of the
Guaranteed Interest Division in accordance with the deduction allocation
percentages you specify in your application, or in accordance with your
subsequent instructions. However, we generally make deductions
-24-
<PAGE>
for the first policy month from the Money Market division. See "Variable
Investment Division Investment Choices."
Allocation percentages for deductions may be any whole numbers (from
zero to one hundred) which add up to one hundred. You may change deduction
allocation percentages by giving us instructions. Changes will be effective
as of the date we receive them.
We will subtract charges for partial withdrawals of net cash
surrender value and transfers of Policy Account values equally among the
divisions from which the transactions were made. If we cannot make the charge
this way, we will make it based on the proportion of the unloaned amounts in
the Guaranteed Interest Division, if any, and the amounts in the variable
investment divisions, to the total unloaned value of the Policy Account.
POLICY ACCOUNT VALUE
The amount in a Policy Account is the sum of the amounts allocated
to the Guaranteed Interest Division and to the variable investment divisions.
The amount in a Policy Account also reflects various deductions and charges.
We deduct monthly charges on the first day of each policy month. We deduct
transaction charges or surrender charges on the effective date of the
transaction.
Charges against the Separate Account are reflected daily. Any amount
you allocate to a variable investment division will increase or decrease
depending on the investment experience of that division, and there is no
guaranteed minimum cash value. We guarantee the value of amounts in a Policy
Account you allocate to the Guaranteed Interest Division, and interest
credited to those amounts. See "The Guaranteed Interest Division," below.
AMOUNTS IN THE VARIABLE INVESTMENT DIVISIONS
We use amounts you allocate, transfer or add to the variable
investment divisions to purchase units representing undivided interests in
the various divisions. The value of the units we credit to the Policy Account
for a division represents the amount in that division. We calculate the
number of units purchased or redeemed in a variable investment division by
dividing the dollar amount of the transaction by the division's unit value
next calculated at the close of business on the effective date of the
transaction. (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 changes only when you purchase or redeem them,
but the value of a unit will change with the investment performance of the
corresponding Fund. The value of a unit also reflects charges we assess
against the Separate Account. On any given day, the value your Policy Account
has in a variable investment division is the unit
25
<PAGE>
value times the number of units you have in that division. The units of each
variable investment division have different unit values.
You purchase units of a variable investment division when you
allocate premiums, repay loans or transfer amounts to that division. You
redeem or sell units when you make withdrawals or transfer amounts from a
variable investment division (including transfers for loans) or when we pay a
death benefit when the Insured Person dies. We also redeem units for monthly
charges or other charges from the Separate Account.
DETERMINATION OF THE UNIT VALUE
We determine unit values for each variable investment division 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. We 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, we are 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 equals the unit value for
the preceding business day multiplied by the net investment factor for that
division on that business day.
We determine a net investment factor for each variable investment
division every business day as follows:
- First, we determine the value of the shares belonging to the
division in the corresponding Fund at the close of business that
day (before giving effect to any policy transactions for that day,
such as premium payments or surrenders). For this purpose, we use
the share value reported to us by the Fund;
- Next, we add any dividends or capital gains distributions paid for
the corresponding Fund on that day;
- Then, we divide this sum 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, we subtract a daily mortality and expense risk charge for
each calendar day between business days. (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%;
- Finally, we subtract any daily charge for taxes or amounts set
aside as a reserve for taxes.
-26-
<PAGE>
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 we describe below may have different effects on the
Policy Account, death benefit, Face Amount or cost of insurance. You should
consider the net effects before requesting Policy Account transactions. See
"The Features of EquiBuilder III-TM- Policies-Changes in EquiBuilder III-TM-
Policies," above. Certain transactions also entail charges. For information
regarding other charges, see "Deductions And Charges," above.
CHANGING PREMIUM AND DEDUCTION ALLOCATION PERCENTAGES
You may change the allocation percentages of your net premiums or
your monthly deductions by giving instructions to us. These changes will go
into effect as of the date we receive the request, and they will affect
transactions on and after that date.
TRANSFERS OF POLICY ACCOUNT VALUE AMONG INVESTMENT DIVISIONS
You may transfer amounts from any variable investment division to
any other variable investment division or to the Guaranteed Interest
Division. You may make up to four transfers of Policy Account value among
variable investment divisions in each policy year without charge. Depending
on the overall cost of performing these transactions, we may charge up to $25
for each additional transfer, except that we will impose no charge for a
transfer of all amounts in the variable investment divisions to the
Guaranteed Interest Division. To make a transfer, give us instructions at our
Administrative Office.
If there is a charge for making a transfer, we 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 a variable investment division will take effect as
of the business day we receive instructions to make the transfer. The minimum
amount we 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 variable investment division or be transferred to any one variable
investment division as long as the total amount transferred that day equals
or exceeds the minimum. However, we will transfer the entire amount in any
variable investment division even if it is less than the minimum specified in
a policy. Note that we will allocate future premiums and deductions to
variable investment divisions or the Guaranteed Interest Division in
accordance with existing allocations unless you also instruct us to change
them.
-27-
<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, you may
borrow money from us using only your policy as security for the loan. The
maximum aggregate amount that we will loan is 90% of the cash surrender value
of the policy on the business day we receive the request for a loan. 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 we expect 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
Send requests for loans to us. You may specify how much of the loan
should be taken from the unloaned amount, if any, of your Policy Account
allocated to the Guaranteed Interest Division and how much should be taken
from the amounts allocated to the variable investment divisions. If you
request a loan from a variable investment division, we will redeem units
sufficient to cover that part of the loan and transfer the amount to the
loaned portion of the Guaranteed Interest Division. We determine the amounts
in each division as of the day we receive the request for a loan.
If you do not specify how to allocate a loan, we will allocate it
according to your deduction allocation percentages. If we cannot allocate it
based on these percentages, we will allocate it based on the proportions of
the unloaned amount, if any, of your Policy Account allocated to the
Guaranteed Interest Division and the respective amounts allocated to each
variable investment division to the unloaned value of the Policy Account.
POLICY LOAN INTEREST
Interest on a policy loan accrues daily at an adjustable interest
rate. We determine 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. We will notify you of the current rate when you request a
loan. We determine 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
-28-
<PAGE>
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, we will use any successor or
the average established by the insurance supervisory official of the
jurisdiction in which we delivered the policy.
We will not charge more than the maximum rate permitted by
applicable law. We 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%. We will give advance notice of any increase in the interest
rate on any loans outstanding.
WHEN INTEREST IS DUE
Interest is due on each policy anniversary. If you do not pay
interest when it is due, we will add it to the outstanding loan and allocate
it based on the deduction allocation percentages for the Policy Account then
in effect. This means that we make an additional loan to pay the interest,
and transfer amounts from the variable investment divisions and the unloaned
portion of the Guaranteed Interest Division to make the loan. If we cannot
allocate the interest based on these percentages, we will allocate it as
described above for allocating the loan.
REPAYING THE LOAN
You may repay all or part of a policy loan 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, we will apply all amounts we receive in respect to that policy
as a premium unless you include with the payment written instructions that we
should apply it to repayment of the policy loan.
We 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 you borrowed $500 from the Guaranteed Interest
Division and $500 from the VIP Equity-Income Division, we will not allocate
repayments to the VIP Equity-Income Division until the $500 borrowed from the
Guaranteed Interest Division is repaid. After you have repaid this amount,
you may specify how we should allocate subsequent repayments. If you do not
give us instructions, we will allocate repayments based on current premium
allocation percentages at the time you make the repayment.
-29-
<PAGE>
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 you
repay it. When we make a loan 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
variable investment divisions or in the unloaned portion of the Guaranteed
Interest Division.
We expect the interest rate credited to loaned amounts in the
Guaranteed Interest Division to be different from the rate that applies to
unloaned amounts in the Guaranteed Interest Division. The interest rate for
loaned amounts in all years in the Guaranteed Interest Division will never be
less than 4-1/2%. Currently, (1) for the first ten policy years, it will be
2% less than the interest rate charged on the loan, minus any charge for
taxes or reserves for taxes, and (2) after the tenth policy year, (a) the
interest rate applied to Preferred Loan amounts (as defined in the following
paragraph) in the Guaranteed Interest Division will be equal to the interest
rate charged on the loan, minus any charge for taxes or reserves for taxes
and (b) the interest rate for other loaned amounts in the Guaranteed Interest
Division will be as set forth in clause (1) above. Each month, we add this
interest to unloaned amounts of the Policy Account in the Guaranteed Interest
Division.
"Preferred Loans" are policy loans made after the tenth policy year
which do not in the aggregate exceed a specified percentage of the cash
surrender value. The following table shows the maximum amount eligible for
Preferred Loan status for the applicable policy year:
<TABLE>
<CAPTION>
POLICY YEAR MAXIMUM AGGREGATE AMOUNT ELIGIBLE FOR
PREFERRED LOAN STATUS AS A PERCENTAGE OF
THE CASH SURRENDER VALUE
<S> <C>
11 10%
12 20%
13 30%
14 40%
15 50%
16 60%
17 70%
18 80%
19 and thereafter 90%
</TABLE>
The percentage limits set forth in the table above are cumulative
(not per policy year) limits, and are also subject to the overall maximum
aggregate amount that will be loaned, which is 90% of the cash surrender
value of the policy.
The impact of a loan on a Policy Account will depend, on one hand,
on the investment experience of the variable investment divisions and the
rates declared for the
-30-
<PAGE>
unloaned portion of the Guaranteed Interest Division and, on the other hand,
the rates declared for the loaned portion of the Guaranteed Interest Division.
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 you cannot use the loaned amount
to cover monthly charges against the Policy Account. This may have negative
tax consequences. If the monthly 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, you may have to
pay additional premium payments to keep the policy in force if you borrowed
the maximum amount. For more information about these provisions, see
"Additional Information About EquiBuilder III-TM- Policies-Lapse of the
Policy," below.
WITHDRAWING MONEY FROM THE POLICY ACCOUNT
After a policy has been in effect for a year, you may request a
partial withdrawal of the net cash surrender value by sending us a written
request. The withdrawal and any reductions in Face Amount and net cash
surrender value will be effective as of the business day we receive the
request for them. 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
we 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 law.
You may specify how much of the withdrawal you want taken from each
investment division. If you do not give us instructions, we will make the
withdrawal on the basis of the then-current deduction allocation percentages.
If we cannot withdraw the amount based on your directions or on the deduction
allocation percentages, we 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
variable investment divisions to the total unloaned value of the Policy
Account. For example, if 50% of a Policy Account were in the Guaranteed
Interest Division and 50% were in the Money Market Division and you wanted to
withdraw $1,000, we would take $500 from each division.
When you make a partial withdrawal of net cash surrender value, we
assess a current expense charge of $25 or 2% of the amount withdrawn,
whichever is less, against the Policy Account. We will allocate this charge
equally among the divisions from which the withdrawal was made. If we cannot
allocate the charge in this manner, we will
-31-
<PAGE>
allocate it as described under "Deductions And Charges-Allocation of Policy
Account Charges," above.
A partial withdrawal of net cash surrender value reduces the amount
in the Policy Account. It also reduces the cash surrender value and the death
benefit on a dollar-for-dollar basis. If the death benefit based on a
percentage multiple applies, the reduction in death benefit can be greater.
See "The Features of EquiBuilder III-TM- Policies-Death Benefits," above.
If you have death benefit Option A, we will also reduce the Face
Amount of the policy so there will be no change in the amount at risk. We
will not deduct any pro rata surrender charge in connection with a reduction
in Face Amount we make in connection with a partial withdrawal of net cash
surrender value. We will send you an endorsement to reflect this change. We
may ask you to return the policy to us so that we can make a change. A
partial withdrawal will not affect the Face Amount of the policy if death
benefit Option B is in effect. 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 your 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 the same.
Especially during the initial policy years, the applicable surrender charge
may be a substantial portion of the premiums paid.
You may surrender a policy for its net cash surrender value at any
time while the Insured Person is living. You can do this by sending to us the
policy and a written request in a form satisfactory to us. The net cash
surrender value of the policy equals the cash surrender value minus any
outstanding loan and loan interest. We will compute the net cash surrender
value as of the business day we receive a request for surrender and the
policy, 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
You may allocate some or all of your Policy Account to the
Guaranteed Interest Division, which is part of our General Account and pays
interest at a declared rate guaranteed by us for each policy year. We also
guarantee the principal, after charges. The General Account supports our
insurance and annuity obligations. Because of applicable exemptive and
exclusionary provisions, we have not registered interests in the Guaranteed
Interest Division under the Securities Act of 1933, and we have registered
neither the Guaranteed Interest Division nor the General Account 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
-32-
<PAGE>
under the 1933 Act or the 1940 Act. We have 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 laws which require statements in a prospectus to be accurate and
complete.
AMOUNTS IN THE GUARANTEED INTEREST DIVISION
You may accumulate amounts in the Guaranteed Interest Division by:
- Allocating net premiums and loan repayments;
- Transferring amounts from the variable investment divisions; or
- Earning interest on amounts already allocated to the Guaranteed
Interest Division.
The amount in the Guaranteed Interest Division at any time is the
sum of all net premiums and loan repayments and transfers you have allocated
to that division and earned interest, plus amounts securing any outstanding
policy loans. This amount is reduced by amounts you transfer or withdraw from
and charges you allocate to this division.
INTEREST ON AMOUNTS IN THE GUARANTEED INTEREST DIVISION
We pay a declared interest rate on all amounts in the Guaranteed
Interest Division. At policy issuance and prior to each policy anniversary,
we declare the rates that will apply to amounts in the Guaranteed Interest
Division for the following policy year. We pay different rates 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, we will credit interest to amounts
in the Guaranteed Interest Division in the following way:
- We credit amounts in the Guaranteed Interest Division during the
entire policy month with interest from the beginning to the end
of the month;
- We credit amounts added to the Guaranteed Interest Division
during the month from net premiums or loan repayments with
interest from the date we receive them, except for the initial
net premium payment;
- We credit amounts you transfer to the Guaranteed Interest
Division with interest from the date of the transfer to the end
of the month; and
-33-
<PAGE>
- We credit amounts charged against or withdrawn from the
Guaranteed Interest Division with interest from the beginning of
the policy month to the date of the charge or withdrawal.
We allocate interest credited to any loaned amounts in the Guaranteed
Interest Division to the unloaned portion of the Guaranteed Interest Division.
TRANSFERS FROM THE GUARANTEED INTEREST DIVISION
You may request a transfer of unloaned amounts in the Guaranteed
Interest Division to one or more of the variable investment divisions. We
will make the transfer as of the date we receive a written request for it,
BUT WE WILL ONLY PROCESS A TRANSFER OUT OF THE GUARANTEED INVESTMENT DIVISION
IF WE RECEIVE IT WITHIN 30 DAYS AFTER A POLICY ANNIVERSARY. The maximum
amount that you may transfer 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 we issued it. The smallest
amount that you may transfer is the lesser of the unloaned value in the
Guaranteed Interest Division on the date the transfer takes effect or the
minimum transfer amount shown in the policy.
ADDITIONAL INFORMATION ABOUT EQUIBUILDER III-TM- POLICIES
RIGHT TO EXAMINE
You have a right to examine your policy. If for any reason you are
not satisfied with it, you may cancel the policy within the time limits
described below by sending it to us with a written request to cancel.
A request to cancel the policy must be postmarked no later than the
latest of the following two dates:
10 days after you receive your policy; or
45 days after you sign Part 1 of the policy application.
If you cancel the policy, we 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 you send a request for cancellation.
LAPSE
If the net cash surrender value 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, we will
start procedures to terminate the policy. We will notify you and any assignee
shown on our records in writing that the net cash surrender value is
insufficient to pay monthly charges or that an outstanding policy loan
-34-
<PAGE>
plus loan interest exceeds the cash surrender value of the policy. In either
case, we will notify you that a grace period has begun during which you must
pay an additional premium to prevent lapse of the policy, and that you must
pay a specified amount of premium that will cover estimated monthly charges
for three months, to avoid lapse of the policy. The grace period extends for
61 days beginning on the day we send you notice that it is starting.
If we receive at least the specified amount before the end of the
grace period, we will use the payment to satisfy the overdue charges. We will
place any remaining balance in the Policy Account, and will allocate it in
the same manner as previous premium payments. We will apply a payment of less
than the specified amount we receive before the end of the grace period to
overdue charges. This will not prevent lapse of the policy.
If we do not receive at least the specified payment within the 61
days, the policy will lapse without value. We will withdraw any amount left
in the Policy Account and apply this amount to the charges owed us, including
any applicable surrender charge.
If the Insured Person dies during the grace period, we will pay the
insurance benefits to the beneficiary, minus any outstanding policy loan and
loan interest and overdue charges.
REINSTATEMENT
You may reinstate your policy within three years after it lapses if:
- You provide evidence that the Insured person is still insurable;
and
- You send us a premium payment sufficient to keep the policy in
force for three months after the date it is reinstated.
The effective date of the reinstated policy will be the beginning of
the policy month which coincides with or follows the date we approve the
reinstatement application. Upon reinstatement, we will reduce the maximum
surrender charge for the policy by the amount of all surrender charges
previously imposed on the policy, and for purposes of determining any future
surrender charges on the policy, we will deem the policy to have been in
effect since the original Register Date. We will not reinstate previous loans.
POLICY PERIODS, ANNIVERSARIES, DATES AND AGES
We measure policy years, policy months and policy anniversaries 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,
we are 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 we receive a check for
the full initial premium. The
-35-
<PAGE>
issue date, shown on the Policy Information page of each policy, is the date
we actually issue a policy, 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.
We will put the initial net premium in the Policy Account as of the
date of payment. We will allocate it to the Money Market division of the
Separate Account, regardless of your premium allocation percentages, until
the first business day 15 days after the issue date. We will allocate any
other net premium we receive during that period to the Money Market division.
On the first business day 15 days after the issue date, we will reallocate
the amount in the Policy Account in accordance with your premium allocation
percentages. We first assess charges and deductions under the policy as of
the Register Date. See "The Features of EquiBuilder III-TM- 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 III-TM- policies
and does not purport to be complete or to cover all tax situations. This
discussion is not intended as tax advice. Counsel or other competent tax
advisors should be consulted for more complete information. This discussion
is based upon our understanding of the present Federal income tax laws. No
representation is made as to the likelihood of continuation of the present
Federal income tax laws or as to how they may be interpreted by the Internal
Revenue Service.
TAX STATUS OF THE POLICY
In order to qualify as a life insurance contract for Federal income
tax purposes and to receive the tax treatment normally accorded life
insurance contracts under Federal tax law, a life insurance policy must
satisfy certain requirements which are set forth in the Internal Revenue
Code. Guidance as to how these requirements are to be applied is limited.
Nevertheless, we believe that EquiBuilder III-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 III-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 III-TM-
policies will in all cases satisfy the applicable requirements. If it is
subsequently determined that an EquiBuilder III-TM- policy does not satisfy
the applicable
-36-
<PAGE>
requirements, we may take appropriate steps to bring the policy into
compliance with such requirements and we reserve the right to modify an
EquiBuilder III-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 the 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 III-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 III-TM- policies do not give Policy Owners investment control
over Separate Account assets, we reserve the right to modify the EquiBuilder
III-TM- policies as necessary to prevent Policy Owners from being treated as
the owners of the Separate Account assets supporting their policies.
In addition, federal income tax laws (the "Code") require that the
investments of the variable investment divisions be "adequately diversified"
in order for the EquiBuilder III-TM- policies to be treated as life insurance
contracts for Federal income tax purposes. It is intended that the investment
divisions, through the Funds, will satisfy these diversification requirements.
The following discussion assumes that the EquiBuilder III-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
III-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 III-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 III-TM- policies as to
premiums and benefits, the individual circumstances of each EquiBuilder
III-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
-37-
<PAGE>
current or prospective Policy Owner should consult with a competent advisor
to determine whether a policy transaction will cause the policy to be
classified as a modified endowment contract.
DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT
CONTRACTS. EquiBuilder III-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 III-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. However, the tax
consequences associated with Preferred Loans are less clear and a tax adviser
should be consulted about such loans.
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.
-38-
<PAGE>
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
III-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 III-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
the purchase of a new EquiBuilder III-TM- policy or a change in an existing
EquiBuilder III-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 III-TM- policy could change by legislation or otherwise.
Consult a tax adviser with respect to legislative developments and their
effect on the EquiBuilder III-TM- policy.
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 variable investment divisions or to the
EquiBuilder III-TM- policies. We reserve the right to charge the variable
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
We intend for the tables below 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 variable investment divisions 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 variable
investment divisions. The tables are for male non-tobacco users. We assume that
planned premium
-39-
<PAGE>
payments are 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 we guarantee 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 variable investment divisions. This charge includes a
.75% annual charge against the variable investment divisions for mortality and
expense risks and the effect on each division's investment experience of the
charges to the Funds' assets for management (.59% of aggregate average daily net
assets is assumed) and direct expenses of the Funds (.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 Fund and may vary from year to year.
During 1998 the aggregate actual charge for management fees and direct expenses
incurred by certain Funds as a percentage of average daily net assets exceeded
the figures assumed.
Fidelity Management has voluntarily agreed to use a portion of the
brokerage commissions paid by certain Funds to reduce their total expenses. In
addition, certain Fidelity Funds 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 Fund has an expense offset
arrangement which reduces the Fund's custodian fee, and the investment adviser
has agreed to bear expenses for MFS Capital Opportunities 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 Fund's yield.
The tables reflect a deduction from each premium for taxes (a 2%
deduction is assumed) and a sales expense deduction of 5% of each premium paid
during any policy year until total premiums for that policy year equal the
Target Premium. There are tables for both Death Benefit Option A and Death
Benefit Option B and we illustrate each option 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, we assume deduction of the current additional monthly administrative
charge of $24 per month to cover costs of establishing a policy in each of the
first 12 policy months. The tables reflect the fact that we currently do not
deduct anything for federal or state income taxes. If we deduct charges 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
-40-
<PAGE>
annually. These tables show that if a policy is surrendered in its very early
years for payment of its cash surrender value, that cash surrender value will be
low in comparison to the amount of the premiums accumulated with interest. Thus,
the cost of owning a policy for a relatively short time will be high.
At the request of an applicant for a policy, we 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 we will also provide an illustration of
future policy benefits based on both guaranteed and current cost factor
assumptions and actual Policy Account value. If you request illustrations more
than once in any policy year, we may assess a charge.
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 42
Age 40, Option A-Guaranteed Charges $3,000 42
Age 40, Option B-Current Charges $3,000 43
Age 40, Option B-Guaranteed Charges $3,000 43
</TABLE>
INITIAL FACE AMOUNT $100,000 MALE NON-TOBACCO
<TABLE>
<CAPTION>
PREMIUM PAGE
<S> <C> <C>
Age 40, Option A-Current Charges $1,500 44
Age 40, Option A-Guaranteed Charges $1,500 44
Age 40, Option B-Current Charges $1,500 45
Age 40, Option B-Guaranteed Charges $1,500 45
</TABLE>
-41-
<PAGE>
EQUIBUILDER III FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
INITIAL FACE AMOUNT $200,000 MALE AGE 40 NON-TOBACCO USER 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%
(1)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,150 200,000 200,000 200,000 200,000 2,147 2,246 2,346 2,445 1,512 1,612 1,711 1,811
2 6,458 200,000 200,000 200,000 200,000 4,527 4,819 5,120 5,430 3,622 3,915 4,216 4,525
3 9,930 200,000 200,000 200,000 200,000 6,850 7,436 8,055 8,707 5,710 6,296 6,915 7,567
4 13,577 200,000 200,000 200,000 200,000 9,118 10,099 11,161 12,310 7,978 8,959 10,021 11,170
5 17,406 200,000 200,000 200,000 200,000 11,331 12,807 14,449 16,272 10,191 11,667 13,309 15,132
6 21,426 200,000 200,000 200,000 200,000 13,491 15,565 17,934 20,635 12,351 14,425 16,794 19,495
7 25,647 200,000 200,000 200,000 200,000 15,571 18,345 21,600 25,414 14,659 17,433 20,688 24,502
8 30,080 200,000 200,000 200,000 200,000 17,575 21,151 25,464 30,658 16,891 20,467 24,780 29,974
9 34,734 200,000 200,000 200,000 200,000 19,505 23,986 29,543 36,421 19,049 23,530 29,087 35,965
10 39,620 200,000 200,000 200,000 200,000 21,361 26,851 33,849 42,760 21,133 26,623 33,621 42,532
11 44,751 200,000 200,000 200,000 200,000 23,144 29,747 38,404 49,743 23,144 29,747 38,404 49,743
12 50,139 200,000 200,000 200,000 200,000 24,883 32,703 43,249 57,467 24,883 32,703 43,249 57,467
13 55,796 200,000 200,000 200,000 200,000 26,546 35,690 48,378 65,988 26,546 35,690 48,378 65,988
14 61,736 200,000 200,000 200,000 200,000 28,137 38,712 53,815 75,400 28,137 38,712 53,815 75,400
15 67,972 200,000 200,000 200,000 200,000 29,656 41,772 59,583 85,807 29,656 41,772 59,583 85,807
16 74,521 200,000 200,000 200,000 200,000 31,097 44,864 65,704 97,321 31,097 44,864 65,704 97,321
17 81,397 200,000 200,000 200,000 200,000 32,425 47,959 72,176 110,050 32,425 47,959 72,176 110,050
18 88,617 200,000 200,000 200,000 200,000 33,660 51,075 79,047 124,157 33,660 51,075 79,047 124,157
19 96,198 200,000 200,000 200,000 200,000 34,796 54,209 86,347 139,806 34,796 54,209 86,347 139,806
20 104,158 200,000 200,000 200,000 210,604 35,824 57,355 94,107 157,167 35,824 57,355 94,107 157,167
25 150,340 200,000 200,000 200,000 335,208 38,995 73,073 141,260 274,761 38,995 73,073 141,260 274,761
</TABLE>
EQUIBUILDER III FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
INITIAL FACE AMOUNT $200,000 MALE AGE 40 NON-TOBACCO USER 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%
(1)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,150 200,000 200,000 200,000 200,000 2,147 2,246 2,346 2,445 1,512 1,612 1,711 1,811
2 6,458 200,000 200,000 200,000 200,000 4,119 4,404 4,696 4,997 3,215 3,499 3,791 4,092
3 9,930 200,000 200,000 200,000 200,000 6,015 6,568 7,153 7,770 4,875 5,428 6,013 6,630
4 13,577 200,000 200,000 200,000 200,000 7,831 8,735 9,718 10,784 6,691 7,595 8,578 9,644
5 17,406 200,000 200,000 200,000 200,000 9,566 10,904 12,398 14,065 8,426 9,764 11,258 12,925
6 21,426 200,000 200,000 200,000 200,000 11,216 13,069 15,197 17,638 10,076 11,929 14,057 16,498
7 25,647 200,000 200,000 200,000 200,000 12,781 15,229 18,123 21,534 11,869 14,317 17,211 20,622
8 30,080 200,000 200,000 200,000 200,000 14,256 17,382 21,181 25,788 13,572 16,698 20,497 25,104
9 34,734 200,000 200,000 200,000 200,000 15,639 19,521 24,377 30,437 15,183 19,065 23,921 29,981
10 39,620 200,000 200,000 200,000 200,000 16,925 21,643 27,718 35,523 16,697 21,415 27,490 35,295
11 44,751 200,000 200,000 200,000 200,000 18,109 23,742 31,211 41,094 18,109 23,742 31,211 41,094
12 50,139 200,000 200,000 200,000 200,000 19,178 25,805 34,856 47,198 19,178 25,805 34,856 47,198
13 55,796 200,000 200,000 200,000 200,000 20,120 27,819 38,655 53,888 20,120 27,819 38,655 53,888
14 61,736 200,000 200,000 200,000 200,000 20,923 29,770 42,611 61,230 20,923 29,770 42,611 61,230
15 67,972 200,000 200,000 200,000 200,000 21,569 31,642 46,725 69,294 21,569 31,642 46,725 69,294
16 74,521 200,000 200,000 200,000 200,000 22,049 33,423 51,006 78,170 22,049 33,423 51,006 78,170
17 81,397 200,000 200,000 200,000 200,000 22,352 35,102 55,464 87,963 22,352 35,102 55,464 87,963
18 88,617 200,000 200,000 200,000 200,000 22,472 36,671 60,116 98,795 22,472 36,671 60,116 98,795
19 96,198 200,000 200,000 200,000 200,000 22,394 38,116 64,975 110,806 22,394 38,116 64,975 110,806
20 104,158 200,000 200,000 200,000 200,000 22,107 39,424 70,060 124,162 22,107 39,424 70,060 124,162
25 150,340 200,000 200,000 200,000 264,527 16,454 42,854 99,388 216,826 16,454 42,854 99,388 216,826
</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 you pay premiums in different amounts or frequencies. 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 investment allocations to the variable investment
divisions and the different rates of return of the Funds, 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. WE cannot
represent that these hypothetical rates of return can be achieved for any one
year or sustained over any period of time.
-42-
<PAGE>
EQUIBUILDER III FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
INITIAL FACE AMOUNT $200,000 MALE AGE 40 NON-TOBACCO USER 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%
(1)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,150 202,144 202,243 202,342 202,441 2,144 2,243 2,342 2,441 1,509 1,608 1,707 1,806
2 6,458 204,516 204,808 205,108 205,416 4,516 4,808 5,108 5,416 3,611 3,903 4,203 4,512
3 9,930 206,827 207,411 208,028 208,677 6,827 7,411 8,028 8,677 5,687 6,271 6,888 7,537
4 13,577 209,079 210,054 211,111 212,254 9,079 10,054 11,111 12,254 7,939 8,914 9,971 11,114
5 17,406 211,269 212,736 214,367 216,178 11,269 12,736 14,367 16,178 10,129 11,596 13,227 15,038
6 21,426 213,402 215,459 217,808 220,488 13,402 15,459 17,808 20,488 12,262 14,319 16,668 19,348
7 25,647 215,446 218,192 221,415 225,190 15,446 18,192 21,415 25,190 14,534 17,280 20,503 24,278
8 30,080 217,404 220,937 225,198 230,328 17,404 20,937 25,198 30,328 16,720 20,253 24,514 29,644
9 34,734 219,278 223,696 229,171 235,948 19,278 23,696 29,171 35,948 18,822 23,240 28,715 35,492
10 39,620 221,067 226,465 233,344 242,098 21,067 26,465 33,344 42,098 20,839 26,237 33,116 41,870
11 44,751 222,772 229,245 237,728 248,835 22,772 29,245 37,728 48,835 22,772 29,245 37,728 48,835
12 50,139 224,424 232,068 242,370 256,252 24,424 32,068 42,370 56,252 24,424 32,068 42,370 56,252
13 55,796 225,986 234,895 247,247 264,380 25,986 34,895 47,247 64,380 25,986 34,895 47,247 64,380
14 61,736 227,462 237,728 252,376 273,297 27,462 37,728 52,376 73,297 27,462 37,728 52,376 73,297
15 67,972 228,851 240,567 257,772 283,082 28,851 40,567 57,772 83,082 28,851 40,567 57,772 83,082
16 74,521 230,146 243,402 263,443 293,820 30,146 43,402 63,443 93,820 30,146 43,402 63,443 93,820
17 81,397 231,303 246,187 269,361 305,562 31,303 46,187 69,361 105,562 31,303 46,187 69,361 105,562
18 88,617 232,345 248,943 275,564 318,436 32,345 48,943 75,564 118,436 32,345 48,943 75,564 118,436
19 96,198 233,265 251,660 282,059 332,553 33,265 51,660 82,059 132,553 33,265 51,660 82,059 132,553
20 104,158 234,051 254,322 288,853 348,026 34,051 54,322 88,853 148,026 34,051 54,322 88,853 148,026
25 150,340 235,526 266,223 327,450 447,960 35,526 66,223 127,450 247,960 35,526 66,223 127,450 247,960
</TABLE>
EQUIBUILDER III FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
INITIAL FACE AMOUNT $200,000 MALE AGE 40 NON-TOBACCO USER 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%
(1)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,150 202,144 202,243 202,342 202,441 2,144 2,243 2,342 2,441 1,509 1,608 1,707 1,806
2 6,458 204,101 204,384 204,675 204,975 4,101 4,384 4,675 4,975 3,196 3,479 3,770 4,070
3 9,930 205,974 206,523 207,103 207,716 5,974 6,523 7,103 7,716 4,834 5,383 5,963 6,576
4 13,577 207,758 208,653 209,625 210,681 7,758 8,653 9,625 10,681 6,618 7,513 8,485 9,541
5 17,406 209,452 210,772 212,246 213,890 9,452 10,772 12,246 13,890 8,312 9,632 11,106 12,750
6 21,426 211,050 212,871 214,963 217,360 11,050 12,871 14,963 17,360 9,910 11,731 13,823 16,220
7 25,647 212,551 214,949 217,781 221,119 12,551 14,949 17,781 21,119 11,639 14,037 16,869 20,207
8 30,080 213,951 216,998 220,700 225,188 13,951 16,998 20,700 25,188 13,267 16,314 20,016 24,504
9 34,734 215,245 219,012 223,721 229,595 15,245 19,012 23,721 29,595 14,789 18,556 23,265 29,139
10 39,620 216,426 220,981 226,842 234,367 16,426 20,981 26,842 34,367 16,198 20,753 26,614 34,139
11 44,751 217,491 222,899 230,063 239,536 17,491 22,899 30,063 39,536 17,491 22,899 30,063 39,536
12 50,139 218,423 224,746 233,372 245,124 18,423 24,746 33,372 45,124 18,423 24,746 33,372 45,124
13 55,796 219,209 226,504 236,759 251,159 19,209 26,504 36,759 51,159 19,209 26,504 36,759 51,159
14 61,736 219,834 228,154 240,212 257,672 19,834 28,154 40,212 57,672 19,834 28,154 40,212 57,672
15 67,972 220,279 229,672 243,712 264,688 20,279 29,672 43,712 64,688 20,279 29,672 43,712 64,688
16 74,521 220,535 231,042 247,250 272,249 20,535 31,042 47,250 72,249 20,535 31,042 47,250 72,249
17 81,397 220,590 232,243 250,812 280,395 20,590 32,243 50,812 80,395 20,590 32,243 50,812 80,395
18 88,617 220,437 233,264 254,392 289,179 20,437 33,264 54,392 89,179 20,437 33,264 54,392 89,179
19 96,198 220,064 234,084 257,973 298,651 20,064 34,084 57,973 98,651 20,064 34,084 57,973 98,651
20 104,158 219,460 234,683 261,542 308,870 19,460 34,683 61,542 108,870 19,460 34,683 61,542 108,870
25 150,340 211,984 232,988 277,915 372,796 11,984 32,988 77,915 172,796 11,984 32,988 77,915 172,796
</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 you pay premiums in different amounts or frequencies. 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 investment allocations to the variable investment
divisions and the different rates of return of the Funds, 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. WE cannot
represent that these hypothetical rates of return can be achieved for any one
year or sustained over any period of time.
-43-
<PAGE>
EQUIBUILDER III FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
INITIAL FACE AMOUNT $100,000 MALE AGE 40 NON-TOBACCO USER 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%
(1)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 100,000 100,000 100,000 100,000 883 929 974 1,020 566 611 657 702
2 3,229 100,000 100,000 100,000 100,000 2,025 2,158 2,296 2,437 1,573 1,706 1,843 1,984
3 4,965 100,000 100,000 100,000 100,000 3,138 3,407 3,691 3,990 2,568 2,837 3,121 3,420
4 6,788 100,000 100,000 100,000 100,000 4,221 4,674 5,164 5,695 3,651 4,104 4,594 5,125
5 8,703 100,000 100,000 100,000 100,000 5,275 5,960 6,722 7,567 4,705 5,390 6,152 6,997
6 10,713 100,000 100,000 100,000 100,000 6,300 7,266 8,368 9,624 5,730 6,696 7,798 9,054
7 12,824 100,000 100,000 100,000 100,000 7,284 8,578 10,096 11,873 6,828 8,122 9,640 11,417
8 15,040 100,000 100,000 100,000 100,000 8,223 9,895 11,910 14,334 7,881 9,553 11,568 13,992
9 17,367 100,000 100,000 100,000 100,000 9,122 11,220 13,819 17,033 8,894 10,992 13,591 16,805
10 19,810 100,000 100,000 100,000 100,000 9,978 12,550 15,827 19,995 9,864 12,436 15,713 19,881
11 22,376 100,000 100,000 100,000 100,000 10,794 13,889 17,945 23,253 10,794 13,889 17,945 23,253
12 25,069 100,000 100,000 100,000 100,000 11,583 15,250 20,193 26,852 11,583 15,250 20,193 26,852
13 27,898 100,000 100,000 100,000 100,000 12,331 16,618 22,567 30,818 12,331 16,618 22,567 30,818
14 30,868 100,000 100,000 100,000 100,000 13,034 17,993 25,074 35,192 13,034 17,993 25,074 35,192
15 33,986 100,000 100,000 100,000 100,000 13,697 19,377 27,729 40,026 13,697 19,377 27,729 40,026
16 37,261 100,000 100,000 100,000 100,000 14,331 20,782 30,553 45,382 14,331 20,782 30,553 45,382
17 40,699 100,000 100,000 100,000 100,000 14,923 22,197 33,549 51,313 14,923 22,197 33,549 51,313
18 44,309 100,000 100,000 100,000 100,000 15,465 23,614 36,724 57,883 15,465 23,614 36,724 57,883
19 48,099 100,000 100,000 100,000 100,000 15,953 25,033 40,092 65,170 15,953 25,033 40,092 65,170
20 52,079 100,000 100,000 100,000 100,000 16,382 26,447 43,666 73,262 16,382 26,447 43,666 73,262
25 75,170 100,000 100,000 100,000 156,542 17,440 33,328 65,276 128,313 17,440 33,328 65,276 128,313
</TABLE>
EQUIBUILDER III FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
INITIAL FACE AMOUNT $100,000 MALE AGE 40 NON-TOBACCO USER 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%
(1)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 100,000 100,000 100,000 100,000 883 929 974 1,020 566 611 657 702
2 3,229 100,000 100,000 100,000 100,000 1,800 1,929 2,061 2,198 1,348 1,476 1,609 1,745
3 4,965 100,000 100,000 100,000 100,000 2,679 2,930 3,195 3,475 2,109 2,360 2,625 2,905
4 6,788 100,000 100,000 100,000 100,000 3,519 3,930 4,376 4,861 2,949 3,360 3,806 4,291
5 8,703 100,000 100,000 100,000 100,000 4,319 4,928 5,608 6,367 3,749 4,358 5,038 5,797
6 10,713 100,000 100,000 100,000 100,000 5,077 5,922 6,892 8,003 4,507 5,352 6,322 7,433
7 12,824 100,000 100,000 100,000 100,000 5,793 6,910 8,230 9,785 5,337 6,454 7,774 9,329
8 15,040 100,000 100,000 100,000 100,000 6,465 7,892 9,625 11,726 6,123 7,550 9,283 11,384
9 17,367 100,000 100,000 100,000 100,000 7,091 8,863 11,079 13,844 6,863 8,635 10,851 13,616
10 19,810 100,000 100,000 100,000 100,000 7,668 9,822 12,595 16,157 7,554 9,708 12,481 16,043
11 22,376 100,000 100,000 100,000 100,000 8,195 10,767 14,175 18,686 8,195 10,767 14,175 18,686
12 25,069 100,000 100,000 100,000 100,000 8,665 11,689 15,818 21,450 8,665 11,689 15,818 21,450
13 27,898 100,000 100,000 100,000 100,000 9,070 12,581 17,524 24,473 9,070 12,581 17,524 24,473
14 30,868 100,000 100,000 100,000 100,000 9,406 13,438 19,293 27,783 9,406 13,438 19,293 27,783
15 33,986 100,000 100,000 100,000 100,000 9,663 14,250 21,123 31,411 9,663 14,250 21,123 31,411
16 37,261 100,000 100,000 100,000 100,000 9,836 15,011 23,017 35,394 9,836 15,011 23,017 35,394
17 40,699 100,000 100,000 100,000 100,000 9,919 15,713 24,978 39,778 9,919 15,713 24,978 39,778
18 44,309 100,000 100,000 100,000 100,000 9,910 16,354 27,012 44,616 9,910 16,354 27,012 44,616
19 48,099 100,000 100,000 100,000 100,000 9,801 16,925 29,124 49,969 9,801 16,925 29,124 49,969
20 52,079 100,000 100,000 100,000 100,000 9,585 17,419 31,318 55,908 9,585 17,419 31,318 55,908
25 75,170 100,000 100,000 100,000 118,840 6,358 18,157 43,629 97,410 6,358 18,157 43,629 97,410
</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 you pay premiums in different amounts or frequencies. 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 investment allocations to the variable investment
divisions and the different rates of return of the Funds, 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. WE cannot
represent that these hypothetical rates of return can be achieved for any one
year or sustained over any period of time.
-44-
<PAGE>
EQUIBUILDER III FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
INITIAL FACE AMOUNT $100,000 MALE AGE 40 NON-TOBACCO USER 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%
(1)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 100,881 100,927 100,972 101,018 881 927 972 1,018 564 609 655 700
2 3,229 102,020 102,153 102,289 102,430 2,020 2,153 2,289 2,430 1,567 1,700 1,837 1,978
3 4,965 103,126 103,394 103,677 103,975 3,126 3,394 3,677 3,975 2,556 2,824 3,107 3,405
4 6,788 104,201 104,651 105,139 105,666 4,201 4,651 5,139 5,666 3,631 4,081 4,569 5,096
5 8,703 105,243 105,924 106,680 107,519 5,243 5,924 6,680 7,519 4,673 5,354 6,110 6,949
6 10,713 106,254 107,211 108,303 109,548 6,254 7,211 8,303 9,548 5,684 6,641 7,733 8,978
7 12,824 107,218 108,499 110,000 111,757 7,218 8,499 10,000 11,757 6,762 8,043 9,544 11,301
8 15,040 108,133 109,783 111,771 114,162 8,133 9,783 11,771 14,162 7,791 9,441 11,429 13,820
9 17,367 109,002 111,067 113,624 116,785 9,002 11,067 13,624 16,785 8,774 10,839 13,396 16,557
10 19,810 109,821 112,346 115,559 119,645 9,821 12,346 15,559 19,645 9,707 12,232 15,445 19,531
11 22,376 110,595 113,622 117,586 122,771 10,595 13,622 17,586 22,771 10,595 13,622 17,586 22,771
12 25,069 111,337 114,910 119,723 126,203 11,337 14,910 19,723 26,203 11,337 14,910 19,723 26,203
13 27,898 112,029 116,191 121,960 129,957 12,029 16,191 21,960 29,957 12,029 16,191 21,960 29,957
14 30,868 112,670 117,462 124,299 134,061 12,670 17,462 24,299 34,061 12,670 17,462 24,299 34,061
15 33,986 113,261 118,725 126,750 138,555 13,261 18,725 26,750 38,555 13,261 18,725 26,750 38,555
16 37,261 113,818 119,993 129,334 143,495 13,818 19,993 29,334 43,495 13,818 19,993 29,334 43,495
17 40,699 114,323 121,249 132,042 148,909 14,323 21,249 32,042 48,909 14,323 21,249 32,042 48,909
18 44,309 114,768 122,482 134,870 154,836 14,768 22,482 34,870 54,836 14,768 22,482 34,870 54,836
19 48,099 115,148 123,687 137,822 161,325 15,148 23,687 37,822 61,325 15,148 23,687 37,822 61,325
20 52,079 115,454 124,853 140,897 168,426 15,454 24,853 40,897 68,426 15,454 24,853 40,897 68,426
25 75,170 115,668 129,796 158,112 214,332 15,668 29,796 58,112 114,332 15,668 29,796 58,112 114,332
</TABLE>
EQUIBUILDER III FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
<TABLE>
<CAPTION>
INITIAL FACE AMOUNT $100,000 MALE AGE 40 NON-TOBACCO USER 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%
(1)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 100,881 100,927 100,972 101,018 881 927 972 1,018 564 609 655 700
2 3,229 101,791 101,919 102,051 102,187 1,791 1,919 2,051 2,187 1,339 1,467 1,599 1,735
3 4,965 102,660 102,909 103,172 103,450 2,660 2,909 3,172 3,450 2,090 2,339 2,602 2,880
4 6,788 103,486 103,892 104,334 104,813 3,486 3,892 4,334 4,813 2,916 3,322 3,764 4,243
5 8,703 104,267 104,868 105,538 106,286 4,267 4,868 5,538 6,286 3,697 4,298 4,968 5,716
6 10,713 105,001 105,831 106,784 107,876 5,001 5,831 6,784 7,876 4,431 5,261 6,214 7,306
7 12,824 105,688 106,782 108,073 109,595 5,688 6,782 8,073 9,595 5,232 6,326 7,617 9,139
8 15,040 106,325 107,716 109,405 111,452 6,325 7,716 9,405 11,452 5,983 7,374 9,063 11,110
9 17,367 106,910 108,630 110,779 113,459 6,910 8,630 10,779 13,459 6,682 8,402 10,551 13,231
10 19,810 107,440 109,520 112,194 115,628 7,440 9,520 12,194 15,628 7,326 9,406 12,080 15,514
11 22,376 107,912 110,381 113,650 117,973 7,912 10,381 13,650 17,973 7,912 10,381 13,650 17,973
12 25,069 108,319 111,205 115,140 120,502 8,319 11,205 15,140 20,502 8,319 11,205 15,140 20,502
13 27,898 108,654 111,981 116,658 123,227 8,654 11,981 16,658 23,227 8,654 11,981 16,658 23,227
14 30,868 108,909 112,701 118,198 126,159 8,909 12,701 18,198 26,159 8,909 12,701 18,198 26,159
15 33,986 109,075 113,352 119,749 129,309 9,075 13,352 19,749 29,309 9,075 13,352 19,749 29,309
16 37,261 109,147 113,926 121,306 132,694 9,147 13,926 21,306 32,694 9,147 13,926 21,306 32,694
17 40,699 109,119 114,413 122,861 136,330 9,119 14,413 22,861 36,330 9,119 14,413 22,861 36,330
18 44,309 108,989 114,808 124,410 140,238 8,989 14,808 24,410 40,238 8,989 14,808 24,410 40,238
19 48,099 108,749 115,099 125,944 144,440 8,749 15,099 25,944 44,440 8,749 15,099 25,944 44,440
20 52,079 108,395 115,276 127,455 148,959 8,395 15,276 27,455 48,959 8,395 15,276 27,455 48,959
25 75,170 104,405 113,770 133,983 176,938 4,405 13,770 33,983 76,938 4,405 13,770 33,983 76,938
</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 you pay premiums in different amounts or frequencies. 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 investment allocations to the variable investment
divisions and the different rates of return of the Funds, 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. WE cannot
represent that these hypothetical rates of return can be achieved for any one
year or sustained over any period of time.
-45-
<PAGE>
ADDITIONAL INFORMATION
VOTING RIGHTS OF A POLICY OWNER
VOTING PRIVILEGES
We invest the variable investment divisions' assets in shares of the
Funds. We are the legal owner of the shares held in the variable account, and we
have the right to vote on certain issues. Among other things, we may:
vote to elect the Boards of Trustees of the Funds;
vote to ratify the selection of independent auditors for the Funds; and
vote on issues described in the Fund's current prospectus or requiring
a vote by shareholders under the Investment Company Act of 1940.
Even though we own the shares, we give you the opportunity to tell us
how to vote the number of shares attributable to your account value. We vote the
shares in accordance with your instructions at meetings of investment portfolio
shareholders. We vote any portfolio shares that are not attributable to
policies, and any investment portfolio shares where the owner does not give us
instructions, the same way we vote where we did receive owner instructions.
We reserve the right to vote investment portfolio shares without
getting instructions from policy owners if the federal securities laws,
regulations, or their interpretations change to allow this.
You may only instruct us on matters relating to the investment
portfolios corresponding to divisions where you have invested assets as of the
record date set by the investment portfolio's Board for the portfolio's
shareholders meeting. We determine the number of investment portfolio shares in
each division that we attribute to your policy by dividing your account value
allocated to that division by the net asset value of one share of the matching
investment portfolio.
We count fractional shares. If you have a voting interest, we send you
proxy material and a form on which to give us your voting instructions.
All investment portfolio shares have the right to one vote. The votes
of all investment portfolios are cast together on a collective basis, except on
issues where the interests of the portfolios differ. In these cases, voting is
done on a portfolio-by-portfolio basis.
Examples of issues that require a portfolio-by-portfolio vote are:
-46-
<PAGE>
- changes in the fundamental investment policy of a particular
investment portfolio; or
- approval of an investment advisory agreement.
MATERIAL CONFLICTS
We are required to track events to identify any material conflicts from
using investment portfolios for both variable life and variable annuity separate
accounts. The boards of the Funds, American Franklin, and other insurance
companies participating in the Funds have this same duty. There may be a
material conflict if:
- state insurance law or federal income tax law changes;
- investment management of an investment portfolio changes; or
- voting instructions given by owners of variable life insurance
policies and variable annuity contracts differ.
The investment portfolios may sell shares to certain qualified pension
and retirement plans qualifying under Code Section 401. These include cash or
deferred arrangements under Code Section 401(k). Therefore, there is a
possibility that a material conflict may arise between the interests of owners
in general, or certain classes of owners, and these retirement plans or
participants in these retirement plans.
If there is a material conflict, we have the duty to determine
appropriate action, including removing the portfolios involved from our variable
investment options. We may take other action to protect policy owners. This
could mean delays or interruptions of the variable operations.
When state insurance regulatory authorities require us, we may ignore
instructions relating to changes in an investment portfolio's adviser or its
investment policies. If we do ignore voting instructions, we give you a summary
of our actions in the next semi-annual report to owners.
Under the Investment Company Act of 1940, we must get your approval for
certain actions involving our separate account. In this case, you have one vote
for every $100 of value you have in the variable divisions. We cast votes
credited to amounts in the variable divisions not credited to policies in the
same proportion as votes cast by owners.
REPORTS TO POLICY OWNERS
After the end of each policy year, we will send you a report that shows
the current death benefit for your policy, the value of your Policy Account,
information about the variable investment divisions, the cash surrender value of
your policy, the amount of any outstanding policy loans, the amount of any
interest you owe on the loan and information about the current loan interest
rate. The annual report will also show any transactions
-47-
<PAGE>
involving your Policy Account that occurred during the year. Transactions
include premium allocations, deductions, and any transfers or withdrawals that
you made in that year. We will also send you semi-annual reports with financial
information on the Separate Account and the Funds, including a list of the
investments held by each portfolio. We will also include in reports any
information required by state law.
We will send you notices of transfers of amounts between variable
investment divisions and certain other policy transactions.
LIMITS ON AMERICAN FRANKLIN'S RIGHT TO CHALLENGE A POLICY
We can challenge the validity of an insurance policy (based on material
misstatements in the application or, with respect to any policy change, in the
application for the change) if it appears that the Insured Person is not
actually covered by the policy under our rules. However, there are some limits
on how and when we can challenge the policy.
Except on the basis of fraud, we 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, we 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.
We can challenge at any time an additional benefit that provides
benefits to the Insured Person in the event that the Insured Person becomes
totally disabled. We can also require proof of continuing disability.
If the Insured Person dies within the time that the validity of the
policy may be challenged, we may delay payment until we decide whether to
challenge the policy.
If the Insured Person's age or sex is misstated on any application, we
can provide the death benefit and any additional benefits that 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, we will limit the death benefit to
the total of all premiums that you 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 you
requested, we 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.)
-48-
<PAGE>
PAYMENT OPTIONS
We can pay policy benefits or other payments, such as the net cash
surrender value or death benefit, immediately in one sum, or in another form of
payment described below. Payments under these options do not depend on the
investment experience of any variable investment division. Instead, interest
accrues pursuant to the options chosen. (Such interest will be appropriately
includable in federal gross income of the beneficiary). If you do not arrange
for a specific form of payment before the Insured Person dies, the beneficiary
will have the choice. However, if you make 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 our rules at the time of selection.
Currently, you can pick these alternate payment options only 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: We 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: We will
pay the money at agreed intervals as a definite number of equal
payments and as long thereafter as the payee lives. You (or the
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 us while the
payee is alive. Interest will accrue on the money at a declared
interest rate, and interest will be paid at agreed-upon intervals.
FIXED AMOUNT: We 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.
We guarantee interest under the foregoing options at the rate of 3% a
year.
We may also pay or credit excess interest on the options from time to
time. We will determine the rate and manner of payment or crediting. Under the
second option we will pay no excess interest 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.
-49-
<PAGE>
We 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 our 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.
You may change your 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 we
pay 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
You must name a beneficiary when you apply for a policy. The
beneficiary is entitled to the insurance benefits of the policy. You may change
the beneficiary during the Insured Person's lifetime by sending us written
notice satisfactory to us. The change will take effect on the date the notice is
signed. However, the change will be subject to all payments made and actions we
took under the Policy before we received the notice. Changing the beneficiary
will cancel any previous arrangement made as to a payment option for benefits.
You can pick a payment option for the new beneficiary.
At the time of the Insured Person's death, we will pay the benefit
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, we will pay the
death benefit to you or to your executors or administrators.
ASSIGNMENT OF A POLICY
You may assign your rights in a policy to someone else as collateral
for a loan or for some other reason. In order to do so you must send a copy of
the assignment to us. We are not responsible for any payment made or any action
taken before we have 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 we described in this Prospectus.
-50-
<PAGE>
EMPLOYEE BENEFIT PLANS
Employers and employee organizations should consider, in
consultation with counsel, the impact of Title VII of the Civil Rights Act of
1964 on the purchase of EquiBuilder III-TM- policies in connection with an
employment-related insurance or benefit plan. The United States Supreme Court
held, in a 1983 decision, that, under Title VII, optional annuity benefits
under a deferred compensation plan could not vary on the basis of sex.
We did not design the EquiBuilder III-TM- policies for use in
connection with qualified plans or trusts under federal tax laws.
PAYMENT OF PROCEEDS
We will pay any death benefits, net cash surrender value or loan
proceeds within seven days after we receive the required form or request (and
other documents that may be required) at our Administrative Office. We determine
death benefits as of the date of death of the Insured Person. Subsequent changes
in the unit values of the variable investment divisions will not affect death
benefits. We will pay interest covering the period from the date of death to the
date of payment.
We may delay payment for one or more of the following reasons:
We contest the policy, or we are deciding whether or not to contest the
policy;
We 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 us to delay
payment to protect the Policy Owners.
We 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. We will pay interest of at least 3% a year from the date we receive a
request for withdrawal of net cash surrender value if payment from the
Guaranteed Interest Division is delayed more than 30 days.
DIVIDENDS
We pay no dividends on the policies offered by this Prospectus.
-51-
<PAGE>
DISTRIBUTION OF THE POLICIES
Franklin Financial Services Corporation ("Franklin Financial"), #1
Franklin Square, Springfield, Illinois 62713, a Delaware corporation and a
wholly-owned subsidiary of The Franklin Life Insurance Company, is the
principal underwriter of the EquiBuilder III-TM- policies for the Separate
Account under a Sales Agreement between Franklin Financial and the Separate
Account. Franklin Financial also acts as principal underwriter for Separate
Account VUL of American Franklin, which is a registered investment company
issuing interests in variable life insurance contracts having policy features
that are similar to those of EquiBuilder III policies but the assets of which
are invested in a different open-end management investment company. We no
longer offer new policies having an interest in that separate account.
Franklin Financial is also the principal underwriter of American Franklin's
EquiBuilder II variable life insurance policies under which interests in the
Separate Account are issued. The EquiBuilder II policies have a policy
features that are similar to those of the EquiBuilder III policies but have a
different sales charge structure. We no longer offer new EquiBuilder II
policies.
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.
We sell our policies primarily through our insurance agents or brokers,
who are authorized by law to sell variable life insurance. Pursuant to an
agreement between us and Franklin Financial, Franklin Financial will employ and
supervise agents chosen by us to sell the policies and will use its best efforts
to qualify such persons as its registered representatives. The policies may also
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.
Registered representatives of Franklin Financial earn commissions on
policy sales of 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. Commissions paid on policies issued under Separate Accounts
VUL and VUL-2 of American Franklin during the year 1998 were $22,024,072.
ADMINISTRATIVE SERVICES
While we are primarily responsible for administering the Policies,
American General Life Companies ("AGLC") has agreed (under 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 Funds and (2) the determination
of unit values for each variable investment division. We and AGLC are parties to
the services agreement. Pursuant to such agreement, we reimburse AGLC for the
costs and expenses which AGLC incurs in
-52-
<PAGE>
providing such administrative services in connection with the Policies, but
neither we nor AGLC incur a loss or realizes a profit by reason thereof.
STATE REGULATION
As a life insurance company organized and operated under Illinois law,
we are subject to statutory provisions governing such companies and to
regulation by the Illinois Director of Insurance. We file an annual statement
with the Director on or before March 1 of each year covering our operations for
the preceding year and our financial condition on December 31 of such year. Our
books and accounts are subject to review and examination by the Illinois
Insurance Department at all times, and the National Association of Insurance
Commissioners ("NAIC") periodically conducts a full examination of our
operations. The NAIC has divided the country into six geographic zones. A
representative of each such zone may participate in the examination.
We are subject to the insurance laws and regulations of the other
states where we operate. Generally, the insurance departments of those states
apply the law of Illinois in determining our permissible investments.
YEAR 2000
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 our information technology and
non-information technology systems; (2) assess which items in the inventory may
expose us 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 our
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. We have 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 we exchange 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 we exercise less,
or no, control over Year 2000 readiness. We have developed a plan to assess and
attempt to mitigate the risks associated with the potential failure of third
parties
-53-
<PAGE>
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 our
contingency planning efforts. Due to the various stages of third parties' Year
2000 readiness, our testing activities will extend through 1999.
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. We are
currently developing contingency plans and expect to substantially complete all
contingency planning activities during the second quarter of 1999.
RISKS AND UNCERTAINTIES. Based on our plans to make internal systems
ready for Year 2000, to deal with third party relationships, and to develop
contingency actions, we believe that we 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 size and complexity of this project, risks and uncertainties exist, and we
cannot predict a most reasonably likely worst case scenario. If conversion of
our 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 our 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 our 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. The cost
of activities related to Year 2000 readiness has not had a material adverse
effect on our results of operations or financial condition. In addition, we have
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
certain advice on matters relating to the federal securities laws.
-54-
<PAGE>
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.
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 have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon. 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. 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/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
We have filed a Registration Statement with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, with respect to the
policies
-55-
<PAGE>
offered by this Prospectus. This Prospectus does not contain all the information
in the Registration Statement, its amendments and exhibits. Read them for
further information on American Franklin, the Separate Account and the policies.
Statements in this Prospectus as to the content of policies and other legal
instruments are summaries. For a complete statement of their terms, refer to
those instruments as we filed them.
OTHER POLICIES AND CONTRACTS
We 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 our
EquiBuilder II-TM- variable life insurance policies, which have policy
features that are similar to those of EquiBuilder III-TM- policies but which
have a different sales charge structure. We no longer offer new EquiBuilder
II policies.
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 Life Insurance Company
("The Franklin") and Franklin Financial.
<TABLE>
<CAPTION>
Principal Occupations Position Held With American
Name During Past 5 Years Franklin and Franklin Financial
- ---- ------------------- -------------------------------
<S> <C> <C>
Robert M. Beuerlein Senior Vice Director, Senior Vice
President-Actuarial/Financial and President-Actuarial/Financial and
Treasurer, The Franklin, since December Treasurer, American Franklin.
of 1998; Senior Vice
President-Actuarial, The Franklin, prior
thereto; Director, The 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.
Brady W. Creel Senior Vice President, Chief Marketing Director, Senior Vice President and
Officer and Director, The Franklin since Chief Marketing Officer, American Franklin
September 3, 1996; Regional Manger, The
Franklin, prior to September, 1996.
</TABLE>
-56-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations Position Held With American
Name During Past 5 Years Franklin and Franklin Financial
- ---- ------------------- -------------------------------
<S> <C> <C>
Barbara Fossum Senior Vice President, The Franklin, Senior Vice President, American Franklin.
since 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 Senior Vice President and Chief
Compliance Officer, The Franklin, since Compliance Officer, American Franklin
December of 1998; Senior Vice President and Franklin Financial.
and Chief 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 Franklin.
Companies, 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.
</TABLE>
-57-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations Position Held With American
Name During Past 5 Years Franklin and Franklin Financial
- ---- ------------------- -------------------------------
<S> <C> <C>
Jon P. Newton* Director and Vice Chairman, The Director and Vice Chairman, American
Franklin, since January 31, 1996; Vice Franklin.
Chairman, 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.
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 Vice Chairman and Director, American
General Life Companies, Houston, Texas, Franklin; Director and Vice Chairman,
since December, 1998; Director, The Franklin Financial.
Franklin, 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.
</TABLE>
-58-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations Position Held With American
Name During Past 5 Years Franklin and Franklin Financial
- ---- ------------------- -------------------------------
<S> <C> <C>
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.
</TABLE>
-59-
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations Position Held With American
Name During Past 5 Years Franklin and Franklin Financial
- ---- ------------------- -------------------------------
<S> <C> <C>
William A. Simpson Director and Chief Executive Officer, Director and Chief Executive Officer,
The 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>
-60-
<PAGE>
- -------------------
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
-61-
<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
CHANGE IN NET ASSETS
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
CHANGE IN NET ASSETS
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 BOND 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
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
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 (Date of GROWTH RESEARCH INCOME RETURN UTILITIES VALUE
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 (120,764) 9,131 7,256 (1,130) 775
VUL-2 divisions, net
------------------------------------------------------------
Number of units outstanding,
end of year 34,035 164,324 218,934 59,098 18,351
------------------------------------------------------------
------------------------------------------------------------
</TABLE>
<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>
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
MERGING MFS GROWTH WITH TOTAL MFS MFS
GROWTH RESEARCH INCOME RETURN UTILITIES VALUE
IVISION 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 $1,592 $2,291 $2,141
securities
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
------------ ----- ----- -----
Fixed maturity securities
<S> <C> <C> <C>
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>
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>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
EQUIBUILDER III-TM-
ISSUED BY
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
AN AMERICAN GENERAL COMPANY
#1 FRANKLIN SQUARE,
SPRINGFIELD, ILLINOIS 62713-0001
EQUIBUILDER III IS A TRADEMARK OF THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
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 99 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:
<TABLE>
<S> <C>
1-A(1) Certified resolutions regarding organization of Separate Account
VUL-2.
1-A(2) Inapplicable.
1-A(3)(a) Sales Agreement between Franklin Financial Services Corporation
("Franklin Financial") and Separate Account VUL-2 of The American
Franklin Life Insurance Company, dated as of January 31, 1995.
1-A(3)(b)(i) Specimen Regional Manager Registered Representative Agreement
between Franklin Financial and registered representatives of
Franklin Financial distributing EquiBuilder III policies.
1-A(3)(b)(ii) Specimen Registered Representative Agreement between Franklin
Financial and registered representatives of Franklin Financial
distributing EquiBuilder III policies.
**1-A(3)(c) Schedule of Sales Commissions.
1-A(4) Agreement between The American Franklin Life Insurance Company
("American Franklin") and Franklin Financial, dated March 31,
l994, regarding supervision of agents.
1-A(5)(a) EquiBuilder III Flexible Premium Life Insurance Policy.
1-A(5)(b) Accidental Death Benefit Rider.
1-A(5)(c) Term Insurance Rider.
1-A(5)(d) Children's Term Insurance Rider.
1-A(5)(e) Disability Rider - Waiver of Monthly Deductions.
1-A(5)(f) Endorsement to EquiBuilder III Flexible Premium Life Insurance
policy when issued to a Policy Owner in the State of Texas.
1-A(5)(g) Accelerated Benefit Settlement Option Rider is incorporated
herein by reference to Exhibit 1-A(5)(g) to Post-Effective
Amendment No. 5 on Form S-6 of Separate Account VUL-2 of The
American Franklin Life Insurance Company, filed February 27, 1998
(Reg. No. 33-77470).
*1-A(6)(a) Articles of Incorporation of American Franklin.
1-A(6)(b) By-Laws of American Franklin are incorporated herein by reference
to Exhibit 1-A(6)(b) to Post-Effective Amendment No. 3 on Form
S-6 of Separate Account VUL-2 of The American Franklin Life
Insurance Company, filed February 28, 1997 (Reg. No. 33-77470).
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
1-A(7) Inapplicable.
1-A(8)(a)(1) Participation Agreement among American Franklin, Variable
Insurance Products Fund ("VIP") and Fidelity Distributors
Corporation ("FDC"), dated July 18, 1991.
1-A(8)(a)(2) Amendment No. 1 to Participation Agreement among American
Franklin, VIP and FDC, effective as of November 1, 1991.
1-A(8)(a)(3) Participation Agreement among American Franklin, Variable
Insurance Products Fund II ("VIP II") and FDC, dated July 18,
1991.
1-A(8)(a)(4) Amendment No. 1 to Participation Agreement among American
Franklin, VIP II and FDC, effective as of November 1, 1991.
1-A(8)(a)(5) Sub-License Agreement between FDC and American Franklin dated
July 18, 1991.
1-A(8)(a)(6) Amendment No. 2 to Participation Agreement among American
Franklin, VIP and FDC, dated January 18, 1995.
1-A(8)(a)(7) Amendment No. 2 to Participation Agreement among American
Franklin, VIP II and FDC, dated January 18, 1995.
1-A(8)(a)(8) Amendment No. 3 to Participation Agreement among American
Franklin, VIP and FDC, dated July 1, 1996, is hereby incorporated
herein by reference to Exhibit 8(a)(4) to the Registration
Statement on Form N-4 (Reg. No. 333-10489) of Separate Account
VA-1 of American Franklin, filed August 20, 1996.
1-A(8)(a)(9) Amendment No. 3 to Participation Agreement among American
Franklin, VIP II and FDC, dated July 1, 1996, is hereby
incorporated herein by reference to Exhibit 8(b)(4) to the
Registration Statement on Form N-4 (Reg. No. 333-10489) of
Separate Account VA-1 of American Franklin, filed August 20,
1996.
1-A(8)(a)(10) Amendment No. 4 to Participation Agreement among American
Franklin, VIP and FDC, dated November, 1996, is hereby
incorporated herein by reference to Exhibit 8(a)(5) to
Pre-Effective Amendment No. 1 to Registration Statement on Form
N-4 (Reg. No. 333-10489) of Separate Account VA-1 of American
Franklin, filed November 26, 1996.
1-A(8)(a)(11) Amendment No. 4 to Participation Agreement among American
Franklin, VIP II and FDC, dated November, 1996, is hereby
incorporated herein by reference to Exhibit 8(b)(5) to
Pre-Effective Amendment No. 1 to Registration Statement on Form
N-4 (Reg. No. 333-10489) of Separate Account VA-1 of American
Franklin, filed November 26, 1996.
1-A(8)(b)(1) Participation Agreement among MFS Variable Insurance Trust,
American Franklin and Massachusetts Financial Services Company
("MFS"), dated July 30, 1996 is incorporated herein by reference
to Exhibit 8(d)(1) to Form N-4 of Separate Account VA-1 of The
American Franklin Life Insurance Company, filed August 20, 1996
(Reg. No. 333-10489).
1-A(8)(b)(2) Indemnification Agreement between American Franklin and MFS dated
July 30, 1996 is incorporated herein by reference to Exhibit
8(d)(2) to Form N-4 of Separate Account VA-1 of The American
Franklin Life Insurance Company, filed August 20, 1996 (Reg. No.
333-10489).
1-A(8)(b)(3) Form of Amendment No. 1 dated November, 1996 to Participation
Agreement among MFS Variable Insurance Trust, American Franklin
and MFS is incorporated herein by reference to Exhibit (8)(d)(3)
to Form N-4 of Separate Account VA-1 of The American Franklin
Life Insurance Company, filed November 26, 1996 (Reg. No.
333-10489).
**1-A(8)(b)(4) Amendment No. 2 to Participation Agreement among American
Franklin, MFS Variable Insurance Trust and MFS, dated November,
1997.
1-A(8)(c) Modified Coinsurance Agreement between American Franklin and
Integrity, dated March 10, 1989.
1-A(8)(c)(1) Amendment No. 1 to Modified Coinsurance Agreement between
American Franklin and Integrity.
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
1-A(8)(c)(2) Amendment No. 2 to Modified Coinsurance Agreement between
American Franklin and Integrity is incorporated herein by
reference to similarly designated exhibit to Post-Effective
Amendment No. 3 on Form S-6 of Separate Account VUL-2 of The
American Franklin Life Insurance Company, filed February 28, 1997
(Reg. No. 33-77470).
1-A(8)(c)(3) Amendment No. 3 to Modified Coinsurance Agreement between
American Franklin and Integrity effective April 1, 1989 is
incorporated herein by reference to similarly designated exhibit
to Post-Effective Amendment No. 3 on Form S-6 of Separate Account
VUL-2 of The American Franklin Life Insurance Company, filed
February 28, 1997 (Reg. No. 33-77470).
1-A(8)(c)(4) Amendment No. 3 to Modified Coinsurance Agreement between
American Franklin, Integrity, and Phoenix Home Life Mutual
Insurance Company, assignee of Integrity effective January 1,
1997 is incorporated herein by reference to similarly designated
exhibit to Post-Effective Amendment No. 3 on Form S-6 of Separate
Account VUL-2 of The American Franklin Life Insurance Company,
filed February 28, 1997 (Reg. No. 33-77470).
1-A(8)(d) Reinsurance Agreement between American Franklin and The Franklin
Life Insurance Company ("The Franklin"), effective as of January
1, 1988.
1-A(8)(d)(1) Amendment No. 1 effective as of January 1, 1990 to Reinsurance
Agreement between American Franklin and The Franklin.
1-A(8)(d)(2) Amendment No. 2 effective as of January 1, 1990 to Reinsurance
Agreement between American Franklin and The Franklin.
1-A(8)(e) Modified Coinsurance Agreement effective as of January 1, 1997
between American Franklin and The Franklin is incorporated herein
by reference to similarly designated exhibit to Post-Effective
Amendment No. 5 on Form S-6 of Separate Account VUL-2 of The
American Franklin Life Insurance Company, filed February 27, 1998
(Reg. No. 33-77470).
1-A(8)(e)(1) Amendment No. 1 effective September 1, 1997 to Modified
Coinsurance Agreement between American Franklin and The Franklin
is incorporated herein by reference to similarly designated
exhibit to Post-Effective Amendment No. 5 on Form S-6 of Separate
Account VUL-2 of The American Franklin Life Insurance Company,
filed February 27, 1998 (Reg. No. 33-77470).
1-A(9) Administrative Service Agreement between The Franklin and
American Franklin, dated May 16, l988.
1-A(10) Application for EquiBuilder III Policy is incorporated herein by
reference to similarly designated exhibit to Post-Effective
Amendment No. 5 on Form S-6 of Separate Account VUL-2 of The
American Franklin Life Insurance Company, filed February 27, 1998
(Reg. No. 33-77470).
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.
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. 5 on
Form S-6 of Separate Account VUL-2 of The American Franklin Life
Insurance Company, filed February 27, 1998 (Reg. No. 33-77470).
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C>
7(b) Power of Attorney is incorporated herein by reference to
similarly designated exhibit to Post-Effective Amendment No. 7 on
Form S-6 of Separate Account VUL-2 of The American Franklin Life
Insurance Company, filed March 1, 1999 (Reg. No. 33-77470).
**8 Description of American Franklin's Issuance, Transfer and
Redemption Procedures for EquiBuilder III Policies pursuant to
Rule 6e-3(T)(b)(12)(iii) under the Investment Company Act of
1940.
9 Notice of Cancellation Right Pursuant to Rule
6e-3(T)(b)(13)(viii) under the Investment Company Act of 1940.
</TABLE>
- ----------
* Incorporated herein by reference to similarly designated exhibit to
Post-Effective Amendment No. 2 on Form S-6 of Separate Account VUL-2 of The
American Franklin Life Insurance Company, filed April 30, 1996 (Reg.
No. 33-77470).
** 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, 1998 (Reg.
No. 33-77470).
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant,
Separate Account VUL-2 of The American Franklin Life Insurance Company certifies
that it meets 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. 8 to the Registration Statement on Form
S-6 to be signed on its behalf by the undersigned, thereunto duly authorized,
and its seal to be hereunto affixed and attested, all in the City of
Springfield, and State of Illinois on the 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:
<TABLE>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/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
</TABLE>
II-7
<PAGE>
Exhibit List
<TABLE>
<S> <C>
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 III policies.
1-A(3)(b)(ii) Specimen Registered Representative Agreement between Franklin
Financial and registered representatives of Franklin Financial
distributing EquiBuilder III policies.
1-A(4) Agreement between The American Franklin Life Insurance Company
("American Franklin") and Franklin Financial, dated March 31,
l994, regarding supervision of agents.
1-A(5)(a) EquiBuilder III Flexible Premium Life Insurance Policy.
1-A(5)(b) Accidental Death Benefit Rider.
1-A(5)(c) Term Insurance Rider.
1-A(5)(d) Children's Term Insurance Rider.
1-A(5)(e) Disability Rider - Waiver of Monthly Deductions.
1-A(5)(f) Endorsement to EquiBuilder III Flexible Premium Life Insurance
policy when issued to a Policy Owner in the State of Texas.
1-A(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.
3(b) Opinion and Consent of Robert M. Beuerlein, Senior Vice President
- Actuarial/ Financial and Treasurer.
6(a) Consent of Ernst & Young LLP.
6(b) Consent of Sutherland Asbill & Brennan LLP.
</TABLE>
II-8
<PAGE>
<TABLE>
<S> <C>
9 Notice of Cancellation Right Pursuant to Rule
6e-3(T)(b)(13)(viii) under the Investment Company Act of 1940.
</TABLE>
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>
- 3 7 3 -
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>
- 3 7 4 -
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>
- 3 7 5 -
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;
(l) 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>
- 3 7 6 -
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>
- 3 7 7 -
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>
- 3 7 8 -
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>
- 3 7 9 -
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>
- 3 8 0 -
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>
- 3 8 1 -
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 1-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. REPRESENTATTVE 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 FF 640 1-D
<PAGE>
Exhibit 1-A(4)
AGREEMENT BETWEEN FRANKLIN FINANCIAL SERVICES CORPORATION AND THE
AMERICAN FRANKLIN LIFE INSURANCE COMPANY
THIS AGREEMENT dated March 31, 1994 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 its
EquiBuilder III-TM- 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 Act 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
<PAGE>
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 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 Franklin Financial and the supervisor or
supervisors designated by Franklin Financial, and that the Agent's right to
continue to 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 will fully comply with the requirements of the
NASD and of applicable law and will establish such rules and procedures as
may be necessary to adequately 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
2
<PAGE>
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 other remuneration payable to Agents by the Company.
All deductions from premiums for sales expenses 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
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
3
<PAGE>
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 the Agents with applicable rules of the
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.
4
<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: Robert M. Beuerlein
Title:
FRANKLIN FINANCIAL SERVICES
CORPORATION
By:______________________________
Name: Thomas J. Byerly
Title: President
5
<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 will 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
Form T1735 Page l
<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>
Policy Information Page 3
Table of Guaranteed Maximum Insurance Cost Rates Page 4
The Insurance Benefits We Pay Page 5
The Premiums You Pay Page 7
The Value of Your Policy Account Page 10
How a Loan Can be Made Page 13
Our Annual Report to You Page 16
Settlement Options Page 19
Application Follows Page 21
</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.
Form T1735 Page 2
<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.
Form T1735 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%] 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.
Form T1735 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.
***ADMINISTRATIVE OFFICE: THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY***
200 EAST WILSON BRIDGE ROAD
WORTHINGTON, OH 43085
Form T1735 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 INSURED
PERSON'S MONTHLY PERSON'S MONTHLY
ATTAINED AGE RATE ATTAINED AGE RATE
-------------- -------------- -------------- -------------
<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>
Form T1735 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.
Form T1735 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>
<S> <C> <C> <C>
-------------------- ------------------- -------------------- -------------------
INSURED INSURED
PERSON'S AGE PERCENTAGE PERSON'S AGE PERCENTAGE
-------------------- ------------------- -------------------- -------------------
-------------------- ------------------- -------------------- -------------------
40 and under 250% 65 120%
------------------- ------------------- -------------------- -------------------
-------------------- ------------------- -------------------- -------------------
45 215 70 115
------------------- ------------------- -------------------- -------------------
-------------------- ------------------- -------------------- -------------------
50 185 75 thru 90 105
-------------------- ------------------- -------------------- -------------------
-------------------- ------------------- -------------------- -------------------
55 150 95 100
-------------------- ------------------- -------------------- -------------------
-------------------- ------------------- -------------------- -------------------
60 130
-------------------- ------------------- -------------------- -------------------
</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:
Form T1735 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.
Form T1735 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.
Form T1735 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 investment 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.
Form T1735 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.
Form T1735 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.
Form T1735 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.
Form T1735 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.
Form T1735 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.
Form T1735 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 (VUL-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
Form T1735 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 premiums paid and policy transactions for
the year. For the investment divisions 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,
Form T1735 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.
Form TI735 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.
Form T1735 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.
Form T1735 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 MONTHLY AGE 5 10 15 20 5 10 15 20
OF INCOME OF YEARS YEARS YEARS YEARS YEARS YEARS YEARS YEARS
YEARS PAYEE
---------- ----------- --------- --------- --------- --------- --------- --------- --------- --------- --------
<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.
Form T1735 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.
Form T1735 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
Form T0112
3
<PAGE>
Exhibit 1-A(5)(f)
ENDORSEMENT TO EQUIBUILDER III 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")
1
<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
16
<PAGE>
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 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 officer
SEAL By:
-----------------------------------------
Title: Stephen P. Horvat, Jr.
Senior Vice President, General Counsel
and Secretary
Date:
Fund:
VARIABLE INSURANCE PRODUCTS FUND
By its authorized officer,
By:
-----------------------------------------
SEAL 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
--------
<TABLE>
<CAPTION>
<S> <C>
Name of Account Date of Resolution of Company's Board
which Established the Account
Separate Account VUL-2 April 9, 1991
</TABLE>
24
<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.)
25
<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.
26
<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.
<TABLE>
<S> <C>
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
</TABLE>
<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
1
<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.
2
<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.
3
<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
4
<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
5
<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.
6
<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.
7
<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
8
<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.
9
<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
10
<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.
11
<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
12
<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
13
<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.
14
<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
15
<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.
16
<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:
17
<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
18
<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
19
<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
20
<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
21
<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.
22
<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.
23
<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
<TABLE>
<CAPTION>
<S> <C>
FMR CORP. (MASSACHUSETTS CORPORATION) FIRST USE 2-22-1984; IN COMMERCE
CORPORATION) 2-22-1984.
82 DEVONSHIRE STREET
BOSTON, MA 02109, ASSIGNEE OF NO CLAIM IS MADE TO THE EXCLUSIVE
FIDELITY DISTRIBUTORS CORPORATION RIGHT TO USE "INVESTMENTS", APART
MASSACHUSETTS CORPORATION) FROM THE MARK AS SHOWN.
BOSTON, MA 02109
02109
SER. NO. 641,707, FILED 1-28-1987
FOR: MUTUAL FUND AND STOCK
BROKERAGE SERVICES,
IN CLASS 36
(U.S. CLS. 101 AND 102). RUSS HERMAN, EXAMINING ATTORNEY
</TABLE>
<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.
1337y
- 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
</TABLE>
<TABLE>
<S> <C>
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.
Standard $300,000
Substandard $200,000
through Table D
Accidental Death Benefit $100,000
(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
<TABLE>
<CAPTION>
LIFE DISABILITY A.D.B.
<S> <C> <C> <C> <C>
Insurance in force $ $ $ Plan
------------- ------------- -------------- ------------
Of which we retain $ $ $ Existing Pol.No(s).
------------- ------------- --------------
</TABLE>
Substandard ratings and dates
------------------------------------------
CURRENT INSURANCE
<TABLE>
<CAPTION>
LIFE DISABILITY A.D.B.
<S> <C> <C> <C> <C>
Insurance applied
for $ $ $ Plan
------------- ------------- -------------- ------------
Of which we New Policy No(s).
propose to retain $ $ $
------------- ------------- --------------
</TABLE>
Aviation Exclusion Provision? / / Yes / / No
REINSURANCE APPLIED FOR
<TABLE>
<S> <C> <C>
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?)
</TABLE>
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*
<TABLE>
<S> <C> <C>
- ------------------------------------------ --------------- -----------------------
NAME OF INSURED BIRTH DATE STATE OF RESIDENCE
</TABLE>
<TABLE>
<S> <C> <C> <C>
- --------------------------- ---------------------- ------------------ --------------------------------
POLICY NUMBER POLICY DATE SHORT TERM FROM RESERVE BASIS:
MORT.TABLE,INT.RATE,MODIFICATION
</TABLE>
<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
<TABLE>
<S> <C>
DATE CEDING COMPANY The American Franklin Life Ins. Co.
-----------------
DATED AT Springfield, Illinois BY
--------------------- -----------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
AGE / / AGE NEAREST BIRTHDAY
-------------------------
SHORT TERM:
PREMIUM $ / / AGE LAST BIRTHDAY
--------------------
</TABLE>
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
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
<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>
<S> <C> <C>
SUBSTANDARD
AGES STANDARD THROUGH TABLE P
---- --------------- ---------------
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*
Life
----
Ages Standard-Table P
---- ----------------
0-70 $50,000
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
----
Substandard
Ages Standard Through Table P
---- -------- ---------------
0-70 $50,000 on an $50,000 on an
individual life individual life
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
------------------
Classification First Year Renewal
-------------- ---------- -------
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
<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)
The
American Franklin
Life Insurance Company
Stephen P. Horvat, Jr.
Senior Vice President
General Counsel and Secretary
- -------------------------------------------------------------------------------
Building Brighter Tomorrows
March 30, 1994
The American Franklin Life Insurance Company
#1 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 EquiBuilder III
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,
in connection with the proposed offering of the Policies. The Registration
Statement covers an indefinite number of units of interest in the Separate
Account to be issued under the Policies. In addition, I have examined such other
documents and such questions 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.
3. The issuance and sale of the Policies have been duly authorized by
American
<PAGE>
The American Franklin Life Insurance Company
March 30, 1994
Page Two
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,
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. 8 to the Registration Statement on Form S-6
(Reg. No. 33-77470) by Separate Account VUL-2 of The American Franklin Life
Insurance Company (the "Separate Account") and The American Franklin Life
Insurance Company ("American Franklin") covering an indefinite number of
units of interests in the Separate Account. Net premiums received under
American Franklin's EquiBuilder III individual flexible premium variable life
insurance policies (the "Policies") to be offered by American Franklin may be
allocated by American Franklin to the Separate Account as described in the
Prospectus forming a part of the Registration Statement.
I participated in the preparation of the Policies and I am familiar
with their provisions. I am also familiar with the description contained in
the Prospectus. In my opinion:
1. The illustrations for the Policies set forth under
"Illustrations of Death Benefits, Policy Account and Cash
Surrender Values and Accumulated Premiums" in the Prospectus,
based on the assumptions stated in the illustrations, are
consistent with the provisions of the Policies. The rate
structure of the Policies has not been designed so as to make
the relationship between planned premiums and benefits, as
shown in the illustrations, appear to be correspondingly more
favorable to a prospective purchaser of Policies for males age
40 than to prospective purchasers of Policies for a male at
other ages or for a female.
2. The table of cost of insurance rates, set forth under
"Deductions and Charges--Charges Against the Policy Account--
Cost of Insurance Charge" in the Prospectus, contains both the
current and guaranteed rates to be used for these Policies for
males of illustrative ages. These rates have not been designed
so as to make the relationship between current and guaranteed
rates more favorable for males of the ages illustrated than
for a male at other ages or a female.
I hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of my name under the caption "Experts" in
the Prospectus forming a part of the Registration Statement.
Very truly yours,
/s/ Robert M. Beuerlein
-----------------------
ROBERT M. BEUERLEIN
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. 8 to the Registration Statement on Form S-6
(No. 33-77470) under the Securities Act of 1933 of Securities of Unit Investment
Trusts Registered on Form N-8B-2 and related Prospectus of Separate Account
VUL-2 of The American Franklin Life Insurance Company.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Chicago, Illinois
April 28, 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. 33-77470). 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:
