<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. 9
SEPARATE ACCOUNT VUL-2
of
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
(Exact Name of Trust)
THE AMERICAN FRANKLIN LIFE PAULETTA P. COHN, ESQ.
INSURANCE COMPANY THE AMERICAN FRANKLIN LIFE
(Name of Depositor) INSURANCE COMPANY
#1 Franklin Square 2929 Allen Parkway
Springfield, Illinois 62713 Houston, Texas 77019
(Address of Depositor's (Name and Address of Agent
Principal Executive Offices) for Service)
Insurance Company's Telephone Number,
including Area Code: (800) 528-2011
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 May 1, 2000 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. 9
Reconciliation and Tie
----------------------
Registration Item
of Form N-8B-2 Location in Prospectus
- -------------- ----------------------
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.
<PAGE>
Registration Item
of Form N-8B-2 Location in Prospectus
- -------------- ----------------------
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
<PAGE>
Registration Item
of Form N-8B-2 Location in Prospectus
- -------------- ----------------------
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
Other Policies and Contracts.
28 .................................... The American Franklin Life Insurance
Company; Management.
<PAGE>
Registration Item
of Form N-8B-2 Location in Prospectus
- -------------- ----------------------
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.
<PAGE>
Registration Item
of Form N-8B-2 Location in Prospectus
- -------------- ----------------------
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.
<PAGE>
Registration Item
of Form N-8B-2 Location in Prospectus
- -------------- ----------------------
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.
<PAGE>
================================================================================
Flexible Premium Variable Life Insurance Policy
EQUIBUILDER III(TM)
Issued by
The American Franklin
Life Insurance Company
Prospectus Dated May 1, 2000
Fidelity Investments:
Variable Insurance Products Fund and
Variable Insurance Products Fund II
Prospectus Dated April 30, 2000
Massachusetts Financial
Services Company:
MFS Variable Insurance Trust
Prospectus Dated May 1, 2000
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
Insured Person 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
May 1, 2000
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 ("VIPII") 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 Series
* MFS Research Series
* MFS Growth With Income Series
* MFS Total Return Series
* MFS Utilities Series
* MFS Capital Opportunities Series
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 guaranteed 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 rate 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
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
DEFINITIONS........................................................................................... v
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............................................................................. 19
CHARGES AGAINST THE POLICY ACCOUNT................................................................... 20
CHARGES AGAINST THE SEPARATE ACCOUNT................................................................. 21
SURRENDER CHARGE..................................................................................... 22
OTHER TRANSACTION CHARGES............................................................................ 24
ALLOCATION OF POLICY ACCOUNT CHARGES................................................................. 25
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
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................................................................................................ 35
REINSTATEMENT........................................................................................ 35
POLICY PERIODS, ANNIVERSARIES, DATES AND AGES........................................................ 36
FEDERAL TAX CONSIDERATIONS............................................................................ 36
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
TAX EFFECTS.......................................................................................... 36
IN GENERAL........................................................................................... 36
TESTING FOR MODIFIED ENDOWMENT CONTRACT STATUS....................................................... 37
OTHER EFFECTS OF POLICY CHANGES...................................................................... 38
TAXATION OF PRE-DEATH DISTRIBUTIONS IF YOUR POLICY IS NOT A MODIFIED ENDOWMENT CONTRACT.............. 38
TAXATION OF PRE-DEATH DISTRIBUTIONS IF YOUR POLICY IS A MODIFIED ENDOWMENT CONTRACT.................. 38
POLICY LAPSES AND REINSTATEMENTS..................................................................... 39
DIVERSIFICATION...................................................................................... 39
ESTATE AND GENERATION SKIPPING TAXES................................................................. 40
LIFE INSURANCE IN SPLIT DOLLAR ARRANGEMENTS.......................................................... 40
PENSION AND PROFIT-SHARING PLANS..................................................................... 41
OTHER EMPLOYEE BENEFIT PROGRAMS...................................................................... 41
ERISA................................................................................................ 41
OUR TAXES............................................................................................ 42
WHEN WE WITHHOLD INCOME TAXES........................................................................ 42
TAX CHANGES.......................................................................................... 42
ILLUSTRATIONS OF DEATH BENEFITS, POLICY ACCOUNT AND CASH SURRENDER VALUES, AND ACCUMULATED PREMIUMS... 43
TABLE OF CONTENTS FOR ILLUSTRATIONS................................................................... 44
INITIAL FACE AMOUNT $200,000 MALE NON-TOBACCO........................................................ 44
INITIAL FACE AMOUNT $100,000 MALE NON-TOBACCO........................................................ 45
ADDITIONAL INFORMATION................................................................................ 50
VOTING RIGHTS OF A POLICY OWNER....................................................................... 50
VOTING PRIVILEGES.................................................................................... 50
MATERIAL CONFLICTS................................................................................... 51
REPORTS TO POLICY OWNERS.............................................................................. 51
LIMITS ON AMERICAN FRANKLIN'S RIGHT TO CHALLENGE A POLICY............................................. 52
PAYMENT OPTIONS....................................................................................... 53
THE BENEFICIARY....................................................................................... 54
ASSIGNMENT OF A POLICY................................................................................ 54
EMPLOYEE BENEFIT PLANS............................................................................... 55
PAYMENT OF PROCEEDS................................................................................... 55
DIVIDENDS............................................................................................. 55
DISTRIBUTION OF THE POLICIES.......................................................................... 56
ADMINISTRATIVE SERVICES............................................................................... 56
STATE REGULATION...................................................................................... 57
YEAR 2000 CONSIDERATIONS.............................................................................. 57
LEGAL MATTERS......................................................................................... 57
LEGAL PROCEEDINGS..................................................................................... 58
EXPERTS............................................................................................... 58
REGISTRATION STATEMENT................................................................................ 59
OTHER POLICIES AND CONTRACTS......................................................................... 59
MANAGEMENT............................................................................................ 59
</TABLE>
________________________________________________________________________________
This prospectus generally describes only the variable portion of the policy,
except where the fixed account is specifically mentioned.
-iv-
<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 Fidelity Variable Insurance Products Fund, the
Fidelity 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, Your-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
-v-
<PAGE>
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
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* MFS Emerging Growth Series
* MFS Research Series
* MFS Growth With Income Series
* MFS Total Return Series
* MFS Utilities Series
* MFS Capital Opportunities Series
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)
- -----------------------------------------------------
Total Fund
Management Other Expenses
Fund Fee Expenses(1) (2)(3)
- -----------------------------------------------------
Fidelity VIP 0.18% 0.09% 0.27%
Money Market
- -----------------------------------------------------
Fidelity VIP 0.58% 0.11% 0.69%
High Income
- -----------------------------------------------------
Fidelity VIP 0.48% 0.09% 0.57%
Equity-Income
- -----------------------------------------------------
Fidelity VIP 0.58% 0.08% 0.66%
Growth
- -----------------------------------------------------
Fidelity VIP 0.73% 0.18% 0.91%
Overseas
- -----------------------------------------------------
Fidelity 0.43% 0.11% 0.54%
VIPII
Investment
Grade Bond
- -----------------------------------------------------
Fidelity 0.53% 0.10% 0.63%
VIPII
Asset
Manager
- -----------------------------------------------------
Fidelity VIPII 0.24% 0.10% 0.34%
Index 500
- -----------------------------------------------------
Fidelity VIPII 0.58% 0.13% 0.71%
Asset
Manager:
Growth
- -----------------------------------------------------
Fidelity VIPII 0.58% 0.09% 0.67%
Contrafund
- -----------------------------------------------------
MFS 0.75% 0.09% 0.84%
Emerging
Growth
- -----------------------------------------------------
MFS Research 0.75% 0.11% 0.86%
- -----------------------------------------------------
MFS Growth 0.75% 0.13% 0.88%
With Income
- -----------------------------------------------------
MFS Total 0.75% 0.15% 0.90%
Return
- -----------------------------------------------------
MFS Utilities 0.75% 0.16% 0.91%
- -----------------------------------------------------
MFS Capital 0.75% 0.27% 1.02%
Opportunities (4)
- -----------------------------------------------------
/(1)/Fund Annual Expenses are those incurred for the year ended December 31,
1999.
/(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
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operating expenses, after reimbursement for VIP Equity-Income Portfolio would
have been: 0.56%; for VIP Growth Portfolio: 0.65%; for VIP Overseas Portfolio:
0.87%; for VIPII Asset Manager Portfolio: 0.62%; for VIPII Index 500 Portfolio:
0.28%; for VIPII Contrafund Portfolio: 0.65%; and for VIPII Asset Manager:
Growth Portfolio: 0.70%.
(3) Each MFS series has an expense offset arrangement which reduces the series'
custodian fee based upon the amount of cash maintained by the series with its
custodian and dividend disbursing agent. Each MFS series may enter into other
such arrangements and directed brokerage arrangements, which would also have the
effect of reducing the series' expenses. MFS series expenses do not take into
account these expense reductions, and are therefore higher than the actual
expenses of the series. Including these reductions and any applicable expense
reimbursement, the total operating expenses would have been for MFS Emerging
Growth: 0.83%; for MFS Research: 0.85%; for MFS Growth with Income: 0.87%; for
MFS Total Return: 0.89%; for MFS Utilities: 0.90%; and for MFS Capital
Opportunities: 0.90%
(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 0.15% of
the average daily net assets of the series during the current fiscal year (after
taking into account the expense offset arrangement described above). After
taking this expense reimbursement into account (but not the expense offset
arrangement), the total operating expenses for MFS Capital Opportunities would
have been 0.91%. 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, 2001, 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.
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Taxes
We intend for the policy to satisfy the definition of life insurance under the
Internal Revenue Code. Therefore, the death benefit generally should be
excludable from the gross income of its recipient. However, there is some
uncertainty as to whether a policy issued on a substandard basis will satisfy
the Internal Revenue Code definition of life insurance. Under certain
circumstances, a policy could be treated as a modified endowment contract. See
"Tax Considerations" for a discussion of when withdrawals and loans from policy
value could be subject to Federal income tax and penalty tax.
Cash Benefits
Your Policy Account is the sum of the amounts allocated to the variable
investment divisions and the amount allocated to the Guaranteed Interest
Division. The cash surrender value (the account value less any applicable
surrender charges) may be substantially less than the premiums paid, especially
in early policy years.
Policy Loans. You may take loans in the aggregate amount of up to 90% of the
policy's cash surrender value. The minimum loan amount is usually $500. Policy
loans reduce the amount available for allocations and transfers.
Full Surrender. You may surrender the policy at any time for its net cash
surrender value. The net cash surrender value is the cash surrender value less
any outstanding loan and loan interest due.
Partial Surrender. You generally may make a partial surrender of the policy at
any time during the insured's life and after the policy has been in force one
year, provided that the policy has sufficient net cash surrender value
remaining.
Death Benefit
You must select one of two death benefit options under the policy:
Option A - the greater of the policy's Face Amount or a multiple of its Policy
Account value on the date of death; or
Option B - the greater of (i) the policy's Face Amount plus its account value or
(ii) a multiple of its Policy Account value on the date of death.
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.
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
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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
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.
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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.
We are a member of the Insurance Marketplace Standards Association
("IMSA"), and may include the IMSA logo and information about IMSA membership in
our advertisements. Companies that belong to IMSA subscribe to a set of ethical
standards covering the various aspects of sales and service for individually
sold life insurance and annuities.
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
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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 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
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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.
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.
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Choosing not to make premium payments may have the effect of reducing the
Policy Account. Reducing the Policy Account will, under Option A, increase the
amount at risk (and thereby increase cost of insurance charges) while leaving
the death benefit unchanged. Under Option B, it will decrease the death benefit
while leaving the amount at risk and the cost of insurance charge unchanged.
See "The Features of EquiBuilder III(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
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Policy Account, and then we decrease the Face Amount. See "The Features of
EquiBuilder III(TM) Policies-Death Benefits," above.
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
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written notice of our decision to disapprove any requested change for this
reason. See "Federal Tax Considerations," below.
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.
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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.
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<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:
Fidelity VIP Money Market Fidelity VIPII Asset Manager: Growth
Fidelity VIP High Income Fidelity VIPII Contrafund
Fidelity VIP Equity-Income MFS Emerging Growth Series
Fidelity VIP Growth MFS Research Series
Fidelity VIP Overseas MFS Growth With Income Series
Fidelity VIPII Investment Grade MFS Total Return Series
Bond MFS Utilities Series
Fidelity VIPII Asset Manager MFS Capital Opportunities Series
Fidelity VIPII Index 500
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<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,
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<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.
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<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 will also seek to
provide income equal to approximately 90% of the Dividend Yield on the Standard
& Poors 500 Composite Index. 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 (including emerging
market) 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
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<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
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
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<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.
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<PAGE>
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 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.
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<PAGE>
Charges Against the Policy Account
At the beginning of each policy month, we deduct the following charges from
each Policy Account.
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.
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<PAGE>
Illustrative Table of Monthly Cost of Insurance Rates for
Male Non-Tobacco (rounded) per $1,000 of Amount at Risk
$50,000 - $199,999 $200,000 and Over
Face Amount Size Band Face Amount Size Band
--------------------- ---------------------
Attained Guaranteed Current Guaranteed Current
Age Maximum Rate Rate Maximum Rate Rate
--- ------------ ---- ------------ ----
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
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.
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<PAGE>
We may profit from this charge and may use such profits for any lawful
purpose including paying distribution expenses.
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
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<PAGE>
before surrender or lapse (i.e., only if the maximum surrender charge is
not reached). However, structuring payments in this manner will increase
the risk that a policy will lapse. 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.
During Premium Charge Premium Charge Premium Charge
Year
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
- --------------------------------------------------------------------------------
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.
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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)
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<PAGE>
---------------------------------------------------------------------------
Then multiply this fraction by the surrender charge in effect before
the decrease.
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.
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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.
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<PAGE>
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 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
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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 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
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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.
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
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or the Guaranteed Interest Division in accordance with existing allocations
unless you also instruct us to change them.
The policies are not designed for professional market timing organizations
or other entities using progammed and frequent transfers. We reserve the right
at any time and without prior notice to any party to terminate, suspend, or
modify our policies or procedures regarding telephone requests or to stop
permitting telephone requests altogether.
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
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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 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
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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.
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:
Policy Year Maximum Aggregate Amount Eligible for
Preferred Loan Status as a Percentage
of the Cash Surrender Value
11 10%
12 20%
13 30%
14 40%
15 50%
16 60%
17 70%
18 80%
19 and thereafter 90%
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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 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.
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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 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
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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 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;
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. 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
. 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(TM)
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 greater of (1) the premiums paid or (2) the Policy Account value
plus any amount deducted from the premiums paid prior to allocation to the
Policy Account.
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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 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.
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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 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
Tax Effects
This discussion is based on current federal income tax law and
interpretations. It assumes that the policy owner is a natural person who is a
U.S. citizen and resident. The tax effects on corporate taxpayers, non-U.S.
residents or non-U.S. citizens, may be different. This discussion is general in
nature, and should not be considered tax advice, for which you should consult a
qualified tax adviser.
In General
Your policy will be treated as "life insurance" for federal income tax
purposes (a) if it meets the definition of life insurance under Section 7702 of
the Internal Revenue Code of 1986, as amended (the "Code") and (b) for as long
as the investments made by the
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underlying Funds satisfy certain investment diversification requirements under
Section 817(h) of the Code. We believe that the policy will meet these
requirements and that:
. the death benefit received by the beneficiary under your policy will not be
subject to federal income tax; and
. increases in your policy's accumulation value as a result of interest or
investment experience will not be subject to federal income tax unless and
until there is a distribution from your policy, such as a surrender or a
partial surrender.
The federal income tax consequences of a distribution from your policy can
be affected by whether your policy is determined to be a "modified endowment
contract" (which is discussed below). In all cases, however, the character of
all income that is described below as taxable to the payee will be ordinary
income (as opposed to capital gain).
Testing for Modified Endowment Contract Status
Your policy will be a "modified endowment contract" if, at any time during
the first seven policy years, you have paid a cumulative amount of premiums that
exceeds the premiums that would have been paid by that time under a similar
fixed-benefit insurance policy that was designed (based on certain assumptions
mandated under the Code) to provide for paid-up future benefits after the
payment of seven level annual premiums. This is called the "seven-pay" test.
Whenever there is a "material change" under a policy, the policy will
generally be (a) treated as a new contract for purposes of determining whether
the policy is a modified endowment contract and (b) subjected to a new seven-pay
period and a new seven-pay limit. The new seven-pay limit would be determined
taking into account, under a prescribed formula, the accumulation value of the
policy at the time of such change. A materially changed policy would be
considered a modified endowment contract if it failed to satisfy the new seven-
pay limit. A material change for these purposes could occur as a result of a
change in death benefit option. A material change will occur as a result of an
increase in your policy's specified amount of coverage, and certain other
changes.
If your policy's benefits are reduced during the first seven policy years
(or within seven years after a material change), the calculated seven-pay
premium limit will be redetermined based on the reduced level of benefits and
applied retroactively for purposes of the seven-pay test. (Such a reduction in
benefits could include, for example, a decrease in the specified amount
resulting from a partial surrender). If the premiums previously paid are greater
than the recalculated seven-payment premium level limit, the policy will become
a modified endowment contract. A life insurance policy that is received in
exchange for a modified endowment contract will also be considered a modified
endowment contract.
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Other Effects of Policy Changes
Changes made to your policy (for example, a decrease in benefits or a lapse
or reinstatement of your policy) may also have other effects on your policy.
Such effects may include impacting the maximum amount of premiums that can be
paid under your policy, as well as the maximum amount of accumulation value that
may be maintained under your policy.
Taxation of Pre-death Distributions if Your Policy is Not a Modified Endowment
Contract
As long as your policy remains in force during the Insured Person's
lifetime and not as a modified endowment contract, a policy loan will be treated
as indebtedness, and no part of the loan proceeds will be subject to current
federal income tax. Interest on the policy loan generally will not be tax
deductible.
After the first 15 policy years, the proceeds from a partial surrender will
not be subject to federal income tax except to the extent such proceeds exceed
your "basis" in your policy. (Your basis generally will equal the premiums you
have paid, less the amount of any previous distributions from your policy that
were not taxable.) During the first 15 policy years, the proceeds from a partial
surrender could be subject to federal income tax, under a complex formula, to
the extent that your accumulation value exceeds your basis in your policy.
On the maturity date or upon full surrender, any excess in the amount of
proceeds we pay (including amounts we use to discharge any policy loan) over
your basis in the policy, will be subject to federal income tax. In addition, if
a policy ends after a grace period while there is a policy loan, the
cancellation of such loan and accrued loan interest will be treated as a
distribution and could be subject to tax under the above rules. Finally, if you
make an assignment of rights or benefits under your policy you may be deemed to
have received a distribution from your policy, all or part of which may be
taxable.
Taxation of Pre-death Distributions if Your Policy is a Modified Endowment
Contract
If your policy is a modified endowment contract, any distribution from your
policy during the insured person's lifetime will be taxed on an "income-first"
basis. Distributions for this purpose include a loan (including any increase in
the loan amount to pay interest on an existing loan or an assignment or a pledge
to secure a loan) or a partial surrender. Any such distributions will be
considered taxable income to you to the extent your accumulation value exceeds
your basis in the policy. For modified endowment contracts, your basis is
similar to the basis described above for other policies, except that your basis
would be increased by the amount of any prior loan under your policy that was
considered taxable income to you. For purposes of determining the taxable
portion of any distribution, all modified endowment contracts issued by the same
insurer (or its affiliate) to the same owner (excluding certain qualified plans)
during any calendar year are aggregated. The Treasury Department has authority
to prescribe additional rules to
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<PAGE>
prevent avoidance of "income-first" taxation on distributions from modified
endowment contracts.
A 10% penalty tax also will apply to the taxable portion of most
distributions from a policy that is a modified endowment contract. The penalty
tax will not, however, apply to distributions:
. to taxpayers 59 1/2 years of age or older;
. in the case of a disability (as defined in the Code); or
. received as part of a series of substantially equal periodic annuity
payments for the life (or life expectancy) of the taxpayer or the
joint lives (or joint life expectancies) of the taxpayer and his or
her beneficiary.
If your policy ends after a grace period while there is a policy loan, the
cancellation of the loan will be treated as a distribution to the extent not
previously treated as such and could be subject to tax, including the 10%
penalty tax, as described above. In addition, on the maturity date or upon a
full surrender, any excess of the proceeds we pay (including any amounts we use
to discharge any policy loan) over your basis in the policy, will be subject to
federal income tax and, unless an exception applies, the 10% penalty tax.
Distributions that occur during a policy year in which your policy becomes
a modified endowment contract, and during any subsequent policy years, will be
taxed as described in the two preceding paragraphs. In addition, distributions
from a policy within two years before it becomes a modified endowment contract
also will be subject to tax in this manner. This means that a distribution made
from a policy that is not a modified endowment contract could later become
taxable as a distribution from a modified endowment contract. The Treasury
Department has been authorized to prescribe rules which would treat similarly
other distributions made in anticipation of a policy becoming a modified
endowment contract.
Policy Lapses and Reinstatements
A policy which has lapsed may have the tax consequences described above,
even though you may be able to reinstate that policy. For tax purposes, some
reinstatements may be treated as the purchase of a new insurance contract.
Diversification
Under Section 817(h) of the Code, the Treasury Department has issued
regulations that implement investment diversification requirements. Our failure
to comply with these regulations would disqualify your policy as a life
insurance policy under Section 7702 of the Code. If this were to occur, you
would be subject to federal income tax on the income under the policy for the
period of the disqualification and for subsequent periods. Also, if the insured
died during such period of disqualification or subsequent periods, a portion of
the death benefit proceeds would be taxable to the beneficiary. Separate
Account VUL-2,
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<PAGE>
through the Funds, intends to comply with these requirements. Although we do not
have direct control over the investments or activities of the Funds, we have
entered into agreements with them requiring the Funds to comply with the
diversification requirements of the Section 817(h) Treasury Regulations.
In connection with the issuance of then temporary diversification
regulations, the Treasury Department stated that it anticipated the issuance of
guidelines prescribing the circumstances in which the ability of a policy owner
to direct his or her investment to particular divisions within Separate Account
VUL-2 may cause the policy owner, rather than the insurance company, to be
treated as the owner of the assets in the account. Due to the lack of specific
guidance on investor control, there is some uncertainty about when a policy
owner is considered the owner of the assets for tax purposes. If you were
considered the owner of the assets of Separate Account VUL-2, income and gains
from the account would be included in your gross income for federal income tax
purposes. Under current law, however, we believe that American Franklin, and not
the owner of a policy, would be considered the owner of the assets of Separate
Account VUL-2.
Estate and Generation Skipping Taxes
If the insured person is the policy's owner, the death benefit under the
policy will generally be includable in the owner's estate for purposes of
federal estate tax. If the owner is not the insured person, under certain
conditions, only an amount approximately equal to the cash surrender value of
the policy would be includable. The federal estate tax is integrated with the
federal gift tax under a unified rate schedule and unified credit. The Taxpayer
Relief Act of 1997 gradually raises the value of the credit over the next seven
years to $1,000,000. In addition, an unlimited marital deduction may be
available for federal estate tax purposes.
As a general rule, if a "transfer" is made to a person two or more
generations younger than the policy's owner, a generation skipping tax may be
payable at rates similar to the maximum estate tax rate in effect at the time.
The generation skipping tax provisions generally apply to "transfers" that would
be subject to the gift and estate tax rules. Individuals are generally allowed
an aggregate generation skipping tax exemption of $1 million. Because these
rules are complex, you should consult with a qualified tax adviser for specific
information, especially where benefits are passing to younger generations.
The particular situation of each policy owner, insured person or
beneficiary will determine how ownership or receipt of policy proceeds will be
treated for purposes of federal estate and generation skipping taxes, as well as
state and local estate, inheritance and other taxes.
Life Insurance in Split Dollar Arrangements
Internal Revenue Service ("IRS") has released a technical advice memorandum
("TAM") on the taxability of the insurance policies used in certain split dollar
arrangements. A TAM provides advice as to the internal revenue laws,
regulations, and
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<PAGE>
related statutes with respect to a specific set of facts and a specific
taxpayer. In the TAM, among other things, the IRS concluded that an employee was
subject to current taxation on the excess of the cash surrender value of the
policy over the premiums to be returned to the employer. Purchasers of life
insurance policies to be used in split dollar arrangements are strongly advised
to consult with a qualified tax adviser to determine the tax treatment resulting
from such an arrangement.
Pension and Profit-sharing Plans
If a life insurance policy is purchased by a trust or other entity that
forms part of a pension or profit-sharing plan qualified under Section 401(a) of
the Code for the benefit of participants covered under the plan, the federal
income tax treatment of such policies will be somewhat different from that
described above.
The reasonable net premium cost for such amount of insurance that is
purchased as part of a pension or profit-sharing plan is required to be included
annually in the plan participant's gross income. This cost (generally referred
to as the "P.S. 58" cost) is reported to the participant annually. If the plan
participant dies while covered by the plan and the policy proceeds are paid to
the participant's beneficiary, then the excess of the death benefit over the
policy's accumulation value will not be subject to federal income tax. However,
the policy's accumulation value will generally be taxable to the extent it
exceeds the participant's cost basis in the policy. The participant's cost basis
will generally include the costs of insurance previously reported as income to
the participant. Special rules may apply if the participant had borrowed from
the policy or was an owner-employee under the plan.
There are limits on the amounts of life insurance that may be purchased on
behalf of a participant in a pension or profit-sharing plan. Complex rules, in
addition to those discussed above, apply whenever life insurance is purchased by
a tax qualified plan. You should consult a qualified tax adviser.
Other Employee Benefit Programs
Complex rules may also apply when a policy is held by an employer or a
trust, or acquired by an employee, in connection with the provision of other
employee benefits. These policy owners must consider whether the policy was
applied for, by, or issued to, a person having an insurable interest under
applicable state law and with the insured person's consent. The lack of an
insurable interest or consent may, among other things, affect the qualification
of the policy as life insurance for federal income tax purposes and the right of
the beneficiary to receive a death benefit.
ERISA
Employers and employer-created trusts may be subject to reporting,
disclosure and fiduciary obligations under the Employee Retirement Income
Security Act of 1974, as amended. You should consult a qualified legal adviser.
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<PAGE>
Our Taxes
We report the operations of Separate Account VUL-2 in our federal income
tax return, but we currently pay no income tax on Separate Account VUL-2's
investment income and capital gains, because these items are, for tax purposes,
reflected in our variable life insurance policy reserves. We currently make no
charge to any Separate Account VUL-2 division for taxes. We reserve the right to
make a charge in the future for taxes incurred; for example, a charge to
Separate Account VUL-2 for income taxes we incur that are allocable to the
policy.
We may have to pay state, local or other taxes in addition to applicable
taxes based on premiums. At present, these taxes are not substantial. If they
increase, we may make charges for such taxes when they are attributable to
Separate Account VUL-2 or allocable to the policy.
Certain Funds in which Separate Account VUL-2 assets are invested may elect
to pass through to American Franklin taxes withheld by foreign taxing
jurisdictions on foreign source income. Such an election will result in
additional taxable income and income tax to American Franklin. The amount of
additional income tax, however, may be more than offset by credits for the
foreign taxes withheld which are also passed through. These credits may provide
a benefit to American Franklin.
When We Withhold Income Taxes
Generally, unless you provide us with an election to the contrary before we
make the distribution, we are required to withhold income tax from any proceeds
we distribute as part of a taxable transaction under your policy. In some cases,
where generation skipping taxes may apply, we may also be required to withhold
for such taxes unless we are provided satisfactory written notification that no
such taxes are due.
In the case of non-resident aliens who own a policy, the withholding rules
may be different. With respect to distributions from modified endowment
contracts, nonresident aliens are generally subject to federal income tax
withholding at a statutory rate of 30% of the distributed amount. In some
cases, the non-resident alien may be subject to lower or even no withholding if
the United States has entered into a tax treaty with his or her country of
residence.
Tax Changes
The U.S. Congress frequently considers legislation that, if enacted, could
change the tax treatment of life insurance policies. In addition, the Treasury
Department may amend existing regulations, issue regulations on the
qualification of life insurance and modified endowment contracts, or adopt new
interpretations of existing law. State and local tax law or, if you are not a
U.S. citizen and resident, foreign tax law, may also affect the tax consequences
to you, the insured person or your beneficiary, and are subject to change. Any
changes in federal, state, local or foreign tax law or interpretation could have
a retroactive effect. We suggest you consult a qualified tax adviser.
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<PAGE>
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 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 a charge for 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 (.11% 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 -1.45%, on
4% it would be 2.55%, on 8% it would be 6.55% and on 12% it would be 10.55%.
Management fees and direct expenses of the Funds vary by Fund and may vary from
year to year. The charges to the Funds' assets for management and direct
expenses are based on the average of the expense ratios of each of the Funds for
the last fiscal year and take into account current expense reimbursement
arrangements.
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.
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<PAGE>
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 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
Premium Page
Age 40, Option A-Current Charges $3,000 46
Age 40, Option A-Guaranteed Charges $3,000 46
Age 40, Option B-Current Charges $3,000 47
Age 40, Option B-Guaranteed Charges $3,000 47
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<PAGE>
Initial Face Amount $100,000 Male Non-Tobacco
Premium Page
Age 40, Option A-Current Charges $1,500 48
Age 40, Option A-Guaranteed Charges $1,500 48
Age 40, Option B-Current Charges $1,500 49
Age 40, Option B-Guaranteed Charges $1,500 49
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<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/1/
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 Premium/(1)/ 0% 4% 8% 12% 0% 4% 8% 12% 0% 4% 8% 12%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,150 200,000 200,000 200,000 200,000 2,148 2,247 2,346 2,446 1,513 1,612 1,711 1,811
2 6,458 200,000 200,000 200,000 200,000 4,528 4,821 5,122 5,431 3,623 3,916 4,217 4,526
3 9,930 200,000 200,000 200,000 200,000 6,852 7,439 8,058 8,710 5,712 6,299 6,918 7,570
4 13,577 200,000 200,000 200,000 200,000 9,123 10,104 11,166 12,316 7,983 8,964 10,026 11,176
5 17,406 200,000 200,000 200,000 200,000 11,338 12,815 14,457 16,281 10,198 11,675 13,317 15,141
6 21,426 200,000 200,000 200,000 200,000 13,501 15,576 17,946 20,649 12,361 14,436 16,806 19,509
7 25,647 200,000 200,000 200,000 200,000 15,584 18,360 21,618 25,434 14,672 17,448 20,706 24,522
8 30,080 200,000 200,000 200,000 200,000 17,592 21,171 25,488 30,686 16,908 20,487 24,804 30,002
9 34,734 200,000 200,000 200,000 200,000 19,525 24,011 29,573 36,459 19,069 23,555 29,117 36,003
10 39,620 200,000 200,000 200,000 200,000 21,385 26,882 33,889 42,810 21,157 26,654 33,661 42,582
11 44,751 200,000 200,000 200,000 200,000 23,173 29,785 38,453 49,808 23,173 29,785 38,453 49,808
12 50,139 200,000 200,000 200,000 200,000 24,917 32,748 43,310 57,549 24,917 32,748 43,310 57,549
13 55,796 200,000 200,000 200,000 200,000 26,585 35,744 48,453 66,091 26,585 35,744 48,453 66,091
14 61,736 200,000 200,000 200,000 200,000 28,181 38,775 53,905 75,528 28,181 38,775 53,905 75,528
15 67,972 200,000 200,000 200,000 200,000 29,706 41,845 59,690 85,965 29,706 41,845 59,690 85,965
16 74,521 200,000 200,000 200,000 200,000 31,153 44,948 65,831 97,514 31,153 44,948 65,831 97,514
17 81,397 200,000 200,000 200,000 200,000 32,487 48,055 72,326 110,285 32,487 48,055 72,326 110,285
18 88,617 200,000 200,000 200,000 200,000 33,728 51,184 79,224 124,441 33,728 51,184 79,224 124,441
19 96,198 200,000 200,000 200,000 200,000 34,871 54,332 86,552 140,147 34,871 54,332 86,552 140,147
20 104,158 200,000 200,000 200,000 211,149 35,906 57,494 94,345 157,574 35,906 57,494 94,345 157,574
25 150,340 200,000 200,000 200,000 336,314 39,114 73,310 141,735 275,667 39,114 73,310 141,735 275,667
</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 Premium/(1)/ 0% 4% 8% 12% 0% 4% 8% 12% 0% 4% 8% 12%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,150 200,000 200,000 200,000 200,000 2,148 2,247 2,346 2,446 1,513 1,612 1,711 1,811
2 6,458 200,000 200,000 200,000 200,000 4,121 4,405 4,698 4,999 3,216 3,500 3,793 4,094
3 9,930 200,000 200,000 200,000 200,000 6,018 6,571 7,156 7,773 4,878 5,431 6,016 6,633
4 13,577 200,000 200,000 200,000 200,000 7,835 8,740 9,723 10,790 6,695 7,600 8,583 9,650
5 17,406 200,000 200,000 200,000 200,000 9,573 10,911 12,406 14,074 8,433 9,771 11,266 12,934
6 21,426 200,000 200,000 200,000 200,000 11,225 13,079 15,209 17,651 10,085 11,939 14,069 16,511
7 25,647 200,000 200,000 200,000 200,000 12,792 15,243 18,139 21,552 11,880 14,331 17,227 20,640
8 30,080 200,000 200,000 200,000 200,000 14,270 17,399 21,202 25,813 13,586 16,715 20,518 25,129
9 34,734 200,000 200,000 200,000 200,000 15,657 19,543 24,404 30,471 15,201 19,087 23,948 30,015
10 39,620 200,000 200,000 200,000 200,000 16,945 21,670 27,752 35,567 16,717 21,442 27,524 35,339
11 44,751 200,000 200,000 200,000 200,000 18,133 23,775 31,254 41,151 18,133 23,775 31,254 41,151
12 50,139 200,000 200,000 200,000 200,000 19,206 25,844 34,908 47,270 19,206 25,844 34,908 47,270
13 55,796 200,000 200,000 200,000 200,000 20,152 27,864 38,719 53,978 20,152 27,864 38,719 53,978
14 61,736 200,000 200,000 200,000 200,000 20,959 29,823 42,688 61,341 20,959 29,823 42,688 61,341
15 67,972 200,000 200,000 200,000 200,000 21,610 31,703 46,816 69,431 21,610 31,703 46,816 69,431
16 74,521 200,000 200,000 200,000 200,000 22,095 33,494 51,115 78,338 22,095 33,494 51,115 78,338
17 81,397 200,000 200,000 200,000 200,000 22,402 35,182 55,592 88,166 22,402 35,182 55,592 88,166
18 88,617 200,000 200,000 200,000 200,000 22,526 36,762 60,265 99,041 22,526 36,762 60,265 99,041
19 96,198 200,000 200,000 200,000 200,000 22,454 38,218 65,149 111,102 22,454 38,218 65,149 111,102
20 104,158 200,000 200,000 200,000 200,000 22,171 39,538 70,262 124,517 22,171 39,538 70,262 124,517
25 150,340 200,000 200,000 200,000 265,491 16,541 43,044 99,791 217,615 16,541 43,044 99,791 217,615
</TABLE>
/(1)/ Assumes Net Interest of 5% compounded annually.
/(2)/ Assumes no policy loan has been made.
The death benefits and Policy Account and Cash Surrender Values will differ if
premiums are paid in different amounts or frequencies. It is emphasized that the
hypothetical investment results are illustrative only and should not be deemed a
representation of past or future investment results. Actual investment results
may be more or less than those shown. The death benefits and Policy Account and
Cash Surrender Values for a policy would be different from those shown if actual
rates of investment return applicable to the policy averaged 0%, 4%, 8%or 12%
over a period of years, but also fluctuated above or below that average for
individual policy years. The death benefits and Policy Account and Cash
Surrender Values for a policy would also be different from those shown,
depending on the investment allocations made to the investment divisions of the
Separate Account and the different rates of return of the Funds, if the actual
rates of investment return applicable to the policy averaged 0%, 4%, 8% and 12%,
but varied above or below that average for individual divisions. No
representations can be made that these hypothetical rates of return can be
achieved for any one year or sustained over any period of time.
_________________________
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<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
Last Day Insurance Benefit(2) Policy Account(2) Cash Surrender Value(2)
Of Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross
Policy Accumulated Annual Investment Return of Annual Investment Return of Annual Investment Return of
Year Premiums(1) 0% 4% 8% 12% 0% 4% 8% 12% 0% 4% 8% 12%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,150 202,144 202,243 202,342 202,442 2,144 2,243 2,342 2,442 1,509 1,608 1,708 1,807
2 6,458 204,517 204,809 205,109 205,418 4,517 4,809 5,109 5,418 3,612 3,904 4,205 4,513
3 9,930 206,830 207,414 208,031 208,681 6,830 7,414 8,031 8,681 5,690 6,274 6,891 7,541
4 13,577 209,083 210,059 211,117 212,260 9,083 10,059 11,117 12,260 7,943 8,919 9,977 11,120
5 17,406 211,276 212,744 214,376 216,187 11,276 12,744 14,376 16,187 10,136 11,604 13,236 15,047
6 21,426 213,412 215,470 217,821 220,502 13,412 15,470 17,821 20,502 12,272 14,330 16,681 19,362
7 25,647 215,458 218,207 221,432 225,210 15,458 18,207 21,432 25,210 14,546 17,295 20,520 24,298
8 30,080 217,420 220,957 225,222 230,356 17,420 20,957 25,222 30,356 16,736 20,273 24,538 29,672
9 34,734 219,298 223,720 229,202 235,985 19,298 23,720 29,202 35,985 18,842 23,264 28,746 35,529
10 39,620 221,091 226,495 233,382 242,148 21,091 26,495 33,382 42,148 20,863 26,267 33,154 41,920
11 44,751 222,800 229,282 237,777 248,899 22,800 29,282 37,777 48,899 22,800 29,282 37,777 48,899
12 50,139 224,457 232,112 242,430 256,332 24,457 32,112 42,430 56,332 24,457 32,112 42,430 56,332
13 55,796 226,024 234,947 247,320 264,481 26,024 34,947 47,320 64,481 26,024 34,947 47,320 64,481
14 61,736 227,505 237,789 252,463 273,421 27,505 37,789 52,463 73,421 27,505 37,789 52,463 73,421
15 67,972 228,899 240,637 257,876 283,235 28,899 40,637 57,876 83,235 28,899 40,637 57,876 83,235
16 74,521 230,199 243,483 263,566 294,006 30,199 43,483 63,566 94,006 30,199 43,483 63,566 94,006
17 81,397 231,362 246,279 269,505 305,786 31,362 46,279 69,505 105,786 31,362 46,279 69,505 105,786
18 88,617 232,410 249,048 275,731 318,706 32,410 49,048 75,731 118,706 32,410 49,048 75,731 118,706
19 96,198 233,337 251,777 282,253 332,875 33,337 51,777 82,253 132,875 33,337 51,777 82,253 132,875
20 104,158 234,128 254,453 289,076 348,410 34,128 54,453 89,076 148,410 34,128 54,453 89,076 148,410
25 150,340 235,634 266,435 327,876 448,776 35,634 66,435 127,876 248,776 35,634 66,435 127,876 248,776
</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
Last Day Insurance Benefit(2) Policy Account(2) Cash Surrender Value(2)
Of Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross
Policy Accumulated Annual Investment Return of Annual Investment Return of Annual Investment Return of
Year Premiums(1) 0% 4% 8% 12% 0% 4% 8% 12% 0% 4% 8% 12%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,150 202,144 202,243 202,342 202,442 2,144 2,243 2,342 2,442 1,509 1,608 1,708 1,807
2 6,458 204,102 204,385 204,677 204,976 4,102 4,385 4,677 4,976 3,198 3,481 3,772 4,072
3 9,930 205,977 206,525 207,106 207,719 5,977 6,525 7,106 7,719 4,837 5,385 5,966 6,579
4 13,577 207,762 208,657 209,630 210,686 7,762 8,657 9,630 10,686 6,622 7,517 8,490 9,546
5 17,406 209,458 210,779 212,254 213,898 9,458 10,779 12,254 13,898 8,318 9,639 11,114 12,758
6 21,426 211,059 212,881 214,974 217,373 11,059 12,881 14,974 17,373 9,919 11,741 13,834 16,233
7 25,647 212,562 214,962 217,796 221,137 12,562 14,962 17,796 21,137 11,650 14,050 16,884 20,225
8 30,080 213,965 217,015 220,721 225,213 13,965 17,015 20,721 25,213 13,281 16,331 20,037 24,529
9 34,734 215,261 219,033 223,747 229,628 15,261 19,033 23,747 29,628 14,805 18,577 23,291 29,172
10 39,620 216,446 221,007 226,875 234,409 16,446 21,007 26,875 34,409 16,218 20,779 26,647 34,181
11 44,751 217,514 222,931 230,104 239,590 17,514 22,931 30,104 39,590 17,514 22,931 30,104 39,590
12 50,139 218,450 224,783 233,423 245,192 18,450 24,783 33,423 45,192 18,450 24,783 33,423 45,192
13 55,796 219,239 226,547 236,820 251,244 19,239 26,547 36,820 51,244 19,239 26,547 36,820 51,244
14 61,736 219,868 228,204 240,284 257,776 19,868 28,204 40,284 57,776 19,868 28,204 40,284 57,776
15 67,972 220,317 229,729 243,797 264,815 20,317 29,729 43,797 64,815 20,317 29,729 43,797 64,815
16 74,521 220,577 231,106 247,350 272,403 20,577 31,106 47,350 72,403 20,577 31,106 47,350 72,403
17 81,397 220,635 232,316 250,929 280,580 20,635 32,316 50,929 80,580 20,635 32,316 50,929 80,580
18 88,617 220,486 233,346 254,526 289,400 20,486 33,346 54,526 89,400 20,486 33,346 54,526 89,400
19 96,198 220,117 234,174 258,128 298,914 20,117 34,174 58,128 98,914 20,117 34,174 58,128 98,914
20 104,158 219,517 234,783 261,718 309,180 19,517 34,783 61,718 109,180 19,517 34,783 61,718 109,180
25 150,340 212,054 233,139 278,235 373,456 12,054 33,139 78,235 173,456 12,054 33,139 78,235 173,456
</TABLE>
/(1)/ Assumes Net Interest of 5% compounded annually.
/(2)/ Assumes no policy loan has been made.
The death benefits and Policy Account and Cash Surrender Values will differ if
premiums are paid in different amounts or frequencies. It is emphasized that the
hypothetical investment results are illustrative only and should not be deemed a
representation of past or future investment results. Actual investment results
may be more or less than those shown. The death benefits and Policy Account and
Cash Surrender Values for a policy would be different from those shown if actual
rates of investment return applicable to the policy averaged 0%, 4%, 8%or 12%
over a period of years, but also fluctuated above or below that average for
individual policy years. The death benefits and Policy Account and Cash
Surrender Values for a policy would also be different from those shown,
depending on the investment allocations made to the investment divisions of the
Separate Account and the different rates of return of the Funds, if the actual
rates of investment return applicable to the policy averaged 0%, 4%, 8% and 12%,
but varied above or below that average for individual divisions. No
representations can be made that these hypothetical rates of return can be
achieved for any one year or sustained over any period of time.
-47-
<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
Last Day Insurance Benefit(2) Policy Account(2) Cash Surrender Value(2)
Of Accumulated Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross
Policy Premiums Annual Investment Return of Annual Investment Return of Annual Investment Return of
Year (1) 0% 4% 8% 12% 0% 4% 8% 12% 0% 4% 8% 12%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 100,000 100,000 100,000 100,000 883 929 974 1,020 566 611 657 703
2 3,229 100,000 100,000 100,000 100,000 2,026 2,159 2,296 2,438 1,573 1,707 1,844 1,985
3 4,965 100,000 100,000 100,000 100,000 3,139 3,408 3,692 3,992 2,569 2,838 3,122 3,422
4 6,788 100,000 100,000 100,000 100,000 4,223 4,676 5,167 5,698 3,653 4,106 4,597 5,128
5 8,703 100,000 100,000 100,000 100,000 5,278 5,964 6,726 7,571 4,708 5,394 6,156 7,001
6 10,713 100,000 100,000 100,000 100,000 6,305 7,271 8,374 9,631 5,735 6,701 7,804 9,061
7 12,824 100,000 100,000 100,000 100,000 7,290 8,585 10,105 11,883 6,834 8,129 9,649 11,427
8 15,040 100,000 100,000 100,000 100,000 8,231 9,905 11,922 14,348 7,889 9,563 11,580 14,006
9 17,367 100,000 100,000 100,000 100,000 9,131 11,232 13,834 17,051 8,903 11,004 13,606 16,823
10 19,810 100,000 100,000 100,000 100,000 9,989 12,565 15,845 20,019 9,875 12,451 15,731 19,905
11 22,376 100,000 100,000 100,000 100,000 10,807 13,907 17,968 23,283 10,807 13,907 17,968 23,283
12 25,069 100,000 100,000 100,000 100,000 11,598 15,271 20,221 26,890 11,598 15,271 20,221 26,890
13 27,898 100,000 100,000 100,000 100,000 12,349 16,644 22,602 30,866 12,349 16,644 22,602 30,866
14 30,868 100,000 100,000 100,000 100,000 13,054 18,022 25,116 35,253 13,054 18,022 25,116 35,253
15 33,986 100,000 100,000 100,000 100,000 13,720 19,411 27,779 40,101 13,720 19,411 27,779 40,101
16 37,261 100,000 100,000 100,000 100,000 14,357 20,821 30,613 45,473 14,357 20,821 30,613 45,473
17 40,699 100,000 100,000 100,000 100,000 14,952 22,242 33,620 51,424 14,952 22,242 33,620 51,424
18 44,309 100,000 100,000 100,000 100,000 15,497 23,666 36,807 58,017 15,497 23,666 36,807 58,017
19 48,099 100,000 100,000 100,000 100,000 15,988 25,091 40,189 65,331 15,988 25,091 40,189 65,331
20 52,079 100,000 100,000 100,000 100,000 16,420 26,512 43,778 73,454 16,420 26,512 43,778 73,454
25 75,170 100,000 100,000 100,000 157,063 17,495 33,438 65,499 128,740 17,495 33,438 65,499 128,740
</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
Last Day Insurance Benefit(2) Policy Account(2) Cash Surrender Value(2)
Of Accumulated Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross
Policy Premiums Annual Investment Return of Annual Investment Return of Annual Investment Return of
Year (1) 0% 4% 8% 12% 0% 4% 8% 12% 0% 4% 8% 12%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 100,000 100,000 100,000 100,000 883 929 974 1,020 566 611 657 703
2 3,229 100,000 100,000 100,000 100,000 1,801 1,929 2,062 2,198 1,348 1,477 1,609 1,746
3 4,965 100,000 100,000 100,000 100,000 2,680 2,931 3,196 3,476 2,110 2,361 2,626 2,906
4 6,788 100,000 100,000 100,000 100,000 3,521 3,932 4,378 4,863 2,951 3,362 3,808 4,293
5 8,703 100,000 100,000 100,000 100,000 4,322 4,931 5,612 6,371 3,752 4,361 5,042 5,801
6 10,713 100,000 100,000 100,000 100,000 5,081 5,926 6,897 8,009 4,511 5,356 6,327 7,439
7 12,824 100,000 100,000 100,000 100,000 5,798 6,916 8,237 9,793 5,342 6,460 7,781 9,337
8 15,040 100,000 100,000 100,000 100,000 6,472 7,899 9,634 11,738 6,130 7,557 9,292 11,396
9 17,367 100,000 100,000 100,000 100,000 7,099 8,873 11,092 13,860 6,871 8,645 10,864 13,632
10 19,810 100,000 100,000 100,000 100,000 7,678 9,835 12,611 16,177 7,564 9,721 12,497 16,063
11 22,376 100,000 100,000 100,000 100,000 8,206 10,781 14,195 18,711 8,206 10,781 14,195 18,711
12 25,069 100,000 100,000 100,000 100,000 8,677 11,706 15,842 21,482 8,677 11,706 15,842 21,482
13 27,898 100,000 100,000 100,000 100,000 9,085 12,602 17,553 24,514 9,085 12,602 17,553 24,514
14 30,868 100,000 100,000 100,000 100,000 9,422 13,462 19,328 27,834 9,422 13,462 19,328 27,834
15 33,986 100,000 100,000 100,000 100,000 9,681 14,278 21,165 31,473 9,681 14,278 21,165 31,473
16 37,261 100,000 100,000 100,000 100,000 9,857 15,043 23,067 35,470 9,857 15,043 23,067 35,470
17 40,699 100,000 100,000 100,000 100,000 9,942 15,750 25,036 39,871 9,942 15,750 25,036 39,871
18 44,309 100,000 100,000 100,000 100,000 9,935 16,395 27,080 44,728 9,935 16,395 27,080 44,728
19 48,099 100,000 100,000 100,000 100,000 9,828 16,971 29,202 50,104 9,828 16,971 29,202 50,104
20 52,079 100,000 100,000 100,000 100,000 9,614 17,471 31,409 56,070 9,614 17,471 31,409 56,070
25 75,170 100,000 100,000 100,000 119,288 6,397 18,242 43,811 97,777 6,397 18,242 43,811 97,777
</TABLE>
/(1)/ Assumes Net Interest of 5% compounded annually.
/(2)/ Assumes no policy loan has been made.
The death benefits and Policy Account and Cash Surrender Values will differ if
premiums are paid in different amounts or frequencies. It is emphasized that the
hypothetical investment results are illustrative only and should not be deemed a
representation of past or future investment results. Actual investment results
may be more or less than those shown. The death benefits and Policy Account and
Cash Surrender Values for a policy would be different from those shown if actual
rates of investment return applicable to the policy averaged 0%, 4%, 8%or 12%
over a period of years, but also fluctuated above or below that average for
individual policy years. The death benefits and Policy Account and Cash
Surrender Values for a policy would also be different from those shown,
depending on the investment allocations made to the investment divisions of the
Separate Account and the different rates of return of the Funds, if the actual
rates of investment return applicable to the policy averaged 0%, 4%, 8% and 12%,
but varied above or below that average for individual divisions. No
representations can be made that these hypothetical rates of return can be
achieved for any one year or sustained over any period of time.
-48-
<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
Last Day Insurance Benefit(2) Policy Account(2) Cash Surrender Value(2)
Of Accumulated Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross
Policy Premiums Annual Investment Return of Annual Investment Return of Annual Investment Return of
Year (1) 0% 4% 8% 12% 0% 4% 8% 12% 0% 4% 8% 12%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 100,882 100,927 100,972 101,018 882 927 972 1,018 564 610 655 701
2 3,229 102,020 102,153 102,290 102,431 2,020 2,153 2,290 2,431 1,568 1,701 1,838 1,978
3 4,965 103,127 103,396 103,679 103,977 3,127 3,396 3,679 3,977 2,557 2,826 3,109 3,407
4 6,788 104,203 104,654 105,142 105,669 4,203 4,654 5,142 5,669 3,633 4,084 4,572 5,099
5 8,703 105,247 105,927 106,684 107,523 5,247 5,927 6,684 7,523 4,677 5,357 6,114 6,953
6 10,713 106,258 107,216 108,309 109,554 6,258 7,216 8,309 9,554 5,688 6,646 7,739 8,984
7 12,824 107,224 108,506 110,008 111,766 7,224 8,506 10,008 11,766 6,768 8,050 9,552 11,310
8 15,040 108,141 109,792 111,782 114,175 8,141 9,792 11,782 14,175 7,799 9,450 11,440 13,833
9 17,367 109,011 111,078 113,638 116,802 9,011 11,078 13,638 16,802 8,783 10,850 13,410 16,574
10 19,810 109,833 112,360 115,577 119,668 9,833 12,360 15,577 19,668 9,719 12,246 15,463 19,554
11 22,376 110,608 113,640 117,608 122,800 10,608 13,640 17,608 22,800 10,608 13,640 17,608 22,800
12 25,069 111,352 114,930 119,751 126,241 11,352 14,930 19,751 26,241 11,352 14,930 19,751 26,241
13 27,898 112,047 116,216 121,994 130,004 12,047 16,216 21,994 30,004 12,047 16,216 21,994 30,004
14 30,868 112,689 117,490 124,340 134,119 12,689 17,490 24,340 34,119 12,689 17,490 24,340 34,119
15 33,986 113,284 118,758 126,799 138,627 13,284 18,758 26,799 38,627 13,284 18,758 26,799 38,627
16 37,261 113,843 120,030 129,391 143,582 13,843 20,030 29,391 43,582 13,843 20,030 29,391 43,582
17 40,699 114,351 121,292 132,109 149,014 14,351 21,292 32,109 49,014 14,351 21,292 32,109 49,014
18 44,309 114,798 122,530 134,948 154,962 14,798 22,530 34,948 54,962 14,798 22,530 34,948 54,962
19 48,099 115,181 123,741 137,913 161,475 15,181 23,741 37,913 61,475 15,181 23,741 37,913 61,475
20 52,079 115,490 124,913 141,001 168,604 15,490 24,913 41,001 68,604 15,490 24,913 41,001 68,604
25 75,170 115,717 129,894 158,309 214,712 15,717 29,894 58,309 114,712 15,717 29,894 58,309 114,712
</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
Last Day Insurance Benefit(2) Policy Account(2) Cash Surrender Value(2)
Of Accumulated Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross
Policy Premiums Annual Investment Return of Annual Investment Return of Annual Investment Return of
Year (1) 0% 4% 8% 12% 0% 4% 8% 12% 0% 4% 8% 12%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 100,882 100,927 100,972 101,018 882 927 972 1,018 564 610 655 701
2 3,229 101,792 101,920 102,052 102,188 1,792 1,920 2,052 2,188 1,340 1,468 1,600 1,736
3 4,965 102,661 102,910 103,173 103,452 2,661 2,910 3,173 3,452 2,091 2,340 2,603 2,882
4 6,788 103,488 103,894 104,336 104,816 3,488 3,894 4,336 4,816 2,918 3,324 3,766 4,246
5 8,703 104,270 104,871 105,542 106,290 4,270 4,871 5,542 6,290 3,700 4,301 4,972 5,720
6 10,713 105,005 105,836 106,789 107,882 5,005 5,836 6,789 7,882 4,435 5,266 6,219 7,312
7 12,824 105,693 106,788 108,080 109,603 5,693 6,788 8,080 9,603 5,237 6,332 7,624 9,147
8 15,040 106,332 107,724 109,414 111,463 6,332 7,724 9,414 11,463 5,990 7,382 9,072 11,121
9 17,367 106,918 108,640 110,791 113,474 6,918 8,640 10,791 13,474 6,690 8,412 10,563 13,246
10 19,810 107,449 109,531 112,210 115,648 7,449 9,531 12,210 15,648 7,335 9,417 12,096 15,534
11 22,376 107,923 110,395 113,669 117,998 7,923 10,395 13,669 17,998 7,923 10,395 13,669 17,998
12 25,069 108,332 111,221 115,163 120,533 8,332 11,221 15,163 20,533 8,332 11,221 15,163 20,533
13 27,898 108,668 112,001 116,686 123,265 8,668 12,001 16,686 23,265 8,668 12,001 16,686 23,265
14 30,868 108,925 112,724 118,231 126,207 8,925 12,724 18,231 26,207 8,925 12,724 18,231 26,207
15 33,986 109,092 113,378 119,787 129,367 9,092 13,378 19,787 29,367 9,092 13,378 19,787 29,367
16 37,261 109,166 113,956 121,351 132,764 9,166 13,956 21,351 32,764 9,166 13,956 21,351 32,764
17 40,699 109,140 114,447 122,914 136,414 9,140 14,447 22,914 36,414 9,140 14,447 22,914 36,414
18 44,309 109,011 114,845 124,471 140,339 9,011 14,845 24,471 40,339 9,011 14,845 24,471 40,339
19 48,099 108,773 115,140 126,014 144,560 8,773 15,140 26,014 44,560 8,773 15,140 26,014 44,560
20 52,079 108,420 115,321 127,535 149,100 8,420 15,321 27,535 49,100 8,420 15,321 27,535 49,100
25 75,170 104,436 113,837 134,128 177,243 4,436 13,837 34,128 77,243 4,436 13,837 34,128 77,243
</TABLE>
/(1)/ Assumes Net Interest of 5% compounded annually.
/(2)/ Assumes no policy loan has been made.
The death benefits and Policy Account and Cash Surrender Values will differ if
premiums are paid in different amounts or frequencies. It is emphasized that the
hypothetical investment results are illustrative only and should not be deemed a
representation of past or future investment results. Actual investment results
may be more or less than those shown. The death benefits and Policy Account and
Cash Surrender Values for a policy would be different from those shown if actual
rates of investment return applicable to the policy averaged 0%, 4%, 8%or 12%
over a period of years, but also fluctuated above or below that average for
individual policy years. The death benefits and Policy Account and Cash
Surrender Values for a policy would also be different from those shown,
depending on the investment allocations made to the investment divisions of the
Separate Account and the different rates of return of the Funds, if the actual
rates of investment return applicable to the policy averaged 0%, 4%, 8% and 12%,
but varied above or below that average for individual divisions. No
representations can be made that these hypothetical rates of return can be
achieved for any one year or sustained over any period of time.
-49-
<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:
-50-
<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
-51-
<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.)
-52-
<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.
-53-
<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.
-54-
<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.
-55-
<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 100% 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 1999 were $24,947,968.
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
-56-
<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 Considerations
As of March 10, 2000, all of our ultimate parent, American General
Corporation's ("AGC") major technology systems, programs, and applications,
including those which rely on third parties, are operating smoothly following
our transition into 2000. We have experienced no interruptions to normal
business operations, including the processing of customer account data and
transactions. We will continue to monitor our technology systems, including
critical third party dependencies, as necessary to maintain our Year 2000
readiness. We do not expect any future disruptions, if they occur, to have a
material effect on Our results of operations, liquidity, or financial condition.
Through December 31, 1999, AGC incurred and expensed pretax costs of $98
million related to Year 2000 readiness, including $18 million in 1999 and $65
million in 1998. In 1999, Year 2000 readiness expenses were included in
division earnings. The 1998 expenses were excluded from division earnings,
consistent with the manner in which we reviewed division results. In addition,
we accelerated the planned replacement of certain systems as part of our Year
2000 plans. The cost of these replacement systems was immaterial. We do not
anticipate incurring any significant costs in the future to maintain Year 2000
readiness.
Legal Matters
Sutherland Asbill & Brennan LLP of Washington, D.C. has provided certain
advice on matters relating to the federal securities laws.
-57-
<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 in 1996. On December 16, 1998, AGC announced that American
Franklin had entered into an agreement to resolve the market conduct class
action lawsuits. The order approving the settlement agreement for American
Franklin was entered by the court on June 1, 1999, and became final on July 1,
1999.
American Franklin is a party to various other lawsuits and proceedings
arising in the ordinary course of business. Many of these lawsuits and
proceedings, including claims filed by individuals who excluded themselves from
the market conduct class action settlement, 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, 1999 and the related
statement of operations for the year then ended and the statements of changes in
net assets for each of the two years in the period then ended of the Separate
Account, appearing herein, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein. The
financial statements of American Franklin at December 31, 1999 and 1998 and for
each of the three years in the period ended December 31, 1999, appearing herein,
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon appearing elsewhere herein. Such financial statements
referred to above are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
Actuarial matters in this Prospectus have been examined by Robert M.
Beuerlein, who is Senior Vice President and Chief Actuary of American Franklin.
His opinion on actuarial matters is filed as an exhibit to the Registration
Statement relating to the policies filed with the SEC.
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<PAGE>
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 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.
Principal Occupation
Name During Past Five Years
---- ----------------------
*Rodney O. Martin, Jr. Senior Chairman and Chief Executive Officer of
American Franklin Life Insurance Company since April
1998. Senior Chairman of the Board of American
General Life Insurance Company since April 1999 and a
Director since August 1996. President and CEO (August
1996-July 1998). President of American General Life
Insurance Company of New York (November 1995-August
1996). Vice President - Agencies, Connecticut Mutual
Life Insurance Company, Hartford, Connecticut (1990-
1995).
*Donald W. Britton President of American Franklin Life Insurance Company
since January 2000. Director and Vice Chairman of the
Board of American General Life Insurance Company
since April 1999. President of First Colony Life,
Lynchburg, Virginia (1996 -April 1999) and Executive
Vice President of First Colony Life (1992 -1996).
*David A. Fravel Executive Vice President of American Franklin Life
Insurance Company since April 1999. Director of
American General Life Insurance Company since
November 1996. Previously held position of Senior
Vice President of American General Life Insurance
Company since November 1996. Senior Vice President of
Massachusetts Mutual, Springfield, Missouri (March
1996-June 1996); Vice President, New Business,
Connecticut Mutual Life Insurance Company, Hartford,
Connecticut (December 1978-March 1996).
-59-
<PAGE>
*David L. Herzog Director, Executive Vice President and Chief
Financial Officer of American Franklin Life Insurance
Company since February 2000. Chief Financial Officer,
American General Life Insurance Company since
February 2000. Vice President, American General St.
Louis, Missouri (June 1991 - February 2000).
*John V. LaGrasse Executive Vice President of American Franklin Life
Insurance Company since April 1999. Previously Senior
Executive Vice President and Chief Technology Officer
since April 1998. Director and Chief Systems Officer
of American General Life Insurance Company since
August 1996. Elected Executive Vice President in July
1998. Previously held position of Senior Vice
President of American General Life Insurance Company
since August 1996. Director of Citicorp Insurance
Services, Inc., Dover, Delaware (1986-1996).
*Paul Mistretta Executive Vice President of American Franklin Life
Insurance Company since July 1999. Executive Vice
President of American General Life Insurance Company
since July 1999. Senior Vice President of First
Colony Life Insurance, Lynchburg, Virginia (1992 -
July 1999).
**Brian D. Murphy Executive Vice President of American Franklin Life
Insurance Company since July 1999. Executive Vice
President of American General Life Insurance Company
since July 1999. Previously held position of Senior
Vice President-Insurance Operations of American
General Life Insurance Company since April 1998. Vice
President-Sales, Phoenix Home Life, Hartford, CT
(January 1997-April 1998). Vice President of
Underwriting and Issue, Phoenix Home Life (July 1994-
January 1997).
*Thomas M. Zurek Director of American Franklin Life Insurance Company
since March 2000. Executive Vice President, General
Counsel and Secretary since July 1999. Previously
held the position of Vice President, July 1998.
Director and Executive Vice President of American
General Life Insurance Company since April 1999.
Elected Secretary in July 1999 and General Counsel in
December 1998. Previously held various positions with
American General Life Insurance Company including
Senior Vice President since December 1998 and Vice
President since October 1998. In February 1998 named
Senior Vice President and Deputy General Counsel of
American General Corporation. Attorney Shareholder
with Nyemaster, Goode, Voigts, West, Hansell &
O'Brien, Des Moines, Iowa (June 1992 - February
1998).
Barbara J. Fossum Director of American Franklin Life Insurance Company
since December 1999. Senior Vice President
Springfield Service Center since July 1999.
Previously Senior Vice President since April 1998;
Vice President from June 1995 -March 1998.
**Robert F. Herbert, Jr. Senior Vice President of American Franklin Life
Insurance Company since July 1998. Senior Vice
President and Treasurer of American General Life
Insurance Company since May 1996, and Controller
since February 1991.
**Simon J. Leech Senior Vice President of American Franklin Life
Insurance Company since April 1999. Senior Vice
President-Houston Service Center for American General
Life Insurance Company since July 1997. Previously
held various positions with American General Life
Insurance Company since 1981, including Director of
Policy Owners' Service Department in 1993, and Vice
President-Policy Administration in 1995.
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<PAGE>
Darrell J. Malano Director and Senior Vice President of American
Franklin Life Insurance Company since September 1999.
Senior Vice President - Sales, The Franklin Life
Insurance Company since September 1999. Vice
President - Marketing, The Franklin Life Insurance
Company (1989 - 1999).
Robert M. Beuerlein Senior Vice President and Chief Actuary of American
Franklin Life Insurance Company since July 1999.
Director, Senior Vice President and Chief Actuary of
The Franklin Life Insurance Company, Springfield,
Illinois (January 1991 -June 1999).
**Wayne A. Barnard Vice President American Franklin Life Insurance
Company since April 1998. Senior Vice President of
American General Life Insurance Company since
November 1997. Previously held various positions with
American General Life Insurance Company including
Vice President since February 1991.
**Steven E. Zimmerman Senior Vice President and Chief Medical Director of
American Franklin Life Insurance Company since
January 2000. Previously Vice President and Chief
Medical Director of American General since March
1999. Prior to joining American General, he was
Director Medical Policy Issues for the American
Council of Life Insurance. His insurance career
started with Aetna Life & Casualty Company in 1987
after spending five years in the practice of medical
oncology.
Mark R. McGuire Director of American Franklin Life Insurance Company
since December 1999. Vice President of American
Franklin Life Insurance Company, Springfield,
Illinois (January 1997 - present). Director, American
General Life Insurance Company, Houston, Texas
(August 1988 - January 1997).
*Richard W. Scott Vice President and Chief Investment Officer of
American Franklin Life Insurance Company since April
1998. Executive Vice President/Chief Investment
Officer, American General Corporation since February
1998. Vice Chairman, Western National Life Insurance
Company, Houston, Texas (July 1996 - February 1998).
Chief Investment Officer, Western National Life
Insurance Company (May 1995 -February 1998).
Executive Vice President, Western National (February
1994 -July 1996).
Thomas Clay Spires Vice President Corporate Tax American Franklin Life
Insurance Company since 1999. Previously held the
position of Director - Corporate Tax commencing July
1998. Director of Corporate Tax, Franklin Life
Insurance Company, Springfield, Illinois (March 1997-
June 1999). Manager - Taxes, First Colony Life
Insurance Company, Lynchburg, Virginia (March 1994 -
February 1997).
Christian D. Weiss Vice President, Controller and Treasurer of American
Franklin Life Insurance Company (June 1997 -
present). Assistant Controller, ReliaStar United
Services Life Insurance Company, Arlington, Virginia
(January 1994 -June 1997).
___________
The principal business address of each individual with an asterisk next to
his name is 2929 Allen Parkway, Houston, Texas 77019. The principal business
address of each individual with two asterisks next to his name is 2727-A Allen
Parkway, Houston, Texas 77019. The principal business address of each other
individual is in care of The Franklin Life Insurance Company, #1 Franklin
Square, Springfield, Illinois 62713.
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<PAGE>
Principal Underwriter's Management
The directors and principal officers of the principal underwriter are:
Position and Offices
with Underwriter,
Name and Principal Franklin Financial
Business Address Services Corporation
- ---------------- --------------------
F. Paul Kovach, Jr. Chairman and Chief
American General Securities Incorporated Executive Officer
2727 Allen Parkway
Houston, TX 77019
Gary D. Osmonson Director and President
#1 Franklin Square
Springfield, Illinois 62713-0001
Ronald H. Ridlehuber Director
#1 Franklin Square
Springfield, Illinois 62713-0001
Daniel E. Trudan Vice President and Assistant
#1 Franklin Square Secretary
Springfield, Illinois 62713-0001
Donald W. Britton Assistant Vice President
2929 Allen Parkway
Houston, Texas 77019
Thomas M. Zurek Assistant Vice President
2929 Allen Parkway
Houston, Texas 77019
T. Clay Spires Assistant Tax Officer
2727A Allen Parkway
Houston, Texas 77019
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<PAGE>
Index To Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
The Separate Account:
Report of Independent Auditors....................................... F-2
Audited Financial Statements:
Statement of Net Assets, December 31, 1999....................... F-3--F-5
Statement of Operations for the year ended December 31, 1999..... F-6--F-8
Statements of Changes in Net Assets for the years ended
December 31, 1999 and 1998....................................... F-9--F-11
Notes to Financial Statements.................................... F-12--F-17
The American Franklin Life Insurance Company:*
Report of Independent Auditors....................................... F-18
Audited Financial Statements:
Statement of Operations for the years ended December 31, 1999,
1998 and 1997.................................................... F-19
Balance Sheet, December 31, 1999 and 1998....................... F-20
Statement of Shareholder's Equity for the years ended
December 31, 1999, 1998 and 1997................................. F-21
Statement of Comprehensive Income (Loss) for the years ended
December 31, 1999, 1998 and 1997................................. F-21
Statement of Cash Flows for the years ended December 31, 1999,
1998 and 1997.................................................... F-22
Notes to Financial Statements.................................... F-23--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, VIPII Contrafund, MFS
Emerging Growth, MFS Research, MFS Growth With Income, MFS Total Return, MFS
Utilities, and MFS Capital Opportunities (formerly MFS Value) Divisions) as of
December 31, 1999, 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
statement of operations for the year then ended and the statement of changes in
net assets for the MFS Emerging Growth, MFS Research, MFS Growth with Income,
MFS Total Return, MFS Utilities, and MFS Capital Opportunities (formerly MFS
Value) Divisions for the year ended December 31, 1999 and 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 auditing standards generally accepted
in the United States. 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, 1999 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, 1999, and the
results of their operations and changes in net assets for the periods referred
to above in conformity with accounting principles generally accepted in the
United States.
/s/ Ernst & Young LLP
Ernst & Young LLP
Chicago, Illinois
February 9, 2000
F-2
<PAGE>
The American Franklin Life Insurance Company
Separate Account VUL-2
Statement of Net Assets
December 31, 1999
<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) $ 6,559,005 $ 59,819,562 $ 121,001,658 $ 16,494,507 $ 3,349,133
Due from (to) general account 31,628 (12,482) (16,477) (2,435) (249)
-----------------------------------------------------------------------------
Net assets $ 6,590,633 $ 59,807,080 $ 120,985,181 $ 16,492,072 $ 3,348,884
=============================================================================
Unit value $ 138.06 $ 343.25 $ 505.18 $ 262.93 $ 168.64
=============================================================================
Units outstanding 47,739 174,240 239,489 62,723 19,858
=============================================================================
Cost of investments $ 6,627,834 $ 49,721,666 $ 73,142,197 $ 11,320,468 $ 3,588,804
=============================================================================
See Notes to Financial Statements
</TABLE>
F-3
<PAGE>
The American Franklin Life Insurance Company
Separate Account VUL-2
Statement of Net Assets (continued)
December 31, 1999
<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) $ 2,209,359 $ 34,883,206 $ 50,894,695 $ 11,383,629 $ 39,680,007
Due from (to) general account (191) (16,071) (2,574) (712) (12,526)
--------------------------------------------------------------------------------
Net assets $ 2,209,168 $ 34,867,135 $ 50,892,121 $ 11,382,917 $ 39,667,481
================================================================================
Unit value $ 155.31 $ 254.54 $ 347.55 $ 223.33 $ 276.97
================================================================================
Units outstanding 14,225 136,980 146,433 50,968 143,217
================================================================================
Cost of investments $ 2,209,269 $ 29,354,502 $ 35,721,607 $ 9,605,478 $ 28,029,156
================================================================================
</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, 1999
<TABLE>
<CAPTION>
MFS Variable Insurance Trust
--------------------------------------------------------------------------------------
MFS
MFS Growth MFS MFS
Emerging MFS With Total MFS Capital
Growth Research Income Return Utilities Opportunities
Division Division Division Division Division Division*
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investments in Funds at fair value
(cost: see below) $ 7,741,120 $ 3,834,599 $ 2,420,689 $ 1,637,035 $ 1,954,538 $ 2,779,954
Due from (to) general account 156 77 (847) 31 38 55
-----------------------------------------------------------------------------------------
Net assets $ 7,741,276 $ 3,834,676 $ 2,419,842 $ 1,637,066 $ 1,954,576 $ 2,780,009
=========================================================================================
Unit value $ 189.94 $ 127.16 $ 112.63 $ 105.23 $ 137.83 $ 151.78
=========================================================================================
Units outstanding 40,756 30,156 21,484 15,557 14,181 18,316
=========================================================================================
Cost of investments $ 4,926,290 $ 3,138,332 $ 2,309,782 $ 1,640,127 $ 1,621,431 $ 2,119,058
=========================================================================================
</TABLE>
See Notes to Financial Statements
*Formerly known as MFS Value Division
F-5
<PAGE>
The American Franklin Life Insurance Company
Separate Account VUL-2
Statement of Operations
Year Ended December 31, 1999
<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 $ 251,436 $ 2,619,662 $ 9,446,395 $ 458,701 $ 292,551
Expenses
Mortality and expense risk charge 35,007 441,309 723,574 96,002 22,997
------------------------------------------------------------------------
Net investment income (expense) 216,429 2,178,353 8,722,821 362,699 269,554
Net realized and unrealized gain (loss)
on investments
Net realized gain (loss) 23,858 1,051,810 933,427 155,042 (19,693)
Net unrealized appreciation
(depreciation)
Beginning of year (83,735) 11,152,579 27,077,236 1,229,297 (206,194)
End of year (68,829) 10,097,896 47,859,461 5,174,039 (239,671)
------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) during the year 14,906 (1,054,683) 20,782,225 3,944,742 (33,477)
------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments 38,764 (2,873) 21,715,652 4,099,784 (53,170)
------------------------------------------------------------------------
Net increase (decrease) in net assets
from operations $ 255,193 $ 2,175,480 $ 30,438,473 $ 4,462,483 $ 216,384
========================================================================
</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, 1999
<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> <S> <C> <C> <C> <C>
Net investment income (expense)
Income
Dividends $ 121,797 $ 2,378,276 $ 563,394 $ 514,333 $ 1,062,837
Expenses
Mortality and expense risk charge 17,031 244,708 306,261 70,371 233,365
------------------------------------------------------------------------
Net investment income (expense) 104,766 2,133,568 257,133 443,962 829,472
Net realized and unrealized gain
(loss) on investments
Net realized gain (loss) 21,389 318,639 203,229 62,797 112,244
Net unrealized appreciation
(depreciation)
Beginning of year 156,188 4,943,879 8,790,937 1,046,388 6,359,992
End of year 90 5,528,704 15,173,088 1,778,151 11,650,851
------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) during the year (156,098) 584,825 6,382,151 731,763 5,290,859
------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments (134,709) 903,464 6,585,380 794,560 5,403,103
------------------------------------------------------------------------
Net increase (decrease) in net assets
from operations $ (29,943) $ 3,037,032 $ 6,842,513 $ 1,238,522 $ 6,232,575
========================================================================
</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, 1999
<TABLE>
<CAPTION>
MFS Variable Insurance Trust
---------------------------------------------------------------------------------------
MFS
MFS Growth MFS MFS
Emerging MFS With Total MFS Capital
Growth Research Income Return Utilities Opportunities
Division Division Division Division Division Division*
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net investment income (expense)
Income
Dividends $ - $ 24,760 $ 8,195 $ 54,551 $ 65,732 $ 4,873
Expenses
Mortality and expense risk
charge 26,189 18,154 11,286 9,198 8,587 10,320
-----------------------------------------------------------------------------------------
Net investment income (expense) (26,189) 6,606 (3,091) 45,353 57,145 (5,447)
Net realized and unrealized gain
(loss) on investments
Net realized gain (loss) 13,741 5,925 44,499 1,213 3,525 11,567
Net unrealized appreciation
(depreciation)
Beginning of year 252,419 140,093 57,569 32,868 30,425 54,315
End of year 2,814,830 696,267 110,907 (3,092) 333,107 660,896
-----------------------------------------------------------------------------------------
Net change in unrealized
appreciation (depreciation)
during the year 2,562,411 556,174 53,338 (35,960) 302,682 606,581
-----------------------------------------------------------------------------------------
Net realized and unrealized gain
(loss) on investments 2,576,152 562,099 97,837 (34,747) 306,207 618,148
-----------------------------------------------------------------------------------------
Net increase (decrease) in net
assets from operations $ 2,549,963 $568,705 $ 94,746 $ 10,606 $ 363,352 $612,701
=========================================================================================
</TABLE>
See Notes to Financial Statements
*Formerly known as MFS Value Division
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
------------------------------------------------------------------------------
Year Ended December 31, 1999
Change in net assets
From operations:
<S> <C> <C> <C> <C> <C>
Net investment income (expense) $ 216,429 $ 2,178,353 $ 8,722,821 $ 362,699 $ 269,554
Net realized gain (loss) on investments 23,858 1,051,810 933,427 155,042 (19,693)
Net change in unrealized appreciation
(depreciation) on investments 14,906 (1,054,683) 20,782,225 3,944,742 (33,477)
------------------------------------------------------------------------------
Net increase (decrease) in net assets from
operations 255,193 2,175,480 30,438,473 4,462,483 216,384
From policy related transactions:
Net contract purchase payments 20,390,047 14,189,126 18,487,950 2,756,248 1,051,554
Withdrawals (1,477,209) (10,184,231) (13,945,360) (1,998,575) (667,582)
Transfers between Separate Account
VUL-2 divisions, net (17,079,666) (538,991) 4,144,426 (39,699) (132,311)
------------------------------------------------------------------------------
Net increase (decrease) in net assets from
policy related transactions 1,833,172 3,465,904 8,687,016 717,974 251,661
------------------------------------------------------------------------------
Net increase (decrease) in net assets 2,088,365 5,641,384 39,125,489 5,180,457 468,045
Net assets, beginning of year 4,502,268 54,165,696 81,859,692 11,311,615 2,880,839
------------------------------------------------------------------------------
Net assets, end of year $ 6,590,633 $ 59,807,080 $ 120,985,181 $ 16,492,072 $ 3,348,884
==============================================================================
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 (decrease) in net assets from
policy related transactions 1,344,478 8,580,245 7,174,471 989,128 624,641
------------------------------------------------------------------------------
Net increase (decrease) 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
==============================================================================
</TABLE>
See Notes to Financial Statements
F-9
<PAGE>
The American Franklin Life Insurance Company
Separate Account VUL-2
Statement of Changes in Net Assets (continued)
<TABLE>
<CAPTION>
Variable Insurance Products Fund II
----------------------------------------------------------------------------
VIPII VIPII
Investment VIPII VIPII Asset VIPII
Grade Asset Index Manager: Contra-
Bond Manager 500 Growth fund
Division Division Division Division Division
-----------------------------------------------------------------------------
Year Ended December 31, 1999
Change in net assets
From operations:
<S> <C> <C> <C> <C> <C>
Net investment income (expense) $ 104,766 $ 2,133,568 $ 257,133 $ 443,962 $ 829,472
Net realized gain (loss) on investments 21,389 318,639 203,229 62,797 112,244
Net change in unrealized appreciation
(depreciation) on investments (156,098) 584,825 6,382,151 731,763 5,290,859
----------------------------------------------------------------------------
Net increase (decrease) in net assets from
operations (29,943) 3,037,032 6,842,513 1,238,522 6,232,575
From policy related transactions:
Net contract purchase payments 508,217 5,410,700 13,605,268 3,660,580 10,574,487
Withdrawals (465,806) (5,012,240) (7,102,948) (1,847,689) (5,566,604)
Transfers between Separate Account
VUL-2 divisions, net (119,367) (259,252) 4,316,026 501,769 3,050,952
----------------------------------------------------------------------------
Net increase (decrease) in net assets from
policy related transactions (76,956) 139,208 10,818,346 2,314,660 8,058,835
----------------------------------------------------------------------------
Net increase (decrease) in net assets (106,899) 3,176,240 17,660,859 3,553,182 14,291,410
Net assets, beginning of year 2,316,067 31,690,895 33,231,262 7,829,735 25,376,071
----------------------------------------------------------------------------
Net assets, end of year $ 2,209,168 $ 34,867,135 $ 50,892,121 $ 11,382,917 $ 39,667,481
============================================================================
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 (decrease) in net assets from
policy related transactions 147,614 969,117 9,153,594 2,727,082 6,877,422
----------------------------------------------------------------------------
Net increase (decrease) 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
=============================================================================
</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 MFS
Emerging MFS With Total MFS Capital
Growth Research Income Return Utilities Opportunities
Division Division Division Division Division Division*
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31, 1999
Change in net assets
From operations:
Net investment income (expense) $ (26,189) $ 6,606 $ (3,091) $ 45,353 $ 57,145 $ (5,447)
Net realized gain (loss) on investments 13,741 5,925 44,499 1,213 3,525 11,567
Net change in unrealized appreciation
(depreciation) on investments 2,562,411 556,174 53,338 (35,960) 302,682 606,581
-----------------------------------------------------------------------------------
Net increase (decrease) in net assets from
operations 2,549,963 568,705 94,746 10,606 363,352 612,701
From policy related transactions:
Net contract purchase payments 2,439,724 1,628,413 1,086,393 625,687 938,854 899,529
Withdrawals (837,970) (638,998) (399,640) (222,380) (340,639) (279,352)
Transfers between Separate Account
VUL-2 divisions, net 2,083,854 991,809 1,019,100 631,756 538,146 921,222
-----------------------------------------------------------------------------------
Net increase (decrease) in net assets from
policy related transactions 3,685,608 1,981,224 1,705,853 1,035,063 1,136,361 1,541,399
-----------------------------------------------------------------------------------
Net increase (decrease) in net assets 6,235,571 2,549,929 1,800,599 1,045,669 1,499,713 2,154,100
Net assets, beginning of year 1,505,705 1,284,747 619,243 591,397 454,863 625,909
-----------------------------------------------------------------------------------
Net assets, end of year $ 7,741,276 $3,834,676 $ 2,419,842 $ 1,637,066 $ 1,954,576 $ 2,780,009
===================================================================================
Period from May 1, 1998 (Date of
Inception) to December 31, 1998
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 (decrease) in net assets from
policy related transactions 1,256,651 1,147,912 562,222 560,073 426,025 559,290
-----------------------------------------------------------------------------------
Net increase (decrease) in net assets 1,505,705 1,284,747 619,243 591,397 454,863 625,909
Net assets, beginning of period - - - - - -
-----------------------------------------------------------------------------------
Net assets, end of period $ 1,505,705 $1,284,747 $ 619,243 $ 591,397 $ 454,863 $ 625,909
===================================================================================
</TABLE>
See Notes to Financial Statements
*Formerly known as MFS Value Division
F-11
<PAGE>
The American Franklin Life Insurance Company
Separate Account VUL-2
Notes to Financial Statements
December 31, 1999
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, 1999 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 (VIP) and Variable Insurance Products Fund
II (VIPII), sponsored by Fidelity Investments, and beginning May 1, 1998,
the MFS Variable Insurance Trust (MFS), 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 VIP; 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 VIPII; and the MFS
Emerging Growth, MFS Research, MFS Growth With Income, MFS Total Return,
MFS Utilities, and MFS Capital Opportunities (formerly MFS Value) Divisions
of the Account are invested in shares of a corresponding Portfolio of MFS.
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 American Franklin business.
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
Investments in shares of the Funds are carried at fair value using 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 and losses on sales of the Account's shares are
determined on the specific identification method.
F-12
<PAGE>
The American Franklin Life Insurance Company
Separate Account VUL-2
Notes to Financial Statements (continued)
December 31, 1999
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. POLICY CHARGES
Certain jurisdictions require deductions 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
charges 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 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 $32,856,400 and $26,329,000 for the years
ended December 31, 1999 and 1998, 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, 1999
4. SUMMARY OF UNIT VALUES AND CHANGES IN OUTSTANDING UNITS
Unit value information and a summary of changes in outstanding units is
shown below:
<TABLE>
<CAPTION>
Year Ended December 31, 1999
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 $ 132.28 $ 329.63 $ 373.90 $191.40 $ 156.98
==================================================================
Unit value, end of year $ 138.06 $ 343.25 $ 505.18 $262.93 $ 168.64
==================================================================
Number of units outstanding,
beginning of year 34,035 164,324 218,934 59,098 18,351
Net contract purchase payments 150,533 40,893 43,852 13,165 6,309
Withdrawals (10,614) (29,345) (33,027) (9,110) (3,997)
Transfers between Separate Account
VUL-2 divisions, net (126,215) (1,632) 9,730 (430) (805)
------------------------------------------------------------------
Number of units outstanding,
end of year 47,739 174,240 239,489 62,723 19,858
==================================================================
</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 $ 157.66 $ 232.11 $ 295.61 $196.85 $ 229.00
==================================================================
Unit value, end of year $ 155.31 $ 254.54 $ 347.55 $223.33 $ 276.97
==================================================================
Number of units outstanding,
beginning of year 14,690 136,532 112,414 39,775 110,811
Net contract purchase payments 3,247 22,571 42,965 17,744 42,651
Withdrawals (2,950) (20,963) (22,550) (8,962) (22,419)
Transfers between Separate Account
VUL-2 divisions, net (762) (1,160) 13,604 2,411 12,174
------------------------------------------------------------------
Number of units outstanding,
end of year 14,225 136,980 146,433 50,968 143,217
==================================================================
</TABLE>
F-14
<PAGE>
The American Franklin Life Insurance Company
Separate Account VUL-2
Notes to Financial Statements (continued)
December 31, 1999
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:
<TABLE>
<CAPTION>
Year Ended December 31, 1999
MFS Variable Insurance Trust
--------------------------------------------------------------------------
MFS MFS MFS MFS
Emerging MFS Growth With Total MFS Capital
Growth Research Income Return Utilities Opportunities
Division Division Division Division Division Division*
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Unit value, beginning of year $113.74 $104.90 $107.39 $103.73 $106.58 $105.18
==========================================================================
Unit value, end of year $189.94 $127.16 $112.63 $105.23 $137.83 $151.78
==========================================================================
Number of units outstanding,
beginning of year 13,238 12,247 5,767 5,701 4,268 5,951
Net contract purchase payments 18,545 14,652 9,996 5,935 8,077 7,199
Withdrawals (6,401) (5,764) (3,651) (2,105) (2,931) (2,276)
Transfers between Separate
Account VUL-2 divisions, net 15,374 9,021 9,372 6,026 4,767 7,442
--------------------------------------------------------------------------
Number of units outstanding,
end of year 40,756 30,156 21,484 15,557 14,181 18,316
==========================================================================
</TABLE>
*Formerly known as MFS Value Division
5. REMUNERATION OF MANAGEMENT
The Account incurs no liability for payments 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 and non-technology systems that
are managed on a decentralized basis. AGC's Year 2000 readiness efforts have
been performed by its key business units with centralized oversight. Each
business unit, including American Franklin, executed a plan to minimize the
risk of a significant negative impact on its operations.
While the specifics of the plans varied, the plans included the following
activities: (1) perform an inventory of American Franklin's information
technology and non-information technology systems; (2) assess which items in
the inventory may expose American Franklin to business interruptions due to
Year 2000 issues; (3) reprogram or replace systems that are not Year 2000
ready; (4) test systems to prove that they will function into the next
century; and (5) return the systems to operations. As of December 31, 1999,
these activities had been completed, making American Franklin's critical
systems Year 2000 ready.
F-15
<PAGE>
The American Franklin Life Insurance Company
Separate Account VUL-2
Notes to Financial Statements (continued)
December 31, 1999
American Franklin continued to test its systems throughout 1999 to maintain
Year 2000 readiness. In addition, American Franklin implemented plans for the
century transition. These plans included a freeze on system modifications
from November 1999 through January 2000, the creation of rapid response teams
to address problems and limiting vacations for certain business and technical
personnel. In addition, AGC established Y2K command centers in Houston and
each of its locations across the country. Each command center monitored all
major business processing activities during the century transition and
reported progress to the Houston command center which coordinated AGC's
nationwide Year 2000 effort. The command centers continued to operate 24
hours a day until January 7, 2000.
On January 1, 2000, AGC announced that its Year 2000 command centers reported
that all major technology systems, programs, and applications were operating
smoothly following the transition into the 21st century. As of February 9,
2000, American Franklin has experienced no interruptions to normal business
operations, including the processing of customer account data and
transactions. American Franklin will continue to monitor its technology
systems and maintain quality customer service throughout the transition
period.
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 such parties' Year 2000 readiness.
American Franklin developed plans to assess and mitigate the risks associated
with the potential failure of third parties to achieve Year 2000 readiness.
These plans included 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, and, where feasible, American
Franklin has taken reasonable precautions to protect against the receipt of
non-Year 2000 ready data. Where necessary, critical third party dependencies
have been included in American Franklin's contingency plans.
Contingency Plans. American Franklin's contingency planning process was
-----------------
designed to reduce the risk of Year 2000-related business failures related to
both internal systems and third party relationships. The contingency plans
included the following activities: (1) evaluate the consequences of failure
of critical business processes with significant exposure to Year 2000 risk;
(2) determine the probability of a Year 2000-related failure for those
critical processes that have a high consequence of failure; (3) develop an
action plan to complete contingency plans for critical processes that rank
high in consequence and probability of failure; and (4) complete the
applicable contingency plans. The contingency plans were tested and updated
throughout 1999.
F-16
<PAGE>
The American Franklin Life Insurance Company
Separate Account VUL-2
Notes to Financial Statements (continued)
December 31, 1999
Risks and Uncertainties. Based on the Year 2000 readiness of internal
-----------------------
systems, century transition plans, plans to deal with third party
relationships, contingency plans and the reports from the AGC command centers
described above, American Franklin believes that American Franklin will
experience at most isolated and minor disruptions of business processes due
to the Year 2000 transition. 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 Year 2000 readiness is not achieved due to American Franklin's failure to
maintain critical systems as Year 2000 ready, failure of critical third
parties to achieve Year 2000 readiness on a timely basis, failure of
contingency plans to reduce Year 2000-related business failures, or other
unforeseen circumstances in completing American Franklin's plans, 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, 1999, American Franklin has incurred, and
-----
anticipates that it will continue to incur, costs relative to achieving and
maintaining Year 2000 readiness. The cost of activities related to Year 2000
readiness has not had a material adverse effect on American Franklin's
results of operations or financial condition. In addition, American Franklin
has elected to accelerate the planned replacement of certain systems as part
of the Year 2000 plans. Costs of the replacement systems are being
capitalized and amortized over their useful lives, in accordance with
American Franklin's normal accounting policies. None of the costs associated
with Year 2000 readiness are passed to divisions of the Account.
F-17
<PAGE>
REPORT OF INDEPENDENT AUDITORS
___________________________________
Board of Directors
and Shareholder
The American Franklin Life Insurance Company
We have audited the accompanying balance sheet of The American Franklin Life
Insurance Company, (the Company), a wholly-owned subsidiary of The Franklin Life
Insurance Company, which is an indirect wholly-owned subsidiary of American
General Corporation, as of December 31, 1999 and 1998, and the related
statements of operations, shareholder's equity, comprehensive income (loss), and
cash flows for each of the three years in the period ended December 31, 1999.
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 auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
/s/ Ernst & Young LLP
Ernst & Young LLP
Chicago, Illinois
February 18, 2000
F-18
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
For the years ended December 31
---------------------------------------------------------
1999 1998 1997
---------------------------------------------------------
<S> <C> <C> <C>
Revenues
Premiums and other considerations $ 10,087 $ 7,725 $ 4,397
Net investment income 2,541 2,419 2,530
Realized investment gains 21 47 283
Other income 32,418 18,678 14,578
---------------------------------------------------------
Total revenues 45,067 28,869 21,788
Benefits and expenses
Insurance and annuity benefits 9,040 4,889 3,674
Operating cost and expenses 21,524 15,910 9,635
Commissions and allowances 28,533 27,695 20,096
Change in deferred policy acquisition costs and cost
of insurance purchased (16,871) (20,354) (15,351)
Litigation settlement - 8,064 -
---------------------------------------------------------
Total benefits and expenses 42,226 36,204 18,054
---------------------------------------------------------
Income (loss) before income taxes 2,841 (7,335) 3,734
Income tax expense (benefit)
Current (1,449) (1,247) 715
Deferred 1,358 (2,270) 244
---------------------------------------------------------
Total income tax expense (benefit) (91) (3,517) 959
---------------------------------------------------------
Net income (loss) $ 2,932 $ (3,818) $ 2,775
=========================================================
</TABLE>
See Notes to Financial Statements.
F-19
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
BALANCE SHEET
(In thousands, except share data)
<TABLE>
<CAPTION>
At December 31
---------------------------
ASSETS 1999 1998
<S> <C> <C>
Investments
Fixed maturity securities (amortized cost: $15,746; $31,219) $ 15,852 $ 32,587
Policy loans 17,037 12,371
Short-term investments 6,733 -
---------------------------
Total investments 39,622 44,958
Cash 13,552 14,211
Accrued investment income 338 408
Amounts recoverable from reinsurers 10,875 10,314
Deferred policy acquisition costs 70,989 52,352
Cost of insurance purchased 7,884 8,941
Insurance premiums in course of settlement 795 1,620
Other assets 1,519 1,922
Assets held in separate accounts 644,899 442,801
---------------------------
Total assets $ 790,473 $ 577,527
===========================
LIABILITIES
Insurance and annuity liabilities
Policy reserves, contract claims and other policyholders' funds $ 9,804 $ 16,965
Universal life contracts 40,493 31,150
Annuity contracts 7,246 5,376
Unearned revenue 10,127 9,591
Income tax liabilities
Current (2,565) (1,220)
Deferred (3,288) (4,464)
Accrued expenses and other liabilities 17,237 25,402
Liabilities related to separate accounts 644,899 442,801
---------------------------
Total liabilities 723,953 525,601
SHAREHOLDER'S EQUITY
Common stock ($5 par value; 500,000 shares authorized,
issued and outstanding) 2,500 2,500
Paid-in capital 63,437 51,437
Accumulated other comprehensive income 92 430
Retained earnings (deficit) 491 (2,441)
---------------------------
Total shareholder's equity 66,520 51,926
---------------------------
Total liabilities and shareholder's equity $ 790,473 $ 577,527
===========================
</TABLE>
See Notes to Financial Statements.
F-20
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
STATEMENT OF SHAREHOLDER'S EQUITY
(In thousands)
<TABLE>
<CAPTION>
For the years ended December 31
1999 1998 1997
---------------------------------
<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 51,437 25,373 25,373
Capital contribution 12,000 26,064 -
---------------------------------
Balance at end of year 63,437 51,437 25,373
---------------------------------
Retained earnings (deficit)
Balance at beginning of year (2,441) 1,377 (1,398)
Net income (loss) 2,932 (3,818) 2,775
---------------------------------
Balance at end of year 491 (2,441) 1,377
---------------------------------
Accumulated other comprehensive income
Balance at beginning of year 430 398 391
Change during the year (520) 49 10
Amounts applicable to deferred federal income taxes 182 (17) (3)
---------------------------------
Balance at end of year 92 430 398
---------------------------------
Total shareholder's equity at end of year $ 66,520 $ 51,926 $ 29,648
=================================
</TABLE>
STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
<TABLE>
<CAPTION>
For the years ended December 31
1999 1998 1997
---------------------------------
<S> <C> <C> <C>
Net income (loss) $ 2,932 $ (3,818) $ 2,775
Other comprehensive income (loss)
Gross change in unrealized gains (losses) on
securities (pretax: $(499); $96; $293) (324) 63 191
Less: gains realized in net income
(pretax:$21; $47, $283) 14 31 184
---------------------------------
Change in net unrealized gains (losses) on
securities (pretax: $(520); $49; $10) (338) 32 7
---------------------------------
Comprehensive income (loss) $ 2,594 $ (3,786) $ 2,782
=================================
</TABLE>
See Notes to Financial Statements.
F-21
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
For the years ended December 31
1999 1998 1997
-------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income (loss) $ 2,932 $ (3,818) $ 2,775
Reconciling adjustments to net cash used for
operating activities
Policy reserves, claims and other
policyholders' funds (2,994) 12,783 18,078
Realized investment gains (21) (47) (283)
Deferred policy acquisition costs and cost of
insurance purchased (16,871) (20,354) (15,351)
Charges on universal life contracts, net of
interest credited (28,863) (21,569) (17,369)
Change in other assets and liabilities (7,621) 11,343 (2,939)
------------------------------------------------
Net cash used for operating activities (53,438) (21,662) (15,089)
------------------------------------------------
Investing activities
Investment purchases
Available-for-sale (30,018) (26,271) (6,900)
Other (4,721) (5,794) (2,766)
Investment calls, maturities and sales
Available-for-sale 45,751 16,568 17,557
Other 55 504 142
Net increase in short term investments (6,733) - -
------------------------------------------------
Net cash provided by (used for)
investing activities 4,334 (14,993) 8,033
------------------------------------------------
Financing activities
Policyholder account deposits 167,565 191,502 99,023
Policyholder account withdrawals (131,120) (173,049) (88,026)
Proceeds from intercompany borrowings - 18,896 15,320
Repayments of intercompany borrowings - (18,896) (15,320)
Capital contribution 12,000 26,064 -
------------------------------------------------
Net cash provided by financing activities 48,445 44,517 10,997
------------------------------------------------
Net increase (decrease) in cash (659) 7,862 3,941
Cash at beginning of year 14,211 6,349 2,408
------------------------------------------------
Cash at end of year $ 13,552 $ 14,211 $ 6,349
================================================
</TABLE>
See Notes to Financial Statements.
F-22
<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. AMFLIC's ultimate parent is American General
Corporation (AGC).
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).
Management must make estimates and assumptions that affect amounts reported
in the financial statements and in disclosures of contingent assets and
liabilities. Ultimate results could differ from our estimates.
1.3 Investments
-----------
Fixed Maturity Securities. All fixed maturity securities were classified as
available-for-sale and reported at fair value. We adjust related balance
sheet accounts as if the unrealized gains (losses) had been realized and
record the net adjustment in accumulated other comprehensive income (loss)
in shareholder's equity. If the fair value of a security classified as
available-for-sale declines below its cost and we consider the decline to
be other than temporary, we reduce the security's amortized cost to its
fair value and recognize a realized loss.
Policy Loans. Policy loans are reported at unpaid principal balance.
Short-Term Investments. Short-term investments include investments with
maturities of less than one year at the date of acquisition and are carried
at amortized cost, which approximates fair value.
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, as appropriate.
Mortgage-Backed Securities. We recognize income on mortgage-backed
securities using a constant effective yield based on estimated prepayments
of the underlying mortgages. If actual prepayments differ from estimated
prepayments, we calculate a new effective yield and adjust the net
investment in the security accordingly. The adjustment is recognized in net
investment income.
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 variable universal life and annuities, for which the
investment risk lies predominantly with the contract holder. The 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.
F-23
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
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. We adjust the DPAC balance and
related expense when our estimate of future gross profits changes
significantly. DPAC associated with all other insurance contracts is
charged to expense over the premium-paying period or as the premiums are
earned over the life of the contract.
DPAC is adjusted for the impact on estimated future gross profits as if net
unrealized gains (losses) on securities had been realized at the balance
sheet date. The impact of this adjustment is included in accumulated other
comprehensive income (loss) in shareholder's equity.
We review the carrying amount of DPAC on at least an annual basis. We
consider estimated future gross profits or future premiums, expected
mortality, interest earned and credited rates, persistency, and expenses to
determine whether the carrying amount is recoverable. Any amounts deemed
unrecoverable are charged to expense.
1.6 Cost of Insurance Purchased (CIP)
---------------------------------
The cost assigned to AMFLIC 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%. CIP is charged to expense and adjusted for the impact of net
unrealized gains (losses) on securities in the same manner as DPAC. We
review 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. AMFLIC normally cannot change or cancel these
contracts.
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 our estimates of the cost of
future policy benefits, using the net level premium method. Interest
assumptions used to compute reserves ranged from 3% to 5.5% at December 31,
1999.
1.8 Premium Recognition
-------------------
Most receipts for annuities and interest-sensitive life insurance policies
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 Reinsurance
-----------
AMFLIC limits its exposure to loss on any individual life to $100,000 by
ceding additional risks through reinsurance contracts with other insurers,
including FLIC. We diversify our risk of reinsurance loss by ceding to a
number of reinsurers that have strong financial strength ratings. If a
reinsurer is not able to meet its obligations, AMFLIC remains liable. We
consider the likelihood of a material reinsurance liability not being met
by a reinsurer to be remote.
AMFLIC records a receivable for the portion of benefits paid and insurance
liabilities that have been reinsured. The cost of reinsurance is recognized
over the life of the reinsured policies using assumptions consistent with
those used to account for the underlying policies.
F-24
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1.10 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, using 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.
1.11 Reclassification
----------------
Certain amounts in the 1997 and 1998 financial statements have been
reclassified to conform to the 1999 presentation.
1.12 Future Accounting Changes
-------------------------
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires all derivative
instruments to be recognized at fair value in the balance sheet. Changes
in the fair value of a derivative instrument will be reported as earnings
or other comprehensive income, depending upon the intended use of the
derivative instrument. We will adopt SFAS 133 on January 1, 2001. We do
not expect adoption to have a material impact on AMFLIC's results of
operations and financial position.
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, 1999
----------------------------------------------------------
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
In thousands Cost Gains Losses Value
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate bonds
Investment grade $ 5,803 $ 135 $ 79 $ 5,859
Below investment grade 678 6 1 683
Public utilities 1,508 77 - 1,585
Mortgage-backed 944 37 - 981
U.S. government 6,611 15 90 6,536
States/political subdivisions 202 6 - 208
----------------------------------------------------------
Total fixed maturity securities $ 15,746 $ 276 $ 170 $ 15,852
==========================================================
</TABLE>
<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>
F-25
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
--------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2.1 Fixed Maturity Securities (continued)
-------------------------------------
Net Unrealized Gains (Losses). Net unrealized gains (losses) on fixed
maturity securities included in accumulated other comprehensive income
(loss) at December 31 were as follows:
<TABLE>
<CAPTION>
In thousands 1999 1998
------------------------------------------------------------------
<S> <C> <C>
Gross unrealized gains $ 276 $ 1,368
Gross unrealized losses (170) -
DPAC fair value adjustment 560 (86)
CIP fair value adjustment (525) (621)
Deferred federal income taxes (49) (231)
--------------------
Net unrealized gains on securities $ 92 $ 430
====================
</TABLE>
Maturities. The contractual maturities of fixed maturity securities at
December 31, 1999 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 $ 1,147 $ 1,150
In years two through five 10,060 10,128
In years six through ten 2,182 2,228
After ten years 1,413 1,365
Mortgage-backed securities 944 981
----------------------------
Total fixed maturity securities $ 15,746 $15,852
============================
</TABLE>
Actual maturities may differ from contractual maturities since borrowers
may have the right to call or prepay obligations. AMFLIC may sell
investments before maturity to achieve corporate requirements and
investments strategies.
2.2 Investment Income
-----------------
Investment income was as follows:
<TABLE>
<CAPTION>
In thousands 1999 1998 1997
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturity securities $ 1,461 $ 1,592 $ 2,291
Policy loans 698 445 264
Other investments 547 473 12
---------------------------------------
Gross investment income 2,706 2,510 2,567
Investment expense 165 91 37
---------------------------------------
Net investment income $ 2,541 $ 2,419 $ 2,530
=======================================
</TABLE>
F-26
<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:
In thousands 1999 1998 1997
-------------------------------------------------------------------
Fixed maturity securities
Gross gains $ 56 $ 116 $ 564
Gross losses - - (10)
---------------------------
Total 56 116 554
Other (35) (69) (271)
---------------------------
Realized investment gains $ 21 $ 47 $ 283
===========================
Voluntary sales of investments resulted in the following realized gains
(losses):
Realized
--------------------
In thousands Category Proceeds Gains Losses
- ------------------------------------------------------------------------------
1999 Available-for-sale $ 1,758 $ 56 $ -
==============================================================================
1998 Available-for-sale $ 2,110 $ 116 $ -
==============================================================================
1997 Available-for-sale $ 9,992 $ 550 $ 8
2.4 Investments on Deposit
----------------------
At December 31, 1999 and 1998, fixed maturity securities with a carrying
value of $6,337,848 and $6,717,000 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, 1999 and
1998, AMFLIC's largest investment in any one entity other than U.S.
government obligations was $1,000,000.
3. Income Taxes
AMFLIC is subject to the life Insurance company provisions of the federal
tax law and is part of a 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
consolidated return.
3.1 Tax Expense
-----------
A reconciliation between the Federal income tax rate and the effective tax
rate follows:
1999 1998 1997
----------------------------
Federal income tax rate 35.0 % 35.0% 35.0 %
Invested asset items (37.7) 14.3 (5.4)
Other (0.5) (1.4) (3.9)
---------------------------
Effective tax rate (3.2)% 47.9 % 25.7 %
===========================
F-27
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3.2 Deferred Taxes
--------------
Components of deferred tax liabilities and assets at December 31, were as
follows:
In thousands 1999 1998
-----------------------
Deferred tax liabilities, applicable to:
Basis differential of investments $ - $ 398
DPAC and CIP 18,141 14,891
Other 4,740 1,202
-----------------------
Total deferred tax liabilities 22,881 16,491
Deferred tax assets, applicable to:
Policy reserves (24,713) (20,738)
Other (1,456) (217)
-----------------------
Total deferred tax assets (26,169) (20,955)
-----------------------
Net deferred tax assets $ (3,288) $ (4,464)
=======================
AMFLIC expects adequate future taxable income to realize the net deferred
tax assets. Accordingly, no valuation allowance is considered necessary.
3.3 Taxes Paid
----------
Income taxes paid (received) were as follows:
In thousands 1999 1998 1997
-----------------------------------------------------------
Federal $ (447) $ 243 $ 519
State 143 110 1
4. Deferred Policy Acquisition Costs (DPAC)
Activity in DPAC was as follows:
In thousands 1999 1998 1997
-------------------------------------------------------------------------
Beginning at January 1 $ 52,352 $ 30,515 $ 13,781
Deferrals 24,543 25,320 18,223
Amortization (6,524) (3,383) (1,307)
Effect of net unrealized (gains)
losses on securities 646 (47) (6)
Effect of realized investment gains (28) (53) (176)
---------------------------------
Balance at December 31 $ 70,989 $ 52,352 $ 30,515
=================================
5. Cost of Insurance Purchased (CIP)
Activity in CIP was as follows:
In thousands 1999 1998 1997
-------------------------------------------------------------------------
Balance at January 1 $ 8,941 $ 10,549 $ 12,212
Accretion of interest 767 926 1,054
Amortization (1,915) (2,509) (2,619)
Effect of net unrealized (gains)
losses on securities 96 (12) (3)
Effect of realized investment gains (5) (13) (95)
---------------------------------
Balance at December 31 $ 7,884 $ 8,941 $ 10,549
=================================
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
F-28
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. Cost of Insurance Purchased (CIP) (continued)
CIP amortization, net of accretion, expected to be recorded in each of the
next five years is:
Amount
Year (000's)
------------------------------------------------
2000 $1,054
2001 927
2002 820
2003 727
2004 647
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, including the values of underlying customer relationships
and distribution systems, and (2) the reporting of investments at fair
value without a corresponding revaluation of related policyholder
liabilities can be misinterpreted.
<TABLE>
<CAPTION>
1999 1998
-----------------------------------------------------------------
Carrying Fair Carrying Fair
In thousands Amount Value Amount Value
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Fixed maturity securities $ 15,852 $ 15,852 $ 32,587 $ 32,587
Policy Loans 17,037 17,037 12,371 12,371
Short-term investments 6,733 6,733 - -
Assets held in separate accounts 644,899 644,899 442,801 442,801
Liabilities
Insurance investment contracts 7,480 7,102 5,479 5,189
Liabilities related to separate accounts 644,899 644,899 442,801 442,801
</TABLE>
We used the following methods and assumptions to estimate the fair value of
our financial instruments:
Fixed Maturity Securities. Fair values of fixed maturity securities were
based on quoted market prices, where available. For investments not
actively traded, we estimated the fair values 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 1999 and 1998 was 6.11% and 6.96%,
respectively.
Assets and Liabilities Related to Separate Accounts. We valued separate
account assets and liabilities based on quoted net asset value per share of
the underlying mutual funds.
Insurance Investment Contracts. We estimated the fair value of insurance
investment contracts, which do not subject AMFLIC to significant risks
arising from policyholder mortality or morbidity, using cash flows
discounted at market interest rates.
F-29
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. Reinsurance
Under the provisions of an assumed reinsurance agreement, AMFLIC recognized
the following:
<TABLE>
<CAPTION>
In thousands 1999 1998 1997
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums and other
considerations $ 1,416 $ 2,387 $ 1,169
Other income 1,337 1,869 810
Benefits 1,756 3,331 1,329
Commission expense 215 (20) (59)
</TABLE>
Under the provisions of a modified coinsurance agreement which cedes a
portion of the variable universal life product activity, AMFLIC recognized
the following:
<TABLE>
<CAPTION>
In thousands 1999 1998 1997
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums and other
considerations $ 12,027 $ 9,058 $ 5,226
Expense allowances from
reinsurer 8,531 7,239 4,965
Other 1,744 885 60
</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 1999 1998 1997
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums and other
considerations $ 10,687 $ 9,476 $ 7,994
Change in policy reserves 10,382 9,086 7,804
</TABLE>
8. Statutory Accounting
State insurance laws and regulations prescribe accounting practices for
calculating statutory net income and equity. In addition, state regulators
may permit statutory accounting practices that differ from prescribed
practices. No significant permitted practices are used to prepare AMFLIC's
statutory financial statements.
At December 31, 1999 and 1998, AMFLIC had statutory stockholder's equity of
$41,590,000 and $32,662,000, respectively. AMFLIC's statutory net loss was
$2,947,000, $2,615,000 and $648,000 for the years ended December 31, 1999,
1998 and 1997, respectively.
Generally, AMFLIC is restricted by state insurance laws as to amounts it
may pay in the form of dividends, loans or advances without the approval of
the Illinois Insurance Department. Under these restrictions, during 2000 no
dividends may be paid out and, loans and advances in excess of $10,398,000
may not be transferred without the approval of the Illinois Insurance
Department.
F-30
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. Statement of Cash Flows
In addition to the cash activities shown in the statement of cash flows,
the following transactions, occurred:
In thousands 1999 1998 1997
-----------------------------------------------------------------------
Interest added to universal
life contracts and other deposit funds $ 2,214 $ 1,387 $ 1,279
==========================
10. Related Party Transactions
AMFLIC has no full-time employees or office facilities. General and
administrative expenses were allocated to AMFLIC from FLIC prior to 1999,
based upon hours worked by administrative personnel. Effective January 1,
1999 AMFLIC entered into a shared services agreement with other AGC life
subsidiaries. As part of this agreement, administration and general
expenses are allocated to AMFLIC from all subsidiaries. The amount
allocated to AMFLIC has increased since 1997 reflecting AMFLIC's increased
emphasis and focus on its variable product portfolio. Allocated expenses
for the years ended December 31, 1999, 1998 and 1997, amounted to
approximately $20,084,000, $8,541,000, and $5,104,000, respectively.
AMFLIC participates in a program of short-term borrowing with AGC to
maintain its long-term investment commitments. AMFLIC had no short-term
borrowing in 1999, and borrowed and repaid $18,896,000 in 1998. Interest
was paid on the outstanding balance based on the rate as stipulated in the
program.
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. A number of these lawsuits have resulted in substantial
settlements across the life insurance industry. AMFLIC was a defendant is
similar class action lawsuits. In 1998, AMFLIC entered into agreements to
resolve substantially all of the material pending market conduct class
action lawsuits. We recorded a charge of $8 million for additional
policyholder benefits and other anticipated expenses resulting from the
proposed settlements, 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. All of these settlements were
finalized in 1999.
AMFLIC is a party to various other lawsuits and proceedings arising in the
ordinary course of business. These lawsuits and proceedings include certain
class action claims and claims filed by individuals who excluded themselves
from market conduct settlements. In addition, many of these claims arise in
jurisdictions, such as Alabama and Mississippi, that permit damage awards
disproportionate to the actual economic damages alleged to have been
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 or no relation to actual economic damages incurred
by plaintiffs continues to create the potential for an unpredictable
judgement in any given suit.
12. Year 2000 (Unaudited)
As of February 18, 2000, all of our major technology systems, programs, and
applications, including those which rely on third parties, are operating
smoothly following our transition into 2000. We have experienced no
interruptions to normal business operations, including the processing of
customer account data and transactions. We will continue to monitor our
technology systems, including critical third party dependencies, as
necessary to maintain our Year 2000 readiness. We do not expect any
F-31
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. Year 2000 (Unaudited) (continued)
future disruptions, if they occur, to have a material effect on the
company's results of operations, liquidity, or financial condition.
Through December 31, 1999, AGC incurred and expensed pretax costs of $98
million related to Year 2000 readiness, including $18 million in 1999 and
$65 million in 1998. In 1999, Year 2000 readiness expenses were included in
division earnings. The 1998 expenses were excluded from division earnings,
consistent with the manner in which AGC reviewed division results. In
addition, we accelerated the planned replacement of certain systems as part
of our Year 2000 plans. The cost of these replacement systems was
immaterial. We do not anticipate incurring any significant costs in the
future to maintain Year 2000 readiness.
F-32
<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 94 pages.
Undertaking to file reports.
Undertaking pursuant to Rule 484 under the Securities Act of 1933.
The signatures.
Written Consents of the following persons:
Sutherland Asbill & Brennan LLP
Robert M. Beuerlein, Senior Vice President -Actuarial/Financial and
Treasurer
Ernst & Young LLP
The following exhibits required by Article IX(A) of Form N-8B-2:
*** 1-A(1) Certified resolutions regarding organization of
Separate Account VUL-2.
*** 1-A(2) Inapplicable.
*** 1-A(3)(a) sales Agreement between Franklin Financial Services
Corporation ("Franklin Financial") and Separate Account
VUL-2 of The American Franklin Life Insurance Company,
dated as of January 31, 1995.
*** 1-A(3)(b)(i) Specimen Regional Manager Registered Representative
Agreement between Franklin Financial and registered
representatives of Franklin Financial distributing
EquiBuilder 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, 1994, 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.
1-A(7) Inapplicable.
II-2
<PAGE>
*** 1-A(8)(a)(1) Participation Agreement among American Franklin,
Variable Insurance Products Fund ("VIP") and Fidelity
Distributors Corporation ("FDC"), dated July 18, 1991.
*** 1-A(8)(a)(2) Amendment No. 1 to Participation Agreement among
American Franklin, VIP and FDC, effective as of
November 1, 1991.
*** 1-A(8)(a)(3) Participation Agreement among American Franklin, Variable
Insurance Products Fund II ("VIP II") and FDC, dated
July 18, 1991.
*** 1-A(8)(a)(4) Amendment No. 1 to Participation Agreement among American
Franklin, VIP II and FDC, effective as of Novem Beuerlein
ber 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
Franklin and Integrity.
II-3
<PAGE>
1-A(8)(c)(2) Amendment No. 2 to Modified Coinsurance Agreement between
American Franklin and Integrity is incorporated herein by
reference to similarly designated exhibit to Post-
Effective Amendment No. 3 on Form S-6 of Separate Account
VUL-2 of The American Franklin Life Insurance Company,
filed February 28, 1997 (Reg. No. 33-77470).
1-A(8)(c)(3) Amendment No. 3 to Modified Coinsurance Agreement between
American Franklin and Integrity effective April 1, 1989 is
incorporated herein by reference 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 of (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 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.
4 Inapplicable.
5 Inapplicable.
6(a) Consent of Ernst & Young LLP.
6(b) Consent of Sutherland Asbill & Brennan LLP.
6(c) Opinion of Robert M. Beuerlein Senior Vice President -
Acturial/Financial
7 Power of Attorney filed herein (see signature pages).
** 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.
II-4
<PAGE>
*** 9 Notice of Cancellation Right Pursuant to Rule
6e-3(T)(b)(13)(viii) under the Investment Company Act of 1940.
- --------------------------------------------------------------------------------
* Incorporated herein by reference to similarly designated exhibit to 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).
*** Incorporated herein by reference to similarly designated exhibit to Post-
Effective Amendment No. 8 on Form S-6 of Separate Account VUL-2 of The
American Franklin Life Insurance Company, filed April 30, 1999 (Reg. No.
33-77470).
II-5
<PAGE>
POWERS OF ATTORNEY
Each person whose signature appears below hereby appoints Thomas M. Zurek,
Robert Herbert, Jr. and Pauletta P. Cohn and each of them, any one of whom may
act without the joinder of the others, as his/her attorney-in-fact to sign on
his/her behalf and in the capacity stated below and to file all amendments to
this Registration Statement, which amendment or amendments may make such
changes and additions to this Registration Statement as such attorney-in-fact
may deem necessary or appropriate.
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant, American Franklin Life Insurance Company through the
Separate Account VUL-2, certifies that it meets the requirements of Securities
Act Rule 485(b) for effectiveness of this amended Registration Statement and has
duly caused this Registration Statement to be signed on its behalf, in the City
of Houston, and State of Texas, on the 24th day of April, 2000.
THE AMERICAN FRANKLIN LIFE
INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
(Registrant)
BY: THE AMERICAN FRANKLIN LIFE
INSURANCE COMPANY
(On behalf of the Registrant and itself)
BY: /s/ David L. Herzog
---------------------------------------
David L. Herzog
Executive Vice President and
Chief Financial Officer
[SEAL]
ATTEST: /s/ Julie A. Cotton
------------------------------
Julie A. Cotton
Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following officers and directors
of the American Franklin Life Insurance Company in the capacities and on the
dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Rodney O. Martin, Jr. Chairman and Chief April 24, 2000
- -------------------------------- Executive Officer
Rodney O. Martin, Jr.
<PAGE>
/s/ Thomas M. Zurek Director April 24, 2000
- --------------------------------
Thomas M. Zurek
/s/ Donald W. Britton Director April 24, 2000
- --------------------------------
Donald W. Britton
/s/ Barbara J. Fossum Director April 24, 2000
- --------------------------------
Barbara J. Fossum
/s/ David L. Herzog Director, April 24, 2000
- -------------------------------- Executive Vice President,
David L. Herzog Chief Financial Officer
/s/ Darrell J. Malano Director April 24, 2000
- --------------------------------
Darrell J. Malano
/s/ Mark R. McGuire Director April 24, 2000
- --------------------------------
Mark R. McGuire
/s/ Ronald H. Ridlehuber Director April 24, 2000
- --------------------------------
Ronald H. Ridlehuber
<PAGE>
EXHIBIT INDEX
1-A(3)(c) Schedule of Sales Commissions
1-A(6)(b) By-Laws of American Franklin
6(a) Consent of Ernst & Young LLP
6(b) Consent of Sutherland Asbill & Brennan LLP
6(c) Opinion of Robert M. Beuerlein, Senior Vice President
<PAGE>
EXHIBIT 1-A(3)(c)
SCHEDULE OF SALES COMMISSIONS
For EquiBuilder III, individual flexible premium variable life insurance
policies.
Policy Year Percent of Target Premiums*
----------- ---------------------------
1st 100%
2nd through 10th 3%
11th and later 1.5%
After two years, trail commissions are earned at an annual rate of 0.25% on the
amount in the Policy Account that is in the Separate Account.
* First year and subsequent policy year allowances are generally applicable to
a target premium. For first year premiums in excess of such amount the
distribution allowance is 5%.
If the planned premium is less than the target premium, the first year rate will
be applied to the planned premium only.
The target premium is based on 75% of a net annual premium by using the 1980 CSO
mortality table (male and female, age nearest birthday) and a 4.5% interest
rate. It assumes the premium is paid annually at the beginning of the yar until
the policy ends.
<PAGE>
EXHIBIT 1-A(6)(b)
BYLAWS OF
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
(Amended and Restated as of April 14, 1998)
ARTICLE I
MEETING OF STOCKHOLDERS
Section 1. The regular annual meeting of the Stockholders of the Company
shall be held at the Home Office of the Company, in the City of
Springfield, Illinois or at such other place within or without
the State of Illinois as may be determined by the Board of
Directors from time to time, on or before April 30 of each year,
as shall be fixed by the President.
Section 2. Special meetings of the Stockholders may be called at any time by
the President and Secretary or by the holders of not less than a
majority of the then outstanding stock by mailing to each
Stockholder a written notice (stating the time, place, and object
of the meeting) at least five (5) days prior to the date fixed
therefor.
Section 3. At any meeting of Stockholders the holders of the majority of the
capital stock issued and outstanding, present in person or
represented by proxy, shall constitute a quorum for all purposes.
If the holders of the amount of stock necessary to constitute a
quorum shall fail to attend in person or by proxy at the time and
place fixed by these Bylaws for an annual meeting, or fixed by
notice as provided for a special meeting, a majority in interest
(although less than a quorum) of the Stockholders present in
person or by proxy may adjourn, from time to time, without notice
other than by announcement at the meeting. At any such adjourned
meeting at which a quorum shall be present any business may be
transacted which might have been transacted at the meeting as
originally fixed or notified.
ARTICLE II
DIRECTORS
Section 1. The Board of Directors of the Company shall consist of not less
than five (5) nor more than ten (10) members, as determined by
the Board from time to time, at least three (3) of whom shall be
residents and citizens of the State of Illinois at the time of
their election and that the number of Directors for the ensuing
year shall be the number elected by the Stockholders at their
annual meeting for the term of one year each or until their
successors are elected and qualified, or at any regular or
special meeting to hold such office until the next annual meeting
of Stockholders and until their successors have been elected and
qualified.
Section 2. Vacancies in the Board of Directors may be filled by the
Stockholders at any regular
Page 1 of 6
<PAGE>
or special meeting of Stockholders, that any Director so elected
by the Board of Directors to fill a vacancy shall hold office for
the remainder of the full term of the Director whose departure
from the Board created the vacancy, and that any vacancy
occurring in the Board of Directors and any directorship to be
filled by reason of an increase in the number of Directors may be
filled by election at an annual meeting or at any regular or
special meeting of Stockholders called for that purpose.
Section 3. Regular meetings of the Directors may be held as provided by the
Board. Any meeting of the Board of Directors shall be held at the
home office of the Company or at such other place or places,
within or without the State of Illinois, as the Board of
Directors may designate. Notice of each meeting shall be given to
each member of the Board by the President or Secretary at least
three days prior to the meeting date. A majority of all of the
Directors shall constitute a quorum for the transaction of
business but when a quorum is not present, one or more Directors
present may adjourn and continue to adjourn such meeting from
time to time, but not to a time beyond the date of the next
regular meeting.
Section 4. Special meetings of the Board of Directors may be called by the
President and Secretary, or by a majority of the Directors, by
mailing to each Director a written notice (stating the time,
place and object of the meeting) at least two days prior to the
date fixed therefor. A majority of all Directors shall constitute
a quorum.
Section 5. The Board of Directors, at its first meeting following the
regular annual meeting of the Stockholders in each year, shall
elect one of its members as Chairman of the Board to serve for
one year or until his successor is elected. The Chairman shall
preside at all meetings of the Stockholders and of the Board of
Directors and shall perform such other duties as may be required
of him by the Board or by the Executive Committee. In case of a
vacancy in the office of Chairman the same may be filled for the
unexpired term by the Board of Directors at any regular meeting
or at any special meeting called for that purpose. In the event
of the absence or inability of the Chairman his duties shall be
performed by the President. In the event of the absence or
inability of the Chairman and the President the duties of the
Chairman shall be performed by a Vice President designated by the
Board of Directors.
Section 6. The Board of Directors shall have the power to elect or appoint,
and to remove at pleasure, all officers, committees and members
of committees, and shall fix the salaries of all officers and
committee members and prescribe their duties.
Page 2 of 6
<PAGE>
ARTICLE III
STANDING COMMITTEES
Section 1. The Board of Directors may, at its first meeting following the
regular annual meeting of the Stockholders in each year, appoint
the following standing committees: an Executive Committee of not
less than three members or more than seven members; an Investment
Committee of not less than three members or more than nine
members; an Interest Rates Committee of not less than three
members or more than five members; a Reinsurance Committee of not
less than three and not more than eight members, one of which
shall be a Director; and a Stockholder Dividends Committee of not
less than three members or more than five members. All members
shall serve for a term of one year or until their successors may
be appointed. Vacancies may be filled by the Board of Directors
at any regular meeting, or at any special meeting called for that
purpose. Said Committees shall make written reports of their
transactions to the Board, and their acts shall be subject to
review by the Board of Directors. A majority of the members of
any committee shall be a quorum for the transactions of business.
Section 2. In addition to these committees, the Board of Directors, by
resolution adopted by a majority of the full Board of Directors,
may designate such other committees as it shall deem to be
appropriate, each of which shall have and may exercise that
authority of the Board of Directors which shall have been
delegated to it in the resolution creating such committee, except
as may be prohibited by law.
ARTICLE IV
EXECUTIVE OFFICERS
Section 1. The Executive Officers of the Company shall consist of a
President, one or more Vice Presidents, a Secretary, one or more
Assistant Secretaries, a Treasurer, and one or more Assistant
Treasurers, who shall be elected by the Board of Directors at
their first meeting after the annual meeting of the Stockholders,
and they shall, subject to these Bylaws, serve for a term of one
year each or until their successors are duly elected. In case of
a vacancy in any of the offices named in this section the same
may be filled for the unexpired term by the Board of Directors at
any regular meeting, or at a special meeting called for that
purpose.
Section 2. The President shall perform such duties as usually pertain to his
office or may be required of him by the Board of Directors or by
the Executive Committee.
Section 3. The Vice Presidents, in the order designated by the President,
shall perform the duties of the President in case of his absence
or inability to act. In event the President shall fail to make
such designation the order shall be designated by the Board of
Directors, and in event of the absence or inability of the
President and the Vice Presidents, the Board of Directors
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<PAGE>
may select one of its members as President Pro Tem. The Vice
Presidents shall perform such other duties as may be required of
them by the Board of Directors or by the Executive Committee.
Section 4. The Secretary shall keep a record of the meetings of the
Stockholders and of the Board of Directors, and shall perform
such duties as usually pertain to his office, or as may be
required of him by the Board of Directors or by the Executive
Committee.
Section 5. The Assistant Secretaries, in the order designated by the
Secretary, shall perform the duties of the Secretary in case of
his absence or inability to act. In event the Secretary shall
fail to make such designation the order shall be designated by
the Board of Directors, and in the event of the absence or
inability of the Secretary and the Assistant Secretaries, the
Board of Directors may select one of its members as Secretary Pro
Tem. The Assistant Secretaries shall perform such other duties as
may be required of them by the Board of Directors or by the
Executive Committee.
Section 6. The Treasurer shall perform such duties as may be required of him
by the Board of Directors, or by the Executive Committee.
Section 7. The Assistant Treasurers, in the order designated by the
Treasurer, shall perform the duties of the Treasurer in case of
his absence or inability to act. In event the Treasurer shall
fail to make such designation the order shall be designated by
the Board of Directors, and in the event of the absence or
inability of the Treasurer and the Assistant Treasurers, the
Board of Directors may select one of its members as Treasurers
Pro Tem. The Assistant Treasurers shall perform such other duties
as may be required of them by the Board of Directors or by the
Executive Committee.
Section 8. The Officers of this Company shall comply with the Rules of the
Illinois Insurance Department respecting Internal Security
Standards and Fidelity Bonds as now defined in Rule 9.04 of the
Illinois Insurance Department.
ARTICLE V
TRANSFERRING REAL ESTATE, SECURITIES, ETC.
Section 1. The President or a Vice President or an Assistant Vice President
or the General Counsel or the Treasurer or the Assistant
Treasurer and the Secretary or an Assistant Secretary are
authorized for and on behalf of the Company.
(a) To execute, acknowledge, and deliver deeds to real estate when such
real estate has been sold.
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<PAGE>
(b) To assign, transfer, and cancel evidence of indebtedness and notes
secured by mortgage upon real estate when such notes have been paid or
sold.
(c) To execute releases of mortgages upon real estate when the notes such
mortgages were given to secure have been paid, and to execute partial
releases, easements, and subordinations.
(d) To transfer bonds, stocks, and/or other securities held as collateral
security for loans when such loans have been paid or sold.
(e) To transfer bonds, stocks and/or other assets or securities when such
bonds, stocks and/or other assets or securities have been sold or
called for payment.
(f) To execute such other instruments from time to time as may be
necessary or expedient to carry on the business of the Company.
Section 2. The President, a Vice President, an Assistant Vice President, the
General Counsel or the Secretary is authorized to negotiate and
enter into any leasing agreement for any real estate owned by the
Company and to execute the same for and on behalf of the Company,
and to do and perform any and all other acts that may be
necessary to effectively accomplish the purposes mentioned.
ARTICLE VI
ACTUARIES, MEDICAL DIRECTORS, ETC.
Section 1. The Board of Directors may appoint one or more Actuaries, one or
more Associate Actuaries, and one or more Assistant Actuaries,
one or more Medical Directors, one or more Associate Medical
Directors, or one or more Assistant Medical Directors and such
other officers and department heads as it may deem necessary and
expedient, who shall perform such duties as may be required of
them by the Board of Directors or by the Executive Committee.
ARTICLE VII
SALARIES
Section 1. All salaries, compensations or emolument to be paid to any
officer or Director of the Company, and all salaries,
compensations, or emolument amounting in any year to more than
forty thousand dollars ($40,000.00) to any person, firm, or
corporation, shall be first authorized by a vote of the Board of
Directors, which vote shall be by roll call at regular meeting of
said Board, and which vote shall be duly recorded in the records
of the Company.
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ARTICLE VIII
AMENDMENTS
Section 1. These Bylaws may be amended, repealed, or altered in whole or in
part by the Board of Directors at any regular meeting, or at any
special meeting called for that purpose.
ARTICLE IX
INDEMNIFICATION FOR OFFICERS AND DIRECTORS
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 persons 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 willful misconduct.
* * * * * * * *
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<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 9, 2000, with respect to the financial
statements of Separate Account VUL-2 of The American Franklin Life Insurance
Company and our report dated February 18, 2000 with respect to the financial
statements of The American Franklin Life Insurance Company in this Post-
Effective Amendment No. 9 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 24, 2000
<PAGE>
EXHIBIT 6(b)
[Letterhead of SUTHERLAND ASBILL & BRENNAN LLP]
April 25,2000
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 Post-Effective Amendment No. 9 to 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/ Stephen E. Roth
---------------------------
Stephen E. Roth, Esq.
<PAGE>
American
General
Financial Group
Exhibit 6(c)
Robert M. Beuerlein, FSA, MAAA
Senior Vice President & Chief Actuary
AGLD & Chief Actuary
April 25, 2000
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. 9 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
ACTURIAL/FINANCIAL
American General Life Companies
Member American General Financial Group
2727-A Allen Pkwy. . Houston, TX 77019 . 713.831.2738
Fax 713.831.8016 . [email protected]
