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Flexible Premium Variable Life Insurance Policy
EQUIBUILDER II/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 II is a trademark of The American Franklin Life Insurance Company
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EQUIBUILDER II/TM/
POLICIES
* Fidelity VIP Money Market
FLEXIBLE PREMIUM VARIABLE * Fidelity VIP High Income
LIFE INSURANCE POLICY * Fidelity VIP Equity-Income
issued by * Fidelity VIP Growth
THE AMERICAN FRANKLIN LIFE * Fidelity VIP Overseas
INSURANCE COMPANY * Fidelity VIPII Investment Grade
Through Bond
Separate Account VUL-2 * Fidelity VIPII Asset Manager
* Fidelity VIPII Index 500
This Prospectus describes EquiBuilder II/TM/ * Fidelity VIPII Asset Manager: Growth
flexible premium variable life insurance * Fidelity VIPII Contrafund
policies issued by The American Franklin Life * MFS Emerging Growth Series
Insurance Company ("American Franklin"). * MFS Research Series
American Franklin no longer sells new * MFS Growth With Income Series
EquiBuilder II/TM/ policies. EquiBuilder II/TM/ * MFS Total Return Series
policies provide life insurance coverage with * MFS Utilities Series
flexibility in death benefits, premium payments * MFS Capital Opportunities Series
and investment choices. Capitalized terms not
otherwise defined on this cover page have the Each of these portfolios is available through
same meanings as they have in the Prospectus. an investment division.
EquiBuilder II/TM/ is a trademark of American
Franklin. The Policy Account value allocated to a
variable investment division depends on the
EquiBuilder II/TM/ pays a death benefit to a investment performance of the corresponding
beneficiary you designate when the person you Fund. We do not guarantee any minimum cash
insure dies. You choose one of two death value for amounts allocated to the variable
benefit options. Whichever option you choose, investment divisions. If the Fund
we will pay a death benefit of a percentage of investments go down, the value of a Policy
the Policy Account as of the day the Insured can decline. The value of the Guaranteed
Person dies, if that benefit would be greater Interest Division will depend on the interest
than the death benefit under the option you rates that we declare.
picked.
After you pay the first premium, you decide,
PROSPECTUS within limits, the amount and frequency of
May 1, 2000 your premium payments. You can also increase
or decrease the amount of insurance
We deposit your net premium in your Policy protection, within limits.
Account. You may allocate amounts to our
Guaranteed Interest Division (which is part of Please read this prospectus carefully before
our General Account and pays interest at a investing, and keep it for future reference.
declared rate) or to one or more of the variable It contains important information about the
investment divisions of the Separate Account, or EquiBuilder II/TM/ variable life insurance
both. (For the first fifteen days after we policy, which is issued by:
issue your policy, we require premiums to be
invested in the VIP Money Market division.) The American Franklin Life Insurance Company
# 1 Franklin Square
The variable investment divisions each purchase Springfield, Illinois 62713-0001
shares of a corresponding portfolio of the Telephone No. 800/528-2011
Variable Insurance Products Fund ("VIP"), the
Variable Insurance Products Fund II ("VIPII") or The SEC maintains an Internet website
the MFS Variable Insurance Trust (each, a (http://www.sec.gov) that contains material
"Fund," and collectively, the "Funds"). The incorporated by reference into this
Prospectuses of the Funds, attached to this prospectus and other information.
Prospectus, describe the investment objectives,
policies and risks of each Fund Portfolio.
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VARIABLE LIFE INSURANCE POLICIES INVOLVE CERTAIN If the net cash surrender value (the cash
RISKS, AND YOU MAY LOSE SOME OR ALL OF YOUR surrender value reduced by any loan balance)
INVESTMENT. is insufficient to cover the charges due
under the policy, the policy may terminate
. WE DO NOT GUARANTEE HOW ANY OF THE VARIABLE without value.
INVESTMENT DIVISIONS WILL PERFORM.
BUYING THIS POLICY MIGHT NOT BE A GOOD WAY OF
. THE POLICY IS NOT A DEPOSIT OR OBLIGATION OF REPLACING YOUR EXISTING INSURANCE OR ADDING
ANY BANK, AND NO BANK ENDORSES OR GUARANTEES THE MORE INSURANCE IF YOU ALREADY OWN A FLEXIBLE
POLICY. PREMIUM VARIABLE LIFE INSURANCE POLICY.
. NEITHER THE U.S. GOVERNMENT NOR ANY FEDERAL THE SEC HAS NOT APPROVED OR DISAPPROVED
AGENCY INSURES YOUR INVESTMENT IN THE POLICY. THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
. THERE IS NO GUARANTEED CASH SURRENDER VALUE REPRESENTATION TO THE CONTRARY IS A CRIMINAL
FOR AMOUNTS ALLOCATED TO THE VARIABLE INVESTMENT OFFENSE.
DIVISIONS.
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TABLE OF CONTENTS
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DEFINITIONS........................................................................................... vii
SUMMARY............................................................................................... 1
DETAILED INFORMATION ABOUT AMERICAN FRANKLIN AND EQUIBUILDER II/TM/ POLICIES
The American Franklin Life Insurance Company.......................................................... 6
The Features of EquiBuilder II/TM/ Policies........................................................... 6
How EquiBuilder II/TM/ Policies Differ from Whole Life Insurance................................. 6
Death Benefits................................................................................... 6
Policy Issuance Information...................................................................... 7
Maturity Benefit................................................................................. 8
Changes in EquiBuilder II/TM/ Policies........................................................... 8
Changing the Face Amount of Insurance............................................................ 8
Changing Death Benefit Options................................................................... 9
When Policy Changes Go Into Effect............................................................... 9
Flexible Premium Payments........................................................................ 9
Additional Benefits.............................................................................. 10
Disability Waiver Benefit........................................................................ 10
Accidental Death Benefit......................................................................... 10
Children's Term Insurance........................................................................ 10
Term Insurance on an Additional Insured Person................................................... 11
Separate Account Investment Choices................................................................... 11
The Separate Account and Its Investment Divisions................................................ 11
The Funds........................................................................................ 11
Investment Policies of the Portfolios of the Funds............................................... 12
Ownership of the Assets of the Separate Account.................................................. 14
Right to Change Operations....................................................................... 14
Deductions and Charges................................................................................ 15
Deductions From Premiums......................................................................... 15
Charges Against the Policy Account............................................................... 15
Administrative Charge............................................................................ 15
Cost of Insurance Charge......................................................................... 16
Charges for Additional Benefits.................................................................. 16
Changes in Monthly Charges....................................................................... 16
Charges Against the Separate Account............................................................. 16
Mortality and Expense Risks...................................................................... 17
Charges Against the Funds........................................................................ 17
Tax Reserve...................................................................................... 17
Surrender Charge................................................................................. 17
Other Transaction Charges........................................................................ 19
Partial Withdrawal of Net Cash Surrender Value................................................... 19
Increase in the Face Amount of Insurance......................................................... 19
Transfers........................................................................................ 19
Illustrations.................................................................................... 19
Allocation of Policy Account Charges............................................................. 19
Policy Account Value.................................................................................. 20
Amounts in the Separate Account.................................................................. 20
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Determination of the Unit Value.................................................................. 20
Policy Account Transactions........................................................................... 21
Changing Premium and Deduction Allocation Percentages............................................ 21
Transfers of Policy Account Value Among Investment Divisions..................................... 21
Borrowing from the Policy Account................................................................ 22
Loan Requests.................................................................................... 22
Policy Loan Interest............................................................................. 22
When Interest is Due............................................................................. 23
Repaying the Loan................................................................................ 23
The Effects of a Policy Loan on the Policy Account............................................... 23
Lapse of the Policy.............................................................................. 24
Withdrawing Money from the Policy Account........................................................ 24
Withdrawal Charges............................................................................... 24
The Effects of a Partial Withdrawal.............................................................. 24
Surrendering the Policy for Its Net Cash Surrender Value......................................... 25
The Guaranteed Interest Division...................................................................... 25
Amounts in the Guaranteed Interest Division...................................................... 25
Interest on the Amounts in the Guaranteed Interest Division...................................... 25
Transfers from the Guaranteed Interest Division.................................................. 26
Additional Information about EquiBuilder II/TM/ Policies.............................................. 26
Right to Examine the Policy...................................................................... 26
Lapse of the Policy.............................................................................. 27
Reinstatement of the Policy...................................................................... 27
Policy Periods, Anniversaries, Dates and Ages.................................................... 27
Federal Tax Considerations............................................................................ 28
Tax Effects...................................................................................... 28
In General....................................................................................... 28
Testing for Modified Endowment Contract Status................................................... 28
Other Effects of Policy Changes.................................................................. 29
Taxation of Pre-death Distributions if Your Policy is Not a Modified
Endowment Contract.............................................................................. 29
Taxation of Pre-death Distributions if Your Policy is a Modified
Endowment Contract.............................................................................. 29
Policy Lapses and Reinstatements................................................................. 30
Diversification.................................................................................. 30
Estate and Generation Skipping Taxes............................................................. 30
Life Insurance in Split Dollar Arrangements...................................................... 31
Pension and Profit-Sharing Plans................................................................ 31
Other Employee Benefit Programs.................................................................. 31
ERISA............................................................................................ 32
Other Taxes...................................................................................... 32
When We Withhold Income Taxes.................................................................... 32
Tax Changes...................................................................................... 32
ILLUSTRATIONS OF DEATH BENEFITS, POLICY ACCOUNT AND CASH SURRENDER VALUES, AND ACCUMULATED PREMIUMS... 33
ADDITIONAL INFORMATION................................................................................ 39
Voting Rights of a Policy Owner....................................................................... 39
Voting Rights of the Funds....................................................................... 39
Determination of Voting Shares................................................................... 39
How Shares of the Funds are Voted................................................................ 39
Voting Privileges of Participants in Other Separate Accounts..................................... 40
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Separate Account Voting Rights................................................................... 40
Reports to Policy Owners.............................................................................. 40
Limits on American Franklin's Right to Challenge a Policy............................................. 41
Payment Options....................................................................................... 41
The Beneficiary....................................................................................... 42
Assignment of a Policy................................................................................ 42
Employee Benefit Plans................................................................................ 43
Payment of Proceeds................................................................................... 43
Dividends............................................................................................. 43
Distribution of the Policies.......................................................................... 43
Applications.......................................................................................... 44
Reinsurance Agreements................................................................................ 44
Administrative Services............................................................................... 45
State Regulation...................................................................................... 45
Year 2000 Transition.................................................................................. 45
Legal Matters......................................................................................... 45
Legal Proceedings..................................................................................... 46
Experts............................................................................................... 46
Registration Statement................................................................................ 46
Other Polices and Contracts........................................................................... 46
Management............................................................................................ 47
FINANCIAL STATEMENTS.................................................................................. F-1
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This prospectus generally describes only the variable portion of the policy,
except where the fixed account is specifically mentioned.
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DEFINITIONS
Set forth below is a glossary of certain terms used in this Prospectus.
Administrative Office -- The address of the Administrative Office of American
Franklin is #1 Franklin Square, Springfield, Illinois 62713-0001.
Age -- The age of the Insured Person on his or her nearest birthday.
American Franklin -- The American Franklin Insurance Company, an Illinois stock
life insurance company and the issuer of the EquiBuilder IITM individual
flexible premium variable life insurance policies described in this Prospectus.
Amount at risk -- The difference between the amount of the Policy Account and
the current death benefit of a policy at any time.
Cash Surrender Value -- The amount of the Policy Account less any applicable
surrender charges.
Code -- The Internal Revenue Code of 1986, as amended.
Date of Payment -- Normally, the day American Franklin receives, at its
Administrative Office, a check for the full initial premium of a policy.
Face Amount -- The face amount of insurance shown on the Policy Information page
of a policy. The Face Amount is the minimum death benefit payable under a
policy while the policy remains in effect. The death benefit proceeds will be
reduced by any outstanding loan and loan interest on the policy and any due and
unpaid charges.
Final Policy Date -- The policy anniversary nearest the Insured Person's 95th
birthday. American Franklin will pay to the Policy Owner the amount of the
Policy Account, net of any outstanding loan and loan interest on the policy, if
the Insured Person is still living on the Final Policy Date.
Fund(s) -- Portfolio(s) of the 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 the policy.
Issue Date -- The date that American Franklin actually issues a policy.
Net Cash Surrender Value -- Cash Surrender Value less any outstanding loan and
loan interest on the policy.
Net Premium -- The amount of any premium paid by the Policy Owner less the
amount of applicable state and local premium taxes, if any.
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Policy Account -- The sum of accounts allocated to the investment divisions of
the Separate Account and American Franklin's Guaranteed Interest Division for a
particular policy.
Policy Anniversary -- An anniversary of the Register Date of a policy while the
policy is in effect.
Policy month -- A month-long period beginning on the Register Date and on the
same day in each subsequent calendar month while a policy is in effect.
Policy Owner, You, Your -- The person designated as such on the Policy
Information page of a policy.
Policy year -- An annual period beginning on the Register Date and on each
anniversary of the Register Date while the policy is in effect.
Register Date -- The earlier of the Issue Date and the Date of Payment.
Separate Account -- Separate Account VUL-2, a segregated investment account of
American Franklin established under the Insurance Law of the State of Illinois,
in which amounts in a Policy Account other than those in the Guaranteed Interest
Division are held for investment in one of the portfolios of the Funds. The
value of amounts in the Separate Account will fluctuate in accordance with the
performance of the corresponding portfolios of the Funds.
Target Premium -- A hypothetical annual premium which is based on the age and
sex of the Insured Person, the initial Face Amount of the policy and the types
and amounts of any additional benefits included in the policy. The Target
Premium for each EquiBuilder IITM policy is shown on the Policy Information page
of the policy.
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SUMMARY
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This is a summary of some of the more important points that you should know
about your EquiBuilder IITM variable life insurance policy. We no longer sell
new policies.
THE POLICY
The EquiBuilder II/TM/ variable life insurance policy is an individual flexible
premium variable life insurance policy issued by The American Franklin Life
Insurance Company. Among other things, the policy:
(a) provides insurance protection on the life of the insured until the policy's
maturity date.
(b) allows you to vary the amount and timing of the premiums you pay, within
limits, and to change the amount of the death benefit payable under the
policy, within specified guidelines.
(c) provides the opportunity for cash value bulid-up on a tax-deferred basis,
depending on investment performance of the underlying mutual fund
portfolios (or Funds). However, there is no guaranteed policy value and you
bear the risk of poor investment performance.
(d) permits you to borrow against the policy value, to make partial surrenders,
or to surrender the policy completely. Loans and partial surrenders will
affect the policy value and may affect the death benefit and termination of
the policy.
In addition to providing life insurance, the policy provides a means of
investing for long-term purposes. Tax deferral allows the entire amount you
have invested (net of charges) to remain in the policy where it can continue to
produce an investment return. Therefore, your money could grow faster than in a
comparable taxable investment where current income taxes would be due each year.
You may divide account value among the Guaranteed Interest Division and sixteen
variable investment divisions which invest in portfolios of the Variable
Insurance Products Fund, Variable Insurance Products Fund II, and MFS Variable
Insurance Trust. We guarantee the principal and a minimum interest rate you
will receive from the Guaranteed Interest Division. However, the value of what
you allocate to the sixteen variable investment divisions is not guaranteed.
Instead, your investment in the variable investment divisions will go up or down
with the performance of the particular Funds you select (and the deduction of
charges). You will lose money on account value allocated to the variable
investment divisions if performance is not sufficiently positive to cover the
charges under the policy.
PAYMENT OF PREMIUMS
Although you select planned periodic premiums, you are not required to pay
them. (The minimum initial premium and planned periodic premium depend on age,
sex, and risk class of the insured, on the Face Amount of the policy, and on any
supplemental benefit riders to the policy.) Within limits, you can vary the
frequency and amount of premium payments and can skip planned periodic premiums.
However, extra premiums may be required to prevent policy termination under
certain circumstances.
FUNDING CHOICES
We deduct premium taxes from each premium payment, and then we allocate the net
premium among the variable investment divisions and the Guaranteed Interest
Division according to your written instructions.
You may allocate each net premium (and your existing policy value) among
variable investment divisions which invest in the following sixteen portfolios:
* Fidelity VIP Money Market
* Fidelity VIP High Income
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* 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
You may also allocate each net premium (and your existing account value) to the
Guaranteed Interest Division. We guarantee your Guaranteed Interest Division
allocation will earn at least 4 1/2% interest per year.
CHARGES AND DEDUCTIONS
We deduct applicable premium taxes from each premium payment. Premium taxes
vary by state, and are up to 5%.
We also make certain periodic deductions from your policy value. Each month, we
deduct from your policy value:
(a) the cost of insurance charge;
(b) the monthly administrative charge (currently $6 plus $24 per month for the
first 12 policy months); and
(c) any additional benefit charges.
Each day, we deduct a charge from the assets in the variable investment
divisions for certain mortality and expense risks we bear under the policy.
This charge is at an effective annual rate of 0.75% of those assets.
In addition, investment management fees and other expenses are deducted from
each portfolio of the underlying funds. See the table below for a summary of
these portfolio expenses.
Fund Annual Expenses
(% of average daily net assets)
Total
Other Fund
Fund Management Fee Expenses(1) Expenses(2)(3)
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Fidelity VIP Money Market 0.18% 0.09% 0.27%
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Fidelity VIP High Income 0.58% 0.11% 0.69%
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Fidelity VIP Equity-Income 0.48% 0.09% 0.57%
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Fidelity VIP Growth 0.58% 0.08% 0.66%
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Fidelity VIP Overseas 0.73% 0.18% 0.91%
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Fidelity VIPII Investment Grade Bond 0.43% 0.11% 0.54%
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Fidelity VIPII Asset Manager 0.53% 0.10% 0.63%
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Fidelity VIPII Index 500 0.24% 0.10% 0.34%
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Fidelity VIPII Asset Manager: Growth 0.58% 0.13% 0.71%
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Fidelity VIPII Contrafund 0.58% 0.09% 0.67%
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MFS Emerging Growth 0.75% 0.09% 0.84%
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MFS Research 0.75% 0.11% 0.86%
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MFS Growth With Income 0.75% 0.13% 0.88%
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MFS Total Return 0.75% 0.15% 0.90%
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MFS Utilities 0.75% 0.16% 0.91%
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MFS Capital Opportunities (4) 0.75% 0.27% 1.02%
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(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 operating expenses, after
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reimbursement for VIP Equity-Income Portfolio: 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.
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
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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 its own charge. Among the benefits currently available under
the policy are:
(a) accidental death benefit rider;
(b) children's term insurance rider;
(c) additional insured term insurance rider; and
(d) disability waiver benefit rider.
Other supplemental benefits may also be available.
TRANSFERS: Within certain limits, you may transfer all or part of your policy
value among the variable investment divisions and the Guaranteed Interest
Division. We may charge for transfers in excess of four in a policy year.
There are special limits on transfers from the Guaranteed Interest Division.
ILLUSTRATIONS: Sample illustrations of hypothetical death benefits and Policy
Account
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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 II POLICIES
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
The American Franklin Life Insurance Company ("American Franklin") is a legal
reserve stock life, accident and health insurance company organized under the
laws of the State of Illinois in 1981. It is engaged in the writing of variable
universal life insurance and variable annuities. American Franklin has another
separate account (Separate Account VUL) which issues interests in variable
insurance policies having policy features that are similar to those of
EquiBuilder II policies but the assets of which are invested in a different
open-end management investment company. American Franklin no longer offers new
policies having an interest in Separate Account VUL. American Franklin also has
a separate account which issues interests in variable annuities. American
Franklin is presently authorized to write insurance in forty-six states, the
District of Columbia and Puerto Rico. American Franklin's home office is
located at #1 Franklin Square, Springfield, Illinois 62713.
American Franklin is a wholly-owned subsidiary of The Franklin Life Insurance
Company ("The Franklin"). The Franklin is a legal reserve stock life insurance
company organized under the laws of the State of Illinois in 1884. The Franklin
issues individual life insurance, annuity and accident and health insurance
policies, group annuities and group life and health insurance and offers a
variety of whole life, life, retirement income and level and decreasing term
insurance plans. Its home office is located at #1 Franklin Square, Springfield,
Illinois 62713. The Franklin is not the issuer of the policies offered by this
Prospectus, however, it has certain indirect obligations in respect to those
policies arising from The Franklin's undertakings to the issuer, American
Franklin, as a reinsurer of portions of the death benefits provided under the
policies.
American General Corporation ("American General"), through its wholly-owned
subsidiary, AGC Life Insurance Company, owns all of the outstanding shares of
common stock of The Franklin. The address of AGC Life Insurance Company is
American General Center, Nashville, Tennessee 37250-0001. The address of
American General is 2929 Allen Parkway, Houston, Texas 77019-2155.
American General is one of the largest diversified financial services
organizations in the United States. American General's operating subsidiaries
are leading providers of retirement services, consumer loans, and life
insurance. American General was incorporated as a general business corporation
in Texas in 1980 and is the successor to American General Insurance Company, an
insurance company incorporated in Texas in 1926.
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 II POLICIES
HOW EQUIBUILDER II POLICIES DIFFER FROM WHOLE LIFE INSURANCE
EquiBuilder II policies are designed to provide life insurance coverage with
flexibility in death benefits, premium payments and investment choices.
EquiBuilder II policies are different from traditional whole life insurance in
that the Policy Owner is not required to pay scheduled premiums and may, within
limits, choose the amount and frequency of premium payments. EquiBuilder II
policies also provide for two different types of death benefit options and the
Policy Owner may change options. Another feature of EquiBuilder II policies
which is not available under traditional whole life insurance is that the Policy
Owner generally has the ability to increase or decrease the Face Amount without
purchasing a new policy. However, evidence of insurability may be required. In
addition, the Policy Owner may direct the investment of net premiums, which will
determine, in part, the value of the Policy Account.
DEATH BENEFITS
American Franklin will pay a death benefit (net of any policy loan and loan
interest and any overdue charges) to the beneficiary of a policy when the
Insured Person dies. The Policy Owner may choose
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from two death benefit options: Option A and Option B. Option A provides a
benefit that equals the Face Amount of the policy. Except as described below,
the Option A benefit is fixed. Option B provides a benefit that equals the Face
Amount of the policy plus the amount in the Policy Account on the day the
Insured Person dies. Under Option B, the value of the benefit is variable and
fluctuates with the amount in the Policy Account. Option B entails a higher
monthly cost of insurance charge than Option A and will cause the value of the
Policy Account, and hence the Net Cash Surrender Value of the policy, to be less
than if Option A were chosen, all other things being equal.
Under both options, an alternate death benefit based on provisions of the
federal income tax law applies if it would provide a greater benefit (before
deductions for any outstanding policy loan and loan interest) than the option
selected. This benefit is a percentage multiple of the amount in the Policy
Account. The percentage declines as the Insured Person gets older. The benefit
will be the amount in the Policy Account on the day the Insured Person dies
multiplied by the percentage for the Insured Person's age (as of his or her
nearest birthday) at the beginning of the policy year of the Insured Person's
death. For ages that are not shown on the table set forth below, the applicable
percentages will decrease by a ratable portion for each full year.
Table of Death Benefits
Based On Policy Account Values
- --------------------------------------------------------------------------------
MINIMUM DEATH BENEFIT AS PERCENTAGE
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 were 40 years old and the amount in the
Policy Account were $100,000, the death benefit would be at least $250,000 (250%
of $100,000).
These percentages are based on provisions of federal tax law which require a
minimum death benefit in relation to cash value for a policy to qualify as life
insurance. See "Federal Tax Considerations," below.
Under either Option A or Option B, the length of time a policy remains in
force depends on the Net Cash Surrender Value of the policy. Because the
charges that maintain the policy are deducted from the Policy Account, coverage
will last as long as the Net Cash Surrender Value (the amount in the Policy
Account minus the surrender charge and any outstanding policy loan and loan
interest) can cover these deductions. (See "Additional Information about
EquiBuilder II Policies-Lapse of the Policy," below.) The investment experience
(which may be either positive or negative) of any amounts in the investment
divisions of the Separate Account and the interest earned in the Guaranteed
Interest Division will affect the amount in the Policy Account. As a result,
the returns from these divisions will affect the length of time a policy remains
in force. See "Policy Account Value," below.
Policy Owners who prefer to have insurance coverage that varies with the
investment experience of their Policy Account should choose Option B. In no
event will the death benefit under Option B be less than the greater of the Face
Amount of the policy or the alternate death benefit described above (in either
case, less any outstanding policy loan and loan interest). Policy Owners who
prefer to have insurance coverage that does not vary in amount and that has
lower cost of insurance charges should choose Option A.
POLICY ISSUANCE INFORMATION
American Franklin will not issue a new policy having a Face Amount that is
less than $50,000 nor will it issue a policy in respect of an Insured Person who
is older than 75.
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No insurance under a policy will take effect: (a) until a policy is delivered
and the full initial premium is paid while the person proposed to be insured is
living and (b) unless the information in the application continues to be true
and complete, without material change, as of the time the premium is paid.
See "The Features of EquiBuilder II Policies-Flexible Premium Payments" and
"Distribution of the Policies-Applications," below for additional information
concerning procedures for obtaining a policy.
MATURITY BENEFIT
If the Insured Person is still living on the policy anniversary nearest his or
her 95th birthday, American Franklin will pay the Policy Owner the amount in the
Policy Account net of any outstanding loan and loan interest. The policy will
then end.
CHANGES IN EQUIBUILDER II POLICIES
EquiBuilder II policies provide the Policy Owner flexibility to choose from a
variety of strategies, described in the sections that follow, which enable the
Policy Owner to increase or decrease his or her insurance protection.
A reduction in Face Amount lessens emphasis on the policy's insurance coverage
by reducing both the death benefit and the amount at risk (the difference
between the current death benefit under the policy and the amount of the Policy
Account). The reduced amount at risk results in lower cost of insurance charges
against the Policy Account. See "The Features of EquiBuilder II Policies-
Changing the Face Amount of Insurance," below. A partial withdrawal of Net
Cash Surrender Value reduces the Policy Account and death benefit while
providing a cash payment, but does not reduce the amount at risk or the cost of
insurance charges. See "Policy Account Transactions-Withdrawing Money from the
Policy Account," below. Choosing not to make premium payments may have the
effect of reducing the Policy Account. Reducing the Policy Account will, under
Option A, increase the amount at risk (and thereby increase cost of insurance
charges) while leaving the death benefit unchanged; under Option B, it will
decrease the death benefit while leaving the amount at risk and the cost of
insurance charge unchanged. See "The Features of EquiBuilder II Policies-
Flexible Premium Payments," below.
Increases in the Face Amount emphasize insurance coverage by increasing both
the death benefit and the amount at risk. See "The Features of EquiBuilder II
Policies-Changing the Face Amount of Insurance," below. Additional premium
payments may increase the Policy Account, which has the effect, under Option A,
of reducing the amount at risk and cost of insurance charge while leaving the
death benefit unchanged, or, under Option B, of increasing the death benefit
while leaving the amount at risk and cost of insurance charge unchanged. See
"The Features of EquiBuilder II Policies-Flexible Premium Payments," below.
CHANGING THE FACE AMOUNT OF INSURANCE
Any time after the first policy year while a policy is in force, the Policy
Owner may change the policy's Face Amount. This may be done by sending a
written request to American Franklin's Administrative Office. Any change will
be subject to American Franklin's approval and the following conditions:
If the Face Amount is to be increased, satisfactory evidence that the
Insured Person is still insurable must be provided. American Franklin's
current procedure if the Insured Person has become a more expensive risk is to
ask the Policy Owner to confirm that he or she wishes to pay higher cost of
insurance charges on the amount of the increase.
Any increase in the Face Amount must be at least $10,000. Monthly
deductions from the Policy Account for the cost of insurance will increase,
beginning on the date the increase in the Face Amount takes effect. In
addition, a one-time administrative charge for each increase will be made
against the Policy Account. This charge is currently $1.50 for each
additional $1,000 of insurance up to a maximum charge of $300. An increase in
the Face Amount will not increase the maximum surrender charge.
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The Face Amount may not be reduced below the minimum American Franklin
requires to issue a policy at the time of the reduction. Monthly charges
against the Policy Account for the cost of insurance will decrease if the Face
Amount is reduced. If the Face Amount is reduced during the first ten policy
years, a pro rata share of the applicable surrender charge will be made
against the Policy Account. See "Deductions and Charges-Surrender Charge,"
below.
American Franklin's current procedure is to disapprove a requested decrease in
the Face Amount if it would cause the alternate death benefit to apply.
Instead, the Policy Owner will be requested to make a partial withdrawal of Net
Cash Surrender Value from the Policy Account and then a decrease in the Face
Amount. See "The Features of EquiBuilder II Policies-Death Benefits," below.
American Franklin's current procedure, if the Policy Owner requests a Face
Amount decrease when there has been a previous increase in the Face Amount, is
to apply the decrease first against the most recent increase in the Face Amount.
Decreases will then be applied to prior increases in the Face Amount in the
reverse order in which such increases took place, and then to the original Face
Amount.
Policy changes that result in a reduction of the death benefit, such as a
decrease in the Face Amount, may cause a policy to become a "modified endowment
contract," or may have other adverse tax consequences. See "Federal Tax
Considerations," below.
CHANGING DEATH BENEFIT OPTIONS
At any time after the first policy year while a policy is in force, the Policy
Owner may change the death benefit option by sending a written request to
American Franklin's Administrative Office. If the death benefit is changed from
Option A to Option B, the Face Amount will be decreased by the amount in the
Policy Account on the date of the change. Such a change may not be permitted if
it would reduce the Face Amount below the minimum American Franklin requires to
issue a policy at the time of the reduction. If the death benefit is changed
from Option B to Option A, the Face Amount of insurance will be increased by the
amount in the Policy Account on the date of the change. Changing the death
benefit option may have adverse tax consequences. You should consult a tax
adviser before changing the death benefit option.
No evidence of insurability will be required for the increase in the Face
Amount that occurs when a change is made from Option B to Option A, nor will any
charge be made for this increase. No surrender charge is made for the decrease
in the Face Amount that occurs when a change is made from Option A to Option B.
These increases and decreases in the Face Amount are made so that the amount of
the death benefit remains the same on the date of the change. When the death
benefit remains the same, there is no change in the net amount at risk, which is
the amount on which cost of insurance charges are based (see "Deductions and
Charges-Charges Against the Policy Account-Cost of Insurance Charge," below).
WHEN POLICY CHANGES GO INTO EFFECT
Any change in the Face Amount or death benefit option of a policy will go into
effect at the beginning of the policy month following the date American Franklin
approves a request for the change. After a request is approved, American
Franklin will send the Policy Owner a written notice of the approval showing
each change. The Policy Owner should attach this notice to his or her policy.
American Franklin may also request that the policy be returned to its
Administrative Office so that the appropriate changes may be made.
In some cases, a change requested by the Policy Owner may not be approved
because it might disqualify the policy as life insurance under applicable
federal tax law. American Franklin will send the Policy Owner a written notice
of its decision to disapprove any requested change for this reason. See
"Federal Tax Considerations," below.
FLEXIBLE PREMIUM PAYMENTS
The Policy Owner may choose the amount and frequency of premium payments, as
long as they are within the limits described below. Even though premiums are
flexible, the Policy Information page of each policy will show a "planned"
periodic premium. The planned premium is determined by the Policy
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Owner within limits set by American Franklin when the Policy Owner applied for a
policy and is not necessarily designed to equal the amount of premiums that will
keep the policy in effect. Planned premiums are generally the amount the Policy
Owner decides he or she wants to pay and can be changed at any time.
The Policy Owner must pay a minimum initial premium on or before the date on
which the policy is delivered by American Franklin. The insurance will not go
into effect until American Franklin receives this minimum initial premium.
American Franklin determines the applicable minimum initial premium based on the
age, sex and risk class of the Insured Person, the initial Face Amount of the
policy and any additional benefits selected. The first premium payment may be
made by check or money order payable to "The American Franklin Life Insurance
Company." Any additional premiums should be made by check or money order
payable to "The American Franklin Life Insurance Company" and should be sent
directly to its Administrative Office.
American Franklin will send the Policy Owner premium reminder notices based on
the planned premium unless the Policy Owner requests American Franklin not to do
so in his or her application or by writing to American Franklin's Administrative
Office. Nevertheless, the Policy Owner may make the planned payment, skip the
planned payment or change the frequency or the amount of the payment.
Generally, the Policy Owner may pay other premiums at any time and in any
amount, as long as each payment is at least $100. (Policies issued in some
states may have different minimum premium payments.) American Franklin may
increase this minimum upon 90 days' written notice. American Franklin may also
reject premium payments in a policy year if the payments would cause the policy
to cease to qualify as life insurance under federal tax law. See "Federal Tax
Considerations," below.
If the Policy Owner stops paying premiums temporarily or permanently, the
policy will continue in effect until the Net Cash Surrender Value can no longer
cover the monthly charges against the Policy Account for the benefits selected.
In addition, it should be noted that planned premiums may not be sufficient to
maintain a policy because of investment experience, policy changes or other
factors.
The tables set forth below under "Illustrations of Death Benefits, Policy
Account and Cash Surrender Values, and Accumulated Premiums" illustrate how the
key financial elements of EquiBuilder II policies work. The tables show death
benefits and Policy Account and Cash Surrender Values with Face Amounts and
planned annual premiums of different amounts for Insured Persons of different
ages.
ADDITIONAL BENEFITS
A policy may include additional benefits. A charge will be made against the
Policy Account monthly for each additional benefit. These benefits may be
cancelled at any time. More details will be included in the policy if any of
these benefits are selected. The following additional benefits are currently
available:
Disability Waiver Benefit. With this benefit, monthly charges from the
Policy Account are waived if the Insured Person becomes totally disabled on or
after the Insured Person's fifth birthday and the disability continues for six
months. If the disability starts before the policy anniversary nearest the
Insured Person's 60th birthday, American Franklin will waive monthly charges
for life as long as the disability continues. If the disability starts after
that, the charges will be waived only up to the policy anniversary nearest the
Insured Person's 65th birthday (as long as the disability continues).
Accidental Death Benefit. American Franklin will pay an additional benefit
if the Insured Person dies from bodily injury that results from an accident,
provided the Insured Person dies before the policy anniversary nearest his or
her 70th birthday.
Children's Term Insurance. This benefit provides term life insurance on
the lives of the Insured Person's children, including natural children,
stepchildren and legally adopted children, who have not yet reached their
eighteenth birthdays. The charge for this benefit covers all children under
eighteen. They are covered only until the Insured Person reaches age 65 or
the child reaches age 25, whichever first occurs.
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Term Insurance on an Additional Insured Person. Term insurance may be
obtained for another person, such as the Insured Person's spouse, under a
policy. A separate charge will be deducted for each additional insured
person.
SEPARATE ACCOUNT INVESTMENT CHOICES
After certain amounts are deducted from each premium, the balance, called the
net premium, is put into the Policy Account established for each policy. The
net premium is credited to the Policy Account as of the date the premium payment
is received at American Franklin's Administrative Office, or, if later, the
Register Date. The net premium is credited to the Policy Account prior to
deductions of any charges against the Policy Account due on that date. See
"Deductions and Charges-Deductions from Premiums," below. The Policy Account
will be invested in the Money Market division until the first business day
fifteen days after the Issue Date of the policy. At that time, the Policy
Account will be allocated to the Guaranteed Interest Division or to one or more
of the investment divisions of the Separate Account or both, according to the
directions provided in the policy application. These instructions will apply to
any subsequent premium until the Policy Owner provides new instructions to
American Franklin at its Administrative Office. Premium allocation percentages
may be any whole number from zero to 100, but the sum must equal 100. See "The
Guaranteed Interest Division," below.
THE SEPARATE ACCOUNT AND ITS INVESTMENT DIVISIONS
The Separate Account was established on April 9, 1991 under the Insurance Law
of the State of Illinois, and is a unit investment trust registered with the
Securities and Exchange Commission under the Investment Company Act of 1940.
This registration does not involve any supervision by the Securities and
Exchange Commission of the management or investment policies of the Separate
Account. A unit investment trust is a type of investment company. The Separate
Account meets the definition of a "separate account" under federal securities
laws. The Separate Account has a number of investment divisions, each of which
invests in shares of a corresponding portfolio of the Variable Insurance
Products Fund, or of the Variable Insurance Products Fund II or the MFS Variable
Insurance Trust (individually, a "Fund," and collectively, the "Funds").
Currently, VIP Money Market, VIP High Income, VIP Equity-Income, VIP Growth, VIP
Overseas, VIPII Investment Grade Bond, VIPII Asset Manager, VIPII Index 500,
VIPII Asset Manager: Growth, VIPII and Contrafund, MFS Emerging Growth, MFS
Research, MFS Growth With Income, MFS Total Return, MFS Utilities and MFS
Capital Opportunities divisions are available for investment under EquiBuilder
II policies. The Separate Account also issues interests under EquiBuilder III
variable life insurance policies, which have policy features that are similar to
those of EquiBuilder II policies but which have a different sales charge
structure.
THE FUNDS
Each of the Funds is a diversified open-end management investment company,
more commonly called a mutual fund. As "series" type mutual funds, they issue
several different "series" of stock, each of which relates to a different Fund
portfolio. Currently an aggregate of sixteen portfolios, each of which has
different investment objectives, policies and risks, are available for
investment of amounts allocated to the Separate Account.
The Funds do not impose a sales charge or "load" for buying and selling their
shares. The Funds' shares are bought and sold by the Separate Account at net
asset value pursuant to agreements between American Franklin, and the Funds.
The Funds sell their shares to separate accounts of insurance companies. See
"Voting Rights of a Policy Owner-Voting Privileges of Participants in Other
Separate Accounts" for information about measures that will be taken to protect
Policy Owners in the event of a conflict of interest between the Separate
Account and other separate accounts that invest in the Funds.
More detailed information about the Funds, their investment policies, risks,
expenses and all other aspects of their operations appears in their
Prospectuses, which are attached to this Prospectus, and in their Statements of
Additional Information referred to therein. See "Deductions and Charges -
Charges Against the Funds", below, for additional information relating to
expenses of the Funds.
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INVESTMENT POLICIES OF THE PORTFOLIOS OF THE FUNDS
Each portfolio of the Funds has a different investment objective which it
tries to achieve by following separate investment policies. The objectives and
policies of each portfolio will affect its return and its risks. The investment
experiences of the divisions of the Separate Account depend on the performances
of the corresponding portfolios. The investment objectives and policies of
certain portfolios are similar to the investment objectives and policies of
other funds that may be managed by the same investment adviser. The investment
results of the portfolios, however, may be higher or lower than the results of
such other funds. There can be no assurance, and no representation is made,
that the investment results of any of the portfolios will be comparable to the
investment results of any other fund, even if the other fund has the same
investment adviser. The investment objectives, policies, restrictions and risks
of the portfolios of the Funds are described in detail in the Prospectuses for
the Funds, which are attached to this Prospectus, and in the Funds' Statements
of Additional Information. The policies and objectives of the Portfolios of the
Variable Insurance Products Fund corresponding to the divisions currently
available for investment under EquiBuilder II policies may be summarized as
follows:
VIP MONEY MARKET PORTFOLIO seeks 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 while also
considering growth of capital. The Portfolio normally invests at least 65% of
its total assets in income-producing debt securities, preferred stocks and
convertible securities, with an emphasis on lower-quality debt securities
which provide poor protection for payment of principal and interest (commonly
referred to as "junk bonds"). For a discussion of the risks of investment in
junk bonds, see the Prospectus for the Variable Insurance Products Funds,
which is attached to this Prospectus.
VIP EQUITY-INCOME PORTFOLIO seeks reasonable income. The Portfolio will
also consider the potential for capital appreciation. The Portfolio seeks a
yield which exceeds the composite yield on the securities comprising the
Standard & Poor's 500 Composite Stock Price Index. The Portfolio normally
invests at least 65% of its total assets in income-producing equity
securities.
VIP GROWTH PORTFOLIO seeks capital appreciation and normally invests its
assets primarily in common stocks. The Portfolio invests its assets in
companies which its investment adviser believes have above-average growth
potential.
VIP OVERSEAS PORTFOLIO seeks long-term growth of capital and normally
invests at least 65% of its total assets in foreign securities. The Portfolio
normally invests its assets primarily in common stocks.
The policies and objectives of the portfolios of the Variable Insurance
Products Fund II corresponding to the divisions currently available for
investment under EquiBuilder II policies may be summarized as follows:
VIPII INVESTMENT GRADE BOND PORTFOLIO seeks as high a level of current
income as is consistent with the preservation of capital and normally invests
its assets in U.S. dollar-denominated investment-grade bonds. The investment
adviser uses the Lehman Brothers Aggregate Bond Index as a guide in
structuring the Portfolio and selecting investments and manages the Portfolio
to have similar overall interest rate risk to the index.
VIPII ASSET MANAGER PORTFOLIO seeks a 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.
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VIPII ASSET MANAGER: GROWTH PORTFOLIO seeks to maximize total return by
allocating its assets among stocks, bonds, and 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.
The policies and objectives of the portfolios of the MFS Variable Insurance
Trust corresponding to the divisions currently available for investment under
EquiBuilder II policies may be summarized as follows:
MFS EMERGING GROWTH SERIES will seek long-term growth of capital. The series
invests, under normal market conditions, at least 65% of its total assets in
common stocks and related securities, such as preferred stocks, convertible
securities and depositary receipts for those securities, of emerging growth
companies.
MFS RESEARCH SERIES will seek to provide long-term growth of capital and
future income. The series invests, under normal market conditions, at least 80%
of its total assets in common stocks and related securities, such as preferred
stocks, convertible securities and depositary receipts.
MFS GROWTH WITH INCOME SERIES will seek long-term growth of capital and future
income while providing more current dividend income than is normally obtainable
from a portfolio of only growth stocks. The series 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.
Except for the VIP Money Market, VIPII Investment Grade Bond, VIPII
Index 500 and MFS Growth With Income Portfolios, the portfolios may purchase
lower-quality bonds which provide poor protection for payment of principal and
interest (commonly referred to as "junk bonds"). These securities are highly
speculative. Lower-quality bonds involve greater risk of default or price
changes than securities assigned a higher quality rating due to changes in the
issuer's creditworthiness. This is an aggressive approach to income investing.
For a discussion of the risks of investment in these securities, please see the
Prospectuses for the Funds, which is are attached to this Prospectus.
There is no guarantee that any portfolio of the Funds will achieve its
objective. In addition, the Funds' Prospectuses advises that no single
portfolio constitutes a balanced investment plan.
Before selecting any division, the Policy Owner should carefully read the
Prospectuses for the Funds, which include more complete information about each
portfolio, including investment objectives and policies, charges and expenses.
A Policy Owner may obtain additional copies of the Prospectuses of the Funds by
contacting American Franklin's Administrative Office.
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American Franklin may enter into agreements with affiliates of the Funds
that provide for reimbursement of American Franklin for certain costs incurred
in connection with administering the Funds as variable funding options for the
EquiBuilder II policies. Currently, American Franklin and MFS have entered into
an arrangement whereby American Franklin receives a fee equal, on an annualized
basis, to a percentage of the aggregate net assets of each of the portfolios of
the MFS Variable Insurance Trust attributable to the EquiBuilder II policies and
certain other variable contracts issued by American Franklin and its affiliates.
This fee will not be paid by the portfolios, their shareholders or the Policy
Owners.
Affiliates of Fidelity Management and Research Company ("FMR") may compensate
American Franklin or an affiliate for administrative, distribution, or other
services relating to the portfolios of the Funds. Such compensation is
generally based on assets of the portfolios attributable to the EquiBuilder II
policies and certain other variable contracts issued by American Franklin and
its affiliates. This compensation will not be paid by the portfolios, their
shareholders or the Policy Owners.
OWNERSHIP OF THE ASSETS OF THE SEPARATE ACCOUNT
Under Illinois law, American Franklin owns the assets of the Separate Account
and uses them to support EquiBuilder II policies, other variable life policies
and other variable life policies it may issue in the future. The portion of the
Separate Account's assets supporting these policies may not be used to satisfy
liabilities arising out of any other business of American Franklin. Under
certain unlikely circumstances, one investment division of the Separate Account
may be liable for claims relating to the operations of another division. In
addition to premiums from EquiBuilder II policies, we may allocate premiums from
other policies to the Separate Account. These policy owners will participate in
the Separate Account in proportion to the amounts in the Separate Account
relating to their policies. American Franklin may also permit charges owed to
it to stay in the Separate Account. Thus, American Franklin may also
participate proportionately in the Separate Account. These accumulated amounts
belong to American Franklin and American Franklin may transfer them from the
Separate Account to its General Account at any time.
RIGHT TO CHANGE OPERATIONS
American Franklin reserves the right to change or add investment companies in
which Policy Accounts will be invested and to modify how it or the Separate
Account operates. American Franklin intends to comply with applicable law in
making any changes and, if necessary, will seek Policy Owner approval. American
Franklin has the right to:
add investment divisions to, or remove investment divisions from, the
Separate Account, combine two or more divisions within the Separate Account,
or withdraw assets relating to EquiBuilder II policies from one investment
division and put them into another;
register or end the registration of the Separate Account under the
Investment Company Act of 1940;
operate the Separate Account under the direction of a committee or
discharge such a committee at any time (the committee may be composed entirely
of persons who are "interested persons" of American Franklin within the
meaning of the Investment Company Act of 1940);
restrict or eliminate any voting rights of Policy Owners or other people
who have voting rights that affect the Separate Account;
operate the Separate Account or one or more of its investment divisions in
any other form the law allows, including a form that allows the Separate
Account to make direct investments. The Separate Account may be charged an
advisory fee if its investments are made directly, rather than through an
investment company. American Franklin may invest the assets of the Separate
Account in any legal investments. In choosing these investments American
Franklin will rely on its own or outside counsel for advice. In addition,
American Franklin may disapprove any change in investment advisers or in
investment policy unless a law or regulation provides differently; and
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modify the provisions of the policies to assure qualification under the
pertinent provisions of the Code or to comply with other applicable federal or
state laws.
If any changes are made that result in a material change in the underlying
investments of an investment division, Policy Owners will be notified as
required by law. American Franklin may, for example, cause an investment
division to invest in a mutual fund other than or in addition to the Funds. If,
as a result of any such material change, a Policy Owner then wishes to transfer
the amount of his or her Policy Account invested in one investment division to
another division of the Separate Account or to the Guaranteed Interest Division,
he or she may do so without charge, by giving written instructions to American
Franklin at its Administrative Office. At the same time, the manner in which
net premiums and deductions are allocated may be changed.
DEDUCTIONS AND CHARGES
For information regarding other charges see also "Policy Account
Transactions," below.
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 costs associated with providing the services or
benefits indicated by the designation of the charge or associated with the
particular Policy. For example, the surrender charge may not fully cover all of
the sales and distribution expenses actually incurred by American Franklin, and
proceeds from other charges, including the mortality and expense risk charge,
may be used in part to cover such expenses.
DEDUCTIONS FROM PREMIUMS
Any payment received by American Franklin before the Final Policy Date is
treated as a premium, unless a policy loan is outstanding and the payment is
accompanied by written instructions that it is to be applied to repayment of the
policy loan. (See "Policy Account Transactions-Repaying the Loan," below).
The Final Policy Date is the policy anniversary nearest the Insured Person's
95th birthday. Applicable taxes are deducted from all premiums. The balance of
each premium (the net premium) is placed in the Policy Account.
All states and certain other jurisdictions (cities, counties, municipalities)
tax premium payments or levy other taxes or charges. Taxes currently range up
to 5%. American Franklin deducts the applicable tax from each premium payment.
This is a tax to American Franklin, so the Policy Owner cannot deduct it on his
or her income tax return. The amount of the tax will vary depending on the
jurisdiction in which the Policy Owner resides. Since the tax deduction is a
percentage of the premium, the amount of the tax deduction will also vary with
the amount of the premium. This deduction for taxes will be increased or
decreased to reflect any changes in the applicable taxes. In addition, if a
Policy Owner changes his or her place of residence, the deduction will be
changed to the tax rate of the new jurisdiction. The Policy Owner should notify
American Franklin if he or she changes residence.
CHARGES AGAINST THE POLICY ACCOUNT
At the beginning of each policy month, the following charges are made against
each Policy Account. Additional charges against amounts in the Separate Account
are described under "Deductions and Charges-Charges Against the Separate
Account," below.
ADMINISTRATIVE CHARGE. The current charge is $6 per month. This charge is
designed to cover the continuing costs of maintaining the EquiBuilder II
policies, such as premium billing and collection, claim processing, policy
transactions, record keeping, communications with Policy Owners and other
expenses and overhead. This charge may be raised to reflect higher costs, but
American Franklin guarantees it will never be more than $12 per month. At the
beginning of each of the first twelve policy months that a policy is in effect,
an additional administrative charge of $24 per month will be deducted. This
charge permits American Franklin to recover the costs of issuance and placement
of the policy such as application processing, medical examinations,
establishment of policy records and underwriting costs (determining insurability
and assigning the Insured Person to a risk class).
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COST OF INSURANCE CHARGE. The monthly cost of insurance is American
Franklin's current monthly cost of insurance rate multiplied by the amount at
risk at the beginning of the policy month divided by $1,000. The amount at risk
is the difference between the current death benefit and the amount in the Policy
Account. If the current death benefit for the month is increased due to the
requirements of federal tax law (see "The Features of EquiBuilder II Policies-
Death Benefits," above), the amount at risk for the month will also increase.
For this purpose the amount of each Policy Account is determined before
deduction of the cost of insurance charge but after all other charges due on
that date. The amount of the cost of insurance charge will vary from month to
month with changes in the amount at risk and with increasing age of the Insured
Person.
The cost of insurance rate is based on the sex, age and risk class of the
Insured Person and the Face Amount size band of the policy at the time of the
charge. American Franklin may change these rates from time to time, but they
will never be more than the guaranteed maximum rates set forth in a particular
policy. The maximum charges are based on the Commissioner's 1980 Standard
Ordinary Male and Female Mortality Tables. The table below shows the current
and guaranteed maximum monthly cost of insurance rates per $1,000 of amount at
risk for a male non-tobacco user at various ages. In Montana and Massachusetts
there will be no distinctions based on sex. Congress and the legislatures of
various states have from time to time considered legislation that would require
insurance rates to be the same for males and females of the same age and risk
class. In addition, employers and Employee Organizations should consider the
impact of Title VII of the Civil Rights Act of 1964 on the purchase of an
EquiBuilder II policy in connection with an employment related insurance or
benefit plan. See "Employee Benefit Plans," below. Where required, American
Franklin will provide cost of insurance charges that do not distinguish between
males and females.
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 .49 .88 .42
65 2.14 1.42 2.14 1.20
For a male non-tobacco user, age 35, with a $100,000 Face Amount Option A
policy, an initial premium of $1,000, and a 2% premium tax, the cost of
insurance for the first month will be [$10.90]. This example reflects deduction
of the current administrative charges ($6 per month plus the additional charge
of $24 per month that applies for the first 12 policy months) and uses the
current cost of insurance rate ($.11 per $1,000).
CHARGES FOR ADDITIONAL BENEFITS. The cost of any additional benefits will be
deducted monthly. These charges may be changed, but each policy contains tables
showing the guaranteed maximum rates for all of these insurance costs.
CHANGES IN MONTHLY CHARGES. Any changes in the cost of insurance, charges for
additional benefits or administrative charges will be by class of Insured Person
and will be based on changes in future expectations about such things as
investment earnings, mortality, the length of time policies will remain in
effect, expenses and taxes.
CHARGES AGAINST THE SEPARATE ACCOUNT
The amount in the Policy Account which is allocated to the investment
divisions of the Separate Account will be reduced proportionately by the
following fees and charges, which are allocated to the investment divisions of
the Separate Account. These fees and charges will not be made against amounts
allocated to the Guaranteed Interest Division.
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MORTALITY AND EXPENSE RISKS. American Franklin makes a charge for assuming
mortality and expense risks. American Franklin guarantees that monthly
administrative and cost of insurance deductions from the Policy Account will
never be greater than the maximum amounts shown in the policy. The mortality
risk assumed is that insured persons will live for shorter periods than
estimated. When this happens, American Franklin has to pay a greater amount of
death benefit than expected in relation to the cost of insurance charges it
received. The expense risk assumed is that the cost of issuing and
administering policies will be greater than expected. American Franklin makes a
daily charge for mortality and expense risks at an effective annual rate of .75%
of the value of the assets in the Separate Account attributable to EquiBuilder
II policies. This charge is reflected in the unit values for the investment
divisions of the Separate Account. See "Policy Account Value-Determination of
Unit Value," below. If the money collected from this charge is not needed, it
will be to American Franklin's gain and may be used to cover policy distribution
expenses.
We may profit from this charge and may use such profits for any lawful
purpose including paying distribution expenses.
TAX RESERVE. American Franklin reserves the right to make a charge in the
future for taxes or reserves set aside for taxes, which will reduce the
investment income of the investment divisions of the Separate Account.
See "Federal Tax Considerations," below.
CHARGES AGAINST THE FUNDS. The Separate Account purchases shares of the Funds
at net asset value. That price reflects investment management fees and other
direct expenses that have already been deducted from the assets of the Funds.
The Funds do not impose a sales charge.
For managing each portfolio's investments and business affairs, each portfolio
pays FMR or MFS a monthly fee. See the Prospectuses and Statements of
Additional Information of the Funds for a description of the way in which these
fees are calculated. FMR has entered into sub-advisory agreements with
affiliated companies with respect to management of the VIP High Income,
VIP Overseas, VIP Money Market, VIPII Asset Manager, VIPII Asset Manager: Growth
and VIPII Contrafund Portfolios. The table in the Summary shows the management
fees, other expenses and total annual expenses paid during fiscal 1999 by each
portfolio, expressed as a percentage of average net assets of each portfolio.
SURRENDER CHARGE
If a policy is totally surrendered, or, in some instances, if the Face Amount
of the policy is reduced or the policy is permitted to lapse during the first
ten policy years, a surrender charge is imposed as a means to recover sales
expenses. See "Distribution of the Policies," below. The amount of the
surrender charge will vary depending on the policy year in which the redemption
occurs and the amount of premium paid. No surrender charge will be applicable
after the tenth policy year. If during the first ten policy years a policy is
not surrendered or permitted to lapse and the Face Amount is not reduced, no
surrender charge will be incurred.
The surrender charge is a contingent deferred sales load. It is a contingent
load because it is imposed only if the Policy Owner surrenders his or her policy
(or reduces its Face Amount or lets it lapse) during the first ten policy years.
It is a deferred load because it is not deducted from premiums. The amount of
the load in a policy year is not necessarily related to actual sales expense in
that year. See "Distribution of the Policies," below.
The surrender charge is the difference between the amount in a particular
Policy Account and the Cash Surrender Value of the related policy during the
first ten policy years.
In the first ten policy years, a surrender charge will be imposed if the
Policy Owner:
totally surrenders his or her policy for its Net Cash Surrender Value;
reduces the Face Amount of his or her policy; or
lets his or her policy lapse.
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Surrender charges are based on Target Premiums. Target Premiums are not
based on the "planned" premium the Policy Owner determines. See "The Features
Of EquiBuilder II Policies-Flexible Premium Payments." Target Premiums are
based on the age and sex of the Insured Person, and the initial Face Amount of
the policy and the types and amounts of any additional benefits included in the
policy. Payment of the Target Premium does not guarantee that the policy will
remain in effect.
The maximum surrender charge for a policy will be shown on the Policy
Information page of a policy and will equal 50% of one Target Premium. This
maximum will not vary based on the amount of premiums paid or when they are
paid. At the end of the sixth policy year, and at the end of each of the four
succeeding policy years, the maximum surrender charge is reduced by an amount
equal to 20% of the initial maximum surrender charge. After the end of the
tenth policy year, there is no surrender charge.
Subject to the maximum surrender charge, the surrender charge is calculated
based on actual premium payments. The surrender charge equals 30% of premium
payments made during the first policy year up to the amount of one Target
Premium and 9% of any additional premiums paid during the first ten policy
years, but not more than 50% of one Target Premium.
Paying less than one Target Premium in the first policy year will reduce the
surrender charge only if not more than approximately five Target Premiums are
paid before surrender or lapse (i.e., only if the maximum surrender charge is
not reached). However, structuring payments in this manner will increase the
risk that a policy will lapse (and that a surrender charge will be incurred that
would not have been incurred if the policy had remained in force). If payments
are structured in this manner, the amounts in the Policy Account would need to
receive favorable investment performance for the policy not to lapse. In
addition, paying less premiums may increase cost of insurance charges (which are
based on amount at risk). Attempting to structure the timing and amount of
premium payments to reduce the potential surrender charge below the maximum is
not recommended.
EXAMPLE: Assume the purchase of a $200,000 initial Face Amount policy for a male
age 40. This policy would have a Target Premium of $2,280 and a maximum
surrender charge of $1,140 ($2,280 x 50%). Also, assume that all premium
payments are made at the beginning of each policy year. The following table
shows the surrender charge which would apply under different premium payment
assumptions if surrender of the policy were to occur during the indicated policy
year:
DURING YEAR PREMIUM CHARGE PREMIUM CHARGE PREMIUM CHARGE
1 $3,000 $ 749 $2,280 $ 684 $1,140 $ 342
2 3,000 1,019 2,280 889 3,420 650
3 3,000 1,140 2,280 1,094 2,280 855
4 3,000 1,140 2,280 1,140 2,280 1,060
5 3,000 1,140 2,280 1,140 2,280 1,140
6 3,000 1,140 2,280 1,140 2,280 1,140
7 3,000 912 2,280 912 2,280 912
8 3,000 684 2,280 684 2,280 684
9 3,000 456 2,280 456 2,280 456
10 3,000 228 2,280 228 2,280 228
The maximum surrender charge will be reduced by the amount of any pro rata
surrender charge previously imposed in connection with a decrease in the Face
Amount of a policy.
During the first ten policy years, a decrease in the Face Amount of a policy
may be considered a partial surrender and American Franklin will deduct a
portion of the surrender charge. If the Face Amount of a policy is increased
and then decreased, a surrender charge will apply only to a decrease below the
original Face Amount (i.e., the Face Amount at the Issue Date). Generally, the
pro rata surrender charge for a partial surrender will be determined by dividing
the amount of the Face Amount decrease (excluding the portion that merely
reverses a prior increase) by the original Face Amount and multiplying the
fraction by the surrender charge which would apply if the policy were
surrendered.
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For example, assume that a policy is issued for a male age 40 with a Face
Amount of $200,000. In the third policy year, the Policy Owner decides to
decrease this Face Amount by $100,000. Assume also that an annual premium of
$3,000 was paid for each of the first three policy years and that the maximum
surrender charge for the third policy year is $1,140. To determine the portion
of the surrender charge:
Divide the amount of the Face Amount decrease by the initial Face Amount.
($100,000 / $200,000 = .5)
Then multiply this fraction by the surrender charge in effect before the
decrease.
Pro rata surrender charge = .5 x $1,140 = $570.
Thus, the Policy Owner would be charged $570 for decreasing the Face Amount of
this policy from $200,000 to $100,000 during the third policy year. The maximum
surrender charge payable in the future will be reduced proportionately.
American Franklin would send the Policy Owner a new Policy Information page that
shows the new maximum charges. The Policy Owner will pay the maximum only if he
or she surrenders the policy or lets the policy lapse after paying enough
premiums to reach the maximum.
OTHER TRANSACTION CHARGES
In addition to the deductions and charges described above, fees for certain
policy transactions are charged against the Policy Account:
PARTIAL WITHDRAWAL OF NET CASH SURRENDER VALUE. There is an administrative
charge that is currently $25 or 2% of the amount withdrawn, whichever is less,
each time a partial withdrawal is made. See "Policy Account Transactions-
Withdrawing Money from the Policy Account," below.
INCREASE IN THE FACE AMOUNT OF INSURANCE. There is an administrative
charge that is currently $1.50 for each $1,000 of increase up to a maximum
charge of $300. See "The Features of EquiBuilder II Policies-Changes in
EquiBuilder II Policies," above.
TRANSFERS. If more than four transfers of Policy Account value are made in
a policy year among investment divisions, a charge of up to a maximum of $25
for each additional transfer in that policy year may be made. However, if all
of the assets are transferred to the Guaranteed Interest Division, no transfer
charge will be imposed. See "Policy Account Transactions-Transfers of Policy
Account Value Among Investment Divisions," below. A request for transfer
involving the simultaneous transfer of funds from or to more than one
investment division will be considered one transfer.
ILLUSTRATIONS. If, after a policy is issued, a Policy Owner requests more
than one illustration of projected death benefits and Policy Account and Cash
Surrender Values in a policy year, a fee may be charged. See "Illustrations
of Death Benefits, Policy Account and Cash Surrender Values and Accumulated
Premiums," below.
The fees for partial withdrawals, increases in face amount and transfers are
guaranteed never to exceed the amounts stated above. See also "Deductions and
Charges-Surrender Charge," above.
ALLOCATION OF POLICY ACCOUNT CHARGES
Generally, charges against each Policy Account for monthly charges or certain
transaction fees are allocated among the investment divisions of the Separate
Account and the unloaned portion of the Guaranteed Interest Division in
accordance with the deduction allocation percentages specified by the Policy
Owner in his or her application or in accordance with subsequent instructions
received by American Franklin from the Policy Owner. However, deductions for
the first policy month will generally be made from the Money Market division.
See "Separate Account Investment Choices."
Allocation percentages for deductions may be any whole numbers (from zero to
one hundred) which add up to one hundred. A Policy Owner may change deduction
allocation percentages by giving instructions to American Franklin at its
Administrative Office. Changes will be effective as of the date they are
received by American Franklin.
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Charges for partial withdrawals of Net Cash Surrender Value and transfers of
Policy Account values will be subtracted equally among the divisions from which
the transactions were made. If American Franklin cannot make a charge as
described above, it will make the charge based on the proportion that the
unloaned amounts in the Guaranteed Interest Division, if any, and the amounts in
the investment divisions of the Separate Account bear to the total unloaned
value of the Policy Account.
POLICY ACCOUNT VALUE
The amount in a Policy Account is the sum of the amounts allocated to the
Guaranteed Interest Division and to the various investment divisions of the
Separate Account. The amount in a Policy Account also reflects various
deductions and charges. Monthly charges are made as of the first day of each
policy month. Transaction charges or surrender charges are made as of the
effective date of the transaction (for example, administrative charges for
increases in Face Amount are made as of the next monthly policy anniversary
after American Franklin approves the Policy Owner's request).
Charges against the Separate Account are reflected daily. Any amount
allocated to an investment division of the Separate Account will increase or
decrease depending on the investment experience of that division. For amounts
allocated to the investment divisions of the Separate Account, there is no
guaranteed minimum cash value. The value of amounts in a Policy Account
allocated to the Guaranteed Interest Division is guaranteed. See "The
Guaranteed Interest Division," below.
AMOUNTS IN THE SEPARATE ACCOUNT
Amounts allocated, transferred or added to the investment divisions of the
Separate Account are used to purchase units representing undivided interests in
the various divisions. The amount in each division is represented by the value
of the units credited to the Policy Account for that division. The number of
units purchased or redeemed in an investment division of the Separate Account is
calculated by dividing the dollar amount of the transaction by the division's
unit value next calculated at the close of business on the date of the
transaction (see "Additional Information About EquiBuilder II Policies-Policy
Periods, Anniversaries, Dates and Ages," below, regarding the date that the net
amount of the initial premium is credited to the Policy Account and interim
allocation of the initial net premium and any other net premium received prior
to the time that 15 days have elapsed after the Issue Date, and see "Policy
Account Transactions" and "The Guaranteed Interest Division-Transfers from the
Guaranteed Interest Division," below, regarding the effective dates of Policy
Account transactions). The number of units for an investment division at any
time is the number of units purchased less the number of units redeemed. The
value of units fluctuates with the investment performance of the corresponding
portfolio of a Fund, which reflects the investment income and realized and
unrealized capital gains and losses of the portfolio and the Fund's expenses.
The unit values also reflect charges American Franklin makes against the
Separate Account. The number of units credited to a Policy Account, however,
will not vary because of changes in unit values. On any given day, the value a
Policy Account has in an investment division of the Separate Account is the unit
value times the number of units credited to the Policy Account in that division.
The units of each investment division of the Separate Account have different
unit values.
Units of an investment division are purchased when the Policy Owner allocates
premiums, repays loans or transfers amounts to that division. Units are
redeemed or sold when the Policy Owner makes withdrawals or transfers amounts
from an investment division of the Separate Account (including transfers for
loans) and to pay the death benefit when the Insured Person dies. American
Franklin also redeems units for monthly charges or other charges from the
Separate Account.
DETERMINATION OF THE UNIT VALUE
American Franklin determines unit values for each investment division of the
Separate Account at the end of each business day. Generally, a business day is
any day American Franklin is open and the New York Stock Exchange is open for
trading. American Franklin will not process any policy transactions as of any
day that is not a business day other than to issue a policy anniversary report,
make monthly charge deductions and pay the death benefit under a policy. For
purposes of receiving Policy Owner requests, American Franklin is open from
8:00 a.m. to 3:00 p.m., Springfield, Illinois time. The initial unit value for
each investment division was set at $100. Subsequently, the unit value for any
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business day is equal to the unit value for the preceding business day
multiplied by the net investment factor for that division on that business day.
American Franklin determines a net investment factor for each investment
division every business day as follows:
First, the value of the shares belonging to the division in the
corresponding Fund portfolio at the close of business that day is determined
(before giving effect to any policy transactions for that day, such as premium
payments or surrenders). For this purpose, American Franklin uses the share
value reported to it by the Fund;
Next, any dividends or capital gains distributions paid by the Fund for the
corresponding portfolio on that day are added;
Then, this sum is divided by the value of the amounts in the investment
division at the close of business on the immediately preceding business day
(after giving effect to any policy transactions on that day);
Then, a daily asset charge for each calendar day between business days is
subtracted (for example, a Monday calculation may include charges for Saturday
and Sunday). The daily charge is .00002063, which is an effective annual rate
of .75%. This charge is for mortality and expense risks assumed by American
Franklin under the policy;
Finally, any daily charge for taxes or amounts set aside as a reserve for
taxes is subtracted.
Generally, this means that unit values are adjusted to reflect what happens to
the Funds, and also for the mortality and expense risk charge and any charge for
taxes.
POLICY ACCOUNT TRANSACTIONS
The transactions described below may have different effects on the Policy
Account, death benefit, Face Amount or cost of insurance. The Policy Owner
should consider the net effects before combining Policy Account transactions.
See "The Features of EquiBuilder II Policies-Changes in EquiBuilder II
Policies," above. Certain transactions also entail charges. For information
regarding other charges, see "Deductions And Charges," above.
CHANGING PREMIUM AND DEDUCTION ALLOCATION PERCENTAGES
A Policy Owner may change the allocation percentages of his or her net
premiums or of his or her monthly deductions by giving instructions to American
Franklin at its Administrative Office. These changes will go into effect as of
the date American Franklin receives the request at its Administrative Office and
will affect transactions on and after that date.
TRANSFERS OF POLICY ACCOUNT VALUE AMONG INVESTMENT DIVISIONS
A Policy Owner may transfer amounts from any investment division of the
Separate Account to any other investment division of the Separate Account or to
the Guaranteed Interest Division. A Policy Owner may make up to four transfers
of Policy Account value among investment divisions of the Separate Account in
each policy year without charge. Depending on the overall cost of performing
these transactions, American Franklin may charge up to a current maximum of $25
for each additional transfer, except that no charge will be imposed for a
transfer of all amounts in the investment divisions of the Separate Account to
the Guaranteed Interest Division. If all amounts are in the Guaranteed Interest
Division, the policy will not vary for investment experience. To make a
transfer, the Policy Owner should give instructions to American Franklin at its
Administrative Office.
If a charge is imposed for making a transfer, American Franklin will allocate
the charge as described under "Deductions And Charges-Allocation of Policy
Account Charges," above. All simultaneous transfers included in one transfer
request count as one transfer for purposes of any fee.
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A transfer from an investment division of the Separate Account will take
effect as of the date American Franklin receives instructions to make the
transfer. The minimum amount American Franklin will transfer on any date will
be shown on the Policy Information page in each policy and is usually $500.
This minimum need not come from any one investment division or be transferred to
any one investment division as long as the total amount transferred that day
equals or exceeds the minimum. However, American Franklin will transfer the
entire amount in any investment division of the Separate Account even if it is
less than the minimum specified in a policy. Policy Owners should note that
future premiums will continue to be allocated to investment divisions of the
Separate Account or the Guaranteed Interest Division in accordance with existing
allocations unless instructions are also given with respect to changing them.
The policies are not designed for professional marketing timing
organizations or other entities using programmed 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, the Policy Owner may
borrow money from American Franklin using only his or her policy as security for
the loan. The maximum aggregate amount that will be loaned is equal to 90% of
the Cash Surrender Value of the policy on the date the request for a loan is
received by American Franklin at its Administrative Office. Any new loan must
be at least the minimum amount shown on the Policy Information page of a policy,
usually $500. Any amount that secures a loan remains part of the Policy Account
but is assigned to the Guaranteed Interest Division. This loaned amount earns
interest at a rate that American Franklin expects will be different from the
interest rate for unloaned amounts in the Guaranteed Interest Division. See
"Federal Tax Considerations-Policy Proceeds," below, with respect to the
federal income tax consequences of a loan.
LOAN REQUESTS
Requests for loans should be made to American Franklin at its Administrative
Office. The Policy Owner may specify how much of the loan should be taken from
the unloaned amount, if any, of his or her Policy Account allocated to the
Guaranteed Interest Division and how much should be taken from the amounts
allocated to the investment divisions of the Separate Account. If a loan is
requested from an investment division of the Separate Account, American Franklin
will redeem units sufficient to cover that part of the loan and transfer the
amount to the loaned portion of the Guaranteed Interest Division. The amounts
in each division will be determined as of the day American Franklin receives the
request for a loan at its Administrative Office.
If the Policy Owner does not specify how to allocate a loan, the loan will be
allocated according to the Policy Owner's deduction allocation percentages. If
the loan cannot be allocated based on these percentages, American Franklin will
allocate it based on the proportions of the unloaned amount, if any, of the
Policy Owner's Policy Account allocated to the Guaranteed Interest Division and
the respective amounts allocated to each investment division of the Separate
Account to the unloaned value of the Policy Account.
POLICY LOAN INTEREST
Interest on a policy loan accrues daily at an adjustable interest rate.
American Franklin determines the rate at the beginning of each policy year. The
same rate applies to any outstanding policy loans and any new amounts borrowed
during the year. American Franklin will notify the Policy Owner of the current
rate when a loan is requested. American Franklin determines loan rates as
follows. The maximum rate is the greater of:
5-1/2% ; or
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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 Corporate yield shown in Moody's Corporate Bond Yield
Averages published by Moody's Investor Services, Inc.
If this average is no longer published, American Franklin will use any
successor or the average established by the insurance supervisory official of
the jurisdiction in which the policy is delivered. American Franklin will not
charge more than the maximum rate permitted by applicable law. American
Franklin may also set a rate lower than the maximum.
Any change in the rate from one year to the next will be at least 1/2 of 1%.
The current loan interest rate will only change, therefore, if the Published
Monthly Average differs from the previous loan interest rate by at least 1/2 of
1%. American Franklin will give advance notice of any increase in the interest
rate on any loans outstanding.
WHEN INTEREST IS DUE
Interest is due on each policy anniversary. If interest is not paid when it
is due, it will be added to the outstanding loan and allocated based on the
deduction allocation percentages for the Policy Account then in effect. This
means American Franklin makes an additional loan to pay the interest and
transfers amounts from the investment divisions of the Separate Account and the
unloaned portion of the Guaranteed Interest Division to make the loan. If
American Franklin cannot allocate the interest based on these percentages, it
will allocate it as described above for allocating the loan.
REPAYING THE LOAN
All or part of a policy loan may be repaid at any time while the Insured
Person is alive and a policy is in force, provided that any loan repayment
currently must be at least $100 (unless the amount of the outstanding loan and
loan interest is less than $100). While a policy loan is outstanding, American
Franklin will apply all amounts it receives in respect of that policy as a
premium unless the payment is accompanied by written instructions that it is to
be applied to repayment of the policy loan.
American Franklin will first allocate loan repayments to the Guaranteed
Interest Division until the amount of any loans originally allocated to that
division is repaid. For example, if a Policy Owner borrowed $500 from the
Guaranteed Interest Division and $500 from the Equity-Income Division, no
repayments may be allocated to the Equity-Income Division until the $500
borrowed from the Guaranteed Interest Division is repaid. After this amount has
been repaid, the Policy Owner may specify how subsequent repayments should be
allocated. If the Policy Owner does not give instructions, American Franklin
will allocate repayments based on current premium allocation percentages at the
time repayment is made.
THE EFFECTS OF A POLICY LOAN ON THE POLICY ACCOUNT
A loan against a policy will have a permanent effect on the value of the
Policy Account and, therefore, on benefits under the policy, even if the loan is
repaid. When a loan is made against a policy, the amount of the loan is set
aside in the Guaranteed Interest Division where it earns a declared rate for
loaned amounts. The loan amount will not be available for investment in the
investment divisions of the Separate Account or in the unloaned portion of the
Guaranteed Interest Division.
The interest rate for loaned amounts in the Guaranteed Interest Division is
expected to be different from the rate that applies to unloaned amounts in the
Guaranteed Interest Division. Generally, it will be 2% less than the interest
rate charged on the loan, minus any charge for taxes or reserves for taxes, but
never less than 4-1/2%. Each month, this interest is added to unloaned amounts
of the Policy Account in the Guaranteed Interest Division.
The impact of a loan on a Policy Account will depend, on one hand, on the
investment experience of the investment divisions of the Separate Account and
the rates declared for the unloaned portion of the Guaranteed Interest Division
and, on the other hand, the rates declared for the loaned portion of the
Guaranteed Interest Division. For example, if $1,000 is borrowed against $5,000
in the Money Market Division, the $1,000 will be set aside in the Guaranteed
Interest Division. This $1,000 would not be
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affected by any increases or decreases in the value of units in the Money Market
Division. However, the $1,000 earns interest at a declared interest rate.
LAPSE OF THE POLICY
A policy loan may also affect the amount of time that the insurance provided
by a policy remains in force. For example, a policy may lapse more quickly when
a loan is outstanding because the loaned amount cannot be used to cover the
monthly charges that are made against the Policy Account. If these charges
exceed the Net Cash Surrender Value of the policy, then the lapse provisions of
the policy will apply. Since the policy permits loans up to 90% of the Cash
Surrender Value, additional premium payments may be required to keep the policy
in force if the maximum amount is borrowed. For more information about these
provisions, see "Additional Information About EquiBuilder II Policies-Lapse of
the Policy," below.
WITHDRAWING MONEY FROM THE POLICY ACCOUNT
After a policy has been in effect for a year, the Policy Owner may request a
partial withdrawal of the Net Cash Surrender Value by making a written request
to American Franklin at its Administrative Office. Any withdrawal is subject to
certain conditions. It must:
be at least $500;
not cause the death benefit to fall below the minimum for which American
Franklin would issue the policy at the time (see "Policy Account Transactions-
The Effects of a Partial Withdrawal," below); and
not cause the policy to fail to qualify as life insurance under applicable
tax law.
The Policy Owner may specify how much of the withdrawal he or she wants taken
from each investment division. If no instructions are given, American Franklin
will make the withdrawal on the basis of the then current deduction allocation
percentages. If American Franklin cannot withdraw the amount based on the
Policy Owner's directions or on the deduction allocation percentages, American
Franklin will withdraw the amount based on the proportions of the unloaned
amount, if any, of the Policy Account allocated to the Guaranteed Interest
Division and the respective amounts allocated to the investment divisions of the
Separate Account to the total unloaned value of the Policy Account. For
example, if 50% of a Policy Account is in the Guaranteed Interest Division and
50% is in the Money Market Division and the Policy Owner wants to withdraw
$1,000, American Franklin would take $500 from each division.
WITHDRAWAL CHARGES
When a partial withdrawal of Net Cash Surrender Value is made, a current
expense charge of $25 or 2% of the amount withdrawn, whichever is less, will be
charged against the Policy Account. This charge will be allocated equally among
the divisions from which the withdrawal was made. If the charge cannot be
allocated in this manner, it will be allocated as described under "Deductions
And Charges-Allocation of Policy Account Charges," above.
THE EFFECTS OF A PARTIAL WITHDRAWAL
A partial withdrawal of Net Cash Surrender Value reduces the amount in the
Policy Account. It also reduces the Cash Surrender Value and the death benefit
on a dollar-for-dollar basis. If the death benefit based on a percentage
multiple applies, the reduction in death benefit can be greater. See "The
Features of EquiBuilder II Policies-Death Benefits," above. If death benefit
Option A is selected, the Face Amount of the policy will also be reduced so
there will be no change in the amount at risk. No pro rata surrender charge
will be deducted in connection with a reduction in Face Amount made in
connection with a partial withdrawal of Net Cash Surrender Value. An
endorsement will be sent to the Policy Owner to reflect this change. The Policy
Owner may be asked to return the policy to American Franklin's Administrative
Office to make a change. A partial withdrawal will not affect the Face Amount
of the policy if death benefit Option B is in effect. The withdrawal and these
reductions will be effective
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as of the date American Franklin receives the request at its Administrative
Office. See "Federal Tax Considerations-Tax Treatment of Policy Benefits,"
below, for the tax consequences of a partial withdrawal. A policy loan may be
more advantageous if the Policy Owner's need for cash is temporary.
SURRENDERING THE POLICY FOR ITS NET CASH SURRENDER VALUE
During the first ten policy years, the Cash Surrender Value of a policy is the
amount in the Policy Account minus the surrender charge described under
"Deductions And Charges-Surrender Charge," above. After ten policy years, the
Cash Surrender Value and Policy Account are equal. During the initial policy
years, the applicable surrender charge may represent a substantial portion of
the premiums paid. See "Illustrations of Death Benefits, Policy Account and
Cash Surrender Values, and Accumulated Premiums," below.
A policy may be surrendered for its Net Cash Surrender Value at any time while
the Insured Person is living. This may be done by sending a written request in
form satisfactory to American Franklin and the policy to American Franklin at
its Administrative Office. The Net Cash Surrender Value of the policy equals
the Cash Surrender Value minus any outstanding loan and loan interest. American
Franklin will compute the Net Cash Surrender Value as of the date a request for
surrender and the policy are received by American Franklin at its Administrative
Office, and all insurance coverage under the policy will end on that date. See
"Federal Tax Considerations-Tax Treatment of Policy Benefits," below, for the
tax consequences of a surrender.
THE GUARANTEED INTEREST DIVISION
A Policy Owner may allocate some or all of a Policy Account to the Guaranteed
Interest Division, which is part of American Franklin's General Account and pays
interest at a declared rate guaranteed by American Franklin for each policy
year. The principal, after charges, is also guaranteed by American Franklin.
The General Account supports American Franklin's insurance and annuity
obligations. Because of applicable exemptive and exclusionary provisions,
interests in the Guaranteed Interest Division have not been registered under the
Securities Act of 1933, and neither the Guaranteed Interest Division nor the
General Account has been registered as an investment company under the
Investment Company Act of 1940. Accordingly, neither the General Account, the
Guaranteed Interest Division nor any interests therein are generally subject to
regulation under the 1933 Act or the 1940 Act. American Franklin has been
advised that the staff of the Securities and Exchange Commission has not made a
review of the disclosures which are included in this Prospectus which relate to
the General Account and the Guaranteed Interest Division. These disclosures,
however, may be subject to certain generally applicable provisions of the
federal securities law relating to the accuracy and completeness of statements
made in a prospectus.
AMOUNTS IN THE GUARANTEED INTEREST DIVISION
A Policy Owner may accumulate amounts in the Guaranteed Interest Division by:
allocating net premiums and loan repayments;
transferring amounts from the investment divisions of the Separate Account;
or
earning interest on amounts already allocated to the Guaranteed Interest
Division.
The amount allocated to the Guaranteed Interest Division at any time is the
sum of all net premiums and loan repayments allocated to that division and all
transfers and earned interest, and includes amounts securing any policy loan
outstanding. This amount is reduced by amounts transferred or withdrawn from
and charges allocated to this division.
INTEREST ON AMOUNTS IN THE GUARANTEED INTEREST DIVISION
American Franklin pays a declared interest rate on all amounts in the
Guaranteed Interest Division. At policy issuance and prior to each policy
anniversary, American Franklin declares the rates that will apply to amounts in
the Guaranteed Interest Division for the following policy year. Different rates
are
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paid on unloaned and loaned amounts in the Guaranteed Interest Division.
These annual interest rates will never be less than the minimum guaranteed
interest rate of 4-1/2%. Interest is compounded daily at an effective annual
rate that equals the declared rate for each policy year.
At the end of each policy month, American Franklin will credit interest to
amounts in the Guaranteed Interest Division in the following way:
amounts in the Guaranteed Interest Division during the entire policy month
are credited with interest from the beginning to the end of the month;
amounts added to the Guaranteed Interest Division during the month from net
premiums or loan repayments are credited with interest from the date American
Franklin receives them. The only exception to this rule applies to the
initial net premium payment. American Franklin will allocate the initial net
premium to the Money Market division until 15 days after the Issue Date (any
other net premium received during this period will be allocated in the same
way), and will then allocate the amounts in the Policy Account to the
Guaranteed Interest Division and the investment divisions of the Separate
Account in accordance with the Policy Owner's premium allocation percentages.
See "Additional Information About EquiBuilder II-Policy Periods,
Anniversaries, Dates and Ages," below;
amounts transferred to the Guaranteed Interest Division are credited with
interest from the date of the transfer to the end of the month; and
amounts charged against or withdrawn from the Guaranteed Interest Division
are credited with interest from the beginning of the policy month to the date
of the charge or withdrawal.
Interest credited to any loaned amounts in the Guaranteed Interest Division is
allocated to the unloaned portion of the Guaranteed Interest Division.
TRANSFERS FROM THE GUARANTEED INTEREST DIVISION
A Policy Owner may request a transfer of unloaned amounts in the Guaranteed
Interest Division to one or more of the investment divisions of the Separate
Account. American Franklin will make the transfer as of the date a written
request for transfer is received, provided that the request is received within
30 days after a policy anniversary. The maximum amount that may be transferred
is the greater of 25% of the unloaned value in the Guaranteed Interest Division
on the date the transfer takes effect or the minimum transfer amount shown in
the policy when it is issued. The smallest amount that may be transferred is
the lesser of the unloaned value in the Guaranteed Interest Division on the date
the transfer takes effect or the minimum transfer amount shown in the policy.
ADDITIONAL INFORMATION ABOUT EQUIBUILDER II POLICIES
RIGHT TO EXAMINE THE POLICY
Each Policy Owner has a right to examine the policy. If for any reason the
Policy Owner is not satisfied with it, he or she may cancel the policy within
the time limits described below. The Policy Owner may cancel the policy by
sending it with a written request to cancel to American Franklin's
Administrative Office.
A request to cancel the policy must be postmarked no later than the latest
of the following two dates:
10 days after the Policy Owner receives his or her policy; or
45 days after the Policy Owner signs Part 1 of the policy application.
If the Policy Owner cancels the policy, American Franklin will, within seven
days of receipt of the policy and a duly executed, timely notice of
cancellation, refund an amount equal to the greater of (1) the premiums paid or
(2) the Policy Account value plus any amount deducted from the premums paid
prior to allocation to the Policy Account.
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Insurance coverage ends when a Policy Owner sends a request for cancellation.
LAPSE OF THE POLICY
If the Net Cash Surrender Value of a policy is insufficient to pay the charges
that are made against the Policy Account each month, or if the total of any
policy loan plus loan interest exceeds the Cash Surrender Value of a policy,
American Franklin will commence procedures to terminate the policy. American
Franklin will notify the Policy Owner and any assignee shown on its records in
writing that the Net Cash Surrender Value is insufficient to pay monthly charges
or that an outstanding policy loan plus loan interest exceeds the Cash
Surrender Value of the policy, that a grace period has begun during which the
Policy Owner must pay an additional premium to prevent lapse of the policy, and
that a specified amount of premium, which will cover estimated monthly charges
for three months, must be paid to avoid lapse of the policy. The grace period
extends for 61 days beginning on the day American Franklin sends the Policy
Owner notice that the grace period is starting.
If American Franklin receives payment of at least the stipulated amount before
the end of the grace period, the amount paid will be used to satisfy the overdue
charges. Any balance left will be placed in the Policy Account and allocated in
the same manner as previous premium payments. A payment of less than the
Stipulated Amount received before the end of the grace period will be applied to
overdue charges but will not prevent lapse of the policy.
If American Franklin does not receive payment within the 61 days, the policy
will lapse without value. American Franklin will withdraw any amount left in
the Policy Account and apply this amount to the charges owed to it, including
any applicable surrender charge.
If the Insured Person dies during the grace period, American Franklin will pay
the insurance benefits to the beneficiary, minus any outstanding policy loan and
loan interest and overdue charges.
REINSTATEMENT OF THE POLICY
A Policy Owner may reinstate his or her policy within three years after it
lapses if:
evidence is provided that the Insured Person is still insurable; and
a premium payment sufficient to keep the policy in force for three months
after the date it is reinstated is paid to American Franklin.
The effective date of the reinstated policy will be the beginning of the
policy month which coincides with or follows the date American Franklin approves
the reinstatement application. Upon reinstatement, the maximum surrender charge
for the policy will be reduced by the amount of all surrender charges previously
imposed on the policy, and for purposes of determining any future surrender
charges on the policy, the policy will be deemed to have been in effect since
the original Register Date. Previous loans will not be reinstated.
POLICY PERIODS, ANNIVERSARIES, DATES AND AGES
Policy years, policy months and policy anniversaries are measured from the
Register Date shown on the Policy Information page in the policy. Each policy
month begins on the same day in each calendar month as the day of the month of
the Register Date. For purposes of receiving Policy Owner requests, American
Franklin is open from 8:00 a.m. to 3:00 p.m., Springfield, Illinois time.
The Register Date is the earlier of the Issue Date or the Date of Payment.
The Date of Payment will normally be the day of receipt of a check for the full
initial premium at American Franklin's Administrative Office. The Issue Date,
shown on the Policy Information page of each policy, is the date a policy is
actually issued, and depends on the underwriting and other requirements for
issuing a particular policy. Contestability is measured from the Issue Date, as
is the suicide exclusion.
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The initial net premium will be put in the Policy Account as of the Date of
Payment. The initial net premium will be allocated to the Money Market division
of the Separate Account, regardless of the Policy Owner's premium allocation
percentages, until the first business day 15 days after the Issue Date. Any
other net premium received during that period will also be allocated to the
Money Market division. On the first business day 15 days after the Issue Date,
the amount in the Policy Account will be reallocated in accordance with the
Policy Owner's premium allocation percentages. Charges and deductions under the
policy are first made as of the Register Date. See "The Features of EquiBuilder
II Policies-Death Benefits," above, regarding the commencement of insurance
coverage.
The Final Policy Date is the policy anniversary nearest the Insured Person's
95th birthday. The policy ends on that date if the Insured Person is still
alive and the maturity benefit is paid.
Generally, references in this Prospectus to the age of the Insured Person
refer to his or her age on the birthday nearest to that particular date.
FEDERAL TAX CONSIDERATIONS
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 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
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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.
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 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;
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. 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, 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
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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
The 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 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.
31
<PAGE>
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.
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.
32
<PAGE>
ILLUSTRATIONS OF DEATH BENEFITS, POLICY ACCOUNT
AND CASH SURRENDER VALUES, AND ACCUMULATED PREMIUMS
The tables set forth below are intended to illustrate how the key financial
elements of a policy work. The tables show how death benefits and Policy
Account and Cash Surrender Values ("policy benefits") could vary over an
extended period of time if the investment divisions of the Separate Account had
constant hypothetical gross annual investment returns of 0%, 4%, 8% or 12% over
the years covered by each table. The policy benefits will differ from those
shown in the tables if the annual investment returns are not absolutely
constant. That is, the figures will be different if the returns averaged 0%,
4%, 8% or 12%, over a period of years but went above or below those figures in
individual policy years. The policy benefits will also differ, depending on a
particular Policy Owner's premium allocation to each division, if the overall
actual rates of return averaged 0%, 4%, 8% or 12%, but went above or below those
figures for the individual investment divisions. The tables are for male non-
tobacco users. Planned premium payments are assumed to be paid at the beginning
of each policy year. The difference between the Policy Account and the Cash
Surrender Value in the first ten years is the surrender charge.
The tables illustrate cost of insurance and expense charges (policy cost
factors) at both current rates (which are described under "Deductions and
Charges-Deductions from the Policy Account-Cost of Insurance Charge" and
"Deductions and Charges-Charges Against the Separate Account," above) and at
the maximum rates American Franklin guarantees in the policies. The amounts
shown illustrate policy benefits on the last day of selected policy years. The
illustrations reflect a daily charge against the Separate Account investment
divisions. This charge includes a .75% annual charge against the investment
divisions of the Separate Account for mortality and expense risks, and a charge
for the effect on each division's investment experience of the charges to the
Funds' assets for management (0.59% of aggregate average daily net assets is
assumed) and direct expenses of the Funds (0.11% 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 portfolio and may vary from year to year. The
charges to the Fund's 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. FMR has
voluntarily agreed to use a portion of the brokerage commissions paid by certain
portfolios to reduce their total expenses. In addition, certain Fidelity
portfolios have entered into arrangements with their custodian whereby credits
realized as a result of uninvested cash balances were used to reduce custodian
expenses. Each MFS portfolio has an expense offset arrangement which reduces the
portfolios' custodian fee, and the investment adviser has agreed to bear
expenses for the MFS Capital Opportunities series such that certain expenses
shall not exceed a specified percentage of average net assets. Such
arrangements, which may be terminated at any time without notice, will increase
a portfolio's yield.
The tables assume an applicable tax rate based on premiums of 2%. There are
tables for both Death Benefit Option A and Death Benefit Option B and each
option is illustrated using current and guaranteed policy cost factors. The
current cost tables assume that the monthly administrative charge remains
constant at $6. The guaranteed tables assume that the monthly administrative
charge is $6 in the first year and $12 thereafter. In each case, deduction of
the current additional monthly administrative charge of $24 per month to cover
costs of establishing a policy is assumed in each of the first 12 policy months.
The tables reflect the fact that no deduction is currently made for federal or
state income taxes. If a charge is made for those taxes in the future, it will
take a higher rate of return to produce after-tax returns of 0%, 4%, 8% or 12%.
All illustrations assume that no transfers, withdrawals, policy loans, or
changes in Face Amount or Death Benefit Option will be made and that no
additional benefits are added to the policy.
The second column of each table shows what would happen if an amount equal to
the gross premiums were invested to earn interest, after taxes, of 5% compounded
annually. These tables show 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.
33
<PAGE>
At the request of an applicant for a policy, American Franklin will furnish a
comparable illustration based on the age and sex of the proposed Insured Person,
standard risk assumptions, a stipulated initial Face Amount and proposed
premiums. Upon request after issuance American Franklin will also provide an
illustration of future policy benefits based on both guaranteed and current cost
factor assumptions and actual Policy Account value. If illustrations are
requested more than once in any policy year, a charge may be imposed.
TABLE OF CONTENTS FOR ILLUSTRATIONS
<TABLE>
<CAPTION>
INITIAL FACE AMOUNT $200,000 MALE NON-TOBACCO
PREMIUM PAGE
<S> <C> <C>
Age 40, Option A-Current Charges $3,000 35
Age 40, Option A-Guaranteed Charges $3,000 35
Age 40, Option B-Current Charges $3,000 36
Age 40, Option B-Guaranteed Charges $3,000 36
INITIAL FACE AMOUNT $100,000 MALE NON-TOBACCO
Premium Page
Age 40, Option A-Current Charges $1,500 37
Age 40, Option A-Guaranteed Charges $1,500 37
Age 40, Option B-Current Charges $1,500 38
Age 40, Option B-Guaranteed Charges $1,500 38
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
EquiBuilder II Flexible Premium Variable Life Insurance
The American Franklin Life Insurance Company
INITIAL FACE AMOUNT $200,000 MALE AGE 40 NON-TOBACCO USER PLANNED PREMIUM $3,000
DEATH BENEFIT OPTION A ASSUMING CURRENT CHARGES
Insurance Benefit(2) Policy Account(2) Cash Surrender Value(2)
Last Day Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross
of Annual Investment Return of Annual Investment Return of Annual Investment Return of
Policy Accumulated
Year Premiums 0% 4% 8% 12% 0% 4% 8% 12% 0% 4% 8% 12%
(1)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,150 200,000 200,000 200,000 200,000 2,260 2,364 2,468 2,572 1,511 1,615 1,719 1,823
2 6,458 200,000 200,000 200,000 200,000 4,752 5,058 5,373 5,697 3,733 4,039 4,355 4,678
3 9,930 200,000 200,000 200,000 200,000 7,186 7,800 8,448 9,131 6,046 6,660 7,308 7,991
4 13,577 200,000 200,000 200,000 200,000 9,564 10,592 11,704 12,908 8,424 9,452 10,564 11,768
5 17,406 200,000 200,000 200,000 200,000 11,886 13,433 15,154 17,064 10,746 12,293 14,014 15,924
6 21,426 200,000 200,000 200,000 200,000 14,155 16,328 18,811 21,642 13,015 15,188 17,671 20,502
7 25,647 200,000 200,000 200,000 200,000 16,343 19,251 22,663 26,661 15,431 18,339 21,751 25,749
8 30,080 200,000 200,000 200,000 200,000 18,454 22,204 26,727 32,172 17,770 21,520 26,043 31,488
9 34,734 200,000 200,000 200,000 200,000 20,490 25,191 31,019 38,233 20,034 24,735 30,563 37,777
10 39,620 200,000 200,000 200,000 200,000 22,452 28,213 35,556 44,904 22,224 27,985 35,328 44,676
11 44,751 200,000 200,000 200,000 200,000 24,341 31,272 40,358 52,257 24,341 31,272 40,358 52,257
12 50,139 200,000 200,000 200,000 200,000 26,185 34,397 45,469 60,394 26,185 34,397 45,469 60,394
13 55,796 200,000 200,000 200,000 200,000 27,953 37,558 50,884 69,375 27,953 37,558 50,884 69,375
14 61,736 200,000 200,000 200,000 200,000 29,648 40,761 56,628 79,300 29,648 40,761 56,628 79,300
15 67,972 200,000 200,000 200,000 200,000 31,270 44,008 62,728 90,281 31,270 44,008 62,728 90,281
16 74,521 200,000 200,000 200,000 200,000 32,815 47,296 69,206 102,436 32,815 47,296 69,206 102,436
17 81,397 200,000 200,000 200,000 200,000 34,248 50,593 76,065 115,884 34,248 50,593 76,065 115,884
18 88,617 200,000 200,000 200,000 200,000 35,551 53,888 83,326 130,777 35,551 53,888 83,326 130,777
19 96,198 200,000 200,000 200,000 203,283 36,747 57,201 91,043 147,307 36,747 57,201 91,043 147,307
20 104,158 200,000 200,000 200,000 221,893 37,820 60,521 99,245 165,592 37,820 60,521 99,245 165,592
25 150,340 200,000 200,000 200,000 352,729 40,674 76,781 149,043 289,122 40,674 76,781 149,043 289,122
EquiBuilder II Flexible Premium Variable Life Insurance
The American Franklin Life Insurance Company
INITIAL FACE AMOUNT $200,000 MALE AGE 40 NON-TOBACCO USER PLANNED PREMIUM $3,000
DEATH BENEFIT OPTION A ASSUMING GUARANTEED CHARGES
Insurance Benefit(2) Policy Account(2) Cash Surrender Value(2)
Last Day Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross
of Annual Investment Return of Annual Investment Return of Annual Investment Return of
Policy Accumulated
Year Premiums 0% 4% 8% 12% 0% 4% 8% 12% 0% 4% 8% 12%
(1)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,150 200,000 200,000 200,000 200,000 2,260 2,364 2,468 2,572 1,511 1,615 1,719 1,823
2 6,458 200,000 200,000 200,000 200,000 4,345 4,643 4,950 5,265 3,326 3,624 3,931 4,246
3 9,930 200,000 200,000 200,000 200,000 6,352 6,933 7,547 8,195 5,212 5,793 6,407 7,055
4 13,577 200,000 200,000 200,000 200,000 8,279 9,230 10,263 11,385 7,139 8,090 9,123 10,245
5 17,406 200,000 200,000 200,000 200,000 10,124 11,533 13,107 14,861 8,984 10,393 11,967 13,721
6 21,426 200,000 200,000 200,000 200,000 11,884 13,837 16,080 18,651 10,744 12,697 14,940 17,511
7 25,647 200,000 200,000 200,000 200,000 13,558 16,142 19,194 22,791 12,646 15,230 18,282 21,879
8 30,080 200,000 200,000 200,000 200,000 15,142 18,443 22,454 27,316 14,458 17,759 21,770 26,632
9 34,734 200,000 200,000 200,000 200,000 16,633 20,738 25,869 32,269 16,177 20,282 25,413 31,813
10 39,620 200,000 200,000 200,000 200,000 18,027 23,020 29,444 37,694 17,799 22,792 29,216 37,466
11 44,751 200,000 200,000 200,000 200,000 19,320 25,287 33,191 43,645 19,320 25,287 33,191 43,645
12 50,139 200,000 200,000 200,000 200,000 20,497 27,523 37,110 50,174 20,497 27,523 37,110 50,174
13 55,796 200,000 200,000 200,000 200,000 21,548 29,718 41,206 57,341 21,548 29,718 41,206 57,341
14 61,736 200,000 200,000 200,000 200,000 22,460 31,859 45,484 65,219 22,460 31,859 45,484 65,219
15 67,972 200,000 200,000 200,000 200,000 23,216 33,929 49,947 73,886 23,216 33,929 49,947 73,886
16 74,521 200,000 200,000 200,000 200,000 23,809 35,919 54,609 83,443 23,809 35,919 54,609 83,443
17 81,397 200,000 200,000 200,000 200,000 24,224 37,816 59,481 94,003 24,224 37,816 59,481 94,003
18 88,617 200,000 200,000 200,000 200,000 24,459 39,615 64,584 105,702 24,459 39,615 64,584 105,702
19 96,198 200,000 200,000 200,000 200,000 24,498 41,303 69,937 118,696 24,498 41,303 69,937 118,696
20 104,158 200,000 200,000 200,000 200,000 24,330 42,868 75,563 133,165 24,330 42,868 75,563 133,165
25 150,340 200,000 200,000 200,000 284,054 19,335 47,864 108,559 232,831 19,335 47,864 108,559 232,831
(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.
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
EquiBuilder II Flexible Premium Variable Life Insurance
The American Franklin Life Insurance Company
INITIAL FACE AMOUNT $200,000 MALE AGE 40 NON-TOBACCO USER PLANNED PREMIUM $3,000
DEATH BENEFIT OPTION B ASSUMING CURRENT CHARGES
Insurance Benefit(2) Policy Account(2) Cash Surrender Value(2)
Last Day Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross
of Annual Investment Return of Annual Investment Return of Annual Investment Return of
Policy Accumulated
Year Premiums 0% 4% 8% 12% 0% 4% 8% 12% 0% 4% 8% 12%
(1)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,150 202,256 202,360 202,464 202,568 2,256 2,360 2,464 2,568 1,508 1,611 1,715 1,819
2 6,458 204,740 205,046 205,360 205,683 4,740 5,046 5,360 5,683 3,721 4,027 4,342 4,664
3 9,930 207,162 207,774 208,420 209,100 7,162 7,774 8,420 9,100 6,022 6,634 7,280 7,960
4 13,577 209,523 210,545 211,652 212,850 9,523 10,545 11,652 12,850 8,383 9,405 10,512 11,710
5 17,406 211,822 213,359 215,068 216,965 11,822 13,359 15,068 16,965 10,682 12,219 13,928 15,825
6 21,426 214,062 216,218 218,680 221,488 14,062 16,218 18,680 21,488 12,922 15,078 17,540 20,348
7 25,647 216,211 219,090 222,469 226,426 16,211 19,090 22,469 26,426 15,299 18,178 21,557 25,514
8 30,080 218,275 221,980 226,448 231,826 18,275 21,980 26,448 31,826 17,591 21,296 25,764 31,142
9 34,734 220,252 224,886 230,630 237,737 20,252 24,886 30,630 37,737 19,796 24,430 30,174 37,281
10 39,620 222,143 227,808 235,025 244,210 22,143 27,808 35,025 44,210 21,915 27,580 34,797 43,982
11 44,751 223,950 230,745 239,649 251,305 23,950 30,745 39,649 51,305 23,950 30,745 39,649 51,305
12 50,139 225,702 233,729 244,546 259,118 25,702 33,729 44,546 59,118 25,702 33,729 44,546 59,118
13 55,796 227,364 236,722 249,696 267,686 27,364 36,722 49,696 67,686 27,364 36,722 49,696 67,686
14 61,736 228,938 239,727 255,117 277,091 28,938 39,727 55,117 77,091 28,938 39,727 55,117 77,091
15 67,972 230,423 242,741 260,824 287,418 30,423 42,741 60,824 87,418 30,423 42,741 60,824 87,418
16 74,521 231,814 245,757 266,829 298,756 31,814 45,757 66,829 98,756 31,814 45,757 66,829 98,756
17 81,397 233,066 248,729 273,103 311,164 33,066 48,729 73,103 111,164 33,066 48,729 73,103 111,164
18 88,617 234,158 251,632 279,641 324,731 34,158 51,632 79,641 124,731 34,158 51,632 79,641 124,731
19 96,198 235,116 254,487 286,483 339,602 35,116 54,487 86,483 139,602 35,116 54,487 86,483 139,602
20 104,158 235,918 257,272 293,626 355,878 35,918 57,272 93,626 155,878 35,918 57,272 93,626 155,878
25 150,340 236,768 269,081 333,551 459,370 36,768 69,081 133,551 259,370 36,768 69,081 133,551 259,370
EquiBuilder II Flexible Premium Variable Life Insurance
The American Franklin Life Insurance Company
INITIAL FACE AMOUNT $200,000 MALE AGE 40 NON-TOBACCO USER PLANNED PREMIUM $3,000
DEATH BENEFIT OPTION B ASSUMING GUARANTEED CHARGES
Insurance Benefit(2) Policy Account(2) Cash Surrender Value(2)
Last Day Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross
of Annual Investment Return of Annual Investment Return of Annual Investment Return of
Policy Accumulated
Year Premiums 0% 4% 8% 12% 0% 4% 8% 12% 0% 4% 8% 12%
(1)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 3,150 202,256 202,360 202,464 202,568 2,256 2,360 2,464 2,568 1,508 1,611 1,715 1,819
2 6,458 204,325 204,622 204,928 205,242 4,325 4,622 4,928 5,242 3,307 3,603 3,909 4,223
3 9,930 206,309 206,885 207,495 208,139 6,309 6,885 7,495 8,139 5,169 5,745 6,355 6,999
4 13,577 208,202 209,143 210,166 211,276 8,202 9,143 10,166 11,276 7,062 8,003 9,026 10,136
5 17,406 210,004 211,394 212,946 214,676 10,004 11,394 12,946 14,676 8,864 10,254 11,806 13,536
6 21,426 211,709 213,629 215,833 218,359 11,709 13,629 15,833 18,359 10,569 12,489 14,693 17,219
7 25,647 213,315 215,846 218,833 222,353 13,315 15,846 18,833 22,353 12,403 14,934 17,921 21,441
8 30,080 214,819 218,038 221,947 226,683 14,819 18,038 21,947 26,683 14,135 17,354 21,263 25,999
9 34,734 216,216 220,199 225,175 231,379 16,216 20,199 25,175 31,379 15,760 19,743 24,719 30,923
10 39,620 217,499 222,320 228,518 236,472 17,499 22,320 28,518 36,472 17,271 22,092 28,290 36,244
11 44,751 218,664 224,394 231,976 241,996 18,664 24,394 31,976 41,996 18,664 24,394 31,976 41,996
12 50,139 219,696 226,401 235,539 247,978 19,696 26,401 35,539 47,978 19,696 26,401 35,539 47,978
13 55,796 220,579 228,323 239,196 254,450 20,579 28,323 39,196 54,450 20,579 28,323 39,196 54,450
14 61,736 221,301 230,142 242,937 261,446 21,301 30,142 42,937 61,446 21,301 30,142 42,937 61,446
15 67,972 221,842 231,833 246,746 268,999 21,842 31,833 46,746 68,999 21,842 31,833 46,746 68,999
16 74,521 222,192 233,381 250,613 277,154 22,192 33,381 50,613 77,154 22,192 33,381 50,613 77,154
17 81,397 222,339 234,765 254,527 285,958 22,339 34,765 54,527 85,958 22,339 34,765 54,527 85,958
18 88,617 222,277 235,974 258,482 295,471 22,277 35,974 58,482 95,471 22,277 35,974 58,482 95,471
19 96,198 221,994 236,987 262,464 305,751 21,994 36,987 62,464 105,751 21,994 36,987 62,464 105,751
20 104,158 221,479 237,784 266,460 316,865 21,479 37,784 66,460 116,865 21,479 37,784 66,460 116,865
25 150,340 214,424 237,158 285,439 386,459 14,424 37,158 85,439 186,459 14,424 37,158 85,439 186,459
(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.
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
EquiBuilder II Flexible Premium Variable Life Insurance
The American Franklin Life Insurance Company
INITIAL FACE AMOUNT $100,000 MALE AGE 40 NON-TOBACCO USER PLANNED PREMIUM $1,500
DEATH BENEFIT OPTION A ASSUMING CURRENT CHARGES
Insurance Benefit(2) Policy Account(2) Cash Surrender Value(2)
Last Day Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross
of Annual Investment Return of Annual Investment Return of Annual Investment Return of
Policy Accumulated
Year Premiums 0% 4% 8% 12% 0% 4% 8% 12% 0% 4% 8% 12%
(1)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 100,000 100,000 100,000 100,000 940 987 1,035 1,083 565 613 661 709
2 3,229 100,000 100,000 100,000 100,000 2,137 2,278 2,422 2,571 1,628 1,768 1,913 2,061
3 4,965 100,000 100,000 100,000 100,000 3,306 3,589 3,888 4,202 2,736 3,019 3,318 3,632
4 6,788 100,000 100,000 100,000 100,000 4,444 4,920 5,436 5,994 3,874 4,350 4,866 5,424
5 8,703 100,000 100,000 100,000 100,000 5,553 6,273 7,074 7,963 4,983 5,703 6,504 7,393
6 10,713 100,000 100,000 100,000 100,000 6,632 7,648 8,807 10,128 6,062 7,078 8,237 9,558
7 12,824 100,000 100,000 100,000 100,000 7,669 9,031 10,628 12,497 7,213 8,575 10,172 12,041
8 15,040 100,000 100,000 100,000 100,000 8,663 10,422 12,542 15,092 8,321 10,080 12,200 14,750
9 17,367 100,000 100,000 100,000 100,000 9,615 11,823 14,558 17,940 9,387 11,595 14,330 17,712
10 19,810 100,000 100,000 100,000 100,000 10,523 13,232 16,681 21,068 10,409 13,118 16,567 20,954
11 22,376 100,000 100,000 100,000 100,000 11,392 14,652 18,922 24,511 11,392 14,652 18,922 24,511
12 25,069 100,000 100,000 100,000 100,000 12,234 16,097 21,304 28,316 12,234 16,097 21,304 28,316
13 27,898 100,000 100,000 100,000 100,000 13,034 17,554 23,821 32,514 13,034 17,554 23,821 32,514
14 30,868 100,000 100,000 100,000 100,000 13,790 19,019 26,483 37,146 13,790 19,019 26,483 37,146
15 33,986 100,000 100,000 100,000 100,000 14,506 20,497 29,305 42,269 14,506 20,497 29,305 42,269
16 37,261 100,000 100,000 100,000 100,000 15,178 21,987 32,297 47,938 15,178 21,987 32,297 47,938
17 40,699 100,000 100,000 100,000 100,000 15,785 23,469 35,456 54,205 15,785 23,469 35,456 54,205
18 44,309 100,000 100,000 100,000 100,000 16,317 24,933 38,788 61,142 16,317 24,933 38,788 61,142
19 48,099 100,000 100,000 100,000 100,000 16,787 26,394 42,323 68,843 16,787 26,394 42,323 68,843
20 52,079 100,000 100,000 100,000 103,712 17,185 27,842 46,072 77,397 17,185 27,842 46,072 77,397
25 75,170 100,000 100,000 100,000 164,948 17,672 34,573 68,662 135,203 17,672 34,573 68,662 135,203
EquiBuilder II Flexible Premium Variable Life Insurance
The American Franklin Life Insurance Company
INITIAL FACE AMOUNT $100,000 MALE AGE 40 NON-TOBACCO USER PLANNED PREMIUM $1,500
DEATH BENEFIT OPTION A ASSUMING GUARANTEED CHARGES
Insurance Benefit(2) Policy Account(2) Cash Surrender Value(2)
Last Day Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross
of Annual Investment Return of Annual Investment Return of Annual Investment Return of
Policy Accumulated
Year Premiums 0% 4% 8% 12% 0% 4% 8% 12% 0% 4% 8% 12%
(1)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 100,000 100,000 100,000 100,000 940 987 1,035 1,083 565 613 661 709
2 3,229 100,000 100,000 100,000 100,000 1,913 2,048 2,188 2,332 1,403 1,539 1,678 1,822
3 4,965 100,000 100,000 100,000 100,000 2,848 3,112 3,392 3,688 2,278 2,542 2,822 3,118
4 6,788 100,000 100,000 100,000 100,000 3,743 4,177 4,649 5,161 3,173 3,607 4,079 4,591
5 8,703 100,000 100,000 100,000 100,000 4,598 5,242 5,962 6,764 4,028 4,672 5,392 6,194
6 10,713 100,000 100,000 100,000 100,000 5,411 6,305 7,333 8,510 4,841 5,735 6,763 7,940
7 12,824 100,000 100,000 100,000 100,000 6,181 7,366 8,765 10,413 5,725 6,910 8,309 9,957
8 15,040 100,000 100,000 100,000 100,000 6,907 8,422 10,261 12,489 6,565 8,080 9,919 12,147
9 17,367 100,000 100,000 100,000 100,000 7,587 9,471 11,824 14,759 7,359 9,243 11,596 14,531
10 19,810 100,000 100,000 100,000 100,000 8,219 10,510 13,457 17,240 8,105 10,396 13,343 17,126
11 22,376 100,000 100,000 100,000 100,000 8,799 11,537 15,164 19,958 8,799 11,537 15,164 19,958
12 25,069 100,000 100,000 100,000 100,000 9,323 12,546 16,943 22,935 9,323 12,546 16,943 22,935
13 27,898 100,000 100,000 100,000 100,000 9,783 13,529 18,797 26,196 9,783 13,529 18,797 26,196
14 30,868 100,000 100,000 100,000 100,000 10,173 14,480 20,726 29,773 10,173 14,480 20,726 29,773
15 33,986 100,000 100,000 100,000 100,000 10,484 15,391 22,730 33,701 10,484 15,391 22,730 33,701
16 37,261 100,000 100,000 100,000 100,000 10,713 16,255 24,814 38,023 10,713 16,255 24,814 38,023
17 40,699 100,000 100,000 100,000 100,000 10,853 17,067 26,981 42,789 10,853 17,067 26,981 42,789
18 44,309 100,000 100,000 100,000 100,000 10,901 17,822 29,240 48,059 10,901 17,822 29,240 48,059
19 48,099 100,000 100,000 100,000 100,000 10,850 18,514 31,597 53,901 10,850 18,514 31,597 53,901
20 52,079 100,000 100,000 100,000 100,000 10,694 19,136 34,060 60,394 10,694 19,136 34,060 60,394
25 75,170 100,000 100,000 100,000 128,806 7,794 20,652 48,195 105,578 7,794 20,652 48,195 105,578
(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.
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
EquiBuilder II Flexible Premium Variable Life Insurance
The American Franklin Life Insurance Company
INITIAL FACE AMOUNT $100,000 MALE AGE 40 NON-TOBACCO USER PLANNED PREMIUM $1,500
DEATH BENEFIT OPTION B ASSUMING CURRENT CHARGES
Insurance Benefit(2) Policy Account(2) Cash Surrender Value(2)
Last Day Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross
of Annual Investment Return of Annual Investment Return of Annual Investment Return of
Policy Accumulated
Year Premiums 0% 4% 8% 12% 0% 4% 8% 12% 0% 4% 8% 12%
(1)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 100,938 100,985 101,033 101,081 938 985 1,033 1,081 563 611 659 707
2 3,229 102,132 102,272 102,416 102,564 2,132 2,272 2,416 2,564 1,622 1,762 1,906 2,054
3 4,965 103,294 103,576 103,873 104,187 3,294 3,576 3,873 4,187 2,724 3,006 3,303 3,617
4 6,788 104,423 104,896 105,409 105,964 4,423 4,896 5,409 5,964 3,853 4,326 4,839 5,394
5 8,703 105,519 106,235 107,030 107,912 5,519 6,235 7,030 7,912 4,949 5,665 6,460 7,342
6 10,713 106,584 107,590 108,739 110,047 6,584 7,590 8,739 10,047 6,014 7,020 8,169 9,477
7 12,824 107,600 108,947 110,527 112,374 7,600 8,947 10,527 12,374 7,144 8,491 10,071 11,918
8 15,040 108,568 110,304 112,395 114,910 8,568 10,304 12,395 14,910 8,226 9,962 12,053 14,568
9 17,367 109,489 111,662 114,352 117,678 9,489 11,662 14,352 17,678 9,261 11,434 14,124 17,450
10 19,810 110,359 113,016 116,399 120,699 10,359 13,016 16,399 20,699 10,245 12,902 16,285 20,585
11 22,376 111,183 114,371 118,544 124,003 11,183 14,371 18,544 24,003 11,183 14,371 18,544 24,003
12 25,069 111,975 115,739 120,809 127,634 11,975 15,739 20,809 27,634 11,975 15,739 20,809 27,634
13 27,898 112,717 117,104 123,182 131,607 12,717 17,104 23,182 31,607 12,717 17,104 23,182 31,607
14 30,868 113,406 118,459 125,667 135,954 13,406 18,459 25,667 35,954 13,406 18,459 25,667 35,954
15 33,986 114,046 119,810 128,273 140,718 14,046 19,810 28,273 40,718 14,046 19,810 28,273 40,718
16 37,261 114,633 121,150 131,005 145,939 14,633 21,150 31,005 45,939 14,633 21,150 31,005 45,939
17 40,699 115,142 122,453 133,842 151,635 15,142 22,453 33,842 51,635 15,142 22,453 33,842 51,635
18 44,309 115,558 123,703 136,778 157,843 15,558 23,703 36,778 57,843 15,558 23,703 36,778 57,843
19 48,099 115,899 124,914 139,833 164,631 15,899 24,914 39,833 64,631 15,899 24,914 39,833 64,631
20 52,079 116,151 126,069 143,000 172,046 16,151 26,069 43,000 72,046 16,151 26,069 43,000 72,046
25 75,170 115,580 130,395 160,184 218,900 15,580 30,395 60,184 118,900 15,580 30,395 60,184 118,900
EquiBuilder II Flexible Premium Variable Life Insurance
The American Franklin Life Insurance Company
INITIAL FACE AMOUNT $100,000 MALE AGE 40 NON-TOBACCO USER PLANNED PREMIUM $1,500
DEATH BENEFIT OPTION B ASSUMING GUARANTEED CHARGES
Insurance Benefit(2) Policy Account(2) Cash Surrender Value(2)
Last Day Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross
of Annual Investment Return of Annual Investment Return of Annual Investment Return of
Policy Accumulated
Year Premiums 0% 4% 8% 12% 0% 4% 8% 12% 0% 4% 8% 12%
(1)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 1,575 100,938 100,985 101,033 101,081 938 985 1,033 1,081 563 611 659 707
2 3,229 101,904 102,039 102,178 102,321 1,904 2,039 2,178 2,321 1,394 1,529 1,668 1,811
3 4,965 102,828 103,090 103,368 103,661 2,828 3,090 3,368 3,661 2,258 2,520 2,798 3,091
4 6,788 103,707 104,137 104,604 105,111 3,707 4,137 4,604 5,111 3,137 3,567 4,034 4,541
5 8,703 104,543 105,178 105,888 106,679 4,543 5,178 5,888 6,679 3,973 4,608 5,318 6,109
6 10,713 105,330 106,210 107,219 108,375 5,330 6,210 7,219 8,375 4,760 5,640 6,649 7,805
7 12,824 106,070 107,230 108,599 110,211 6,070 7,230 8,599 10,211 5,614 6,774 8,143 9,755
8 15,040 106,759 108,235 110,027 112,198 6,759 8,235 10,027 12,198 6,417 7,893 9,685 11,856
9 17,367 107,395 109,223 111,505 114,350 7,395 9,223 11,505 14,350 7,167 8,995 11,277 14,122
10 19,810 107,976 110,188 113,031 116,679 7,976 10,188 13,031 16,679 7,862 10,074 12,917 16,565
11 22,376 108,498 111,127 114,605 119,200 8,498 11,127 14,605 19,200 8,498 11,127 14,605 19,200
12 25,069 108,954 112,030 116,221 121,926 8,954 12,030 16,221 21,926 8,954 12,030 16,221 21,926
13 27,898 109,338 112,888 117,874 124,868 9,338 12,888 17,874 24,868 9,338 12,888 17,874 24,868
14 30,868 109,641 113,692 119,557 128,041 9,641 13,692 19,557 28,041 9,641 13,692 19,557 28,041
15 33,986 109,855 114,430 121,262 131,459 9,855 14,430 21,262 31,459 9,855 14,430 21,262 31,459
16 37,261 109,974 115,093 122,983 135,140 9,974 15,093 22,983 35,140 9,974 15,093 22,983 35,140
17 40,699 109,992 115,671 124,713 139,103 9,992 15,671 24,713 39,103 9,992 15,671 24,713 39,103
18 44,309 109,907 116,159 126,449 143,375 9,907 16,159 26,449 43,375 9,907 16,159 26,449 43,375
19 48,099 109,712 116,546 128,182 147,979 9,712 16,546 28,182 47,979 9,712 16,546 28,182 47,979
20 52,079 109,402 116,822 129,906 152,943 9,402 16,822 29,906 52,943 9,402 16,822 29,906 52,943
25 75,170 105,621 115,847 137,730 183,969 5,621 15,847 37,730 83,969 5,621 15,847 37,730 83,969
</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.
38
<PAGE>
ADDITIONAL INFORMATION
VOTING RIGHTS OF A POLICY OWNER
VOTING RIGHTS OF THE FUNDS
As was explained in "Separate Account Investment Choices," above, the assets
in the divisions of the Separate Account are invested in shares of the
corresponding portfolios of the Funds. American Franklin is the legal owner of
the shares and, as such, has the right to vote on certain matters. Among other
things, it may vote to:
a. elect the Boards of Trustees of the Funds;
b. ratify the selection of independent auditors for the Funds; and
c. vote on any other matters described in the current prospectuses of the
Funds or requiring a vote by shareholders under the Investment Company Act
of 1940.
Even though American Franklin owns the shares, American Franklin will provide
Policy Owners the opportunity to tell it how to vote the number of shares that
are allocated to their policies. American Franklin will vote those shares at
meetings of shareholders of the Funds according to such instructions. If
American Franklin does not receive instructions in time from all Policy Owners,
it will vote shares for which no instructions have been received in a portfolio
in the same proportion as it votes shares for which it received instructions in
that portfolio. American Franklin will also vote any shares of the Funds that
it is entitled to vote directly due to amounts it has accumulated in the
Separate Account in the same proportions that Policy Owners vote. If the
federal securities laws or regulations or interpretations of them change so that
American Franklin is permitted to vote shares of the Funds without seeking
instructions from Policy Owners or to restrict Policy Owner voting, American
Franklin may do so.
DETERMINATION OF VOTING SHARES
A Policy Owner may participate in voting only on matters concerning a Fund's
portfolios in which his or her assets have been invested. American Franklin
determines the number of a Fund's shares in each division that are attributable
to a particular policy by dividing the amount in the Policy Account allocated to
that division by the net asset value of one share of the corresponding portfolio
as of the record date set by the Fund's Board for the Fund's shareholders
meeting. The record date for this purpose must be at least 10 and no more than
90 days before the meeting of the Fund. American Franklin will count fractional
shares for these purposes.
For example, suppose that a Policy Account has a net value of $3,000, with 50%
of this amount being attributable to the VIP Equity-Income division and 50%
being attributable to the VIP Money Market division, which means that $1,500 is
in each division. Assume that the net asset value of one share in the
corresponding VIP Equity-Income Portfolio is $150 and the net asset value of one
share in the corresponding VIP Money Market Portfolio is $100. If the $1,500 in
each division is divided by the net asset value of one share, the Policy Owner
will have the right to instruct American Franklin regarding 10 shares for the
VIP Equity-Income division and 15 shares for the VIP Money Market division.
American Franklin will send proxy material and a form for giving voting
instructions to each Policy Owner that has voting rights. In certain cases,
American Franklin may disregard instructions relating to approval of investments
or contracts with an adviser to a Fund or relating to changes in a Fund's
investment adviser, principal underwriter or the investment policies of its
portfolios. If it does so, American Franklin will advise the Policy Owners and
give its reasons in the next semiannual report to Policy Owners.
HOW SHARES OF THE FUNDS ARE VOTED
All shares of the Funds are entitled to one vote. The votes of all divisions
are cast together on an aggregate basis, except on matters where the interests
of the portfolios differ. In such cases, voting is on a portfolio-by-portfolio
basis. In these cases, the approval of the shareholders in one portfolio is not
39
<PAGE>
needed to make a decision in another portfolio. Examples of matters that would
require a portfolio-by-portfolio vote are changes in the fundamental investment
policy of a particular portfolio or approval of an investment advisory
agreement. Shareholders in a portfolio not affected by a particular matter
generally would not be entitled to vote on it.
VOTING PRIVILEGES OF PARTICIPANTS IN OTHER SEPARATE ACCOUNTS
Shares of the Funds may be owned by other separate accounts of American
Franklin or by separate accounts of other insurance companies affiliated or
unaffiliated with American Franklin. Shares owned by these separate accounts
will probably be voted according to the instructions of the owners of insurance
policies and contracts issued by those other insurance companies. Moreover,
American Franklin expects that the number of shares owned in the Funds by
separate accounts of insurance companies that are not affiliated with American
Franklin will initially exceed the number of shares owned by the Separate
Account. These factors will dilute the effect of the voting instructions of
Policy Owners. American Franklin currently does not foresee any disadvantages
to Policy Owners arising out of this. The Securities and Exchange Commission
has granted the Funds exemptive orders pursuant to the Investment Company Act of
1940 that permit the Funds to offer their shares to separate accounts, like the
Separate Account, that are maintained by life insurance companies that are not
affiliated with the Funds. Those exemptive orders impose several conditions on
the Funds and participating separate accounts to protect the holders of
interests in the various separate accounts investing in shares of the Funds.
The Boards of Trustees of the Funds have agreed to monitor events in order to
identify any material irreconcilable conflicts that possibly may arise and to
determine what action, if any, should be taken in response by, and at the
expense of, American Franklin or one or more of the other participating
insurance companies. American Franklin and the other participating insurance
companies are obligated to report potential or existing conflicts of interest to
the Funds' Boards of Trustees. If American Franklin believes that a Fund's
response to any of those events insufficiently protects Policy Owners, American
Franklin will take appropriate action to protect Policy Owners. Corrective
action for an irreconcilable conflict of interest involving the Separate Account
might include withdrawal of the assets of the Separate Account from a Fund.
Also, if American Franklin ever believes that any of the Funds' portfolios is so
large as to impair materially the investment performance of a portfolio or a
Fund, American Franklin will examine other investment options.
SEPARATE ACCOUNT VOTING RIGHTS
Under the Investment Company Act of 1940, certain actions (such as some of
those described under "Separate Account Investment Choices-Right to Change
Operations," above) may require Policy Owner approval. In that case, a Policy
Owner will be entitled to one vote for every $100 of value allocated to his or
her policy in the investment divisions of the Separate Account, and a
proportionate fractional vote for any amount less than $100. American Franklin
will cast votes attributable to amounts retained in the investment divisions of
the Separate Account in the same proportions as votes cast by Policy Owners.
REPORTS TO POLICY OWNERS
After the end of each policy year, each Policy Owner will be sent a report
that shows the current death benefit for his or her policy, the value of his or
her Policy Account, information about investment divisions, the Cash Surrender
Value of his or her policy, the amount of any outstanding policy loans, the
amount of any interest owed on the loan and information about the current loan
interest rate. The annual report will also show any transactions involving the
Policy Owner's Policy Account that occurred during the year. Transactions
include premium allocations, deductions, and any transfers or withdrawals that
were made in that year. American Franklin will also send semi-annual reports
with financial information on the Separate Account and the Funds, including a
list of the investments held by each portfolio.
In addition, reports will also contain any other information that is required
by the insurance supervisory official in the jurisdiction in which a policy is
delivered.
Notices will be sent to Policy Owners for transfers of amounts between
investment divisions and certain other policy transactions.
40
<PAGE>
LIMITS ON AMERICAN FRANKLIN'S RIGHT TO CHALLENGE A POLICY
American Franklin can challenge the validity of an insurance policy (based on
material misstatements in the application or, with respect to any policy change,
based on material misstatements in the application for the change) if it appears
that the Insured Person is not actually covered by the policy under American
Franklin's rules. However, there are some limits on how and when American
Franklin can challenge the policy.
Except on the basis of fraud, American Franklin cannot challenge the policy
after it has been in effect, during the Insured Person's lifetime, for two years
from the date the policy was issued or reinstated. (Some states may require
this time to be measured in some other way.)
Except on the basis of fraud, American Franklin cannot challenge any policy
change that requires evidence of insurability (such as an increase in Face
Amount) after the change has been in effect for two years during the Insured
Person's lifetime.
American Franklin can challenge at any time (and require proof of continuing
disability) an additional benefit that provides benefits to the Insured Person
in the event that the Insured Person becomes totally disabled.
If the Insured Person dies within the time that the validity of the policy may
be challenged, American Franklin may delay payment until it decides whether to
challenge the policy.
If the Insured Person's age or sex is misstated on any application, the death
benefit and any additional benefits provided will be those which would have been
purchased by the most recent deduction for the cost of insurance and the cost of
any additional benefits at the Insured Person's correct age and sex.
If the Insured Person commits suicide within two years after the date on which
the policy was issued or reinstated, the death benefit will be limited to the
total of all premiums that have been paid to the time of death minus the amount
of any outstanding policy loan and loan interest and minus any partial
withdrawals of Net Cash Surrender Value. If the Insured Person commits suicide
within two years after the effective date of an increase in death benefit that
the Policy Owner requested, American Franklin will pay the death benefit which
was in effect before the increase, plus the monthly cost of insurance deductions
for the increase (including the expense charge). (Some states require this time
to be measured by some other date.)
PAYMENT OPTIONS
Policy benefits or other payments such as the Net Cash Surrender Value or
death benefit may be paid immediately in one sum or another form of payment
described below may be designated for all or part of the proceeds. Payments
under these options are not affected by the investment experience of any
investment division of the Separate Account. Instead, interest accrues pursuant
to the options chosen (such interest will be appropriately includable in federal
gross income of the beneficiary). If the Policy Owner does not arrange for a
specific form of payment before the Insured Person dies, the beneficiary will
have his choice. However, if the Policy Owner makes an arrangement for payment
of the money, the beneficiary cannot change that choice after the Insured Person
dies. Payment Options will also be subject to American Franklin's rules at the
time of selection. Currently, these alternate payment options are only
available if the proceeds applied are $1,000 or more and any periodic payment
will be at least $20.
The following payment options are generally available:
INCOME PAYMENTS FOR A FIXED PERIOD: American Franklin will pay the amount
applied in equal installments (including applicable interest) for a specific
number of years, for up to 30 years.
LIFE INCOME WITH PAYMENTS GUARANTEED FOR A FIXED TERM OF YEARS: American
Franklin will pay the money at agreed intervals as a definite number of equal
payments and as long thereafter as
41
<PAGE>
the payee lives. The Policy Owner (or beneficiary in some cases) may choose
any one of four definite periods: 5, 10, 15 or 20 years.
PROCEEDS AT INTEREST: THE MONEY WILL STAY ON DEPOSIT WITH AMERICAN
FRANKLIN WHILE THE PAYEE IS ALIVE. Interest will accrue on the money at a
declared interest rate, and interest will be paid at agreed upon intervals.
FIXED AMOUNT: American Franklin will pay the sum in installments in a
specified amount. Installments will be paid until the original amount,
together with any interest, has been exhausted.
American Franklin guarantees interest under the foregoing options at the rate
of 3% a year.
American Franklin may also pay or credit excess interest on the options from
time to time. The rate and manner of payment or crediting will be determined by
American Franklin. Under the second option no excess interest will be paid on
the part of the proceeds used to provide payments beyond the fixed term of
years.
The beneficiary or any other person who is entitled to receive payment may
name a successor to receive any amount that would otherwise be paid to that
person's estate if that person died. No successor may be named if a payment
option chosen is contingent on the life of a beneficiary. The person who is
entitled to receive payment may change the successor at any time.
American Franklin must approve any arrangements that involve more than one of
the payment options, or a payee who is not a natural person (for example, a
corporation), or a payee who is a fiduciary. Also, the details of all
arrangements will be subject to American Franklin's rules at the time the
arrangements take effect. This includes rules on the minimum amount payable
under an option, minimum amounts for installment payments, withdrawal or
commutation rights (rights to cancel an arrangement involving payments over time
in return for a lump sum payment), the naming of people who are entitled to
receive payment and their successors and the ways of proving age and survival.
A Policy Owner may change his or her choice of a payment option (and may make
later changes) and that change will take effect in the same way as it would if a
beneficiary were being changed. (See "The Beneficiary," below). Any amounts
paid under the payment options will not be subject to the claims of creditors or
to legal process, to the extent that the law provides.
THE BENEFICIARY
An applicant for a policy must name a beneficiary when he or she applies for a
policy. The beneficiary is entitled to the insurance benefits of the policy.
The Policy Owner may change the beneficiary during the Insured Person's lifetime
by written notice satisfactory to American Franklin at its Administrative
Office. The change will take effect on the date the notice is signed. However,
the change will be subject to all payments made and actions taken by American
Franklin under the Policy before American Franklin receives the notice at its
Administrative Office. If the beneficiary is changed, any previous arrangement
made as to a payment option for benefits is canceled. A payment option for the
new beneficiary may be chosen.
At the time of the Insured Person's death, the benefit will be paid equally to
the primary beneficiaries, or, if no primary beneficiaries are living, the first
contingent beneficiaries (if any), or, if no primary or first contingent
beneficiaries are living, the second contingent beneficiaries (if any). If no
beneficiary is living when the Insured Person dies, the death benefit will be
paid to the Policy Owner, or to the executors or administrators of the Policy
Owner.
ASSIGNMENT OF A POLICY
The Policy Owner may assign (transfer) his or her rights in a policy to
someone else as collateral for a loan or for some other reason. In order to do
so the Policy Owner must send a copy of the assignment to American Franklin's
Administrative Office. American Franklin is not responsible for any payment
made or any action taken before it has received notice of the assignment (or of
termination of the assignment) or for the validity of the assignment. An
absolute assignment is a change of ownership.
42
<PAGE>
The federal income tax treatment of a policy that has been assigned for valuable
consideration may be different from the federal income tax treatment described
herein.
EMPLOYEE BENEFIT PLANS
Employers and employee organizations should consider, in consultation with
counsel, the impact of Title VII of the Civil Rights Act of 1964 on the purchase
of EquiBuilder II policies in connection with an employment-related insurance or
benefit plan. The United States Supreme Court held, in a 1983 decision, that,
under Title VII, optional annuity benefits under a deferred compensation plan
could not vary on the basis of sex.
The policies described herein are not intended for use in connection with
qualified plans or trusts under the Code.
PAYMENT OF PROCEEDS
American Franklin will pay any death benefits, Net Cash Surrender Value or
loan proceeds within seven days after it receives the required form or request
(and other documents that may be required) at its Administrative Office. Death
benefits are determined as of the date of death of the Insured Person and will
not be affected by subsequent changes in the unit values of the investment
divisions of the Separate Account. Interest will be paid in respect of the
period from the date of death to the date of payment.
American Franklin may, however, delay payment for one or more of the following
reasons:
American Franklin contests the policy or is deciding whether or not to
contest the policy;
American Franklin cannot determine the amount of the payment because the
New York Stock Exchange is closed, because trading in securities has been
restricted by the Securities and Exchange Commission, or because the
Securities and Exchange Commission has declared that an emergency exists; or
The Securities and Exchange Commission by order permits American Franklin
to delay payment to protect the Policy Owners.
American Franklin may defer payment of any Net Cash Surrender Value or loan
amount from the Guaranteed Interest Division for up to six months after receipt
of a request. American Franklin will pay interest of at least 3% a year from
the date a request for withdrawal of Net Cash Surrender Value is received if
payment from the Guaranteed Interest Division is delayed more than 30 days.
DIVIDENDS
No dividends are paid on the policies offered by this Prospectus.
DISTRIBUTION OF THE POLICIES
Franklin Financial Services Corporation ("Franklin Financial"), a Delaware
corporation and a wholly-owned subsidiary of The Franklin Life Insurance
Company, is the principal underwriter, as defined by the Investment Company Act
of 1940, of the EquiBuilder II policies for the Separate Account under a Sales
Agreement between Franklin Financial and the Separate Account. Franklin
Financial's principal executive office is at #1 Franklin Square, Springfield,
Illinois 62713.
Franklin Financial is registered with the Securities and Exchange Commission
as a broker-dealer under the Securities and Exchange Act of 1934 and is a member
of the National Association of Securities Dealers, Inc. Franklin Financial also
acts as principal underwriter for Separate Account VUL of American Franklin,
which is a registered investment company issuing interests in variable life
insurance contracts having policy features that are similar to those of
EquiBuilder II policies but the assets of which are invested in a different
open-end management investment company. American Franklin no longer offers new
policies having an interest in that separate account. Franklin Financial is the
principal underwriter of American Franklin's EquiBuilder III variable
43
<PAGE>
life insurance policies under which interests in the Separate Account are
issued. The EquiBuilder III policies have policy features that are similar to
those of the EquiBuilder II policies but have a different sales charge
structure.
Policies are sold primarily by persons who are insurance agents or brokers for
American Franklin authorized by applicable law to sell life and other forms of
personal insurance, including variable life insurance. Pursuant to an agreement
between American Franklin and Franklin Financial, Franklin Financial has agreed
to employ and supervise agents chosen by American Franklin to sell the policies
and to use its best efforts to qualify such persons as registered
representatives of Franklin Financial.
Franklin Financial incurs certain sales expenses, such as sales literature
preparation and related costs, in connection with the sale of the policies
pursuant to a Sales Agreement with American Franklin. Surrender charges imposed
in connection with the surrender of a policy and certain reductions of Face
Amount are paid to Franklin Financial as a means to recover sales expenses.
Surrender charges are not necessarily related to Franklin Financial's actual
sales expenses in any particular year. To the extent sales expenses are not
covered by surrender charges, Franklin Financial will cover them from other
assets.
Commissions earned by registered representatives of Franklin Financial on the
sale of the policies range up to 90% of premiums paid during the first policy
year. For policies issued on or after October 8, 1997, annual trail commissions
are earned at an annual rate of 0.25% on the amount in the Policy Account that
is in the Separate Account. Pursuant to an Agreement between American Franklin
and Franklin Financial, American Franklin has agreed to pay such commissions and
Franklin Financial has agreed to remit to American Franklin the excess of all
surrender charges paid to Franklin Financial over the sales and promotional
expenses incurred by Franklin Financial to the extent necessary to reimburse
American Franklin for commissions or other remuneration paid in connection with
sales of the policies. Such Agreement also provides that the amount of such
commissions and other remuneration not so reimbursed shall be deemed to have
been contributed by American Franklin to the capital of Franklin Financial.
Commissions and other remuneration will be paid by American Franklin from other
sources, including mortality and expense risk charges or other charges in
connection with the EquiBuilder II policies, or from its General Account to the
extent it does not receive reimbursement from Franklin Financial.
Commissions paid on policies issued under Separate Accounts VUL and VUL-2 of
American Franklin during the year 1999 were $24,947,968.
Franklin Financial also may enter into agreements with American Franklin and
each such agent with respect to the supervision of such agent. The policies
also may be sold by persons who are registered representatives of other
registered broker-dealers who are members of the National Association of
Securities Dealers, Inc., and with whom Franklin Financial may enter into a
selling agreement.
Registration as a broker-dealer does not mean that the Securities and Exchange
Commission has in any way passed upon the financial standing, fitness or conduct
of any broker or dealer, upon the merits of any securities offering or upon any
other matter relating to the business of any broker or dealer. Salesmen and
employees selling policies, where required, are also licensed as securities
salesmen under state law.
APPLICATIONS
When an application for a policy is completed, it is submitted to American
Franklin. American Franklin makes the decision to issue a policy based on the
information in the application and its standards for issuing insurance and
classifying risks. If it decides not to issue a policy, any premium paid will
be refunded.
REINSURANCE AGREEMENTS
American Franklin has entered into a reinsurance agreement with Integrity Life
Insurance Company ("Integrity") in respect of the EquiBuilder II policies.
This agreement was terminated as to policies sold on or after January 1, 1997
but will continue as to business in force prior to that date.
44
<PAGE>
Integrity is a subsidiary of ARM Financial Group, Inc., a financial services
company controlled by Morgan Stanley & Co. Incorporated, an investment banking
firm headquartered in New York, New York.
American Franklin has also entered into a modified coinsurance agreement
effective January 1, 1997 with The Franklin, under which The Franklin reinsures
on a modified coinsurance basis a portion of the risk under EquiBuilder II
policies issued after January 1, 1997.
ADMINISTRATIVE SERVICES
While American Franklin has primary responsibility for all administration of
the Policies, American General Life Companies ("AGLC") has agreed pursuant to a
services agreement among American General Corporation and almost all of its
subsidiaries to provide the following administrative services in connection with
the Policies: (1) the purchase and redemption of shares of the portfolios of
the Funds and (2) the determination of unit values for each investment division
of the Separate Account. American Franklin and AGLC are parties to the services
agreement. Pursuant to such agreement, American Franklin reimburses AGLC for
the costs and expenses which AGLC incurs in providing such administrative
services in connection with the Policies, but neither American Franklin nor AGLC
incurs a loss or realizes a profit by reason thereof. AGL is a stock life
insurance company organized under the laws of Texas and is also engaged in the
writing and sale of life insurance and annuity contracts.
STATE REGULATION
As a life insurance company organized and operated under Illinois law,
American Franklin is subject to statutory provisions governing such companies
and to regulation by the Illinois Director of Insurance. An annual statement is
filed with the Director on or before March 1 of each year covering the
operations of American Franklin for the preceding year and its financial
condition on December 31 of such year. American Franklin's books and accounts
are subject to review and examination by the Illinois Insurance Department at
all times, and a full examination of its operations is conducted by the National
Association of Insurance Commissioners ("NAIC") periodically. The NAIC has
divided the country into six geographic zones. A representative of each such
zone may participate in the examination.
In addition, American Franklin is subject to the insurance laws and
regulations of the jurisdictions other than Illinois in which it is licensed to
operate. Generally, the insurance departments of such jurisdictions apply the
law of Illinois in determining permissible investments for American Franklin.
YEAR 2000 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, L.L.P. of Washington, D.C. has provided advice
on certain matters relating to the federal securities laws.
45
<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 Life Insurance Company 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.
REGISTRATION STATEMENT
A Registration Statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, with respect to the
policies offered hereby. This Prospectus does not contain all the information
set forth in the Registration Statement and amendments thereto and exhibits
filed as a part thereof, to all of which reference is hereby made for further
information concerning American Franklin, the Separate Account and the policies
offered hereby. Statements contained in this Prospectus as to the content of
policies and other legal instruments are summaries. For a complete statement of
the terms thereof, reference is made to such instruments as filed.
OTHER POLICIES AND CONTRACTS
American Franklin may offer, under other prospectuses, other variable life
policies or variable annuity contracts having interests in the Separate Account
and containing terms and conditions different from those of the policies offered
hereby. Interests in the Separate Account are also issued under American
Franklin's EquiBuilder III variable life insurance policies, which have policy
features that are similar to those of EquiBuilder II policies but which have a
different sales charge structure.
46
<PAGE>
MANAGEMENT
The following persons hold the positions designated with respect to American
Franklin, the table shows their principal occupations during the past five
years.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME DURING PAST FIVE YEARS
- ---------------------------- --------------------------------------------------------------------------
<S> <C>
*Rodney O. Martin, Jr. Senior Chairman and Chief Executive Officer of American Franklin Life
Insurance Company since April 1998. Chairman of the Board of American
General Life Insurance Company since April 2000 and a Director since
August 1996. 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 Director and President of American Franklin Life Insurance Company since
January 2000. Director of the Board of American General Life Insurance
Company since April 1999. President of American General Life Insurance
Company since April 2000. President of First Colony Life, Lynchburg,
Virginia (1996-April 1999) and Executive Vice President of First Colony
Life (1992-1996).
Ronald H. Ridlehuber Director of American Franklin Life Insurance Company since December 1999.
President and Chief Executive Officer of American General Life Insurance
Company from July 1998 to April 2000. Senior Vice President and Chief
Marketing Officer of Jefferson-Pilot Life Insurance Company in
Greensboro, North Carolina (1993-1998).
*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. Elected Executive Vice President in April 1998.
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).
*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 of American General Life
Insurance Company since August 1996. Chief Technology Officer of American
General Life Insurance Company since April 2000. 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).
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
**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.
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.
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
**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).
</TABLE>
- -----------
The principal business address of each individual with an asterisk next to
his name is 2929 Allen Parkway, Houston, Texas 77019. The principal business
address of each individual with two asterisks next to his name is 2727-A Allen
Parkway, Houston, Texas 77019. The principal business address of each other
individual is in care of The Franklin Life Insurance Company, #1 Franklin
Square, Springfield, Illinois 62713.
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
49
<PAGE>
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
50
<PAGE>
Index To Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
The Separate Account:
Report of Independent Auditors....................................... F-2
Audited Financial Statements:
Statement of Net Assets, December 31, 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
=================================
F-28
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
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
