-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QG2aD1QlGEgjDLkU1defzsWQVUq+PVSF6b1s9sdbcr7xP7Y2WmEtJu/xIINHc8OB /vjZ4/jTxKy+AG0MHIXgQQ== 0000899243-00-000089.txt : 20000202 0000899243-00-000089.hdr.sgml : 20000202 ACCESSION NUMBER: 0000899243-00-000089 CONFORMED SUBMISSION TYPE: S-6/A PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 20000121 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AGL SEPARATE ACCOUNT VL R CENTRAL INDEX KEY: 0001051485 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 250598210 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-6/A SEC ACT: SEC FILE NUMBER: 333-89897 FILM NUMBER: 510818 BUSINESS ADDRESS: STREET 1: 2727 A ALLEN PARKWAY CITY: HOUSTON STATE: TX ZIP: 77019-2191 BUSINESS PHONE: 7135221111 MAIL ADDRESS: STREET 1: 2727 A ALLEN PARKWAY CITY: HOUSTON STATE: TX ZIP: 77019-2191 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN GENERAL LIFE INSURANCE CO SEPARATE ACCOUNT VL R DATE OF NAME CHANGE: 19971216 S-6/A 1 AMENDMENT NO. 1 TO FORM S-6 Registration No. 333-89897 As filed with the Securities and Exchange Commission on January 21, 2000 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 PRE-EFFECTIVE AMENDMENT NO. 1 TO FORM S-6 FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM N-8B-2 AMERICAN GENERAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT VL-R (Exact Name of Trust) AMERICAN GENERAL LIFE INSURANCE COMPANY (Exact Name of Depositor) 2727-A Allen Parkway Houston, Texas 77019-2191 (Complete Address of Depositor's Principal Executive Offices) Pauletta P. Cohn, Esq. Deputy General Counsel American General Life Companies 2727 Allen Parkway Houston, Texas 77019-2191 (Name and Complete Address of Agent for Service) Securities Being Offered: Flexible Premium Variable Life Insurance Policies. Approximate Date of Proposed Public Offering: As soon as practicable after the effective date of this Registration Statement. The Registrant hereby amends this Registration Statement on such date or date as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. AMERICAN GENERAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT VL-R RECONCILIATION AND TIE BETWEEN ITEMS IN FORM N-8B-2 AND THE PROSPECTUS (PURSUANT TO INSTRUCTION 4 OF FORM S-6) CROSS REFERENCE SHEET
ITEM NO. OF FORM N-8B-2* PROSPECTUS CAPTION - ----------------------------------------------------------------------------------------------------- 1 Additional Information : Separate Account VL-R. 2 Additional Information: AGL. 3 Inapplicable. 4 Additional Information: Distribution of Policies. 5, 6 Additional Information: Separate Account VL-R. 7 Inapplicable.** 8 Inapplicable.** 9 Additional Information: Legal Matters. 10(a) Additional Information: Your Beneficiary, Assigning Your Policy. 10(b) Basic Questions You May Have: How will the value of my investment in a Policy change over time? 10(c)(d) Basic Questions You May Have: How can I change my Policy's insurance coverage? How can I access my investment in a Policy? Can I choose the form in which AGL pays out any proceeds from my Policy? Additional Information: Payment of Policy Proceeds. 10(e) Basic Questions You May Have: Must I invest any minimum amount in a policy? 10(f) Additional Information: Voting Privileges. 10(g)(1), 10(g)(4), 10(h)(3), 10(h)(2) Basic Questions You May Have: To what extent will AGL vary the terms and conditions of the Policies in particular cases? Additional Information: Voting Privileges; Additional Rights That We Have. 10(g)(3), 10(g)(4), 10(h)(3), 10(h)(4) Inapplicable.** 10(i) Additional Information: Separate Account VL-R; Tax Effects. 11 Basic Questions You May Have: How will the value of my investment in a Policy change over time? Additional Information: Separate Account VL-R. 12(a) Additional Information: Separate Account VL-R; Front Cover. 12(b) Inapplicable.** 12(c), 12(d) Inapplicable.** 12(e) Inapplicable, because the Separate Account did not commence operations until 1998. 13(a) Basic Questions You May Have: What charges will AGL deduct from my investment in a Policy? What charges and expenses will the Mutual Funds deduct from the amounts I invest through my Policy? Additional Information: More About Policy Charges. 13(b) Illustrations of Hypothetical Policy Benefits. 13(c) Inapplicable.** 13(d) Basic Questions You May Have: To what extent will AGL vary the terms and conditions of the Policy in particular cases? 13(e), 13(f), 13(g) None.
14 Basic Questions You May Have: How can I invest money in a Policy? 15 Basic Questions You May Have: How can I invest money in a Policy? How do I communicate with AGL? 16 Basic Questions You May Have: How will the value of my investment in a Policy change over time? ITEM NO. ADDITIONAL INFORMATION - --------------------------------------------------------------------------------------------- 17(a), 17(b) Captions referenced under Items 10(c), 10(d), and 10(e). 17(c) Inapplicable.** 18(a) Captions referred to under Item 16. 18(b), 18(d) Inapplicable.** 18(c) Additional Information: Separate Account VL-R. 19 Additional Information: Separate Account VL-R; Our Reports to Policy Owners. 20(a), 20(b), 20(c), 20(d), 20(e), 20(f) Inapplicable.** 21(a), 21(b) Basic Questions You May Have: How can I access my investment in a Policy? Additional Information: Payment of Policy Proceeds. 21(c) Inapplicable.** 22 Additional Information: Payment of Policy Proceeds- Delay to Challenge Coverage. 23 Inapplicable.** 24 Basic Questions You May Have; Additional Information. 25 Additional Information: AGL. 26 Inapplicable, because the Separate Account did not commence operations until 1998. 27 Additional Information: AGL. 28 Additional Information: AGL's Management. 29 Additional Information: AGL. 30, 31, 32, 33, 34 Inapplicable, because the Separate Account did not commence operations until 1998. 35 Inapplicable.** 36 Inapplicable.** 37 None. 38, 39 Additional Information: Distribution of the Policies. 40 Inapplicable, because the Separate Account did not commence operations until 1998. 41(a) Additional Information: Distribution of the Policies. 41(b), 41(c) Inapplicable** 41,43 Inapplicable, because the Separate Account did not commence operations or issue any securities until 1998. 44(a)(1), 44(a)(2), 44(a)(3) Basic Questions You May Have: How will the value of my investment in a Policy change over time? 44(a)(4) Additional Information: Tax Effects--Our taxes. 44(a)(5), 44(a)(6) Basic Questions You May Have: What charges will AGL deduct from my investment in a Policy? 44(b) Inapplicable.** 44(c) Caption referenced in 13(d) above.
45 Inapplicable, because the Separate Account did not commence operations until 1998. 46(a) Captions referenced in 44(a) above. 46(b) Inapplicable.** 47, 48, 49 None. 50 Inapplicable.** 51 Inapplicable.** 52(a), 52(c) Basic Questions You May Have: To what extent can AGL vary the terms and conditions of the Policy in particular cases? Additional Information: Additional Rights That We Have. 52(b), 52(d) None. 53(a) Additional Information: Tax Effects--Our taxes. 53(b), 54 Inapplicable.** 55 Illustrations of Hypothetical Policy Benefits. 56-59 Inapplicable.**
* Registrant includes this Reconciliation and Tie in its Registration Statement in compliance with Instruction 4 as to the Prospectus as set out in Form S-6. Separate Account VL-R (Account) has previously filed a notice of registration as an investment company on Form N-8A under the Investment Company Act of 1940 (Act), and a Form N-8B-2 Registration Statement. Pursuant to Sections 8 and 30(b)(1) of the Act, Rule 30a-1 under the Act, and Forms N-8B-2 and N-SAR under that Act, the Account will keep its Form N-8B-2 Registration Statement current through the filing of periodic reports required by the Securities and Exchange Commission (Commission). ** Not required pursuant to either Instruction 1(a) as to the Prospectus as set out in Form S-6 or the administrative practice of the Commission and its staff of adapting the disclosure requirements of the Commission's registration statement forms in recognition of the differences between variable life insurance policies and other periodic payment plan certificates issued by investment companies and between separate accounts organized as management companies and unit investment trusts. KEY LEGACY PLUS Flexible Premium Variable Life Insurance Policy (the "Policy") Issued by American General Life Insurance Company ("AGL") HOME OFFICE: (Express Delivery) (US Mail) 2727-A Allen Parkway Variable Universal Life Houston, Texas 77019-2191 Administration PHONE: 1-888-436-4963 P.O. Box 4880 or 1-713-831-3443 Houston, Texas 77210-4880 FAX: 1-877-445-3098 This booklet is called the "prospectus." Investment options. You may use AGL's Separate Account VL-R ("Separate Account") to invest in the following variable investment options and change your selections from time to time:
- --------------------------------------------------------------------------------------------------------------------------- Victory Variable Insurance Funds American General Series Portfolio Putnam Variable Trust Company . Investment Quality Bond Fund . Money Market Fund . Putnam VT Diversified Income . Diversified Stock Fund Fund - Class IB . Small Company Opportunity Fund The Variable Annuity Life Key Asset Management Inc.* Insurance Company * Putnam Investment Management, Inc.* - --------------------------------------------------------------------------------------------------------------------------- Oppenheimer Variable Account Funds Templeton Variable Products American Century Variable Series Fund Portfolios, Inc. . Oppenheimer High Income Fund/VA . Templeton International Fund - . VP Value Fund Class 2 OppenheimerFunds, Inc.* Templeton Investment Counsel,Inc.* American Century Investment Management, Inc.* - --------------------------------------------------------------------------------------------------------------------------- Neuberger Berman Advisers Management Van Kampen Life Investment Trust AIM Variable Insurance Funds, Inc. Trust . Partners Portfolio . Emerging Growth Portfolio . AIM V.I. International Equity Fund Neuberger Berman Management Inc.* Van Kampen Asset Management A I M Advisors, Inc.* Inc.* - --------------------------------------------------------------------------------------------------------------------------- MFS Variable Insurance Trust Franklin Templeton Variable Insurance Products Trust . MFS Total Return Series . Franklin Small Cap Fund - Class 2 Massachusetts Financial Services Company* Franklin Advisers, Inc.* - ---------------------------------------------------------------------------------------------------------------------------
*The Investment Adviser of the investment option Separate prospectuses contain more information about the mutual funds ("Funds" or "Mutual Funds") in which we invest the accumulation value that you allocate to any of the above-listed investment options. The formal name of each such Fund is set forth in the chart that appears on page 1. Your investment results in any such option will depend on those of the related Fund. You should be sure you also read the prospectus of the Mutual Fund for any such investment option you may be interested in. You can request free copies of any or all of the Mutual Fund prospectuses from your AGL representative or from us at our Home Office listed on page 1. Other choices you have. During the insured person's lifetime, you may, within limits: (1) request an increase in the amount of insurance, (2) borrow or withdraw amounts you have invested, (3) choose when and how much you invest, and (4) choose whether your accumulation value under your Policy, upon the insured person's death, will be added to the insurance proceeds we otherwise will pay to the beneficiary. Charges and expenses. We deduct charges and expenses from the amounts you invest. These are described beginning on page 6. Right to return. If for any reason you are not satisfied with your Policy, you may return it to us and we will refund you the greater of (i) any premium payments received by us or (ii) your accumulation value plus any charges that have been deducted. To exercise your right to return your Policy, you must mail it directly to the Home Office address shown on the first page of this prospectus or return it to the AGL representative through whom you purchased the Policy within 10 days after you receive it. In a few states, this period may be longer. Because you have this right, we will invest your initial net premium payment in the money market investment option from the date your investment performance begins until the first business day that is at least 15 days later. Then we will automatically allocate your investment among the above-listed investment options as you have chosen. Any additional premium we receive during the 15-day period will also be invested in the money market division and allocated to the investment options at the same time as your initial net premium. We have designed this prospectus to provide you with information that you should have before investing in the Policies. Please read the prospectus carefully and keep it for future reference. Neither the Securities and Exchange Commission ("SEC") nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense. The Policies are not available in all states. The Policies are not insured by the FDIC or any other agency. They are not deposits or other obligations of any bank and are not bank guaranteed. They are subject to investment risks and possible loss of principal invested. This prospectus is dated _____________. 2 GUIDE TO THIS PROSPECTUS This prospectus contains information that you should know before you purchase Key Legacy Plus policy ("Policy") or exercise any of your rights or privileges under a Policy. Basic Information. Here are the page numbers in this prospectus where you may find answers to most of your questions:
Page to See in this Basic Questions You May Have Prospectus - ---------------------------- ---------- . How can I invest money in a Policy?................................... 4 . How will the value of my investment in a Policy change over time?..... 5 . What is the basic amount of insurance ("death benefit") that AGL pays when the insured person dies?.......................... 5 . What charges will AGL deduct from my investment in a Policy?.......... 6 . What charges and expenses will the Mutual Funds deduct from amounts I invest through my Policy?.................................. 8 . Must I invest any minimum amount in a Policy?......................... 10 . How can I change my Policy's investment options?...................... 10 . How can I change my Policy's insurance coverage?...................... 11 . What additional rider benefits might I select?........................ 11 . How can I access my investment in a Policy?........................... 12 . Can I choose the form in which AGL pays out proceeds from my Policy?.. 13 . To what extent can AGL vary the terms and conditions of the Policy in particular cases? 14 . How will my Policy be treated for income tax purposes?................ 15 . How do I communicate with AGL?........................................ 15
Illustrations of a hypothetical Policy. Starting on page 17, we have included some examples of how the values of a sample Policy would change over time, based on certain assumptions we have made. Because your circumstances may vary considerably from our assumptions, your AGL representative will also provide you with a similar sample illustration that is more tailored to your own circumstances and wishes. Underwriting. We will issue the Policy using either simplified underwriting or full underwriting based on our established guidelines. See the discussion regarding our underwriting process on page 14. Additional information. You may find the answers to any other questions you have under "Additional Information" beginning on page 23 or in the form of our Policy. A table of contents for the "Additional Information" portion of this prospectus also appears on page 23. You can obtain copies of our form of Policy from (and direct any other questions to) your AGL representative or our Home Office (shown on the first page of this prospectus). Financial statements. We have included certain financial statements of AGL. These begin on page Q-1. Special words and phrases. If you want more information about any words or phrases that you read in this prospectus, you may wish to refer to the Index of Words and Phrases that appears at the back of this prospectus. That index will tell you on what page you can read more about many of the words and phrases that we use. 3 BASIC QUESTIONS YOU MAY HAVE How can I invest money in a Policy? Premium payments. We call the investments you make in a Policy "premiums" or "premium payments." The amount we require as your initial premium varies depending on the specifics of your Policy and the insured person. We can refuse to accept a subsequent premium payment that is less than $50. Otherwise, with a few exceptions mentioned below, you can make premium payments at any time and in any amount. Premium payments we receive after your right to return expires, as discussed on page 2, will be allocated upon receipt to the available investment options you have chosen. Limits on premium payments. Federal tax law limits your ability to make certain very large amounts of premium payments (relative to the amount of your Policy's insurance coverage) and may impose penalties on amounts you take out of your Policy if you do not observe certain additional requirements. We will monitor your premium payments, however, to be sure that you do not exceed permitted amounts or inadvertently incur any tax penalties. Also, in certain limited circumstances (if your Policy is determined to be a "modified endowment contract" or if additional premiums cause the death benefit to increase more than the accumulation value), we may refuse to accept an additional premium if the insured person does not provide us with adequate evidence that he/she continues to meet our requirements for issuing insurance. These tax law requirements and a discussion of modified endowment contracts are summarized further under "Tax Effects" beginning on page 24. Ways to pay premiums. You may pay premiums by check or money order drawn on a U.S. bank in U.S. dollars and made payable to "American General Life Insurance Company," or "AGL." Premiums after the initial premium must be sent directly to our Home Office. We also accept premium payments by bank draft, wire, or by exchange from another insurance company. You may obtain further information about how to make premium payments by any of these methods from your AGL representative or from our Home Office shown on the first page of this prospectus. Dollar cost averaging. Dollar cost averaging is an investment strategy designed to reduce the risks that result from market fluctuations. The strategy spreads the allocation of your accumulation value over a period of time. This allows you to reduce the risk of investing most of your funds at a time when prices are high. The success of this strategy depends on market trends and is not guaranteed. Under dollar cost averaging, we automatically make transfers of your accumulation value from the money market investment option to one or more of the other investment options that you choose. You tell us whether you want these transfers to be made monthly, quarterly, semi-annually or annually. We make the transfers as of the end of the valuation period that contains the day of the month that you select other than the 29th, 30th or 31st day of the month. The term "valuation period" is described on page 32. You must have at least $5,000 of accumulation value to start dollar cost averaging and each transfer under the program must be at least $100. You cannot participate in dollar cost averaging while also using automatic rebalancing (discussed below). Dollar cost averaging ceases upon your request, or if your accumulation value in the money market option becomes exhausted. We do not charge you for using this service. 4 Automatic rebalancing. This feature automatically rebalances the proportion of your accumulation value in each investment option under your Policy to correspond to your then current premium allocation designation. You tell us whether you want us to do the rebalancing quarterly, semi-annually or annually. The date automatic rebalancing occurs will be based on the date of issue of your Policy. For example, if your Policy is dated January 17, and you have requested automatic rebalancing on a quarterly basis, automatic rebalancing will start on April 17, and will occur quarterly thereafter. Automatic rebalancing will occur as of the end of the valuation period that contains the date of the month your Policy was issued. You must have a total accumulation value of at least $5,000 to begin automatic rebalancing. You cannot participate in this program while also participating in dollar cost averaging (discussed above). Rebalancing ends upon your request. We do not charge you for using this feature. How will the value of my investment in a Policy change over time? Your accumulation value. From each premium payment you make, we deduct the charges that we describe on page 6 under "Deductions from each premium payment." We invest the rest in one or more of the investment options listed on the first page of this prospectus. We call the amount that is at any time invested under your Policy (including any loan collateral we are holding for your Policy loans) your "accumulation value." Your investment options. We invest the accumulation value that you have allocated to any investment option in shares of a corresponding Mutual Fund. Over time, your accumulation value in any investment option will increase or decrease by the same amount as if you had invested in the related Fund's shares directly (and reinvested all dividends and distributions from the Fund in additional Fund shares); except that your accumulation value will also be reduced by certain charges that we deduct. We describe these charges beginning on page 6 under "What charges will AGL deduct from my investment in a Policy?" You can review other important information about the Mutual Funds that you can choose in the separate prospectuses for those Funds. This includes information about the investment performance that each Fund's investment manager has achieved. You can request additional free copies of these prospectuses from your AGL representative or from our Home Office shown on the first page of this prospectus. Policies are "non-participating." You will not be entitled to any dividends from AGL. What is the basic amount of insurance ("death benefit") that AGL pays when the insured person dies? Your specified amount of insurance. In your application to buy Key Legacy Plus Policy, you will tell us how much life insurance coverage you want on the life of the insured person. We call this the "specified amount" of insurance. Your death benefit. The basic death benefit we will pay is reduced by any outstanding Policy loans. You also choose whether the basic death benefit we will pay is . Option 1--The specified amount on the date of the insured person's death; or . Option 2--The specified amount plus the Policy's accumulation value on the date of death. 5 Under Option 2, your death benefit will tend to be higher than under Option 1. However, the monthly insurance charge we deduct will also be higher to compensate us for our additional risk. Because of this, your accumulation value will tend to be higher under Option 1 than under Option 2. We will automatically pay an alternative basic death benefit if it is higher than the basic Option 1 or Option 2 death benefit (whichever you have selected). The alternative basic death benefit is computed by multiplying your Policy's accumulation value on the insured person's date of death by the following percentages: TABLE OF ALTERNATIVE BASIC DEATH BENEFITS AS A PERCENTAGE MULTIPLE OF POLICY ACCUMULATION VALUE
Insured's Insured's Age on % of Age on % of Policy Accumulation Policy Accumulation Anniversary* Value Anniversary Value ------------- ----- ----------- ----- 0-40 250 60 130 41 243 61 128 42 236 62 126 43 229 63 124 44 222 64 122 45 215 65 120 46 209 66 119 47 203 67 118 48 197 68 117 49 191 69 116 50 185 70 115 51 178 71 113 52 171 72 111 53 164 73 109 54 157 74 107 55 150 75-90 105 56 146 91 104 57 142 92 103 58 138 93 102 59 134 94 101 95+ 100
________ * Nearest birthday at the beginning of the Policy year in which the insured person dies. What charges will AGL deduct from my investment in a Policy? Deductions from each premium payment. There is currently no deduction from each premium payment you make. However, we have the right at any time to assess a charge not to exceed more than 1.5% on all 6 future premium payments for the costs associated with the issuance of the Policy and administrative services we perform. Daily Charge. We will deduct a daily charge based on either the guaranteed rate or the current rate (if lower than the guaranteed rate) for the costs associated with the mortality and expense risks we assume under the Policy. . The guaranteed daily charge will be at an annual effective rate of .90% for the first 10 Policy Years, .65% for Policy Years 11 - 20 and .40% thereafter. The guaranteed daily deduction charges are .15% higher than the current daily charges. The guaranteed daily deduction charges are the maximums we may charge; we may charge less, but we can never charge more. . The current daily charge will be at an annual effective rate of .75% of your accumulation value that is then being invested in any of the investment options. After a Policy has been in effect for 10 years, we intend to reduce the rate of the current charge to .50%, and after 20 years, we intend to further reduce the current charge to .25%. We may change the applicable current charge at any time as long as the charge does not exceed the guaranteed daily charge. Monthly insurance charge. Every month we will deduct from your accumulation value a charge based on the cost of insurance rates applicable to your Policy on the date of the deduction and our "amount at risk" on that date. Our amount at risk is the difference between (a) the death benefit that would be payable before reduction by policy loans if the insured person died on that date and (b) the then total accumulation value under the Policy. For otherwise identical Policies, a greater amount at risk results in a higher monthly insurance charge. The current monthly insurance charge has been designed primarily to provide funds out of which we can make payments of death benefits under the Policy as insured persons die. For otherwise identical Policies, a higher cost of insurance rate also results in a higher monthly insurance charge. Our cost of insurance rates are guaranteed not to exceed those that will be specified in your Policy. We will offer the Policy on a simplified issue method based on our established guidelines, including that the specified amount of the Policy cannot exceed $250,000. Our cost of insurance rates will generally be higher for a simplified issue Policy. In general, our cost of insurance rates increase with the insured person's age. The longer you own your Policy, the higher the cost of insurance rate will be. Also our cost of insurance rates will generally be lower if the insured person is a female than if a male (except in Montana where such costs cannot be based on gender). Similarly, our current cost of insurance rates are generally lower for non- smokers than smokers. Insured persons who present particular health, occupational or non-work related risks may be charged higher cost of insurance rates and other additional charges based on the specified amount of insurance coverage under their Policy. Our cost of insurance rates also are generally higher under a Policy that has been in force for some period of time than they would be under an otherwise identical Policy purchased more recently on the same insured person. 7 Transaction Fee. The fee for each partial surrender you make will be the lesser of 2% of the amount withdrawn or $25 to cover administrative services. This charge will be deducted from the remaining accumulation value in the investment options in the same ratio as the requested partial surrender. Charge for taxes. We can make a charge in the future for federal or state taxes we incur or reserves we set aside for taxes in connection with the Policies. This would reduce the investment experience of your accumulation value. Allocation of charges. You may choose the investment options from which we deduct all monthly charges. If you do not have enough accumulation value in the investment options you have chosen, we will deduct these charges in proportion to the amount of accumulation value you then have in each investment option. For a further discussion regarding the charges we will deduct from your investment in a Policy, see "More About Policy Charges" on page 30. What charges and expenses will the Mutual Funds deduct from amounts I invest through my Policy? Each Mutual Fund pays its investment management fees and other operating expenses. Because they reduce the investment return of a Fund, these fees and expenses also will reduce indirectly the return you will earn on any accumulation value that you have invested in that Fund. Current and future fees and expenses may vary from the fiscal year 1998 fees and expenses. The charges and expenses for fiscal year 1998 are as follows: The Mutual Funds' Annual Expenses (as a percentage of average net assets).
Fund Other Fund Total Fund Management Operating Operating Fees (After Expenses( After Expenses (After Expense Expense Expense Name of Fund Reimbursement) 12b-1 Reimbursement) Reimbursement) ------------ -------------- ----- -------------- -------------- The following fund of AIM Variable Insurance Funds, Inc./1/ AIM V.I. International Equity Fund...... 0.75% 0.16% 0.91% The following fund of American General Series Portfolio Company/1/ Money Market Fund....................... 0.50% 0.04% 0.54%
(footnotes begin on page 10) 8
Fund Other Fund Total Fund Management Operating Operating Fees (After Expenses( After Expenses (After Expense Expense Expense Name of Fund Reimbursement) 12b-1 Reimbursement) Reimbursement) ------------ -------------- ----- -------------- -------------- The following fund of Neuberger Berman Advisers Management Trust/1/ Partners Portfolio............................. 0.78% 0.06% 0.84% The following fund of Putnam Variable Trust/1/ Putnam VT Diversified Income Fund - Class IB/3/............................. 0.50% 0.11% 0.08% 0.69% The following fund of Templeton Variable Products Series Fund/1, 4/ Templeton International Fund - Class 2/3/...... 0.69% 0.25% 0.17% 1.11% The following fund of Oppenheimer Variable Account Funds/1/ Oppenheimer High Income Fund V/A............... 0.74% 0.04% 0.78% The following funds of Victory Variable Insurance Funds/1/ Investment Quality Bond Fund/2/................ 0.00% 0.60% 0.60% Diversified Stock Fund/2/...................... 0.00% 0.75% 0.75% Small Company Opportunity Fund/2/.............. 0.00% 0.75% 0.75% The following fund of American Century Variable Portfolios, Inc./1/ VP Value Fund.................................. 0.85% 0.15% 1.00% The following fund of MFS Variable Insurance Trust/1/ MFS Total Return Series........................ 0.75% 0.16% 0.91% The following fund of Van Kampen Life Investment Trust/1/............... Emerging Growth Portfolio/2/................... 0.32% 0.53% 0.85% The following fund of Franklin Templeton Variable Insurance Products Trust/1/ Franklin Small Cap Fund - Class 2/3/........... 0.75% 0.25% 0.02% 1.02%
______________________ (footnotes on next page) 9 /1/Certain of the Mutual Funds' advisers or administrators have entered into service agreements with AGL. Under these arrangements, the advisers or administrators pay fees to AGL for certain administrative services. The fees do not have a direct relationship to the Mutual Funds' Annual Expenses. (See "Miscellaneous" under "More About Policy Charges.") /2/If certain voluntary expense reimbursements from the investment adviser were terminated, management fees and other expenses for the fiscal year ended in 1998 would have been as set out in the following table.
Other Total Fund Fund Fund Management Operating Operating Name of Fund Fees Expenses Expenses ------------ ---- -------- -------- Victory Investment Quality Bond Fund.... 0.20% 3.80% 4.00% Victory Diversified Stock Fund.......... 0.30% 3.70% 4.00% Victory Small Company Opportunity Fund.. 0.30% 3.70% 4.00% Van Kampen Emerging Growth Portfolio.... 0.70% 0.53% 1.23%
/3/The prospectus for Putnam Variable Trust under "Distribution Plan" discusses this fund's 12b-1 fee. The prospectuses for Templeton Variable Products Series Fund and Franklin Templeton Variable Insurance Products Trust under "Distribution and Services (12b-1) Fees" discuss each fund's 12b-1 fees. /4/On February 8, 2000, a shareholders' meeting will be held to approve a proposal to merge the funds of Templeton Variable Products Series Fund into similar corresponding funds of Franklin Templeton Variable Insurance Product Trust (the "Reorganization"). If approved, this Reorganization will be completed around May 1, 2000. Must I invest any minimum amount in a Policy? Planned periodic premiums. Page 3 of your Policy will specify a "Planned Periodic Premium." This is the amount that you (within limits) choose to have us bill you. Our current practice is to bill quarterly, semi-annually or annually. However, payment of these or any other specific amounts of premiums is not mandatory. After payment of your initial premium, you need only invest enough to ensure your Policy's cash surrender value stays above zero. The less you invest, the more likely it is that your Policy's cash surrender value could fall to zero, as a result of the deductions we periodically make from your accumulation value. Policy lapse and reinstatement. If your Policy's cash surrender value does fall to zero, we will notify you and give you a grace period of 61 days to pay at least the amount we estimate is necessary to keep your Policy in force for a reasonable time. If we do not receive your payment by the end of the grace period, your Policy will end without value and all coverage under your Policy will cease. Although you can apply to have your Policy "reinstated," you must do this within 5 years (or, if earlier, before the Policy's maturity date), and you must present evidence that the insured person still meets our requirements for issuing coverage. Also, you will have to pay enough premium to keep your Policy in force for two months as well as pay or reinstate any indebtedness. In the Policy, you will find additional information about the values and terms of a Policy after it is reinstated. 10 How can I change my Policy's investment options? Future premium payments. You may at any time change the investment options in which future premiums you pay will be invested. Your allocation must, however, be in whole percentages that total 100%. Transfers of existing accumulation value. You may also transfer your existing accumulation value from one investment option under the Policy to another free of charge. You may make transfers at any time. Unless you are transferring the entire amount you have in an investment option, each transfer must be at least $500. See "Additional Rights That We Have" on page 36. Market Timing. The Policy is not designed for professional market 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. How can I change my Policy's insurance coverage? Increase in coverage. You may at any time request an increase in the specified amount of coverage under your Policy. You must, however, provide us with satisfactory evidence that the insured person continues to meet our requirements for issuing insurance coverage. We treat an increase in specified amount in many respects as if it were the issuance of a new Policy. The monthly insurance charge for the increase will be based on the age and risk class of the insured person at the time of the increase. Decrease in Coverage. After the first Policy year, you may request a reduction in the specified amount of coverage, but not below certain minimums. After any decrease, the death benefit amount cannot be less than the greater of (i) $50,000, and (ii) any death benefit amount which, upon comparing such amounts to the sums already paid, would result in an excess of premium payments. Change of death benefit option. You may at any time request us to change your coverage from death benefit Option 1 to 2 or vice-versa. . If you change from Option 1 to 2, we also automatically reduce your Policy's specified amount of insurance by the amount of your Policy's accumulation value (but not below zero) at the time of the change. . If you change from Option 2 to 1, we automatically increase your Policy's specified amount by the amount of your Policy's accumulation value. Tax consequences of changes in insurance coverage. Please read "Tax Effects" starting on page 24 of this prospectus to learn about possible tax consequences of changing your insurance coverage under your Policy. 11 What additional rider benefits might I select? You can request that your Policy include the maturity extension rider benefit described below. Eligibility for and changes in this benefit are subject to our rules and procedures as in effect from time to time. More details are included in the form of the rider, which we suggest that you review if you choose this benefit. Maturity Extension Rider ------------------------ . This rider permits you to extend the Policy's maturity date beyond what it otherwise would be. The rider provides for a death benefit after the original maturity date that is equal to the accumulation value on the date of death. With this rider, all accumulation value that is in the separate account can remain there. . In this rider, only the insurance coverage associated with the base policy will be extended beyond the original maturity date. No additional premium payments, new loans, monthly insurance charge, or changes in specified amount will be allowed after the original maturity date. There is no charge for this rider except for a flat monthly charge of no more than $10 each month after the original maturity date. . Extension of the maturity date beyond the insured person's age 100 may result in the current taxation of increases in your Policy's accumulation value as a result of interest or investment experience after that time. You should consult a qualified tax adviser before making such an extension. How can I access my investment in a Policy? Full surrender. You may at any time, without charge, surrender your Policy in full. If you do, we will pay you the accumulation value, less any Policy loans. We call this amount your "cash surrender value." Partial surrender. You may, at any time after the first Policy year, make a partial surrender of your Policy's cash surrender value. A partial surrender must be at least $500. If the Option 1 death benefit is then in effect, we will also automatically reduce your Policy's specified amount of insurance by the amount of your withdrawal and any related charges. You may choose the investment option or options from which money that you withdraw will be taken. Otherwise, we will allocate the withdrawal in the same proportions as then apply for deducting monthly charges under your Policy or, if that is not possible, in proportion to the amount of accumulation value you then have in each investment option. Exchange of Policy in Certain States. Certain states require that a policy owner be given the right to exchange the Policy for a fixed benefit life insurance policy, within either 18 or 24 months from the date of issue. This right is subject to various conditions imposed by the states and us. In such states, this right has been more fully described in your Policy or related endorsements to comply with the applicable state requirements. 12 Transaction Fee. The fee for each partial surrender you make will be the lesser of 2% of the amount withdrawn or $25 to cover administrative services. This charge will be deducted from the remaining accumulation value in the investment options in the same ratio as the requested partial surrender. Policy loans. You may at any time borrow from us an amount equal to your Policy's cash surrender value less the interest that will be payable on your loan through your next Policy anniversary. This rule is not applicable in all states. The minimum amount of each loan is $500. We remove from your investment options an amount equal to your loan and hold that amount as additional collateral for the loan. We will credit your Policy with interest on this collateral amount at an effective annual rate of 4% (rather than any amount you could otherwise earn in one of our investment options), and we will charge you interest on your loan at an effective annual rate of 4.75%. Loan interest is payable annually, on the Policy anniversary, in advance, at a rate of 4.54%. Any amount not paid by its due date will automatically be added to the loan balance as an additional loan. Interest you pay on Policy loans will not, in most cases, be deductible on your tax returns. You may choose which of your investment options the loan will be taken from. If you do not so specify, we will allocate the loan in the same way that charges under your Policy are being allocated. If this is not possible, we will make the loan pro-rata from each investment option that you then are using. You may repay all or part (but not less than $500) of your loan at any time before the death of the insured while the Policy is in force. You must designate any loan repayment as such. Otherwise, we will treat it as a premium payment instead. We will invest any additional loan repayments you make in the investment options you request. In the absence of such a request we will invest the repayment in the same proportion as you then have selected for premium payments that we receive from you. Any unpaid loan will be deducted from the proceeds we pay following the insured person's death. Preferred loan interest rate. We will credit a higher interest rate, but not more than 4.75%, on an amount of the collateral securing Policy loans taken out after the first 10 Policy years. The maximum amount of new loans that will receive this preferred loan interest rate for any year is: . 10% of your Policy's accumulation value (including any loan collateral we are holding for your Policy loans) at the beginning of the Policy year; or . if less, your Policy's maximum remaining loan value at that anniversary. We intend to set the rate of interest we credit to your preferred collateral amount equal to the loan interest rate you are paying, resulting in a zero net cost of borrowing for that amount. We have full discretion to vary the preferred rate, provided that it will always be greater than the rate we are then crediting in connection with regular Policy loans, and will never be less than an effective annual rate of 4.5%. Because we first offered the Policies in 2000, we have not yet applied the preferred loan interest rate to any Policy loan amounts. Maturity of your Policy. If the insured person is still living on the "Maturity Date" shown on page 3 of your Policy, we will automatically pay you the cash surrender value of the Policy, and the Policy will end. The maturity date is the Policy anniversary nearest the insured person's 100th birthday. 13 Can I choose the form in which AGL pays out the proceeds from my Policy? Choosing a payment option. You may choose to receive the full proceeds from the Policy as a single sum. This includes proceeds that become payable upon the death of the insured person, full surrender or the maturity date. Alternatively, you may elect that all or part of such proceeds be applied to one or more of the following payment options: . Option 1--Equal monthly payments for a specified period of time. . Option 2--Equal monthly payments of a specified amount until all amounts are paid out. . Option 3--Equal monthly payments for the payee's life, but with payments guaranteed for a specified number of years. These payments are based on annuity rates that are set forth in the Policy or, at the payee's request, the annuity rates that we then are using. . Option 4--Proceeds left to accumulate with interest. Additional payment options may also be available with our consent. We have the right to veto any payment option, if the payee is a corporation or other entity. You can read more about each of these options in our Policy form and in the separate form of payment contract that we issue when any such option takes effect. Within 60 days after the insured person's death, any payee entitled to receive proceeds as a single sum may elect one or more payment options. Interest rates that we credit under each option will be at least 3%. Change of payment option. You may change any payment option you have elected at any time while the Policy is in force and before the start date of the payment option. Tax impact. If a payment option is chosen, you or your beneficiary may have tax consequences. You should consult with a qualified tax adviser before deciding whether to elect one or more payment options. To what extent can AGL vary the terms and conditions of the Policy in particular cases? Listed below are some variations we may make in the terms and conditions of a Policy. Any variations will be made only in accordance with uniform rules that we establish. Underwriting. We use two underwriting methods to issue a Policy, simplified underwriting and full underwriting, which are described below. We reserve the right to request additional information or reject an application for any reason under either underwriting procedure. . Simplified Underwriting - Any Policy with a specified amount of $250,000 or lower must be issued based on simplified underwriting. Our guidelines include that the proposed insured must answer limited health questions and certain medical records are required. The Policy specified amount is limited to $250,000, and any requested increases in specified amount are considered 14 under full underwriting only. Additionally, a proposed insured who is rejected under simplified underwriting cannot be considered for full underwriting. . Full Underwriting - Any Policy that has a specified amount of over $250,000 must be issued based on full underwriting. Our guidelines include medical exams or tests and other satisfactory evidence of insurability. Policies purchased through "internal rollovers." We maintain published rules that describe the procedures necessary to replace the other life insurance we issue with a Policy. Not all types of other insurance we issue are eligible to be replaced with a Policy. Our published rules may be changed from time to time, but are evenly applied to all our customers. Policies purchased through term life conversions. We maintain rules about how to convert term insurance to Key Legacy Plus Policy. This is referred to as a term conversion. Term conversions are available to owners of term life insurance we have issued. Any right to a term conversion is stated in the term life insurance policy. Again, our published rules about term conversions may be changed from time to time, but are evenly applied to all our customers. State law requirements. AGL is subject to the insurance laws and regulations in every jurisdiction in which Key Legacy Plus Policies are sold. As a result, various time periods and other terms and conditions described in this prospectus may vary depending on where you reside. These variations will be reflected in your Policy and related endorsements. Variations in expenses or risks. AGL may vary the charges and other terms of the Policy where special circumstances result in sales, administrative or other expenses, mortality risks or other risks that are different from those normally associated with the Policy. How will my Policy be treated for income tax purposes? Generally, death benefits paid under a Policy are not subject to income tax, and earnings on your accumulation value are not subject to income tax as long as we do not pay them out to you. If we do pay any amount of your Policy's accumulation value upon surrender, partial surrender, or maturity of your Policy, all or part of that distribution may be treated as a return of the premiums you paid, which is not subject to income tax. Amounts you receive as Policy loans are not taxable to you, unless you have paid such a large amount of premiums that your Policy becomes what the tax law calls a "modified endowment contract." In that case, the loan will be taxed as if it were a partial surrender. Furthermore, loans, partial surrenders and other distributions from a modified endowment contract may require you to pay additional taxes and penalties that otherwise would not apply. For further information about the tax consequences of owning a Policy, please read "Tax Effects" starting on page 24. 15 How do I communicate with AGL? When we refer to "you," we mean the person who is authorized to take any action with respect to a Policy. Generally, this is the owner named in the Policy. Where a Policy has more than one owner, each owner generally must join in any requested action, except for transfers and changes in the allocation of future premiums or changes among the investment options. General. You should mail or express checks and money orders for premium payments and loan repayments directly to our Home Office. The following requests must be made in writing and signed by you: . transfer of accumulation value; . loan; . full surrender; . partial surrender; . change of beneficiary or contingent beneficiary; . change of allocation percentages for premium payments; . loan repayments or charges; . change of death benefit option or manner of death benefit payment; . changes in specified amount; . addition or cancellation of, or other action with respect to, election of a payment option for Policy proceeds; . tax withholding elections; and . telephone transaction privileges. You should mail or express these requests to our Home Office at the appropriate address shown on the first page of this prospectus. You should also communicate notice of the insured person's death, and related documentation, to our Home Office. We have special forms which should be used for loans, assignments, partial and full surrenders, changes of owner or beneficiary, and all other contractual changes. You will be asked to return your Policy when you request a full surrender. You may obtain these forms from our Home Office or from your AGL representative. Each communication must include your name, Policy number and, if you are not the 16 insured person, that person's name. We cannot process any requested action that does not include all required information. Telephone transactions. If you have a completed telephone authorization form on file with us, you may make transfers, or change the allocation of future premium payments or deduction of charges, by telephone, subject to the terms of the form. We will honor telephone instructions from any person who provides the correct information, so there is a risk of possible loss to you if unauthorized persons use this service in your name. Our current procedure is that only the owner or your AGL representative may make a transfer request by phone. We are not liable for any acts or omissions based upon instructions that we reasonably believe to be genuine. Our procedures include verification of the Policy number, the identity of the caller, both the insured person's and owner's names, and a form of personal identification from the caller. We will mail you a prompt written confirmation of the transaction. If (a) many people seek to make telephone requests at or about the same time, or (b) our recording equipment malfunctions, it may be impossible for you to make a telephone request at the time you wish. You should submit a written request if you cannot make a telephone transfer. Also, if, due to malfunction or other circumstances, the recording of your telephone request is incomplete or not fully comprehensible, we will not process the transaction. The phone number for telephone requests is 1-888-436-4963. ILLUSTRATIONS OF HYPOTHETICAL POLICY BENEFITS To help explain how our Policy works, we have prepared the following tables:
Page to See in this Prospectus ---------- Death Benefit Option 1--Simplified Underwriting/Current Charges................. 19 Death Benefit Option 1--Full Underwriting/Current Charges....................... 20 Death Benefit Option 1--Simplified Underwriting/Guaranteed Maximum Charges...... 21 Death Benefit Option 1--Full Underwriting/Guaranteed Maximum Charges............ 22
The tables show how death benefits, accumulation values, and cash surrender values ("Policy benefits") under a sample Key Legacy Plus Policy would change over time if the investment options had constant hypothetical gross annual investment returns of 0%, 6% or 12% over the years covered by each table. The tables are for a 45 year-old male non-tobacco user. A single premium payment of $56,279 for an initial $250,000 or $250,001 of specified amount of coverage is assumed to be paid at issue. The illustrations assume no Policy loan has been taken. As illustrated, this Policy would be classified as a modified endowment contract (See "Tax Effects" in Additional Information for further discussion). Although the tables below do not include an example of a Policy with an Option 2 death benefit, such a Policy would have higher death benefits and lower cash surrender values. Separate tables are included to show both current and guaranteed maximum charges under both simplified underwriting and full underwriting. We have used the maximum specified amount of $250,000 for the simplified underwriting table and the minimum specified amount of $250,001 for the full underwriting table to show the applicable investment results. 17 . The charges assumed in the current charge tables include a daily charge at an annual effective rate of .75% for the first 10 Policy years, .50% for Policy years 11--20, and .25% thereafter and current monthly insurance charges. . The guaranteed maximum charge tables assume that these charges will include a daily charge at an annual effective rate of .90% for the first 10 Policy years, .65% for Policy years 11--20, and .40% thereafter, and an additional charge of 1.5% of every premium and guaranteed maximum insurance charges. The charges assumed by both the current and guaranteed maximum charge tables also include Mutual Fund expenses equal to .83% of aggregate Mutual Fund assets, which is the arithmetic average of the advisory fees payable with respect to each Mutual Fund, after all reimbursements, plus the arithmetic average of all other operating expenses of each such Fund after all reimbursements, as reflected on pages 8 - 10 of this prospectus. We expect the reimbursement arrangements to continue in the future. If the reimbursement arrangements were not currently in effect, the arithmetic average of Mutual Fund expenses would equal 1.91% of aggregate Mutual Fund assets. Individual illustrations. On request, we will furnish you with a comparable illustration based on your Policy's characteristics. If you request illustrations more than once in any Policy year, we may charge $25 for the illustration. 18 Key Legacy Plus Single Premium $ 56,279 Initial Specified Amount $250,000 Death Benefit Option 1 Male Age 45 Simplified Underwriting Nonsmoker Assuming Current Charges
Death Benefit Accumulation Value Cash Surrender Value End of Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross Policy Annual Investment Return of Annual Investment Return of Annual Investment Return of Year 0.0% 6.0% 12.0% 0.0% 6.0% 12.0% 0.0% 6.0% 12.0% 1 250,000 250,000 250,000 54,549 57,880 61,212 54,549 57,880 61,212 2 250,000 250,000 250,000 52,735 59,454 66,573 52,735 59,454 66,573 3 250,000 250,000 250,000 50,869 61,034 72,448 50,869 61,034 72,448 4 250,000 250,000 250,000 49,034 62,703 78,976 49,034 62,703 78,976 5 250,000 250,000 250,000 47,145 64,385 86,151 47,145 64,385 86,151 6 250,000 250,000 250,000 45,231 66,108 94,076 45,231 66,108 94,076 7 250,000 250,000 250,000 43,235 67,826 102,791 43,235 67,826 102,791 8 250,000 250,000 250,000 41,315 69,680 112,510 41,315 69,680 112,510 9 250,000 250,000 250,000 39,386 71,604 123,280 39,386 71,604 123,280 10 250,000 250,000 200,000 37,424 73,579 135,205 37,424 73,579 135,205 15 250,000 250,000 295,062 28,164 86,069 220,195 28,164 86,069 220,195 20 250,000 250,000 439,874 16,589 100,281 360,552 16,589 100,281 360,552
The values will change if premiums are paid in different amounts or frequencies. The investment results are an example only and are not a representation of past or future investment results. Actual investment results may be more or less than those shown. 19 Key Legacy Plus Single Premium $ 56,279 Initial Specified Amount $250,001 Death Benefit Option 1 Male Age 45 Full Underwriting Nonsmoker Assuming Current Charges
Death Benefit Accumulation Value Cash Surrender Value End of Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross Policy Annual Investment Return of Annual Investment Return of Annual Investment Return of Year 0.0% 6.0% 12.0% 0.0% 6.0% 12.0% 0.0% 6.0% 12.0% 1 250,001 250,001 250,001 55,034 58,376 61,719 55,034 58,376 61,719 2 250,001 250,001 250,001 53,702 60,466 67,629 53,702 60,466 67,629 3 250,001 250,001 250,001 52,425 62,688 74,201 52,425 62,688 74,201 4 250,001 250,001 250,001 51,088 64,938 81,397 51,088 64,938 81,397 5 250,001 250,001 250,001 49,703 67,231 89,300 49,703 67,231 89,300 6 250,001 250,001 250,001 48,280 69,578 97,999 48,280 69,578 97,999 7 250,001 250,001 250,001 46,821 71,988 107,587 46,821 71,988 107,587 8 250,001 250,001 250,001 45,324 74,462 118,163 45,324 74,462 118,163 9 250,001 250,001 250,001 43,775 76,994 129,831 43,775 76,994 129,831 10 250,001 250,001 250,001 42,149 79,564 142,702 42,149 79,564 142,702 15 250,001 250,001 312,452 33,385 94,482 233,173 33,385 94,482 233,173 20 250,001 250,001 465,799 21,694 111,315 381,803 21,694 111,315 381,803
The values will change if premiums are paid in different amounts or frequencies. The investment results are an example only and are not a representation of past or future investment results. Actual investment results may be more or less than those shown. 20 Key Legacy Plus Single Premium $ 56,279 Initial Specified Amount $ 250,000 Death Benefit Option 1 Male Age 45 Simplified Underwriting Nonsmoker Assuming Guaranteed Charges
Death Benefit Accumulation Value Cash Surrender Value End of Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross Policy Annual Investment Return of Annual Investment Return of Annual Investment Return of Year 0.0% 6.0% 12.0% 0.0% 6.0% 12.0% 0.0% 6.0% 12.0% 1 250,000 250,000 250,000 53,599 56,873 60,148 53,599 56,873 60,148 2 250,000 250,000 250,000 51,716 58,309 65,295 51,716 58,309 65,295 3 250,000 250,000 250,000 49,785 59,742 70,923 49,785 59,742 70,923 4 250,000 250,000 250,000 47,782 61,151 77,068 47,782 61,151 77,068 5 250,000 250,000 250,000 45,704 62,534 83,790 45,704 62,534 83,790 6 250,000 250,000 250,000 43,552 63,894 91,160 43,552 63,894 91,160 7 250,000 250,000 250,000 41,299 65,206 99,236 41,299 65,206 99,236 8 250,000 250,000 250,000 38,918 66,447 108,087 38,918 66,447 108,087 9 250,000 250,000 250,000 36,407 67,617 117,812 36,407 67,617 117,812 10 250,000 250,000 250,000 33,738 68,689 128,508 33,738 68,689 128,508 15 250,000 250,000 273,273 17,625 72,975 203,935 17,625 72,975 203,935 20 0 250,000 398,788 0 71,575 326,875 0 71,575 326,875
The values will change if premiums are paid in different amounts or frequencies. The investment results are an example only and are not a representation of past or future investment results. Actual investment results may be more or less than those shown. 21 Key Legacy Plus Single Premium $ 56,279 Initial Specified Amount $ 250,001 Death Benefit Option 1 Male Age 45 Full Underwriting Nonsmoker Assuming Guaranteed Charges
Death Benefit Accumulation Value Cash Surrender Value End of Assuming Hypothetical Gross Assuming Hypothetical Gross Assuming Hypothetical Gross Policy Annual Investment Return of Annual Investment Return of Annual Investment Return of Year 0.0% 6.0% 12.0% 0.0% 6.0% 12.0% 0.0% 6.0% 12.0% 1 250,001 250,001 250,001 53,599 56,873 60,149 53,599 56,873 60,149 2 250,001 250,001 250,001 51,716 58,309 65,295 51,716 58,309 65,295 3 250,001 250,001 250,001 49,785 59,742 70,923 49,785 59,742 70,923 4 250,001 250,001 250,001 47,782 61,151 77,068 47,782 61,151 77,068 5 250,001 250,001 250,001 45,704 62,535 83,790 45,704 62,535 83,790 6 250,001 250,001 250,001 43,552 63,894 91,160 43,552 63,894 91,160 7 250,001 250,001 250,001 41,299 65,206 99,236 41,299 65,206 99,236 8 250,001 250,001 250,001 38,918 66,448 108,087 38,918 66,448 108,087 9 250,001 250,001 250,001 36,407 67,617 117,813 36,407 67,617 117,813 10 250,001 250,001 250,001 33,738 68,689 128,508 33,738 68,689 128,508 15 250,001 250,001 273,274 17,625 72,976 203,936 17,625 72,976 203,936 20 0 250,001 398,790 0 71,576 326,877 0 71,576 326,877
The values will change if premiums are paid in different amounts or frequencies. The investment results are an example only and are not a representation of past or future investment results. Actual investment results may be more or less than those shown. 22 ADDITIONAL INFORMATION A general overview of the Policy appears at page 1 - 22. The additional information that follows gives more details, but generally does not repeat what is set forth above.
Page to See in this Contents of Additional Information Prospectus - ---------------------------------- ---------- AGL....................................................... 23 Separate Account VL-R..................................... 24 Tax Effects............................................... 24 Voting Privileges......................................... 29 Your Beneficiary.......................................... 30 Assigning Your Policy..................................... 30 More About Policy Charges................................. 30 Effective Date of Policy and Related Transactions......... 32 Distribution of the Policies.............................. 33 Payment of Policy Proceeds................................ 34 Adjustments to Death Benefit.............................. 35 Additional Rights That We Have............................ 36 Performance Information................................... 36 Our Reports to Policy Owners.............................. 37 AGL's Management.......................................... 37 Principal Underwriter's Management........................ 40 Legal Matters............................................. 42 Independent Auditors...................................... 42 Actuarial Expert.......................................... 42 Services Agreement........................................ 42 Certain Potential Conflicts............................... 42 Year 2000 Considerations.................................. 43
Special words and phrases. If you want more information about any words or phrases that you read in this prospectus, you may wish to refer to the Index of Words and Phrases that appears at the end of this prospectus (page 46, which follows all of the financial pages). That index will tell you on what page you can read more about many of the words and phrases that we use. AGL We are American General Life Insurance Company ("AGL"). AGL is a stock life insurance company organized under the laws of Texas. AGL is a successor in interest to a company originally organized under the laws of Delaware on January 10, 1917. AGL is an indirect, wholly-owned subsidiary of American General Corporation (formerly American General Insurance Company), a diversified financial services holding company engaged primarily in the insurance business. The commitments under the Policies are AGL's, and American General Corporation has no legal obligation to back those commitments. 23 AGL is a member of the Insurance Marketplace Standards Association ("IMSA"). IMSA is a voluntary membership organization created by the life insurance industry to promote ethical market conduct for individual life insurance and annuity products. AGL's membership in IMSA applies only to AGL and not its products. Separate Account VL-R We hold the Mutual Fund shares in which any of your accumulation value is invested in Separate Account VL-R. Separate Account VL-R is a "separate account," as defined by the SEC and is registered as a unit investment trust with the SEC under the Investment Company Act of 1940, as amended. We created the separate account on May 6, 1997 under Texas law. For record keeping and financial reporting purposes, Separate Account VL-R is divided into 41 separate "divisions," 13 of which correspond to the 13 variable investment options available since the inception of the Policy. The remaining 28 divisions, and some of these 13 divisions, represent investment options available under other variable life policies we offer. We hold the Mutual Fund shares in which we invest your accumulation value for an investment option in the division that corresponds to that investment option. The assets in Separate Account VL-R are our property. The assets in Separate Account VL-R would be available only to satisfy the claims of owners of the Policies, to the extent they have allocated their accumulation value to Separate Account VL-R. Our other creditors could reach only those Separate Account VL-R assets (if any) that are in excess of the amount of our reserves and other contract liabilities under the Policies with respect to Separate Account VL-R. 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. General. Key Legacy Plus 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 Mutual 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. 24 The federal income tax consequences of a distribution from your Policy can be affected by whether your Policy is determined to be a "modified endowment contract" (which is discussed below). In all cases, however, the character of all income that is described below as taxable to the payee will be ordinary income (as opposed to capital gain). Testing for modified endowment contract status. Your Policy will be a "modified endowment contract" if, at any time during the first seven Policy years, you have paid a cumulative amount of premiums that exceeds the premiums that would have been paid by that time under a similar fixed-benefit insurance policy that was designed (based on certain assumptions mandated under the Code) to provide for paid-up future benefits after the payment of seven level annual premiums. This is called the "seven-pay" test. Whenever there is a "material change" under a policy, the policy will generally be (a) treated as a new contract for purposes of determining whether the policy is a modified endowment contract and (b) subjected to a new seven-pay period and a new seven-pay limit. The new seven-pay limit would be determined taking into account, under a prescribed formula, the accumulation value of the policy at the time of such change. A materially changed policy would be considered a modified endowment contract if it failed to satisfy the new seven- pay limit. A material change for these purposes could occur as a result of a change in death benefit option. A material change will occur as a result of an increase in your Policy's specified amount of coverage, and certain other changes. If your Policy's benefits are reduced during the first seven Policy years (or within seven years after a material change), the calculated seven-pay premium limit will be redetermined based on the reduced level of benefits and applied retroactively for purposes of the seven-pay test. (Such a reduction in benefits could include, for example, a decrease in the specified amount resulting from a partial surrender). If the premiums previously paid are greater than the recalculated seven-payment premium level limit, the Policy will become a modified endowment contract. A life insurance policy that is received in exchange for a modified endowment contract will also be considered a modified endowment contract. 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, as a non-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 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. 25 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 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 it also 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; . 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 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. 26 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 VL-R, through the Mutual Funds, intends to comply with these requirements. Although we do not have direct control over the investments or activities of the Mutual Funds, we will enter into agreements with them requiring the Mutual 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 Mutual Funds within Separate Account VL-R 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 VL-R, 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 AGL, and not the owner of a Policy, would be considered the owner of the assets of Separate Account VL-R. Estate and generation skipping taxes. If the insured person is the Policy's owner, the death benefit under Key Legacy Plus 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 credit over the next seven years to $1,000,000. In addition, an unlimited marital deduction may be available for federal estate tax purposes. As a general rule, if a "transfer" is made to a person two or more generations younger than the Policy's owner, a generation skipping tax may be payable at rates similar to the maximum estate tax rate in effect at the time. The generation skipping tax provisions generally apply to "transfers" that would be subject to the gift and estate tax rules. Individuals are generally allowed an aggregate generation skipping tax exemption of $1 million. Because these rules are complex, you should consult with a qualified tax adviser for specific information, especially where benefits are passing to younger generations. The particular situation of each policy owner, insured person or beneficiary will determine how ownership or receipt of Policy proceeds will be treated for purposes of federal estate and generation skipping taxes, as well as state and local estate, inheritance and other taxes. Life Insurance in Split Dollar Arrangements. The Internal Revenue Service ("IRS") has released a technical advice memorandum ("TAM") on the taxability of the insurance policies used in certain split 27 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. 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 VL-R in our federal income tax return, but we currently pay no income tax on Separate Account VL-R'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 VL-R division for taxes. We reserve the right to make a charge in the future for taxes incurred; for example, a charge to Separate Account VL-R for income taxes we incur that are allocable to the Policy. 28 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 VL-R or allocable to the Policy. Certain Mutual Funds in which your accumulation value is invested may elect to pass through to AGL taxes withheld by foreign taxing jurisdictions on foreign source income. Such an election will result in additional taxable income and income tax to AGL. 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 AGL. 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. Voting Privileges We are the legal owner of the Funds' shares held in Separate Account VL-R. However, you may be asked to instruct us how to vote the Fund shares held in the various Mutual Funds and attributable to your Policy at meetings of shareholders of the Funds. The number of votes for which you may give directions will be determined as of the record date for the meeting. The number of votes that you may direct related to a particular Fund is equal to (a) your accumulation value invested in that Fund divided by (b) the net asset value of one share of that Fund. Fractional votes will be recognized. We will vote all shares of each Fund that we hold of record, including any shares we own on our own behalf, in the same proportions as those shares for which we have received instructions from owners participating in that Fund through Separate Account VL-R. If you are asked to give us voting instructions, we will send you the proxy material and a form for providing such instructions. Should we determine that we are no longer required to send the owner such materials, we will vote the shares as we determine in our sole discretion. 29 In certain cases, we may disregard instructions relating to changes in a Fund's investment manager or its investment policies. We will advise you if we do and explain the reasons in our next report to policy owners. AGL reserves the right to modify these procedures in any manner that the laws in effect from time to time allow. Your Beneficiary You name your beneficiary when you apply for a Policy. The beneficiary is entitled to the insurance benefits of the Policy. You may change the beneficiary during the insured person's lifetime. We also require the consent of any irrevocably named beneficiary. A new beneficiary designation is effective as of the date you sign it, but will not affect any payments we may make before we receive it. If no beneficiary is living when the insured person dies, we will pay the insurance proceeds to the owner or the owner's estate. Assigning Your Policy You may assign (transfer) your rights in a Policy to someone else as collateral for a loan or for some other reason. We will not be bound by an assignment unless it is received in writing. You must provide us with two copies of the assignment. We are not responsible for any payment we make or any action taken before we receive a complete notice of the assignment in good order. We are also not responsible for the validity of the assignment. An absolute assignment is a change of ownership. Because there may be unfavorable tax consequences, including recognition of taxable income and the loss of income tax-free treatment for any death benefit payable to the beneficiary, you should consult a qualified tax adviser before making an assignment. More About Policy Charges Purpose of our charges. The charges under the Policy are designed to cover, in total, our direct and indirect costs of selling, administering and providing benefits under the Policy. They are also designed, in total, to compensate us for the risks we assume and services that we provide under the Policy. These include: . mortality risks (such as the risk that insured persons will, on average, die before we expect, thereby increasing the amount of claims we must pay); . investment risks (such as the risk that adverse investment performance will make it more difficult for us to reduce the amount of our daily charge for revenues below what we anticipate); . sales risks (such as the risk that the number of Policies we sell and the premiums we receive net of withdrawals, are less than we expect, thereby depriving us of expected economies of scale); . regulatory risks (such as the risk that tax or other regulations may be changed in ways adverse to issuers of variable life insurance policies); and . expense risks (such as the risk that the costs of administrative services that the Policy requires us to provide will exceed what we currently project). 30 If the charges that we collect from the Policy exceed our total costs in connection with the Policy, we will earn a profit. Otherwise we will incur a loss. The current monthly insurance charge has been designed primarily to provide funds out of which we can make payments of death benefits under the Policy as insured persons die. Any excess from the charges discussed above is primarily intended to: . offset other expenses in connection with the Policies (such as the costs of processing applications for Policies and other unreimbursed administrative expenses, costs of paying marketing and distribution expenses for the Policies, and costs of paying death claims if the mortality experience of insured persons is worse than we expect); . compensate us for the risk we assume under the Policies; or . otherwise be retained by us as profit. Although the paragraphs above describe the primary purposes for which charges under the Policies have been designed, these purposes are subject to considerable change over the life of a Policy. We can retain or use the revenues from any charge or charge increase for any purpose. Change of tobacco use. If the person insured under your Policy is a tobacco user, you may apply to us for an improved risk class if the insured person meets our then applicable requirements for demonstrating that he or she has stopped tobacco use for a sufficient period. Gender neutral Policy. Our cost of insurance charge rates in Montana will not be greater than the comparable male rates illustrated in this prospectus. 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, rating class and tobacco user status. In addition, 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 life insurance policies in connection with an employment-related insurance or benefit plan. In a 1983 decision, the United States Supreme Court held that, under Title VII, optional annuity benefits under a deferred compensation plan could not vary on the basis of gender. Cost of insurance rates. Because of specified amount increases, different cost of insurance rates may apply to different increments of specified amount under your Policy. If so, we attribute your accumulation value first to the oldest increments of specified amount to compute our net amount at risk at each cost of insurance rate. See "Monthly Insurance Charge" beginning on page 7. Miscellaneous. Certain of the distributors or advisers of the Mutual Funds listed on page 8 of this prospectus reimburse us, on a quarterly basis, for certain administrative, Policy, and policy owner support expenses. These reimbursements will be reasonable for the services performed and are not designed to result in a profit. These reimbursements are paid by the distributors or the advisers, and will not be paid 31 by the Mutual Funds, the divisions or the owners. No payments have yet been made under these arrangements, because the number of Policies issued does not require a payment. Effective Date of Policy and Related Transactions Valuation dates, times, and periods. We generally compute values under a Policy on each day that the New York Stock Exchange is open for business. We call each such day a "valuation date." We compute policy values as of 3:00 p.m., Central time, on each valuation date. We call this our "close of business." We call the time from the close of business on one valuation date to the close of business of the next valuation date a "valuation period." Date of receipt. Generally we consider that we have received a premium payment or another communication from you on the day we actually receive it in full and proper order at our Home Office. If we receive it after the close of business on any valuation date, however, we consider that we have received it on the day following that valuation date. Commencement of insurance coverage. After you apply for a Policy, it can sometimes take up to several weeks for us to gather and evaluate all the information we need to decide whether to issue a Policy to you and, if so, what the insured person's insurance rate class should be. We will not pay a death benefit under a Policy unless (a) it has been delivered to and accepted by the owner and at least the initial premium has been paid, and (b) at the time of such delivery and payment, there have been no adverse developments in the insured person's health or risk of death. However, if you pay at least the minimum first premium payment with your application for a Policy, we will provide temporary coverage of up to $500,000 provided the insured person meets certain medical and risk requirements. The terms and conditions of this coverage are described in our "Limited Temporary Life Insurance Agreement." You can obtain a copy from our Home Office by writing to the address shown on the first page of this prospectus or from your AGL representative. Date of issue; Policy months and years. We prepare the Policy only after we approve an application for a Policy and assign an appropriate insurance rate class. The day we begin to deduct charges will appear on page 3 of your Policy and is called the "date of issue." Policy months and years are measured from the date of issue. To preserve a younger age at issue for the insured person, we may assign a date of issue to a Policy that is up to 6 months earlier than otherwise would apply. Monthly deduction days. Each charge that we deduct monthly is assessed against your accumulation value at the close of business on the date of issue and at the end of each subsequent valuation period that includes the first day of a Policy month. We call these "monthly deduction days." Commencement of investment performance. We begin to credit an investment return to the accumulation value resulting from your initial premium payment on the later of (a) the date of issue, or (b) the date all requirements needed to place the Policy in force have been satisfied, including underwriting approval and receipt in the Home Office of the necessary premium. In the case of a back- dated Policy, we do not credit an investment return to the accumulation value resulting from your initial premium payment until the date stated in (b) above. 32 Effective date of other premium payments and requests that you make. Premium payments (after the first) and transactions made in response to your requests and elections are generally effected at the end of the valuation period in which we receive the payment, request or election and based on prices and values computed as of that same time. Exceptions to this general rule are as follows: . Increases you request in the specified amount of insurance, and reinstatements of a Policy that has lapsed take effect on the Policy's monthly deduction day on or next following our approval of the transaction; . We may return premium payments if we determine that such premiums would cause your Policy to become a modified endowment contract or to cease to qualify as life insurance under federal income tax law or exceed the maximum net amount at risk; . If you exercise the right to return your Policy described on the second page of this prospectus, your coverage will end when you mail us your Policy or deliver it to your AGL representative; and . If you pay a premium in connection with a request which requires our approval, your payment will be applied when received rather than following the effective date of the change requested so long as your coverage is in force and the amount paid will not cause you to exceed premium limitations under the Code. If we do not approve your request, no premium will be refunded to you except to the extent necessary to cure any violation of the maximum premium limitations under the Code. We will not apply this procedure to premiums you pay in connection with reinstatement requests. Distribution of the Policies American General Securities Incorporated ("AGSI") is the principal underwriter of the Policies. AGSI is a wholly-owned subsidiary of AGL. AGL, in turn, is a wholly-owned subsidiary of American General Corporation ("American General"). AGSI's principal office is at 2727 Allen Parkway, Houston, Texas 77019. AGSI was organized as a Texas corporation on March 8, 1983 and is a registered broker-dealer under the Securities Exchange Act of 1934, as amended ("1934 Act") and is a member of the National Association of Securities Dealers, Inc. ("NASD"). AGSI is also the principal underwriter for AGL's Separate Accounts A and D, and Separate Account E of American General Life Insurance Company of New York, which is a wholly-owned subsidiary of AGL. These separate accounts are registered investment companies. AGSI, as the principal underwriter, is not paid any fees on the Policies. We and AGSI have sales agreements with various broker-dealers and banks under which the Policies will be sold by registered representatives of the broker-dealers or employees of the banks. These registered representatives and employees are also required to be authorized under applicable state regulations as life insurance agents to sell variable life insurance. The broker-dealers are ordinarily required to be registered with the SEC and must be members of the NASD. We pay compensation directly to broker-dealers and banks for the promotion and sales of the Policies. AGSI also has its own registered representatives who will sell the Policies, and we will pay compensation to AGSI for these sales. The compensation payable to broker-dealers or banks for the sales of the Policies may vary with the sales agreement, but is generally not expected to exceed the amounts described below: 33 A. For a Policy issued based on simplified underwriting: . 1.05% annually of the Policy's accumulation value (reduced by any outstanding loan) in Policy years 1 through 10; and . .85% annually of the Policy's accumulation value (reduced by any outstanding loan) in Policy years 11 through 15. B. For a Policy issued based on full underwriting: . 2.5% of the Policy's accumulation value (reduced by any outstanding loan) in Policy year 1; . 1.0% annually of the Policy's accumulation value (reduced by any outstanding loan) in Policy years 2 through 10; . 0.50% annually of the Policy's accumulation value (reduced by any outstanding loan) in Policy years 11 through 20; and . 0.25% annually of the Policy's accumulation value (reduced by any outstanding loan) after Policy year 20. The maximum value of any alternative amounts we may pay for sales of the Policies is expected to be equivalent over time to the amounts described above. For example, we may pay a broker-dealer compensation in a lump sum which will not exceed the aggregate compensation described above. We pay a comparable amount of compensation to the broker-dealers or banks with respect to any increase in the specified amount of coverage that you request. In addition, we may pay the broker-dealers or banks expense allowances, bonuses, wholesaler fees and training allowances. We pay the compensation directly to AGSI or any other selling broker-dealer firm or bank. We pay the compensation from our own resources which does not result in any additional charge to you that is not described on page 6 of the prospectus. Each broker-dealer or bank, in turn, may compensate its registered representative or employee who acts as agent in selling you a Policy. Payment of Policy Proceeds General. We will pay any death benefit, maturity benefit, cash surrender value or loan proceeds within seven days after we receive the last required form or request (and any other documents that may be required for payment of a death benefit). If we do not have information about the desired manner of payment within 60 days after the date we receive notification of the insured person's death, we will pay the proceeds as a single sum, normally within seven days thereafter. Delay for check clearance. We reserve the right to defer payment of that portion of your accumulation value that is attributable to a premium payment made by check for a reasonable period of time (not to exceed 15 days) to allow the check to clear the banking system. 34 Delay of Separate Account VL-R proceeds. We reserve the right to defer payment of any death benefit, loan or other distribution that comes from that portion of your accumulation value that is allocated to Separate Account VL-R, if: . the New York Stock Exchange is closed other than customary weekend and holiday closings, or trading on the New York Stock Exchange is restricted; . an emergency exists, as a result of which disposal of securities is not reasonably practicable or it is not reasonably practicable to fairly determine the accumulation value; or . the SEC by order permits the delay for the protection of owners. Transfers and allocations of accumulation value among the investment options may also be postponed under these circumstances. If we need to defer calculation of Separate Account VL-R values for any of the foregoing reasons, all delayed transactions will be processed at the next values that we do compute. Delay to challenge coverage. We may challenge the validity of your insurance Policy based on any material misstatements in your application and any application for a change in coverage. However, . We cannot challenge the Policy after it has been in effect, during the insured person's lifetime, for two years from the date the Policy was issued or restored after termination. (Some states may require that we measure this time in some other way.) . We cannot challenge any Policy change that requires evidence of insurability (such as an increase in specified amount) after the change has been in effect for two years during the insured person's lifetime. Adjustments to Death Benefit Suicide. If the insured person commits suicide within two years after the date on which the Policy was issued, the death benefit will be limited to the total of all premiums that have been paid to the time of death minus any outstanding Policy loans and any partial surrenders. If the insured person commits suicide within two years after the effective date of an increase in specified amount that you requested, we will pay the death benefit based on the specified amount which was in effect before the increase, plus the monthly insurance deductions for the increase. Some states require that we compute differently these periods for non-contestability following a suicide. Wrong age or gender. If the age or gender of the insured person was misstated on your application for a Policy (or for any increase in benefits), we will adjust any death benefit to be what the monthly insurance charge deducted for the current month would have purchased based on the correct information. Death during grace period. If the insured person dies during the Policy's grace period, we will deduct any overdue monthly charges from the insurance proceeds. 35 Additional Rights That We Have We have the right at any time to: . transfer the entire balance in an investment option in accordance with any transfer request you make that would reduce your accumulation value for that option to below $500; . transfer the entire balance in proportion to any other investment options you then are using, if the accumulation value in an investment option is below $500 for any other reason; . end the automatic rebalancing feature if your accumulation value falls below $5,000; . change the underlying Mutual Fund that any investment option uses; . add, delete or limit investment options, combine two or more investment options, or withdraw assets relating to Key Legacy Plus from one investment option and put them into another; . operate Separate Account VL-R under the direction of a committee or discharge such a committee at any time; . change our guidelines for the simplified and full underwriting methods; . operate Separate Account VL-R, or one or more investment options, in any other form the law allows, including a form that allows us to make direct investments. Separate Account VL-R may be charged an advisory fee if its investments are made directly rather than through another investment company. In that case, we may make any legal investments we wish; or . make other changes in the Policy that in our judgment are necessary or appropriate to ensure that the Policy continues to qualify for tax treatment as life insurance, or that do not reduce any cash surrender value, death benefit, accumulation value, or other accrued rights or benefits. You will be notified as required by law if there are any material changes in the underlying investments of an investment option that you are using. We intend to comply with all applicable laws in making any changes and, if necessary, we will seek policy owner approval. Performance Information From time to time, we may quote performance information for the divisions of Separate Account VL-R in advertisements, sales literature, or reports to owners or prospective investors. We may quote performance information in any manner permitted under applicable law. We may, for example, present such information as a change in a hypothetical owner's cash value or death benefit. We also may present the yield or total return of the division based on a hypothetical investment in a Policy. The performance information shown may cover various periods of time, including periods beginning with the commencement of the operations of the division or the Mutual Funds in which it invests. The performance information shown may reflect the deduction of one or more charges, such as the premium 36 charge, and we generally expect to exclude costs of insurance charges because of the individual nature of these charges. We may compare a division's performance to that of other variable life separate accounts or investment products, as well as to generally accepted indices or analyses, such as those provided by research firms and rating services. In addition, we may use performance ratings that may be reported periodically in financial publications, such as Money Magazine, Forbes, Business Week, Fortune, Financial Planning and The Wall Street Journal. We also may advertise ratings of AGL's financial strength or claims-paying ability as determined by firms that analyze and rate insurance companies and by nationally recognized statistical rating organizations. Performance information for any division reflects the performance of a hypothetical Policy and are not illustrative of how actual investment performance would affect the benefits under your Policy. You should not consider such performance information to be an estimate or guarantee of future performance. Our Reports to Policy Owners Shortly after the end of each Policy year, we will mail you a report that includes information about your Policy's current death benefit, accumulation value, cash surrender value and policy loans. We will send you notices to confirm premium payments, transfers and certain other Policy transactions. We will mail to you at your last known address of record, these and any other reports and communications required by law. You should give us prompt written notice of any address change. AGL's Management The directors, executive officers, and (to the extent responsible for variable life operations) the other principal officers of AGL are listed below. Name Business Experience Within Past Five Years - ------------------------------------------------------------------------------ Rodney O. Martin, Jr. Senior Chairman of the Board of American General Life Insurance Company since April 1999 and a Director since August 1996. President and CEO (August 1996-July 1998). President of American General Life Insurance Company of New York (November 1995-August 1996). Vice President Agencies, with Connecticut Mutual Life Insurance Company, Hartford, Connecticut (1990-1995). Donald W. Britton Director and Vice Chairman of the Board of American General Life Insurance Company since April 1999. President of First Colony Life, Lynchburg, Virginia (1996 - April 1997) and Executive Vice President of First Colony Life (1992 - 1996). Ronald H. Ridlehuber Director, President and Chief Executive Officer of American General Life Insurance Company since July 1998. Senior Vice President and Chief 37 Marketing Officer of Jefferson-Pilot Life Insurance Company in Greensboro, North Carolina (1993-1998). David A. Fravel 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). Robert F. Herbert, Jr. Director, Senior Vice President and Treasurer of American General Life Insurance Company since May 1996, and Controller since February 1991. Royce G. Imhoff, II Director, Senior Vice President and Chief Marketing Officer for American General Life Insurance Company since November 1997. Previously held various positions with American General Life Insurance Company including Vice President since August 1996 and Regional Director since 1992. John V. LaGrasse Director and Chief Systems Officer of American General Life Insurance Company since August 1996. Elected Executive Vice President in July 1998. Previously held position of Senior Vice President of American General Life Insurance Company since August 1996. Director of Citicorp Insurance Services, Inc., Dover, Delaware (1986-1996). Gary D. Reddick Director of American General Life Insurance Company since October 1998. Elected Executive Vice President in April 1998. Vice Chairman since July 1997 and Executive Vice President-Administration of The Franklin Life Insurance Company since February 1995. Senior Vice President-Administration of American General Corporation (October 1994-February 1995). Senior Vice President for American General Life Insurance Company (September 1986-October 1994). Thomas M. Zurek 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 as 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). 38 Paul L. Mistretta Executive Vice President of American General Life Insurance Company since July 1999. Senior Vice President of First Colony Life Insurance, Lynchburg, Virginia (1992 - July 1999). Brian D. Murphy Executive Vice President of American 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). Various positions with Mutual of New York, Syracuse, NY, including Agent, Agency Manager, Marketing Life and Disability Income Underwriting Management, (1978-July 1994). Wayne A. Barnard 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. Robert M. Beuerlein Senior Vice President and Chief Actuary of American General Life Insurance Company since September 1999. Previously held position of Vice President of American General Life Insurance Company since December 1998. Director, Senior Vice President and Chief Actuary of The Franklin Life Insurance Company, Springfield, Illinois (January 1991 - June 1999). David J. Dietz Senior Vice President - Corporate Markets Group of American General Life Insurance Company since January 1999. President and Chief Executive Officer - Individual Insurance Operations of The United States Life Insurance Company in the City of New York since September, 1997. President of Prudential Select Life, Newark, New Jersey (August 1990 -September 1997). Barbara J. Fossum Senior Vice President of American General Life Insurance Company since July 1999. Previously held position of Vice President of American General Life Insurance Company since 1988. Ross D. Friend Senior Vice President and Chief Compliance Officer of American General Life Insurance Company since July 1998. Senior Vice President and General Counsel of The Franklin Life Insurance Company, Springfield, Illinois (August 1996 - July 1998). Attorney-in-Charge for The Prudential Insurance Company, Jacksonville, Florida (July 1995 - August 1996). Chief Legal Officer for Confederation Life Insurance, Atlanta, Georgia (1982 - June 1995). 39 William Guterding Senior Vice President of American General Life Insurance Company since April 1999. Senior Vice President and Chief Underwriting Officer of The United States Life Insurance Company in the City of New York since October, 1980. F. Paul Kovach, Jr. Senior Vice President-Broker Dealers for American General Life Insurance Company since August 1997. President and Director of American General Securities Incorporated since October 1994. Vice President of Chubb Securities Corporation, Concord, New Hampshire, (February 1990-October 1994). Simon J. Leech 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. JoAnn Waddell Senior Vice President - Human Resources for American General Life Insurance Company since October 1998. Vice President - Human Resources for American General Corporation (1995 - October 1998) and Director, Corporate Personnel of American General Corporation (1993 -1995). Don M. Ward Senior Vice President-Variable Products-Marketing of American General Life Insurance Company since February 1998. Vice President of Pacific Life Insurance Company, Newport Beach, CA (1991-February 1998). The principal business address of each person listed above is our Home Office; except that the street number for Messrs. Ridlehuber, Fravel, LaGrasse, Martin, Reddick, Britton, Mistretta and Zurek is 2929 Allen Parkway, the street number for Messrs. Kovach, Ward and Friend is 2727 Allen Parkway, the street number for Messrs. Dietz and Guterding is 125 Maiden Lane, New York, New York and the street number for Ms. Fossum is #1 Franklin Square, Springfield, Illinois. Principal Underwriter's Management The directors and principal officers of the principal underwriter are: Position and Offices with Underwriter, Name and Principal American General Business Address Securities Incorporated - ---------------- ----------------------- F. Paul Kovach, Jr. Director and Chairman, American General Securities Incorporated President and Chief Executive Officer 2727 Allen Parkway Houston, TX 77019 40 Royce G. Imhoff, II Director American General Life Companies 2727-A Allen Parkway Houston, Texas 77019 Rodney O. Martin, Jr. Director and Vice Chairman American General Life Companies 2929 Allen Parkway Houston, TX 77019 Donald W. Britton Director American General Life Companies 2929 Allen Parkway Houston, TX 77019 John A. Kalbaugh Vice President - American General Life Companies Chief Marketing Officer 2727 Allen Parkway Houston, TX 77019 Robert M. Roth Vice President - American General Securities Incorporated Administration and Compliance, 2727 Allen Parkway Treasurer and Secretary Houston, TX 77019 Don M. Ward Vice President American General Life Companies 2727 Allen Parkway Houston, TX 77019 Julie A. Cotton Assistant Secretary American General Life Companies 2727 Allen Parkway Houston, TX 77019 Robert F. Herbert, Jr. Assistant Treasurer American General Life Companies 2727-A Allen Parkway Houston, Texas 77019 K. David Nunley Assistant Associate Tax Officer 2727-A Allen Parkway Houston, TX 77019 41 Legal Matters We are not involved in any legal proceedings that would be considered material with respect to a policy owner's interest in Separate Account VL-R. Pauletta P. Cohn, Esquire, Deputy General Counsel of the American General Life Companies, an affiliate of AGL, has opined as to the validity of the Policies. Independent Auditors The financial statements of AGL included in this prospectus have been audited by Ernst & Young LLP, independent auditors, as set forth in their report appearing elsewhere in this prospectus. Such financial statements have been included in this prospectus in reliance upon the report of Ernst & Young LLP given upon the authority of such firm as experts in accounting and auditing. Ernst & Young LLP is located at One Houston Center, 1221 McKinney, Suite 2400, Houston, Texas 77010-2007. Actuarial Expert Actuarial matters have been examined by Robert M. Beuerlein, who is Senior Vice President and Chief Actuary of AGL. His opinion on actuarial matters is filed as an exhibit to the registration statement we have filed with the SEC in connection with the Policies. Services Agreement American General Life Companies ("AGLC") is party to an existing general services agreement with AGL. AGLC, an affiliate of AGL, is a corporation incorporated in Delaware on November 24, 1997. Pursuant to this agreement, AGLC provides services to AGL, including most of the administrative, data processing, systems, customer services, product development, actuarial, auditing, accounting and legal services for AGL and Key Legacy Plus Policies. Certain Potential Conflicts The Mutual Funds sell shares to separate accounts of insurance companies, both affiliated and not affiliated with AGL. We currently do not foresee any disadvantages to you arising out of such sales. Differences in treatment under tax and other laws, as well as other considerations, could cause the interests of various owners to conflict. For example, violation of the federal tax laws by one separate account investing in the Funds could cause the contracts funded through another separate account to lose their tax-deferred status, unless remedial action were taken. However, each Mutual Fund has advised us that its board of trustees (or directors) intends to monitor events to identify any material irreconcilable conflicts that possibly may arise and to determine what action, if any, should be taken in response. If we believe that a Fund's response to any such event insufficiently protects our policy owners, we will see to it that appropriate action is taken to do so. If it becomes necessary for any separate account to replace shares of any Mutual Fund in which it invests, that Fund may have to liquidate securities in its portfolio on a disadvantageous basis. 42 Year 2000 Considerations Internal Systems. Our 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 AGL, 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 the company's information technology and non-information technology systems; (2) assess which items in the inventory may expose us to business interruptions due to Year 2000 issues; (3) reprogram or replace systems that are not Year 2000 ready; (4) test systems to prove that they will function into the next century; and (5) return the systems to operations. As of December 31, 1999, these activities have been completed, making our critical systems Year 2000 ready. We continued to test our systems throughout 1999 to maintain Year 2000 readiness. In addition, we 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 and establishing Y2K command centers. 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 the company'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 January 20, 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 and maintain quality customer service throughout the transition period. Third Party Relationships. We have relationships with various third parties who - ------------------------- must also be Year 2000 ready. These third parties provide (or receive) resources and services to (or from) us and include organizations with which we exchange information. Third parties include vendors of hardware, software, and information services; providers of infrastructure services such as voice and data communications and utilities for office facilities; investors; customers; distribution channels; and joint venture partners. Third parties differ from internal systems in that we exercise less, or no, control over such parties' Year 2000 readiness. We 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, we have taken reasonable precautions to protect against the receipt of non-Year 2000 ready data. Where necessary, critical third party dependencies have been included in our contingency plans. Contingency Plans. Our 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 43 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. 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, we believe that we 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 our future results of operations, liquidity, or financial condition. However, due to the magnitude and complexity of this project, risks and uncertainties exist and we are not able to predict a most reasonably likely worst case scenario. If Year 2000 readiness is not achieved due to our 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 its plans, the Year 2000 issues could have a material adverse impact on our operations following the turn of the century. Costs. Through December 31, 1999, we have incurred, and anticipate that we - ----- 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 our results of operations or financial condition. In addition, we have elected to accelerate the planned replacement of certain systems as part of the Year 2000 plans. Costs of the replacement systems are being capitalized and amortized over their useful lives, in accordance with our normal accounting policies. None of the costs associated with Year 2000 readiness are passed to divisions of the Separate Account. 44 FINANCIAL STATEMENTS The financial statements of AGL contained in this prospectus should be considered to bear only upon the ability of AGL to meet its obligations under Key Legacy Plus Policies. They should not be considered as bearing upon the investment experience of Separate Account VL-R. No financial statements of Separate Account VL-R are included because, at the date of this prospectus, none of the Divisions of Separate Account VL-R were available under Key Legacy Plus Policy.
Page to Consolidated Financial Statements of See in this American General Life Insurance Company Prospectus - --------------------------------------- ---------- Unaudited consolidated Balance Sheets as of September 30, 1999.............. Q-1 Unaudited consolidated Income Statements for the nine months ended September 30, 1999................................................. Q-3 Report of Ernst & Young, LLP Independent Auditors........................... F-1 Consolidated Balance Sheets as of December 31, 1998 and 1997................ F-2 Consolidated Income Statements for the years ended December 31, 1998, 1997 and 1996....................................... F-3 Consolidated Statements of Comprehensive Income for the years ended December 31, 1998, 1997, and 1996................... F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996................................ F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996................................. F-6 Notes to Consolidated Financial Statements.................................. F-7
45 American General Life Insurance Company Consolidated Balance Sheet (Unaudited) September 30 1999 -------------- (In Thousands) ASSETS Investments: Fixed maturity securities, at fair value (amortized cost - $27,720,226) $27,539,065 Equity securities, at fair value (cost - $215,480) 245,837 Mortgage loans on real estate 1,703,850 Policy loans 1,224,130 Investment real estate 117,005 Other long-term investments 154,183 Short-term investments 484,721 ----------- Total investments 31,468,791 Cash 89,211 Investment in Parent Company (cost - $7,958) 44,254 Indebtedness from affiliates 53,756 Accrued investment income 477,429 Accounts receivable 505,368 Deferred policy acquisition costs 1,733,978 Property and equipment 74,683 Other assets 225,353 Assets held in separate accounts 18,734,868 ----------- Total assets $53,407,691 =========== Q-1 American General Life Insurance Company Consolidated Balance Sheet (Unaudited) September 30 1999 -------------- (In Thousands) LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Future policy benefits $29,704,115 Other policy claims and benefits payable 45,955 Other policyholders' funds 379,623 Federal income taxes 414,324 Indebtedness to affiliates 3,053 Other liabilities 1,035,653 Liabilities related to separate accounts 18,734,868 ----------- Total liabilities 50,317,591 Shareholders' equity: Common stock, $10 par value, 600,000 shares authorized, issued, and outstanding 6,000 Preferred stock, $100 par value, 8,500 shares authorized, issued, and outstanding 850 Additional paid-in capital 1,369,315 Accumulated other comprehensive income (15,046) Retained earnings 1,728,981 ----------- Total shareholders' equity 3,090,100 ----------- Total liabilities and shareholders' equity $53,407,691 =========== Q-2 American General Life Insurance Company Consolidated Income Statement (Unaudited) Nine months ended September 30 1999 -------------- (In Thousands) Revenues: Premiums and other considerations $ 402,583 Net investment income 1,753,914 Net realized investment gains 3,899 Other 58,530 ---------- Total revenues 2,218,926 Benefits and expenses: Benefits 1,289,534 Operating costs and expenses 367,123 Total benefits and expenses 1,656,657 ---------- Income before income tax expense 562,269 Income tax expense 190,143 ---------- Net income $ 372,126 ========== Q-3 [ERNST & YOUNG LLP LETTERHEAD] . One Houston Center . Phone: 713 750 1500 Suite 2400 Fax: 713 750 1501 1221 McKinney Houston, Texas 77010-2007 Report of Independent Auditors Board of Directors and Stockholder American General Life Insurance Company We have audited the accompanying consolidated balance sheets of American General Life Insurance Company (an indirectly wholly owned subsidiary of American General Corporation) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, comprehensive income, shareholder's equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosure 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 consolidated financial position of American General Life Insurance Company and subsidiaries at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /S/ ERNST & YOUNG LLP --------------------- February 16, 1999 Ernst & Young LLP is a member of Ernst & Young International, Ltd. F-1 American General Life Insurance Company Consolidated Balance Sheets
DECEMBER 31 1998 1997 --------------------------------- (In Thousands) ASSETS Investments: Fixed maturity securities, at fair value (amortized cost- $27,425,605 in 1998 and $26,131,207 in 1997) $28,906,261 $27,386,715 Equity securities, at fair value (cost - $193,368 in 1998 and $19,208 in 1997) 211,684 21,114 Mortgage loans on real estate 1,557,268 1,659,921 Policy loans 1,170,686 1,093,694 Investment real estate 119,520 129,364 Other long-term investments 86,194 55,118 Short-term investments 222,949 100,061 --------------------------------- Total investments 32,274,562 30,445,987 Cash 117,675 99,284 Investment in Parent Company (cost - $8,597 in 1998 and 1997) 54,570 37,823 Indebtedness from affiliates 161,096 96,519 Accrued investment income 459,961 433,111 Accounts receivable 196,596 208,209 Deferred policy acquisition costs 1,087,718 835,031 Property and equipment 66,197 33,827 Other assets 206,318 132,659 Assets held in separate accounts 15,616,020 11,242,270 --------------------------------- Total assets $50,240,713 $43,564,720 ================================= LIABILITIES AND SHAREHOLDER'S EQUITY Liabilities: Future policy benefits $29,353,022 $27,849,893 Other policy claims and benefits payable 54,278 42,677 Other policyholders' funds 398,587 398,314 Federal income taxes 677,315 543,379 Indebtedness to affiliates 18,173 4,712 Other liabilities 554,783 421,861 Liabilities related to separate accounts 15,616,020 11,242,270 --------------------------------- Total liabilities 46,672,178 40,503,106 Shareholder's equity: Common stock, $10 par value, 600,000 shares authorized, issued, and outstanding 6,000 6,000 Preferred stock, $100 par value, 8,500 shares authorized, issued, and outstanding 850 850 Additional paid-in capital 1,368,089 1,184,743 Accumulated other comprehensive income 679,107 427,526 Retained earnings 1,514,489 1,442,495 --------------------------------- Total shareholder's equity 3,568,535 3,061,614 --------------------------------- Total liabilities and shareholder's equity $50,240,713 $43,564,720 =================================
See accompanying notes. F-2 American General Life Insurance Company Consolidated Statements of Income
YEAR ENDED DECEMBER 31 1998 1997 1996 ---------------------------------------------------------- (In Thousands) Revenues: Premiums and other considerations $ 470,238 $ 428,721 $ 382,923 Net investment income 2,316,933 2,198,623 2,095,072 Net realized investment gains (losses) (33,785) 29,865 28,502 Other 69,602 53,370 41,968 ---------------------------------------------------------- Total revenues 2,822,988 2,710,579 2,548,465 Benefits and expenses: Benefits 1,788,417 1,757,504 1,689,011 Operating costs and expenses 467,067 379,012 347,369 Interest expense 15 782 830 Litigation settlement 97,096 - - ---------------------------------------------------------- Total benefits and expenses 2,352,595 2,137,298 2,037,210 ---------------------------------------------------------- Income before income tax expense 470,393 573,281 511,255 Income tax expense 153,719 198,724 176,660 ---------------------------------------------------------- Net income $ 316,674 $ 374,557 $ 334,595 ==========================================================
See accompanying notes. F-3 American General Life Insurance Company Consolidated Statements of Comprehensive Income
YEAR ENDED DECEMBER 31 1998 1997 1996 -------------------------------------------------------- (In Thousands) Net income $316,674 $374,557 $ 334,595 Other comprehensive income: Gross change in unrealized gains (losses) on securities (pretax: $341,000; $318,700; ($404,900)) 222,245 207,124 (263,181) Less: gains (losses) realized in net income (29,336) (1,251) 11,262 -------------------------------------------------------- Change in net unrealized gains (losses) on securities (pretax: $387,000; $320,600; ($422,200) 251,581 208,375 (274,443) ------------------------------------------------------- Comprehensive income $568,255 $582,932 $ 60,152 ========================================================
See accompanying notes. F-4 American General Life Insurance Company Consolidated Statements of Shareholder's Equity
YEAR ENDED DECEMBER 31 1998 1997 1996 ---------------------------------------------------------- (In Thousands) Common stock: Balance at beginning of year $ 6,000 $ 6,000 $ 6,000 Change during year - - - ---------------------------------------------------------- Balance at end of year 6,000 6,000 6,000 Preferred stock: Balance at beginning of year 850 850 850 Change during year - - - ---------------------------------------------------------- Balance at end of year 850 850 850 Additional paid-in capital: Balance at beginning of year 1,184,743 933,342 858,075 Capital contribution from Parent Company 182,284 250,000 75,000 Other changes during year 1,062 1,401 267 ---------------------------------------------------------- Balance at end of year 1,368,089 1,184,743 933,342 Accumulated other comprehensive income: Balance at beginning of year 427,526 219,151 493,594 Change in unrealized gains (losses) on securities 251,581 208,375 (274,443) ---------------------------------------------------------- Balance at end of year 679,107 427,526 219,151 Retained earnings: Balance at beginning of year 1,442,495 1,469,618 1,324,703 Net income 316,674 374,557 334,595 Dividends paid (244,680) (401,680) (189,680) ---------------------------------------------------------- Balance at end of year 1,514,489 1,442,495 1,469,618 ---------------------------------------------------------- Total shareholder's equity $3,568,535 $3,061,614 $2,628,961 ==========================================================
See accompanying notes. F-5 American General Life Insurance Company Consolidated Statements of Cash Flows
YEAR ENDED DECEMBER 31 1998 1997 1996 -------------------------------------------------------------------- (In Thousands) OPERATING ACTIVITIES Net income $ 316,674 $ 374,557 $ 334,595 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Change in accounts receivable 11,613 (37,752) 3,846 Change in future policy benefits and other policy claims (866,428) (1,143,736) (543,193) Amortization of policy acquisition costs 125,062 115,467 102,189 Policy acquisition costs deferred (244,196) (219,339) (188,001) Change in other policyholders' funds 273 21,639 (69,126) Provision for deferred income tax expense 15,872 13,264 12,388 Depreciation 19,418 16,893 16,993 Amortization (26,775) (28,276) (30,758) Change in indebtedness to/from affiliates (51,116) (8,695) 4,432 Change in amounts payable to brokers (894) 31,769 (25,260) Net (gain) loss on sale of investments 37,016 (29,865) (28,502) Other, net 57,307 30,409 32,111 -------------------------------------------------------------------- Net cash used in operating activities (606,174) (863,665) (378,286) INVESTING ACTIVITIES Purchases of investments and loans made (28,231,615) (29,638,861) (27,245,453) Sales or maturities of investments and receipts from repayment of loans 26,656,897 28,300,238 25,889,422 Sales and purchases of property, equipment, and software, net (105,907) (9,230) (8,057) -------------------------------------------------------------------- Net cash used in investing activities (1,680,625) (1,347,853) (1,364,088) FINANCING ACTIVITIES Policyholder account deposits 4,688,831 4,187,191 3,593,380 Policyholder account withdrawals (2,322,307) (1,759,660) (1,746,987) Dividends paid (244,680) (401,680) (189,680) Capital contribution from Parent 182,284 250,000 75,000 Other 1,062 1,401 267 -------------------------------------------------------------------- Net cash provided by financing activities 2,305,190 2,277,252 1,731,980 -------------------------------------------------------------------- Increase (decrease) in cash 18,391 65,734 (10,394) Cash at beginning of year 99,284 33,550 43,944 -------------------------------------------------------------------- Cash at end of year $ 117,675 $ 99,284 $ 33,550 ====================================================================
Interest paid amounted to approximately $420,000, $1,004,000, and $1,080,000 in 1998, 1997, and 1996, respectively. See accompanying notes. F-6 American General Life Insurance Company Notes to Consolidated Financial Statements December 31, 1998 NATURE OF OPERATIONS American General Life Insurance Company (the "Company") is a wholly owned subsidiary of AGC Life Insurance Company, which is a wholly owned subsidiary of American General Corporation (the "Parent Company"). The Company's wholly owned life insurance subsidiaries are American General Life Insurance Company of New York ("AGNY") and The Variable Annuity Life Insurance Company ("VALIC"). During 1998, the Company formed a new wholly owned subsidiary, American General Life Companies (AGLC), to provide management services to certain life insurance subsidiaries of the Parent Company. The Company offers a complete portfolio of the standard forms of universal life, variable universal life, interest-sensitive whole life, term life, structured settlements, and fixed and variable annuities throughout the United States. In addition, a variety of equity products is sold through its wholly owned broker/dealer, American General Securities, Inc. The Company serves the estate planning needs of middle- and upper-income households and the insurance needs of small- to medium-sized businesses. AGNY offers a broad array of traditional and interest-sensitive insurance, in addition to individual annuity products. VALIC provides tax-deferred retirement annuities and employer-sponsored retirement plans to employees of health care, educational, public sector, and other not- for-profit organizations throughout the United States. 1. ACCOUNTING POLICIES 1.1 PREPARATION OF FINANCIAL STATEMENTS The consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") and include the accounts of the Company and its wholly owned subsidiaries. Transactions with the Parent Company and other subsidiaries of the Parent Company are not eliminated from the financial statements of the Company. All other material intercompany transactions have been eliminated in consolidation. The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported in the financial statements and disclosures of contingent assets and liabilities. Ultimate results could differ from those estimates. F-7 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 1. ACCOUNTING POLICIES (CONTINUED) 1.2 STATUTORY ACCOUNTING The Company and its wholly owned life insurance subsidiaries are required to file financial statements with state regulatory authorities. 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. The use of such permitted practices by the Company and its wholly owned life insurance subsidiaries did not have a material effect on statutory equity at December 31, 1998. Statutory financial statements differ from GAAP. Significant differences were as follows (in thousands):
1998 1997 1996 ------------------------------------------------------ Net income: Statutory net income (1998 balance is unaudited) $ 259,903 $ 327,813 $ 284,070 Deferred policy acquisition costs and cost of insurance purchased 116,597 103,872 85,812 Deferred income taxes (53,358) (13,264) (12,388) Adjustments to policy reserves 52,445 (30,162) (19,954) Goodwill amortization (2,033) (2,067) (2,169) Net realized gain on investments 41,488 20,139 14,140 Litigation settlement (63,112) -- -- Other, net (35,256) (31,774) (14,916) ------------------------------------------------------- GAAP net income $ 316,674 $ 374,557 $ 334,595 ======================================================= Shareholders' equity: Statutory capital and surplus (1998 balance is unaudited) $1,670,412 $1,636,327 $1,441,768 Deferred policy acquisition costs 1,109,831 835,031 1,042,783 Deferred income taxes (698,350) (535,703) (410,007) Adjustments to policy reserves (274,532) (319,680) (297,434) Acquisition-related goodwill 54,754 51,424 55,626 Asset valuation reserve ("AVR") 310,564 255,975 291,205 Interest maintenance reserve ("IMR") 27,323 9,596 63 Investment valuation differences 1,487,658 1,272,339 643,289 Surplus from separate accounts (174,447) (150,928) (106,026) Other, net 55,322 7,233 (32,306) ------------------------------------------------------- Total GAAP shareholders' equity $3,568,535 $3,061,614 $2,628,961 =======================================================
F-8 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 1. ACCOUNTING POLICIES (CONTINUED) 1.2 STATUTORY ACCOUNTING (CONTINUED) The more significant differences between GAAP and statutory accounting principles are that under GAAP: (a) acquisition costs related to acquiring new business are deferred and amortized (generally in proportion to the present value of expected gross profits from surrender charges and investment, mortality, and expense margins), rather than being charged to operations as incurred; (b) future policy benefits are based on estimates of mortality, interest, and withdrawals generally representing the Company's experience, which may differ from those based on statutory mortality and interest requirements without consideration of withdrawals; (c) deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of assets and liabilities, at the enacted tax rates expected to be in effect when the temporary differences reverse; (d) certain assets (principally furniture and equipment, agents' debit balances, computer software, and certain other receivables) are reported as assets rather than being charged to retained earnings; (e) acquisitions are accounted for using the purchase method of accounting rather than being accounted for as equity investments; and (f) fixed maturity investments are carried at fair value rather than amortized cost. In addition, statutory accounting principles require life insurance companies to establish an AVR and an IMR. The AVR is designed to address the credit-related risk for bonds, preferred stocks, derivative instruments, and mortgages and market risk for common stocks, real estate, and other invested assets. The IMR is composed of investment- and liability-related realized gains and losses that result from interest rate fluctuations. These realized gains and losses, net of tax, are amortized into income over the expected remaining life of the asset sold or the liability released. 1.3 INSURANCE CONTRACTS The insurance contracts accounted for in these financial statements include primarily long-duration contracts. Long-duration contracts include traditional whole life, endowment, guaranteed renewable term life, universal life, limited payment, and investment contracts. Long-duration contracts generally require the performance of various functions and services over a period of more than one year. The contract provisions generally cannot be changed or canceled by the insurer during the contract period; however, most new contracts written by the Company allow the insurer to revise certain elements used in determining premium rates or policy benefits, subject to guarantees stated in the contracts. F-9 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 1. ACCOUNTING POLICIES (CONTINUED) 1.4 INVESTMENTS FIXED MATURITY AND EQUITY SECURITIES All fixed maturity and equity securities were classified as available-for-sale and recorded at fair value at December 31, 1998, 1997, and 1996. After adjusting related balance sheet accounts as if the unrealized gains (losses) had been realized, the net adjustment is recorded in accumulated other comprehensive income within shareholders' equity. If the fair value of a security classified as available-for-sale declines below its cost and this decline is considered to be other than temporary, the security is reduced to its fair value, and the reduction is recorded as a realized loss. During 1998, the Company maintained a trading portfolio of certain fixed maturity securities. Trading securities are recorded at fair value. Unrealized gains (losses), as well as realized gains (losses), are included in net investment income. The Company held no trading securities at December 31, 1998, and trading securities did not have a material effect on net investment income in 1998. MORTGAGE LOANS Mortgage loans are reported at amortized cost, net of an allowance for losses. The allowance for losses covers all non-performing loans and loans for which management has a concern based on its assessment of risk factors, such as potential non-payment or non-monetary default. The allowance is based on a loan- specific review and a formula that reflects past results and current trends. Loans for which the Company determines that collection of all amounts due under the contractual terms is not probable are considered to be impaired. The Company generally looks to the underlying collateral for repayment of impaired loans. Therefore, impaired loans are considered to be collateral dependent and are reported at the lower of amortized cost or fair value of the underlying collateral, less estimated cost to sell. POLICY LOANS Policy loans are reported at unpaid principal balance. F-10 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 1. ACCOUNTING POLICIES (CONTINUED) 1.4 INVESTMENTS (CONTINUED) INVESTMENT REAL ESTATE Investment real estate is classified as held for investment or available for sale, based on management's intent. Real estate held for investment is carried at cost, less accumulated depreciation and impairment write-downs. Real estate available for sale is carried at the lower of cost (less accumulated depreciation, if applicable) or fair value less cost to sell. INVESTMENT INCOME Interest on fixed maturity securities and performing and restructured mortgage loans is recorded as income when earned and is adjusted for any amortization of premium or discount. Interest on delinquent mortgage loans is recorded as income when received. Dividends are recorded as income on ex-dividend dates. REALIZED INVESTMENT GAINS Realized investment gains (losses) are recognized using the specific- identification method. 1.5 SEPARATE ACCOUNTS Separate Accounts are assets and liabilities associated with certain contracts, principally annuities; for which the investment risk lies solely with the contract holder. Therefore, the Company's liability for these accounts equals the value of the account assets. Investment income, realized investment gains (losses), and policyholder account deposits and withdrawals related to separate accounts are excluded from the consolidated statements of income, comprehensive income, and cash flows. 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-11 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 1. ACCOUNTING POLICIES (CONTINUED) 1.6 DEFERRED POLICY ACQUISITION COSTS ("DPAC") AND COST OF INSURANCE PURCHASED ("CIP") Certain costs of writing an insurance policy, including commissions, underwriting, and marketing expenses, are deferred and reported as DPAC. CIP represents the cost assigned to insurance contracts in force that are acquired through the purchase of a block of business. At December 31, 1998, CIP of $22.1 million was reported within other assets. DPAC and CIP associated with interest-sensitive life contracts, insurance investment contracts, and participating life insurance contracts is charged to expense in relation to the estimated gross profits of those contracts. DPAC and CIP 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 and CIP are adjusted for the impact on estimated future gross profits as if net unrealized gains (losses) on securities had been realized at the balance sheet date. The impact of this adjustment is included in accumulated other comprehensive income within shareholder's equity. The Company reviews the carrying amount of DPAC and CIP on at least an annual basis. Management considers estimated future gross profits or future premiums, expected mortality, interest earned and credited rates, persistency, and expenses in determining whether the carrying amount is recoverable. 1.7 PREMIUM RECOGNITION Most receipts for annuities and interest-sensitive life insurance policies are classified as deposits instead of revenue. Revenues for these contracts consist of mortality, expense, and surrender charges. Policy charges that compensate the Company for future services are deferred and recognized in income over the period earned, using the same assumptions used to amortize DPAC (see Note 1.6). For limited-payment contracts, net premiums are recorded as revenue, and the difference between the gross premium received and the net premium is deferred and recognized in a constant relationship to insurance in force. For all other contracts, premiums are recognized when due. F-12 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 1. ACCOUNTING POLICIES (CONTINUED) 1.8 OTHER ASSETS Acquisition-related goodwill, which is included in other assets, is charged to expense in equal amounts over 40 years. The carrying value of goodwill is regularly reviewed by management for indicators of impairment in value. If facts and circumstances suggest that goodwill is impaired, other than temporarily, the Company assesses the fair value of the underlying assets and reduces goodwill accordingly. 1.9 POLICY AND CONTRACT CLAIMS RESERVES Substantially all of the Company's insurance and annuity liabilities relate to long-duration contracts. The contracts normally cannot be changed or canceled by the Company during the contract period. For interest-sensitive life and insurance investment contracts, reserves equal the sum of the policy account balance and deferred revenue charges. Reserves for other contracts are based on estimates of the cost of future policy benefits. Reserves are determined using the net level premium method. Interest assumptions used to compute reserves ranged from 2.5% to 13.5% at December 31, 1998. 1.10 REINSURANCE The Company limits its exposure to loss on any single insured to $2.5 million by ceding additional risks through reinsurance contracts with other insurers. The Company diversifies its risk of reinsurance loss by using a number of reinsurers that have strong claims-paying ability ratings. If the reinsurer could not meet its obligations, the Company would reassume the liability. The likelihood of a material reinsurance liability being reassumed by the Company is considered to be remote. A receivable is recorded for the portion of benefits paid and insurance liabilities that have been reinsured. Reinsurance recoveries on ceded reinsurance contracts were $63 million, $25 million, and $24 million during 1998, 1997, and 1996, respectively. 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-13 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 1. ACCOUNTING POLICIES (CONTINUED) 1.10 REINSURANCE Benefits paid and future policy benefits related to ceded insurance contracts are recorded as reinsurance receivables. The cost of reinsurance is recognized over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies. 1.11 PARTICIPATING POLICY CONTRACTS Participating life insurance accounted for approximately 2% of life insurance in force at December 31, 1998 and 1997. The portion of earnings allocated to participating policyholders that cannot be expected to inure to shareholders is excluded from net income and shareholder's equity. Dividends to be paid on participating life insurance contracts are determined annually based on estimates of the contracts' earnings. Policyholder dividends were $4.9 million in 1998. 1.12 INCOME TAXES The Company and its life insurance subsidiaries, together with certain other life insurance subsidiaries of the Parent Company, are included in a life/non- life consolidated tax return with the Parent Company and its noninsurance subsidiaries. The Company participates in a tax sharing agreement with other companies included in the consolidated tax return. Under this agreement, tax payments are made to the Parent Company as if the companies filed separate tax returns; and companies incurring operating and/or capital losses are reimbursed for the use of these losses by the consolidated return group. Deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of assets and liabilities, at the enacted tax rates expected to be in effect when the temporary differences reverse. The effect of a tax rate change is recognized in income in the period of enactment. State income taxes are included in income tax expense. F-14 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 1. ACCOUNTING POLICIES (CONTINUED) 1.12 INCOME TAXES (CONTINUED) A valuation allowance for deferred tax assets is provided if it is more likely than not that some portion of the deferred tax asset will not be realized. An increase or decrease in a valuation allowance that results from a change in circumstances that causes a change in judgment about the realizability of the related deferred tax asset is included in income. Changes related to fluctuations in fair value of available-for-sale securities are included in the consolidated statements of comprehensive income and accumulated other comprehensive income in shareholder's equity. 1.13 ACCOUNTING CHANGES During 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) 130, Reporting Comprehensive Income, which establishes standards for reporting and displaying comprehensive income and its components in the financial statements. The Company elected to report comprehensive income and its components in a separate statement of comprehensive income. Adoption of this statement did not change recognition or measurement of net income and, therefore, did not impact the Company's consolidated results of operations or financial position. Effective December 31, 1998, the Company adopted SFAS 131, Disclosures about Segments of an Enterprise and Related Information, which changes the way companies report segment information. With the adoption of SFAS 131, the Company reports division earnings exclusive of goodwill amortization, net realized investment gains, and nonrecurring items. This methodology is consistent with the manner in which management reviews division results. Adoption of this statement did not impact the Company's consolidated results of operations or financial position. In June 1998, the Financial Accounting Standards Board issued SFAS 133, Accounting for Derivative Instruments and Hedging Activities, which requires all derivative instruments to be recognized at fair value as either assets or liabilities in the balance sheet. Changes in the fair value of a derivative instrument are to be reported as earnings or other comprehensive income, depending upon the intended use of the derivative instrument. This statement is effective for years beginning after June 15, 1999. Adoption of SFAS 133 is not expected to have a material impact on the Company's consolidated results of operations or financial position. F-15 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS 2.1 INVESTMENT INCOME Investment income by type of investment was as follows:
1998 1997 1996 ---------------------------------------------------------- (In Thousands) Investment income: Fixed maturities $2,101,730 $1,966,528 $1,846,549 Equity securities 1,813 1,067 1,842 Mortgage loans on real estate 148,447 157,035 175,833 Investment real estate 23,139 22,157 22,752 Policy loans 66,573 62,939 58,211 Other long-term investments 3,837 3,135 2,328 Short-term investments 15,492 8,626 9,280 Investment income from affiliates 10,536 11,094 11,502 ---------------------------------------------------------- Gross investment income 2,371,567 2,232,581 2,128,297 Investment expenses 54,634 33,958 33,225 ---------------------------------------------------------- Net investment income $2,316,933 $2,198,623 $2,095,072 ==========================================================
The carrying value of investments that produced no investment income during 1998 was less than 0.2% of total invested assets. The ultimate disposition of these investments is not expected to have a material effect on the Company's results of operations and financial position. F-16 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS (CONTINUED) 2.2 NET REALIZED INVESTMENT GAINS (LOSSES) Realized gains (losses) by type of investment were as follows:
1998 1997 1996 -------------------------------------------------------- (In Thousands) Fixed maturities: Gross gains $ 20,109 $ 42,966 $ 46,498 Gross losses (62,657) (34,456) (47,293) -------------------------------------------------------- Total fixed maturities (42,548) 8,510 (795) Equity securities 645 1,971 18,304 Other investments 8,118 19,384 10,993 -------------------------------------------------------- Net realized investment gains (losses) before tax (33,785) 29,865 28,502 Income tax expense (benefit) (11,826) 10,452 9,976 -------------------------------------------------------- Net realized investment gains (losses) after tax $(21,959) $ 19,413 $ 18,526 ========================================================
F-17 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS (CONTINUED) 2.3 FIXED MATURITY AND EQUITY SECURITIES All fixed maturity and equity securities are classified as available-for-sale and reported at fair value (see Note 1.4). Amortized cost and fair value at December 31, 1998 and 1997 were as follows:
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAIN LOSS VALUE ------------------------------------------------------------------------------ (In Thousands) DECEMBER 31, 1998 Fixed maturity securities: Corporate securities: Investment-grade $18,800,553 $1,129,504 $(26,353) $19,903,703 Below investment-grade 1,409,198 33,910 (45,789) 1,397,320 Mortgage-backed securities* 6,359,242 294,331 (870) 6,652,703 U.S. government obligations 417,822 69,321 (178) 486,965 Foreign governments 331,699 24,625 (2,437) 353,887 State and political subdivisions 86,778 4,796 (187) 91,387 Redeemable preferred stocks 20,313 - (17) 20,296 ------------------------------------------------------------------------------ Total fixed maturity securities $27,425,605 $1,556,487 $(75,831) $28,906,261 ============================================================================== Equity securities $ 193,368 $ 19,426 $ (1,110) $ 211,684 ============================================================================== Investment in Parent Company $ 8,597 $ 45,973 $ - $ 54,570 ==============================================================================
* Primarily include pass-through securities guaranteed by and mortgage obligations ("CMOs") collateralized by the U.S. government and government agencies. F-18 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS (CONTINUED) 2.3 FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAIN LOSS VALUE ------------------------------------------------------------------------------ (In Thousands) DECEMBER 31, 1997 Fixed maturity securities: Corporate securities: Investment-grade $17,913,942 $ 906,235 $(17,551) $18,802,626 Below investment-grade 950,438 34,290 (4,032) 980,696 Mortgage-backed securities* 6,614,704 278,143 (4,260) 6,888,587 U.S. government obligations 289,406 46,529 (74) 335,861 Foreign governments 318,212 18,076 (3,534) 332,754 State and political subdivisions 44,505 1,686 -- 46,191 ------------------------------------------------------------------------------ Total fixed maturity securities $26,131,207 $1,284,959 $(29,451) $27,386,715 ============================================================================== Equity securities $ 19,208 $ 2,145 $ (239) $ 21,114 ============================================================================== Investment in Parent Company $ 8,597 $ 29,226 $ -- $ 37,823 ==============================================================================
* Primarily include pass-through securities guaranteed by and mortgage obligations ("CMOs") collateralized by the U.S. government and government agencies. F-19 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS (CONTINUED) 2.3 FIXED MATURITY AND EQUITY SECURITIES (CONTINUED) Net unrealized gains (losses) on securities included in accumulated comprehensive income in shareholders' equity at December 31 were as follows:
1998 1997 -------------------------------------------- (In Thousands) Gross unrealized gains $1,621,886 $1,316,330 Gross unrealized losses (76,941) (29,690) DPAC and other fair value adjustments (488,120) (621,867) Deferred federal income taxes (377,718) (237,247) -------------------------------------------- Net unrealized gains on securities $ 679,107 $ 427,526 ============================================
The contractual maturities of fixed maturity securities at December 31, 1998 were as follows:
1998 1997 ----------------------------------------------------------------------------- AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE ----------------------------------------------------------------------------- (In Thousands) (In Thousands) Fixed maturity securities, excluding mortgage- backed securities: Due in one year or less $ 531,496 $ 536,264 $ 205,719 $ 207,364 Due after one year through five years 5,550,665 5,812,581 5,008,933 5,216,174 Due after five years through ten years 9,229,980 9,747,761 9,163,681 9,604,447 Due after ten years 5,754,220 6,156,950 5,138,169 5,470,143 Mortgage-backed securities 6,359,244 6,652,705 6,614,705 6,888,587 ----------------------------------------------------------------------------- Total fixed maturity securities $27,425,605 $28,906,261 $26,131,207 $27,386,715 =============================================================================
Actual maturities may differ from contractual maturities, since borrowers may have the right to call or prepay obligations. In addition, corporate requirements and investment strategies may result in the sale of investments before maturity. Proceeds from sales of fixed maturities were $5.4 billion, $14.8 billion, and $16.2 billion during 1998, 1997, and 1996, respectively. F-20 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS (CONTINUED) 2.4 MORTGAGE LOANS ON REAL ESTATE Diversification of the geographic location and type of property collateralizing mortgage loans reduces the concentration of credit risk. For new loans, the Company requires loan-to-value ratios of 75% or less, based on management's credit assessment of the borrower. The mortgage loan portfolio was distributed as follows at December 31, 1998 and 1997:
OUTSTANDING PERCENT OF PERCENT AMOUNT TOTAL NONPERFORMING ------------------------------------------------------------------ (In Millions) DECEMBER 31, 1998 Geographic distribution: South Atlantic $ 429 27.6% 0.2% Pacific 320 20.6 10.4 Mid-Atlantic 326 20.9 4.1 East North Central 178 11.4 - Mountain 95 6.1 - West South Central 118 7.5 - East South Central 46 3.0 - West North Central 33 2.1 - New England 25 1.6 - Allowance for losses (13) (0.8) - ------------------------------------- Total $ 1,557 100.00% 3.1% ===================================== Property type: Office $ 593 38.1% 7.0% Retail 423 27.1 0.2 Industrial 292 18.8 - Apartments 178 11.4 2.9 Hotel/motel 38 2.4 - Other 46 3.0 - Allowance for losses (13) (0.8) - ------------------------------------- Total $ 1,557 100% 3.1% =====================================
F-21 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS (CONTINUED) 2.4 MORTGAGE LOANS ON REAL ESTATE (CONTINUED)
OUTSTANDING PERCENT OF PERCENT AMOUNT TOTAL NONPERFORMING ------------------------------------------------------------------ (In Millions) DECEMBER 31, 1997 Geographic distribution: South Atlantic $ 456 27.5% 1.8% Pacific 340 20.5 14.4 Mid-Atlantic 288 17.3 - East North Central 186 11.2 - Mountain 151 9.1 2.7 West South Central 132 7.9 .1 East South Central 94 5.7 - West North Central 19 1.1 - New England 17 1.1 - Allowance for losses (23) (1.4) - ------------------------------------- Total $1,660 100.0% 3.6% ===================================== Property type: Office $ 622 37.5% 4.6% Retail 463 27.9 3.0 Industrial 324 19.5 1.8 Apartments 223 13.4 6.1 Hotel/motel 40 2.4 - Other 11 .7 - Allowance for losses (23) (1.4) - ------------------------------------- Total $1,660 100.0% 3.6% =====================================
F-22 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS (CONTINUED) 2.4 MORTGAGE LOANS ON REAL ESTATE (CONTINUED) Impaired mortgage loans on real estate and related interest income were as follows:
DECEMBER 31 1998 1997 ----------------------------------------- (In Millions) Impaired loans: With allowance* $ 13 $ 35 Without allowance - - ----------------------------------------- Total impaired loans $ 13 $ 35 =========================================
* Represents gross amounts before allowance for mortgage loan losses of $1.8 million and $10 million, respectively.
1998 1997 1996 --------------------------------------------------------------- (In Millions) Average investment $ 24 $ 48 $ 72 Interest income earned $ - $ 3 $ 6 Interest income - cash basis $ - $ - $ 6
F-23 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS (CONTINUED) 2.5 INVESTMENT SUMMARY Investments of the Company were as follows:
DECEMBER 31, 1998 DECEMBER 31, 1997 -------------------------------------------------------------------------------------------------------- CARRYING CARRYING COST FAIR VALUE AMOUNT COST FAIR VALUE AMOUNT -------------------------------------------------------------------------------------------------------- (In Thousands) (In Thousands) Fixed maturities: Bonds: United States government and government agencies and authorities $ 417,822 $ 486,965 $ 486,965 $ 289,406 $ 335,861 $ 335,861 States, municipalities, and political subdivisions 86,778 91,387 91,387 44,505 46,191 46,191 Foreign governments 331,699 353,887 353,887 318,212 332,754 332,754 Public utilities 1,777,172 1,895,326 1,895,326 1,848,546 1,952,724 1,952,724 Mortgage-backed securities 6,359,242 6,652,703 6,652,703 6,614,704 6,888,587 6,888,587 All other corporate bonds 18,432,579 19,405,697 19,405,697 17,015,834 17,830,598 17,830,598 Redeemable preferred stocks 20,313 20,296 20,296 - - - -------------------------------------------------------------------------------------------------------- Total fixed maturities 27,425,605 28,906,261 28,906,261 26,131,207 27,386,715 27,386,715 Equity securities: Common stocks: Banks, trust, and insurance companies - - - - - - Industrial, miscellaneous, and other 176,321 211,684 211,684 5,604 5,785 5,785 Nonredeemable preferred stocks 17,047 - - 13,604 15,329 15,329 -------------------------------------------------------------------------------------------------------- Total equity securities 193,368 211,684 211,684 19,208 21,114 21,114 Mortgage loans on real estate* 1,557,268 - 1,557,268 1,659,921 - 1,659,921 Investment real estate 119,520 - 119,520 129,364 - 129,364 Policy loans 1,170,686 - 1,170,686 1,093,694 - 1,093,694 Other long-term investments 86,194 - 86,194 55,118 - 55,118 Short-term investments 222,949 - 222,949 100,061 - 100,061 -------------------------------------------------------------------------------------------------------- Total investments $30,775,590 $ - $32,274,562 $29,188,573 $ - $30,445,987 ========================================================================================================
* Amount is net of allowance for losses of $13 million and $23 million at December 31, 1996 and 1997, respectively. F-24 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 3. DEFERRED POLICY ACQUISITION COSTS The balance of DPAC at December 31 and the components of the change reported in operating costs and expenses for the years then ended were as follows:
1998 1997 1996 ---------------------------------------------------------- (In Thousands) Balance at January 1 $ 835,031 $1,042,783 $ 605,501 Capitalization 244,196 219,339 188,001 Amortization (125,062) (115,467) (102,189) Effect of unrealized gains (losses) on securities 133,553 (311,624) 351,470 ---------------------------------------------------------- Balance at December 31 $1,087,718 $ 835,031 $1,042,783 ==========================================================
4. OTHER ASSETS Other assets consisted of the following:
DECEMBER 31 1998 1997 ------------------------------------ (In Thousands) Goodwill $ 54,754 $ 51,424 American General Corporation CBO (Collateralized Bond Obligation) 98-1 Ltd. 9,740 - Cost of insurance purchased ("CIP") 22,113 - Other 119,711 81,235 ------------------------------------ Total other assets $206,318 $132,659 ====================================
F-25 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 4. OTHER ASSETS (CONTINUED) A rollforward of CIP for the year ended December 31, 1998, was as follows:
1998 -------------------- (In Thousands) Balance at January 1 $ -- Acquisition of business 23,915 Accretion of interest at 5.88% 733 Amortization (2,535) -------------------- Balance at December 31 $ 22,113 ====================
5. FEDERAL INCOME TAXES 5.1 TAX LIABILITIES Income tax liabilities were as follows:
DECEMBER 31 1998 1997 -------------------------------------- (In Thousands) Current tax (receivable) payable $ (21,035) $ 7,676 Deferred tax liabilities, applicable to: Net income 320,632 298,456 Net unrealized investment gains 377,718 237,247 ----------------------------------------- Total deferred tax liabilities 698,350 535,703 ----------------------------------------- Total current and deferred tax liabilities $ 677,315 $ 543,379 =========================================
F-26 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 5. FEDERAL INCOME TAXES (CONTINUED) 5.1 TAX LIABILITIES (CONTINUED) Components of deferred tax liabilities and assets at December 31 were as follows:
1998 1997 ------------------------------------------ (In Thousands) Deferred tax liabilities applicable to: Deferred policy acquisition costs $ 307,025 $ 226,653 Basis differential of investments 590,661 486,194 Other 150,189 139,298 ------------------------------------------ Total deferred tax liabilities 1,047,875 852,145 Deferred tax assets applicable to: Policy reserves (212,459) (232,539) Other (137,066) (83,903) ------------------------------------------ Total deferred tax assets before valuation allowance (349,525) (316,442) Valuation allowance - - ------------------------------------------ Total deferred tax assets, net of valuation allowance (349,525) (316,442) ------------------------------------------ Net deferred tax liabilities $ 698,350 $ 535,703 ==========================================
A portion of life insurance income earned prior to 1984 is not taxable unless it exceeds certain statutory limitations, is distributed as dividends, or unless the income tax deferred status of such amount is modified by future tax legislation. Such income, accumulated in policyholders' surplus accounts, totaled $87.1 million at December 31, 1998. At current corporate rates, the maximum amount of tax on such income is approximately $30.5 million. Deferred income taxes on these accumulations are not required because no distributions are expected. F-27 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 5. FEDERAL INCOME TAXES (CONTINUED) 5.2 TAX EXPENSE Components of income tax expense for the years were as follows:
1998 1997 1996 -------------------------------------------------------- (In Thousands) Current expense $134,344 $185,460 $164,272 Deferred expense (benefit): Deferred policy acquisition cost 33,230 27,644 21,628 Policy reserves 2,189 (27,496) (27,460) Basis differential of investments 11,969 3,769 4,129 Litigation settlement (33,983) -- -- Year 2000 (9,653) -- -- Other, net 15,623 9,347 14,091 -------------------------------------------------------- Total deferred expense 19,375 13,264 12,388 -------------------------------------------------------- Income tax expense $153,719 $198,724 $176,660 ========================================================
A reconciliation between the income tax expense computed by applying the federal income tax rate (35%) to income before taxes and the income tax expense reported in the financial statement is presented below.
1998 1997 1996 -------------------------------------------------------- (In Thousands) Income tax at statutory percentage of GAAP pretax income $164,638 $200,649 $178,939 Tax-exempt investment income (11,278) (9,493) (9,347) Goodwill 712 723 759 Other (353) 6,845 6,309 -------------------------------------------------------- Income tax expense $153,719 $198,724 $176,660 ========================================================
F-28 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 5. FEDERAL INCOME TAXES (CONTINUED) 5.3 TAXES PAID Income taxes paid amounted to approximately $159 million, $168 million, and $182 million in 1998, 1997, and 1996, respectively. 5.4 TAX RETURN EXAMINATIONS The Parent Company and the majority of its subsidiaries file a consolidated federal income tax return. The Internal Revenue Service ("IRS") has completed examinations of the Parent Company's tax returns through 1988. The IRS is currently examining tax returns for 1989 through 1996. In addition, the tax returns of companies recently acquired are also being examined. Although the final outcome of any issues raised in examination is uncertain, the Parent Company believes that the ultimate liability, including interest, will not materially exceed amounts recorded in the consolidated financial statements. 6. TRANSACTIONS WITH AFFILIATES Affiliated notes and accounts receivable were as follows:
DECEMBER 31, 1998 DECEMBER 31, 1997 ------------------------------------------------------------------------ PAR VALUE BOOK VALUE PAR VALUE BOOK VALUE ------------------------------------------------------------------------ (In Thousands) American General Corporation, 9-3/8%, due 2008 $ 4,725 $ 3,345 $ 4,725 $ 3,288 American General Corporation, Promissory notes, due 2004 14,679 14,679 17,125 17,125 American General Corporation, Restricted Subordinated Note, 13-1/2%, due 2002 29,435 29,435 31,494 31,494 ------------------------------------------------------------------------ Total notes receivable from affiliates 48,839 47,459 53,344 51,907 Accounts receivable from affiliates - 113,637 - 44,612 ------------------------------------------------------------------------ Indebtedness from affiliates $48,839 $161,096 $53,344 $96,519 ========================================================================
F-29 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 6. TRANSACTIONS WITH AFFILIATES (CONTINUED) Various American General companies provide services to the Company, principally mortgage servicing and investment management services, provided by American General Investment Management Corporation on a fee basis. The Company paid approximately $46,921,000, $33,916,000, and $22,083,000 for such services in 1998, 1997, and 1996, respectively. Accounts payable for such services at December 31, 1998 and 1997 were not material. The Company rents facilities and provides services on an allocated cost basis to various American General companies. Beginning in 1998, amounts received by the Company from affiliates include amounts received by its wholly-owned, non-life insurance subsidiary, American General Life Companies (AGLC). AGLC provides shared services, including technology and Year 2000-readiness, to a number of American General Corporation's life insurance subsidiaries. The Company received approximately $66,550,000, $6,455,000, and $1,255,000 for such services and rent in 1998, 1997, and 1996, respectively. Accounts receivable for rent and services at December 31, 1998 and 1997 were not material. The Company has 8,500 shares of $100 par value cumulative preferred stock authorized and outstanding with an $80 dividend rate, redeemable at $1,000 per share after December 31, 2000. The holder of this stock, The Franklin Life Insurance Company ("Franklin"), an affiliated company, is entitled to one vote per share, voting together with the holders of common stock. During 1996, the Company's residential mortgage loan portfolio of $42 million was sold to American General Finance, Inc., at carrying value plus accrued interest. 7. STOCK-BASED COMPENSATION Certain officers of the Company participate in American General Corporation's stock and incentive plans which provide for the award of stock options, restricted stock awards, performance awards, and incentive awards to key employees. Stock options constitute the majority of such awards. Expense related to stock options is measured as the excess of the market price of the stock at the measurement date over the exercise price. The measurement date is the first date on which both the number of shares that the employee is entitled to receive and the exercise price are known. Under the stock option plans, no expense is recognized, since the market price equals the exercise price at the measurement date. F-30 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 7. STOCK-BASED COMPENSATION (CONTINUED) Under an alternative accounting method, compensation expense arising from stock options would be measured at the estimated fair value of the options at the date of grant. Had compensation expense for the stock options been determined using this method, net income would have been as follows:
1998 1997 1996 ------------------------------------------------------- (In Thousands) Net income as reported $316,674 $374,557 $334,595 Net income pro forma $315,078 $373,328 $334,029
The average fair values of the options granted during 1998, 1997, and 1996 were $15.38, $10.33, and $7.07, respectively. The fair value of each option was estimated at the date of grant using a Black-Scholes option pricing model. The weighted average assumptions used to estimate the fair value of the stock options were as follows:
1998 1997 1996 ------------------------------------------------------- Dividend yield 2.5% 3.0% 4.0% Expected volatility 23.0% 22.0% 22.3% Risk-free interest rate 5.76% 6.4% 6.2% Expected life 6 YEARS 6 years 6 years
8. BENEFIT PLANS 8.1 PENSION PLANS The Company has non-contributory defined benefit pension plans covering most employees. Pension benefits are based on the participant's compensation and length of credited service. Equity and fixed maturity securities were 56% and 30%, respectively, of the plans' assets at the plans' most recent balance sheet dates. Additionally, 1% of plan assets were invested in general investment accounts of the Parent Company's subsidiaries through deposit administration insurance contracts. F-31 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 8. BENEFIT PLANS (CONTINUED) 8.1 PENSION PLANS (CONTINUED) The benefit plans have purchased annuity contracts from American General Corporation's subsidiaries to provide benefits for certain retirees. These contracts are expected to provide future annual benefits to certain retirees of American General Corporation and its subsidiaries of approximately $52 million. The components of pension expense and underlying assumptions were as follows:
1998 1997 1996 -------------------------------------------------------- (In Thousands) Service cost (benefits earned) $ 3,693 $ 1,891 $ 1,826 Interest cost 6,289 2,929 2,660 Expected return on plan assets (9,322) (5,469) (5,027) Amortization (557) 195 4 -------------------------------------------------------- Pension (income) expense $ 103 $ (454) $ (537) ======================================================== Discount rate on benefit obligation 7.00% 7.25% 7.50% Rate of increase in compensation levels 4.25% 4.00% 4.00% Expected long-term rate of return on plan assets 10.25% 10.00% 10.00%
The Company's funding policy is to contribute annually no more than the maximum deductible for federal income tax purposes. The funded status of the plans and the prepaid pension expense included in other assets at December 31 were as follows:
1998 1997 ----------------------------------- (In Thousands) Projected benefit obligation (PBO) $ 96,554 $ 43,393 Plan assets at fair value 120,898 80,102 Plan assets at fair value in excess of PBO 24,344 36,709 Other unrecognized items, net (10,176) (23,470) ----------------------------------- Prepaid pension expense $ 14,168 $ 13,239 ===================================
F-32 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 8. BENEFIT PLANS (CONTINUED) 8.1 PENSION PLANS (CONTINUED) The change in PBO was as follows:
1998 1997 --------------------------------- (In Thousands) PBO at January 1 $43,393 $37,389 Service and interest costs 9,982 4,820 Benefits paid (1,954) (673) Actuarial loss 17,089 1,810 Amendments, transfers, and acquisitions 28,044 47 --------------------------------- PBO at December 31 $96,554 $43,393 =================================
The change in the fair value of plan assets was as follows:
1998 1997 ---------------------------------- (In Thousands) Fair value of plan assets at January 1 $ 80,102 $65,158 Actual return on plan assets 12,269 14,990 Benefits paid (1,954) (673) Acquisitions and other 30,481 627 ---------------------------------- Fair value of plan assets at December 31 $120,898 $80,102 ==================================
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company has life, medical, supplemental major medical, and dental plans for certain retired employees and agents. Most plans are contributory, which retiree contributions adjusted annually to limit employer contributions to predetermined amounts. The Company has reserved the right to change or eliminate these benefits at any time. F-33 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 8. BENEFIT PLANS (CONTINUED) 8.2 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED) The life plans are insured through December 31, 1999. A portion of the retiree medical and dental plans is funded through a voluntary employees' beneficiary association (VEBA); the remainder is unfunded and self-insured. All of the retiree medical and dental plans' assets held in the VEBA were invested in readily marketable securities at its most recent balance sheet date. Postretirement benefit expense in 1998, 1997, and 1996 was $60,000, $601,000, and $844,000, respectively. The accrued liability for postretirement benefits was $19.2 million and $3.8 million at December 31, 1998 and 1997, respectively. These liabilities were discounted at the same rates used for the pension plans. 9. DERIVATIVE FINANCIAL INSTRUMENTS 9.1 USE OF DERIVATIVE FINANCIAL INSTRUMENTS The Company's use of derivative financial instruments is generally limited to reducing its exposure to interest rate and currency exchange risk by utilizing interest rate and currency swap agreements, and options to enter into interest rate swap agreements (called swaptions). The Company accounts for these derivative and financial instruments as hedges. Hedge accounting requires a high correlation between changes in fair values or cash flows of the derivative financial instrument and the specific item being hedged, both at inception and throughout the life of the hedge. 9.2 INTEREST RATE AND CURRENCY SWAP AGREEMENTS Interest rate swap agreements are used to convert specific investment securities from a floating to a fixed rate basis, or vice versa, and to hedge against the risk of declining interest rates on anticipated security purchases. Interest rate swap agreements are also used to convert a portion of floating-rate borrowings to a fixed rate and to hedge against the risk of rising interest rates on anticipated debt issuances. Currency swap agreements are used to convert cash flows from specific investment securities denominated in foreign currencies into U.S. dollars at specific exchange rates, and to hedge against currency rate fluctuation on anticipated security purchases. F-34 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 9. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) 9.2 INTEREST RATE AND CURRENCY SWAP AGREEMENTS (CONTINUED) The difference between amounts paid and received on swap agreements is recorded on an accrual basis as an adjustment to net investment income or interest expense, as appropriate, over the periods covered by the agreements. The related amount payable to or receivable from counterparties is included in other liabilities or assets. The fair values of swap agreements are recognized in the consolidated balance sheet if the hedge investments are carried at fair value or if they hedge anticipated purchases of such investments. In this event, changes in the fair value of a swap agreement are reported in net unrealized gains on securities included in other accumulated comprehensive income in shareholders' equity, consistent with the treatment of the related investment security. The fair values of swap agreements hedging debt are not recognized in the consolidated balance sheet. For swap agreements hedging anticipated investment purchases or debt issuances, the net swap settlement amount or unrealized gain or loss is deferred and included in the measurement of the anticipated transaction when it occurs. Swap agreements generally have terms of two to ten years. Any gain or loss from early termination of a swap agreement is deferred and amortized into income over the remaining term of the related investment or debt. If the underlying investment or debt is extinguished or sold, any related gain or loss on swap agreements is recognized in income. F-35 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 9. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) 9.2 INTEREST RATE AND CURRENCY SWAP AGREEMENTS (CONTINUED) Interest rate and currency swap agreements related to investment securities at December 31 were as follows:
1998 1997 ----------------------------------- (Dollars in Millions) Interest rate swap agreements to pay fixed rate: Notional amount $ - $ 15 Average receive rate - 6.74% Average pay rate - 6.48% Interest rate swap agreements to receive fixed rate: Notional amount $ 369 $ 144 Average receive rate 6.06% 6.89% Average pay rate 5.48% 6.37% Currency swap agreements (receive U.S. dollars/pay Canadian dollars): Notional amount (in U.S. dollars) $ 124 $ 139 Average exchange rate 1.50 1.50
9.3 CALL SWAPTIONS Options to enter into interest rate swap agreements are used to limit the Company's exposure to reduced spreads between investment yields and interest crediting rates should interest rates decline significantly over prolonged periods. During such periods, the spread between investment yields and interest crediting rates may be reduced as a result of certain limitations on the Company's ability to manage interest crediting rates. Call swaptions allow the Company to enter into interest rate swap agreements to receive fixed rates and pay lower floating rates, effectively increasing the spread between investment yields and interest crediting rates. Premiums paid to purchase call swaptions are included in investments and are amortized to net investment income over the exercise period of the swaptions. If a call swaption is terminated, any gain is deferred and amortized to insurance and annuity benefits over the expected life of the insurance and annuity contracts and any unamortized premium is charged to income. If a call swaption ceases to be an effective hedge, any related gain or loss is recognized in income. F-36 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 9. DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED) 9.3 CALL SWAPTIONS (CONTINUED) Swaptions at December 31 were as follows:
1998 1997 ---------------------------------- (Dollars in Billions) Call swaptions: Notional amount $1.76 $1.35 Average strike rate 3.97% 4.81% Put swaptions: Notional amount $1.05 $ - Average strike rate 8.33% -
9.4 CREDIT AND MARKET RISK Derivative financial instruments expose the Company to credit risk in the event of non-performance by counterparties. The Company limits this exposure by entering into agreements with counterparties having high credit ratings and by regularly monitoring the ratings. The Company does not expect any counterparty to fail to meet its obligation; however, non-performance would not have a material impact on the Company's consolidated results of operations or financial position. The Company's exposure to market risk is mitigated by the offsetting effects of changes in the value of the agreements and the related items being hedged. F-37 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 10. FAIR VALUE OF FINANCIAL INSTRUMENTS Carrying amounts and fair values for certain of the Company'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 the Company's assets and liabilities, and (2) the reporting of investments at fair value without a corresponding evaluation of related policyholders liabilities can be misinterpreted.
1998 1997 -------------------------------------------------------------------------------- FAIR CARRYING FAIR CARRYING VALUE AMOUNT VALUE AMOUNT -------------------------------------------------------------------------------- (In Millions) (In Millions) Assets: Fixed maturity and equity securities * $29,118 $29,118 $27,408 $27,408 Mortgage loans on real estate $ 1,608 $ 1,557 $ 1,702 $ 1,660 Policy loans $ 1,252 $ 1,171 $ 1,127 $ 1,094 Investment in parent company $ 55 $ 55 $ 38 $ 38 Indebtedness from affiliates $ 161 $ 161 $ 97 $ 97 Liabilities: Insurance investment contracts $25,852 $25,675 $24,011 $24,497
* Includes derivative financial instruments with negative fair values of $1.0 million and $4.2 million and positive fair values of $24.3 million and $7.2 million at December 31, 1998 and 1997, respectively. F-38 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 10. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The following methods and assumptions were used to estimate the fair value of financial instruments: FIXED MATURITY AND EQUITY SECURITIES Fair values of fixed maturity and equity securities were based on quoted market prices, where available. For investments not actively traded, fair values were estimated using values obtained from independent pricing services or, in the case of some private placements, by discounting expected future cash flows using a current market rate applicable to yield, credit quality, and average life of investments. MORTGAGE LOANS ON REAL ESTATE Fair value of mortgage loans was estimated primarily using discounted cash flows, based on contractual maturities and risk-adjusted discount rates. POLICY LOANS Fair value of policy loans was estimated using discounted cash flows and actuarially determined assumptions, incorporating market rates. INVESTMENT IN PARENT COMPANY The fair value of the investment in Parent Company is based on quoted market prices of American General Corporation common stock. INSURANCE INVESTMENT CONTRACTS Fair value of insurance investment contracts was estimated using cash flows discounted at market interest rates. F-39 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 10. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) INDEBTEDNESS FROM AFFILIATES Indebtedness from affiliates is composed of accounts receivable and notes receivable from affiliates. Due to the short-term nature of accounts receivable, fair value is assumed to equal carrying value. Fair value of notes receivable was estimated using discounted cash flows based on contractual maturities and discount rates that were based on U.S. Treasury rates for similar maturity ranges. 11. DIVIDENDS PAID American General Life Insurance Company paid $244 million, $401 million, and $189 million in dividends on common stock to AGC Life Insurance Company in 1998, 1997, and 1996, respectively. The Company also paid $680 thousand per year in dividends on preferred stock to an affiliate, The Franklin Life Insurance Company, in 1998, 1997, and 1996. 12. RESTRICTIONS, COMMITMENTS, AND CONTINGENCIES The Company and its insurance subsidiaries are restricted by state insurance laws as to the amounts they may pay as dividends without prior approval from their respective state insurance departments. At December 31, 1998, approximately $3.3 billion of consolidated shareholder's equity represents net assets of the Company which cannot be transferred, in the form of dividends, loans, or advances to the Parent Company. Approximately $2.5 billion of consolidated shareholders' equity is similarly restricted as to transfer from its subsidiaries to the Company. Generally, the net assets of the Company's subsidiaries available for transfer to the Parent are limited to the amounts that the subsidiaries' net assets, as determined in accordance with statutory accounting practices, exceed minimum statutory capital requirements. However, payments of such amounts as dividends may be subject to approval by regulatory authorities and are generally limited to the greater of 10% of policyholders' surplus or the previous year's statutory net gain from operations. The Company has various leases, substantially all of which are for office space and facilities. Rentals under financing leases, contingent rentals, and future minimum rental commitments and rental expense under operating leases are not material. F-40 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 12. RESTRICTIONS, COMMITMENTS, AND CONTINGENCIES (CONTINUED) In recent years, various life insurance companies have been named as defendants in class action lawsuits relating to life insurance pricing and sales practices, and a number of these lawsuits have resulted in substantial settlements. On December 16, 1998, American General Corporation announced that certain of its life insurance subsidiaries had entered into agreements to resolve all pending market conduct class action lawsuits. The settlements are not final until approved by the courts and any appeals are resolved. If court approvals are obtained and appeals are not taken, it is expected the settlements will be final in third quarter 1999. In conjunction with the proposed settlements, the Company recorded a charge of $97.1 million ($63.1 million after-tax) in the fourth quarter of 1998. The charge covers the cost of policyholder benefits and other anticipated expenses resulting from the proposed settlements, as well as other administrative and legal costs. On December 31, 1998, the Company entered into an agreement with the Parent Company whereby the Company assigned, and the Parent Company assumed, $80.1 million of the liabilities of the Company related to the proposed resolution. The liabilities of American General Life Insurance Company of New York, which totaled $17.0 million, were not assumed by the Parent Company. As consideration for the assumption of the liabilities, the Company paid the Parent Company an amount equal to the liabilities recorded with respect to the proposed resolution of the litigation. The assignment of the liabilities was not a novation, and accordingly, the Company retains a contingent liability related to the litigation. The litigation liabilities were reduced by payments of $2.7 million, and the remaining balance of $94.4 million was included in other liabilities on the Company's balance sheet at December 31, 1998. The Company is party to various other lawsuits and proceedings arising in the ordinary course of business. Many of these lawsuits and proceedings arise in jurisdictions, such as Alabama and Mississippi, that permit damage awards disproportionate to the actual economic damages incurred. Based upon information presently available, the Company 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 the Company's consolidated 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. F-41 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 12. RESTRICTIONS, COMMITMENTS, AND CONTINGENCIES (CONTINUED) The increase in the number of insurance companies that are under regulatory supervision has resulted, and is expected to continue to result, in increased assessments by state guaranty funds to cover losses to policyholders of insolvent or rehabilitated insurance companies. Those mandatory assessments may be partially recovered through a reduction in future premium taxes in certain states. At December 31, 1998 and 1997, the Company has accrued $6.0 million and $7.6 million, respectively, for guaranty fund assessments, net of $3.7 million and $4.3 million, respectively, of premium tax deductions. The Company has recorded receivables of $6.2 million and $9.7 million at December 31, 1998 and 1997, respectively, for expected recoveries against the payment of future premium taxes. Expenses incurred for guaranty fund assessments were $3.6 million, $2.1 million, and $6.0 million in 1998, 1997, and 1996, respectively. F-42 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 13. REINSURANCE Reinsurance transactions for the years ended December 31, 1998, 1997, and 1996 were as follows:
CEDED TO ASSUMED PERCENTAGE OF GROSS OTHER FROM OTHER AMOUNT AMOUNT COMPANIES COMPANIES NET AMOUNT ASSUMED TO NET ---------------------------------------------------------------------------------------- (In Thousands) DECEMBER 31, 1998 Life insurance in force $46,057,031 $13,288,183 $629,791 $33,398,639 1.89% ==================================================================== Premiums: Life insurance and annuities $ 90,298 $ 42,235 $ 117 $ 48,180 0.24% Accident and health insurance 1,134 87 - 1,047 0.00% -------------------------------------------------------------------- Total premiums $ 91,432 $ 42,322 $ 117 $ 49,227 0.24% ==================================================================== DECEMBER 31, 1997 Life insurance in force $45,963,710 $10,926,255 $ 4,997 $35,042,452 0.01% ==================================================================== Premiums: Life insurance and annuities $ 100,357 $ 37,294 $ 75 $ 63,138 0.12% Accident and health insurance 1,208 172 - 1,036 0.00% -------------------------------------------------------------------- Total premiums $ 101,565 $ 37,466 $ 75 $ 64,174 0.12% ==================================================================== DECEMBER 31, 1996 Life insurance in force $44,535,841 $ 8,625,465 $ 5,081 $35,915,457 0.01% ==================================================================== Premiums: Life insurance and annuities $ 104,225 $ 34,451 $ 36 $ 69,810 0.05% Accident and health insurance 1,426 64 - 1,362 0.00% -------------------------------------------------------------------- Total premiums $ 105,651 $ 34,515 $ 36 $ 71,172 0.05% ====================================================================
Reinsurance recoverable on paid losses was approximately $7.7 million, $2.3 million, and $6.9 million at December 31, 1998, 1997, and 1996, respectively. Reinsurance recoverable on unpaid losses was approximately $2.5 million, $3.2 million, and $4.3 million at December 31, 1998, 1997, and 1996, respectively. F-43 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 14. YEAR 2000 CONTINGENCY (UNAUDITED) INTERNAL SYSTEMS The Company's ultimate parent, American General Corporation, ("AGC") has numerous technology systems that are managed on a decentralized basis. AGC's Year 2000 readiness efforts are therefore being undertaken by its key business units with centralized oversight. Each business unit, including the Company, has developed and is implementing a plan to minimize the risk of a significant negative impact on its operations. While the specifics of the plans vary, the plans include the following activities: (1) perform an inventory of the Company's information technology and non-information technology systems; (2) assess which items in the inventory may expose the Company to business interruptions due to Year 2000 issues; (3) reprogram or replace systems that are not Year 2000 ready; (4) test systems to prove that they will function into the next century as they do currently; and (5) return the systems to operations. As of December 31, 1998, substantially all of the Company's critical systems are Year 2000 ready and have been returned to operations. However, activities (3) through (5) for certain systems are ongoing, with vendor upgrades expected to be received during the first half of 1999. THIRD PARTY RELATIONSHIPS The Company 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) the Company and include organizations with which the Company 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 the Company exercises less, or no, control over Year 2000 readiness. The Company has developed a plan to assess and attempt to mitigate the risks associated with the potential failure of third parties to achieve Year 2000 readiness. The plan includes the following activities (1) identify and classify third party dependencies; (2) research, analyze, and document Year 2000 readiness for critical third parties; and (3) test critical hardware and software products and electronic interfaces. As of December 31, 1998, AGC has identified and assessed more approximately 700 critical third party dependencies, including those related to the Company. A more detailed evaluation will be completed during the first quarter 1999 as part of the Company's contingency planning efforts. Due to the various stages of third parties' Year 2000 readiness, the Company's testing activities will extend through 1999. F-44 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 14. YEAR 2000 CONTINGENCY (UNAUDITED) (CONTINUED) CONTINGENCY PLANS The Company has commenced contingency planning to reduce the risk of Year 2000- related business failures. The contingency plans, which address both internal systems and third party relationships, include the following activities: (1) evaluate the consequences of failure of business processes with significant exposure to Year 2000 risk; (2) determine the probability of a Year 2000 related failure for those processes that have a high consequence of failure; (3) develop an action plan to complete contingency plans for those processes that rank high in consequence and probability of failure; and (4) complete the applicable actions plans. The Company is currently developing action plans and expects to substantially complete all contingency planning activities by April 30, 1999. RISKS AND UNCERTAINTIES Based on its plans to make internal systems ready for Year 2000, to deal with third party relationships, and to develop contingency action, the Company believes that it will experience at most isolated and minor disruptions of business processes following the turn of the century. Such disruptions are not expected to have a material effect on the Company's future results of operations, liquidity, or financial condition. However, due to the magnitude and complexity of this project, risks and uncertainties exist and the Company is not able to predict a most reasonably likely worst case scenario. If conversion of the Company's internal systems is not completed on a timely basis (due to non- performance by significant third party vendors, lack of qualified personnel to perform the Year 2000 work, or other unforeseen circumstances in completing the Company's plans), or if critical third parties fail to achieve Year 2000 readiness on a timely basis, the Year 2000 issue could have a material adverse impact on the Company's operation following the turn of the century. COSTS Through December 31, 1998, the Company has incurred, and anticipates that it will continue to incur, costs for internal staff, third-party vendors, and other expenses to achieve Year 2000 readiness. The cost of activities related to Year 2000 readiness has not had a material adverse effect on the Company's results of operations or financial condition. In addition, the Company 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 the Company's normal accounting policies. F-45 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 15. DIVISION OPERATIONS 15.1 NATURE OF OPERATIONS The Company manages its business operation through two divisions, which are based on products and services offered. RETIREMENT SERVICES The Retirement Services Division provides tax-deferred retirement annuities and employer-sponsored retirement plans to employees of educational, health care, public sector, and other not-for-profit organizations marketed nationwide through exclusive sales representatives. LIFE INSURANCE The Life Insurance division provides traditional, interest-sensitive, and variable life insurance and annuities to a broad spectrum of customers through multiple distribution channels focused on specific market segments. 15.2 DIVISION RESULTS Results of each division exclude goodwill amortization, net realized investment gains, and non-recurring items. Division earnings information was as follows:
REVENUES INCOME BEFORE TAXES EARNINGS ------------------------------------------------------------------------------------------------------------ 1998 1997 1996 1998 1997 1996 1998 1997 1996 ------------------------------------------------------------------------------------------------------------ (In Millions) Retirement Services $1,987 $1,859 $1,745 $ 469 $398 $343 $315 $261 $226 Life Insurance 870 822 774 162 147 141 107 97 92 ------------------------------------------------------------------------------------------------------------ Total divisions 2,857 2,681 2,519 631 545 484 422 358 318 Goodwill amortization - - - (2) (2) (2) (2) (2) (2) RG (L) (34) 30 29 (34) 30 29 (22) 19 19 Nonrecurring items - - - (125)(a) - - (81)(a) - - ------------------------------------------------------------------------------------------------------------ Total consolidated $2,823 $2,711 $2,548 $ 470 $573 $511 $317 $375 $335 ============================================================================================================
(a) Includes $97 million pretax ($63 million after-tax) in litigation settlements and $28 million pretax ($18 million after-tax) in Year 2000 costs. F-46 American General Life Insurance Company Notes to Consolidated Financial Statements (continued) 15. DIVISION OPERATIONS (CONTINUED) 15.2 DIVISION RESULTS (CONTINUED) Division balance sheet information was as follows:
ASSETS LIABILITIES ------------------------------------------------------------------- DECEMBER 31 ------------------------------------------------------------------- IN MILLIONS 1998 1997 1998 1997 ------------------------------------------------------------------- Retirement Services $41,347 $35,195 $38,841 $33,136 Life Insurance 8,894 8,370 7,831 7,367 ------------------------------------------------------------------- Total consolidated $50,241 $43,565 $46,672 $40,503 ===================================================================
F-47 INDEX OF WORDS AND PHRASES This index should help you to locate more information about some of the terms and phrases used in this prospectus.
Page to See in this Defined Term Prospectus - ------------ ---------- accumulation value 5 AGLC 42 AGL 1 amount at risk 7 automatic rebalancing 5 basis 25 beneficiary 30 cash surrender value 12 close of business 32 Code 24 cost of insurance rates 7 daily charge 7 date of issue 31 death benefit 5 dollar cost averaging 4 full surrender 12 Fund 2 investment option 1 Key Legacy Plus 1 lapse 10 loan, loan interest 13 maturity, maturity date 13 modified endowment contract 25 monthly deduction day 32 monthly insurance charge 7 Mutual Fund 2 option 1, 2 5 partial surrender 12 payment option 14 planned periodic premium 10 Policy 1 Policy loan 13 Policy month, year 32 preferred loan interest 13 premium payments 4 premiums 4 prospectus 1
46
Page to See in this Defined Term Prospectus - ------------ ---------- reinstate, reinstatement 10 SEC 2 separate account 1 Separate Account VL-R 24 seven-pay test 25 specified amount 5 surrender 12 telephone transactions 17 transfers 11 valuation date, period 32
We have filed a registration statement relating to Separate Account VL-R and the Policy with the SEC. The registration statement, which is required by the Securities Act of 1933, includes additional information that is not required in this prospectus. If you would like the additional information, you may obtain it from the SEC's Website at http://www.sec.gov or main office in Washington, D.C. You will have to pay a fee for the material. You should rely only on the information contained in this prospectus or sales materials we have approved. We have not authorized anyone to provide you with information that is different. The policies are not available in all states. This prospectus is not an offer in any state to any person if the offer would be unlawful. 47 PART II (OTHER INFORMATION) UNDERTAKING TO FILE REPORTS Subject to the terms and conditions of Section 15(d) of the Securities Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with the Securities and Exchange Commission such supplementary and periodic information, documents, and reports as may be prescribed by any rule or regulation of the Commission heretofore, or hereafter duly adopted pursuant to authority conferred in that section. RULE 484 UNDERTAKING American General Life Insurance Company's Bylaws provide in Article VII, Section 1 for indemnification of directors, officers and employees of the Company. Insofar as indemnification for liability arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. REPRESENTATION PURSUANT TO SECTION 26(e)(2)(A) OF THE INVESTMENT COMPANY ACT OF 1940 American General Life Insurance Company hereby represents that the fees and charges deducted under the Policy, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred, and risks assumed by American General Life Insurance Company. II-1 CONTENTS OF REGISTRATION STATEMENT This Registration Statement contains the following papers and documents: The facing sheet. Cross-Reference Table. Prospectus, consisting of 47 pages of text, plus 50 financial pages of American General Life Insurance Company. The undertaking to file reports. The Rule 484 undertaking. Representation pursuant to Section 26(e)(2)(A). The signatures. Written Consents of the following persons: (a) Pauletta P. Cohn, Deputy General Counsel of American General Life Companies (b) American General Life Insurance Company's actuary (c) Independent Auditors Independent Auditors The following exhibits: 1. Exhibits required by Article IX, paragraph A of Form N-8B-2: (1)(a) Resolutions of Board of Directors of American General Life Insurance Company authorizing the establishment of Separate Account VL-R. (1) (1)(b) Resolutions of Board of Directors of American General Life Insurance Company authorizing the establishment of variable life insurance standards of suitability and conduct. (1) (2) Not applicable. (3)(a) Amended and Restated Distribution Agreement between American General Securities Incorporated and American General Life Insurance Company effective October 15, 1998. (4) (3)(b) Form of Selling Group Agreement. (Filed herewith) (3)(c) Schedule of Commissions (incorporated by reference from the text included under the heading "Distribution of the Policies" in the prospectus that is filed as part of this amended Registration Statement). (4) Not applicable. (5) Specimen form of the "Key Legacy Plus" Variable Universal Life Insurance Policy (Policy Form No. 99616). (11) II-2 (6)(a) Amended and Restated Articles of Incorporation of American General Life Insurance Company, effective December 31, 1991. (2) (6)(b) Bylaws of American General Life Insurance Company, adopted January 22, 1992. (3) (6)(c) Amendment to the Amended and Restated Articles of Incorporation of American General Life Insurance Company, effective July 13, 1995. (5) (7) Not applicable. (8)(a)(i) Form of Participation Agreement by and Among AIM Variable Insurance Funds, Inc., AIM Distributors, Inc., American General Life Insurance Company, on Behalf of Itself and its Separate Accounts, and American General Securities Incorporated. (6) (8)(a)(ii) Form of Amendment Three to Participation Agreement by and among AIM Variable Insurance Funds, Inc., A I M Distributors, Inc., American General Life Insurance Company, on Behalf of Itself and its Separate Accounts, and American General Securities Incorporated dated as of February 1, 2000. (12) (8)(b)(i) Form of Participation Agreement by and between The Variable Annuity Life Insurance Company and American General Life Insurance Company. (10) (8)(b)(ii) Amendment One to Participation Agreement by and between The Variable Annuity Life Insurance Company and American General Life Insurance Company dated as of July 21, 1998. (8) (8)(c)(i) Form of Participation Agreement Among MFS Variable Insurance Trust, American General Life Insurance Company and Massachusetts Financial Services Company. (6) (8)(c)(ii) Form of Amendment Three to Participation Agreement Among MFS Variable Insurance Trust, American General Life Insurance Company and Massachusetts Financial Services Company dated as of February 1, 2000. (12) (8)(d)(i) Form of Participation Agreement Among Putnam Variable Trust, Putnam Mutual Funds Corp., and American General Life Insurance Company. (6) (8)(d)(ii) Form of Amendment No. 1 to Participation Agreement among Putnam Variable Trust, Putnam Mutual Funds Corp. and American General Life Insurance Company. (12) (8)(e)(i) Amended and Restated Participation Agreement by and among American General Life Insurance Company, American General Securities Incorporated, Van Kampen American Capital Life Investment Trust, Van Kampen American Capital Asset Management, Inc., and Van Kampen American Capital Distributors, Inc. (9) II-3 (8)(e)(ii) Amendment One to Amended and Restated Participation Agreement by and among American General Life Insurance Company, American General Securities Incorporated, Van Kampen American Capital Life Investment Trust, Van Kampen American Capital Asset Management, Inc., and Van Kampen American Capital Distributors, Inc. (8) (8)(e)(iii) Form of Amendment Five to Amended and Restated Participation Agreement by and among American General Life Insurance Company, American General Securities Incorporated, Van Kampen Life Investment Trust, Van Kampen Asset Management Inc. and Van Kampen Funds Inc. (12) (8)(f) Form of Participation Agreement by and among American General Life Insurance Company, Oppenheimer Variable Account Funds, and OppenheimerFunds, Inc. (12) (8)(g)(i) Participation Agreement by and among American General Life Insurance Company, Templeton Variable Products Series Fund, and Franklin Templeton Distributors, Inc. (8) (8)(g)(ii) Form of Amendment to Participation Agreement by and among American General Life Insurance Company, Templeton Variable Products Series Fund, Franklin Templeton Variable Insurance Products Trust, and Franklin Templeton Distributors, Inc. dated February 1, 2000. (12) (8)(h) Form of Participation Agreement by and between American General Life Insurance Company, American General Securities Incorporated, The Victory Variable Insurance Funds and BISYS Fund Services Limited Partnership. (Filed herewith) (8)(i) Form of Shareholders Service Agreement by and between American General Life Insurance Company and American Century Investment Management, Inc. (Filed herewith) (8)(j)(i) Sales Agreement by and between American General Life Insurance Company and Neuberger & Berman Advisers Management Trust, and Neuberger & Berman Management Incorporated. (Filed herewith) (8)(j)(ii) Form of Assignment and Modification Agreement by and between Neuberger & Berman Advisers Management Trust, Neuberger & Berman Management Incorporated, Neuberger & Berman Advisers Management Trust, and American General Life Insurance Company. (Filed herewith) (8)(k) Form of Administrative Services Agreement between American General Life Insurance Company and fund distributor. (5) (8)(l) Administrative Services Agreement between American General Life Insurance Company and Van Kampen Asset Management Inc. dated December 1, 1998. (12) II-4 (8)(m) Form of services agreement dated July 31, 1975, (limited to introduction and first two recitals, and sections 1-3) among various affiliates of American General Corporation, including American General Life Insurance Company and American General Life Companies. (7) (8)(n) Administrative Services Agreement dated as of June 1, 1998, between American General Life Insurance Company and AIM Advisors, Inc. (4) (8)(o) Form of Administrative Services Agreement by and among American General Life Insurance Company and OppenheimerFunds, Inc. (12) (8)(p) Administrative Services Agreement by and among American General Life Insurance Company and Franklin Templeton Services, Inc. dated as of March 9, 1999. (8) (8)(q) Form of Administrative Services Agreement between Neuberger & Berman Management Inc. and American General Life Insurance Company. (Filed herewith) (8)(r) Form of Administrative Services Agreement between Key Asset Management, Inc. and American General Life Insurance Company. (Filed herewith) (9) Not applicable. (10)(a) Single Insured Life Insurance Application - Part A. (11) (10)(b) Single Insured Life Insurance Application - Part B. (11) (10)(c) Medical Exam Form Life Insurance Application. (11) (10)(d) Single Insured Simplified Life Insurance Application. (12) (10)(e) Variable Universal Life Insurance Supplemental Application. (Filed herewith) (10)(f) Service Request Form. (Filed herewith) Other Exhibits 2(a) Opinion and Consent of Pauletta P. Cohn, Deputy General Counsel of American General Life Companies. (Filed herewith) 2(b) Opinion and Consent of American General Life Insurance Company's actuary. (Filed herewith) 3 Not applicable. 4 Not applicable. II-5 5 Financial Data Schedule. (Not applicable) 6 Consent of Independent Auditors. (Filed herewith) 7 Powers of Attorney. (11) 27 Financial Data Schedule. (Inapplicable, because no financial statements of the Separate Account are being filed herewith) /1/ Incorporated herein by reference to the initial filing of the Form S-6 Registration Statement (File No. 333-42567) of American General Life Insurance Company Separate Account VL-R on December 18, 1997. /2/ Incorporated herein by reference to the initial filing of the Form N-4 Registration Statement (File No. 33-43390) of Separate Account D of American General Life Insurance Company on October 16, 1991. /3/ Incorporated herein by reference to the filing of Post-Effective Amendment No. 1 of the Form N-4 Registration Statement (File No. 33-43390) of Separate Account D of American General Life Insurance Company on April 30, 1992. /4/ Incorporated herein by reference to the initial filing of the Form N-4 Registration Statement (File No. 333-70667) of American General Life Insurance Company Separate Account D on January 15, 1999. /5/ Incorporated by reference to the filing of Pre-Effective Amendment No. 3 of the Form S-6 Registration Statement (File No. 333-53909) of American General Life Insurance Company Separate Account VL-R on August 19, 1998. /6/ Incorporated by reference to the filing of Pre-Effective Amendment No. 1 of the Form S-6 Registration Statement (File No. 333-42567) of American General Life Insurance Company Separate Account VL-R on March 23, 1998. /7/ Incorporated by reference to the filing of Pre-Effective Amendment No. 23 to the Form N-4 Registration Statement of American General Life Insurance Company's Separate Account A (File No. 33-44745) on April 24, 1998. /8/ Incorporated by reference to the filing of the Pre-Effective Amendment No. 1 to Form N-4 Registration Statement (File No. 333-70667) of American General Life Insurance Company Separate Account D on March 18, 1999. /9/ Incorporated by reference to Post-Effective Amendment No. 12 to Registrant's Form N-4 Registration Statement (File No. 33-43390) filed on April 30, 1997. /10/ Incorporated by reference to Pre-Effective Amendment No. 1 of the Form N-4 Registration Statement (File No. 333-40637) of Separate Account D of American General Life Insurance Company filed on February 12, 1998. II-6 /11/ Incorporated herein by reference to the initial filing of the Form S-6 Registration Statement (File No. 333-89897) of American General Life Insurance Company Separate Account VL-R on October 29, 1999. /12/ Incorporated herein by reference to the filing of Pre-effective Amendment No. 1 of the Form S-6 Registration Statement. (File No. 333-87307) of American General Life Insurance Company Separate Account VL-R on January 20, 2000. II-7 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant, American General Life Insurance Company Separate Account VL-R, has duly caused this amended registration statement to be signed on its behalf by the undersigned thereunto duly authorized, and its seal to be hereunto affixed and attested, all in the City of Houston, and State of Texas, on the 20/th/ day of January, 2000. AMERICAN GENERAL LIFE INSURANCE COMPANY SEPARATE ACCOUNT VL-R (Registrant) BY: AMERICAN GENERAL LIFE INSURANCE COMPANY (On behalf of the Registrant and itself) BY: /s/ ROBERT F. HERBERT, JR. ------------------------------------ Robert F. Herbert, Jr. Senior Vice President [SEAL] ATTEST: /s/ JULIE A. COTTON ---------------------- Julie A. Cotton Assistant Secretary Pursuant to the requirements of the Securities Act of 1933, this Amended Registration Statement has been signed by the following persons in the capacities and on the dates indicated. Signature Title Date - --------- ----- ---- /s/ RONALD H. RIDLEHUBER* Principal Executive Officer January 20, 2000 - ---------------------------- (Ronald H. Ridlehuber) and Director /s/ ROBERT F. HERBERT, JR.* Principal Financial and January 20, 2000 - ---------------------------- (Robert F. Herbert, Jr.) Accounting Officer and Director II-8 Signature Title Date - --------- ----- ---- /s/ DONALD W. BRITTON* Director January 20, 2000 - ------------------------------ (Donald W. Britton) /s/ DAVID A. FRAVEL* Director January 20, 2000 - ------------------------------ (David A. Fravel) /s/ ROYCE G. IMHOFF, II* Director January 20, 2000 - ------------------------------ (Royce G. Imhoff, II) /s/ JOHN V. LAGRASSE* Director January 20, 2000 - ------------------------------ (John V. LaGrasse) /s/ RODNEY O. MARTIN, JR.* Director January 20, 2000 - ------------------------------ (Rodney O. Martin, Jr.) /s/ GARY D. REDDICK* Director January 20, 2000 - ------------------------------ (Gary D. Reddick) /s/ THOMAS M. ZUREK* Director January 20, 2000 - ------------------------------ (Thomas M. Zurek) */s/ ROBERT F. HERBERT, JR. - ------------------------------ By: Robert F. Herbert, Jr. Attorney-In-Fact II-9 EXHIBIT INDEX: - -------------- The following exhibits: 1. Exhibits required by Article IX, paragraph A of Form N-8B-2: (1)(a) Resolutions of Board of Directors of American General Life Insurance Company authorizing the establishment of Separate Account VL-R. (1) (1)(b) Resolutions of Board of Directors of American General Life Insurance Company authorizing the establishment of variable life insurance standards of suitability and conduct. (1) (2) Not applicable. (3)(a) Amended and Restated Distribution Agreement between American General Securities Incorporated and American General Life Insurance Company effective October 15, 1998. (4) (3)(b) Form of Selling Group Agreement. (Filed herewith) (3)(c) Schedule of Commissions (incorporated by reference from the text included under the heading "Distribution of the Policies" in the prospectus that is filed as part of this amended Registration Statement). (4) Not applicable. (5) Specimen form of the "Key Legacy Plus" Variable Universal Life Insurance Policy (Policy Form No. 99616). (11) (6)(a) Amended and Restated Articles of Incorporation of American General Life Insurance Company, effective December 31, 1991. (2) (6)(b) Bylaws of American General Life Insurance Company, adopted January 22, 1992. (3) (6)(c) Amendment to the Amended and Restated Articles of Incorporation of American General Life Insurance Company, effective July 13, 1995. (5) (7) Not applicable. (8)(a)(i) Form of Participation Agreement by and Among AIM Variable Insurance Funds, Inc., AIM Distributors, Inc., American General Life Insurance E-1 Company, on Behalf of Itself and its Separate Accounts, and American General Securities Incorporated. (6) (8)(a)(ii) Form of Amendment Three to Participation Agreement by and among AIM Variable Insurance Funds, Inc., A I M Distributors, Inc., American General Life Insurance Company, on Behalf of Itself and its Separate Accounts, and American General Securities Incorporated dated as of February 1, 2000. (12) (8)(b)(i) Form of Participation Agreement by and between The Variable Annuity Life Insurance Company and American General Life Insurance Company. (10) (8)(b)(ii) Amendment One to Participation Agreement by and between The Variable Annuity Life Insurance Company and American General Life Insurance Company dated as of July 21, 1998. (8) (8)(c)(i) Form of Participation Agreement Among MFS Variable Insurance Trust, American General Life Insurance Company and Massachusetts Financial Services Company. (6) (8)(c)(ii) Form of Amendment Three to Participation Agreement Among MFS Variable Insurance Trust, American General Life Insurance Company and Massachusetts Financial Services Company dated as of February 1, 2000. (12) (8)(d)(i) Form of Participation Agreement Among Putnam Variable Trust, Putnam Mutual Funds Corp., and American General Life Insurance Company. (6) (8)(d)(ii) Form of Amendment No. 1 to Participation Agreement among Putnam Variable Trust, Putnam Mutual Funds Corp. and American General Life Insurance Company. (12) (8)(e)(i) Amended and Restated Participation Agreement by and among American General Life Insurance Company, American General Securities Incorporated, Van Kampen American Capital Life Investment Trust, Van Kampen American Capital Asset Management, Inc., and Van Kampen American Capital Distributors, Inc. (9) (8)(e)(ii) Amendment One to Amended and Restated Participation Agreement by and among American General Life Insurance Company, American General Securities Incorporated, Van Kampen American Capital Life Investment Trust, Van Kampen American Capital Asset Management, Inc., and Van Kampen American Capital Distributors, Inc. (8) E-2 (8)(e)(iii) Form of Amendment Five to Amended and Restated Participation Agreement by and among American General Life Insurance Company, American General Securities Incorporated, Van Kampen Life Investment Trust, Van Kampen Asset Management Inc. and Van Kampen Funds Inc. (12) (8)(f) Form of Participation Agreement by and among American General Life Insurance Company, Oppenheimer Variable Account Funds, and OppenheimerFunds, Inc. (12) (8)(g)(i) Participation Agreement by and among American General Life Insurance Company, Templeton Variable Products Series Fund, and Franklin Templeton Distributors, Inc. (8) (8)(g)(ii) Form of Amendment to Participation Agreement by and among American General Life Insurance Company, Templeton Variable Products Series Fund, Franklin Templeton Variable Insurance Products Trust, and Franklin Templeton Distributors, Inc. dated February 1, 2000. (12) (8)(h) Form of Participation Agreement by and between American General Life Insurance Company, American General Securities Incorporated, The Victory Variable Insurance Funds and BISYS Fund Services Limited Partnership. (Filed herewith) (8)(i) Form of Shareholders Service Agreement by and between American General Life Insurance Company and American Century Investment Management, Inc. (Filed herewith) (8)(j)(i) Sales Agreement by and between American General Life Insurance Company and Neuberger & Berman Advisers Management Trust, and Neuberger & Berman Management Incorporated. (Filed herewith) (8)(j)(ii) Form of Assignment and Modification Agreement by and between Neuberger & Berman Advisers Management Trust, Neuberger & Berman Management Incorporated, Neuberger & Berman Advisers Management Trust, and American General Life Insurance Company. (Filed herewith) (8)(k) Form of Administrative Services Agreement between American General Life Insurance Company and fund distributor. (5) (8)(l) Administrative Services Agreement between American General Life Insurance Company and Van Kampen Asset Management Inc. dated December 1, 1998. (12) E-3 (8)(m) Form of services agreement dated July 31, 1975, (limited to introduction and first two recitals, and sections 1-3) among various affiliates of American General Corporation, including American General Life Insurance Company and American General Life Companies. (7) (8)(n) Administrative Services Agreement dated as of June 1, 1998, between American General Life Insurance Company and AIM Advisors, Inc. (4) (8)(o) Form of Administrative Services Agreement by and among American General Life Insurance Company and OppenheimerFunds, Inc. (12) (8)(p) Administrative Services Agreement by and among American General Life Insurance Company and Franklin Templeton Services, Inc. dated as of March 9, 1999. (8) (8)(q) Form of Administrative Services Agreement between Neuberger & Berman Management Inc. and American General Life Insurance Company. (Filed herewith) (8)(r) Form of Administrative Services Agreement between Key Asset Management, Inc. and American General Life Insurance Company. (Filed herewith) (9) Not applicable. (10)(a) Single Insured Life Insurance Application - Part A. (11) (10)(b) Single Insured Life Insurance Application - Part B. (11) (10)(c) Medical Exam Form Life Insurance Application. (11) (10)(d) Single Insured Simplified Life Insurance Application. (12) (10)(e) Variable Universal Life Insurance Supplemental Application. (Filed herewith) (10)(f) Service Request Form. (Filed herewith) Other Exhibits 2(a) Opinion and Consent of Pauletta P. Cohn, Deputy General Counsel of American General Life Companies. (Filed herewith) E-4 2(b) Opinion and Consent of American General Life Insurance Company's actuary. (Filed herewith) 3 Not applicable. 4 Not applicable. 5 Financial Data Schedule. (Not applicable) 6 Consent of Independent Auditors. (Filed herewith) 7 Powers of Attorney. (11) 27 Financial Data Schedule. (Inapplicable, because no financial statements of the Separate Account are being filed herewith) /1/ Incorporated herein by reference to the initial filing of the Form S-6 Registration Statement (File No. 333-42567) of American General Life Insurance Company Separate Account VL-R on December 18, 1997. /2/ Incorporated herein by reference to the initial filing of the Form N-4 Registration Statement (File No. 33-43390) of Separate Account D of American General Life Insurance Company on October 16, 1991. /3/ Incorporated herein by reference to the filing of Post-Effective Amendment No. 1 of the Form N-4 Registration Statement (File No. 33-43390) of Separate Account D of American General Life Insurance Company on April 30, 1992. /4/ Incorporated herein by reference to the initial filing of the Form N-4 Registration Statement (File No. 333-70667) of American General Life Insurance Company Separate Account D on January 15, 1999. /5/ Incorporated by reference to the filing of Pre-Effective Amendment No. 3 of the Form S-6 Registration Statement (File No. 333-53909) of American General Life Insurance Company Separate Account VL-R on August 19, 1998. /6/ Incorporated by reference to the filing of Pre-Effective Amendment No. 1 of the Form S-6 Registration Statement (File No. 333-42567) of American General Life Insurance Company Separate Account VL-R on March 23, 1998. /7/ Incorporated by reference to the filing of Pre-Effective Amendment No. 23 to the Form N-4 Registration Statement of American General Life Insurance Company's Separate Account A (File No. 33-44745) on April 24, 1998. E-5 /8/ Incorporated by reference to the filing of the Pre-Effective Amendment No. 1 to Form N-4 Registration Statement (File No. 333-70667) of American General Life Insurance Company Separate Account D on March 18, 1999. /9/ Incorporated by reference to Post-Effective Amendment No. 12 to Registrant's Form N-4 Registration Statement (File No. 33-43390) filed on April 30, 1997. /10/ Incorporated by reference to Pre-Effective Amendment No. 1 of the Form N-4 Registration Statement (File No. 333-40637) of Separate Account D of American General Life Insurance Company filed on February 12, 1998. /11/ Incorporated herein by reference to the initial filing of the Form S-6 Registration Statement (File No. 333-89897) of American General Life Insurance Company Separate Account VL-R on October 29, 1999. /12/ Incorporated herein by reference to the filing of Pre-effective Amendment No. 1 of the Form S-6 Registration Statement (File No. 333-87307) of American General Life Insurance Company Separate Account VL-R on January 20, 2000. E-6 EX-3.B 2 SELLING GROUP AGREEMENT Exhibit (3)(b) SELLING GROUP AGREEMENT AMERICAN GENERAL SECURITIES INCORPORATED AND AMERICAN GENERAL LIFE INSURANCE COMPANY This Selling Group Agreement ("Agreement") is made among American General Securities Incorporated, a registered broker - dealer and the distributor for the variable life insurance policies and/or variable annuity contracts set forth in Schedule A ("Distributor" or "AGSI"), McDonald Investments, Inc. - -------------------------------------------------------------------------------- ("Selling Group Member") KeyCorp Insurance Agency USA Inc., a Washington corporation - -------------------------------------------------------------------------------- ("Associated Agency") and, as the fourth party, American General Life Insurance Company ("AGL"). Distributor is a wholly-owned subsidiary of AGL. Selling Group Member is registered with the Securities and Exchange Commission ("SEC") as a broker- dealer under the Securities Exchange Act of 1934 ("1934 Act") and under any appropriate regulatory requirements of state law, and is a member in good standing of the National Association of Securities Dealers, Inc. ("NASD"), unless Selling Group Member is exempt from the broker-dealer registration requirements of the 1934 Act. Unless exempt, Selling Group Member maintains a level of qualification with the NASD appropriate to enable it to offer and sell the products set forth in Schedule A. Selling Group Member is affiliated with Associated Agency, and Associated Agency's affiliated agencies as set forth in Schedule C, which Schedule C may be amended from time to time (Associated Agency and the Schedule C affiliated agencies are hereinafter collectively referred to as "Associated Agency") which is properly licensed under the insurance laws of the state(s) in which Selling Group Member will act under this Agreement. This Agreement is for the purpose of providing for the distribution of certain variable life insurance policies and/or annuity contracts set forth in Schedule A and any successor or additional SEC registered insurance products (as discussed in Part (1) "NEW PRODUCTS" of this Agreement) to be issued by AGL and distributed through Distributor through representatives who are state insurance licensed and appointed agents of AGL and associated with Associated Agency and are also NASD registered representatives of Selling Group Member ("Sales Persons"). The policies and/or annuity contracts set forth on Schedule A, along with any successor or additional SEC registered insurance products, are referred to collectively herein as the "Contracts" or "Policies." In consideration of the mutual promises and covenants contained in this Agreement, AGL and Distributor appoint Selling Group Member and those persons associated with Associated Agency who are NASD registered representatives of Selling Group Member and state insurance licensed agents of AGL to solicit and procure applications for the Contracts. This appointment is not deemed to be exclusive in any manner and only extends to those jurisdictions where the Contracts have been approved for sale. Selling Group Member is authorized to collect the first purchase payment or premium (collectively "Premiums") on the Contracts and, unless Selling Group Member and AGL have otherwise agreed, must remit such premiums in full dollar amount to AGL. Unless Selling Group Member and AGL have otherwise agreed, applications shall be taken only on preprinted application forms supplied by AGL. All completed applications and supporting documents are the sole property of AGL and must be promptly delivered to AGL. All applications are subject to acceptance by AGL at its sole discretion. (1) NEW PRODUCTS AGL and Distributor may propose, and AGL may issue additional or successor products, in which event Selling Group Member will be informed of the product and its related concession schedule. If Selling Group Member does not agree to distribute such product(s), it must notify Distributor in writing within 10 days of receipt of the Concession Schedule for such product(s). If Selling Group Member does not indicate disapproval of the new product(s) or the terms contained in the related Concession Schedule, Selling Group Member will be deemed to have thereby agreed to distribute such product(s) and agreed to the related Concession Schedule which shall be attached to and made a part of this Agreement. (2) SALES PERSONS Associated Agency is authorized to recommend Sales Persons for appointment by AGL to solicit sales of the Contracts. Associated Agency warrants that all such Sales Persons shall not commence solicitation nor aid, directly or indirectly, in the solicitation of any application for any Contract until that Sales Person is appropriately licensed for such product under applicable insurance laws and is a currently NASD registered representative of Selling Group Member. Associated Agency shall be responsible for all fees required to obtain and/or maintain any licenses or registrations required by state or federal law, for Associated Agency and its Sales Persons. From time to time, AGL will provide Associated Agency and Selling Group Member with information regarding the jurisdictions in which AGL is authorized to solicit applications for the Contracts and any limitations on the availability of such Contracts in any jurisdiction. (3) SALES MATERIAL 2 Associated Agency and Selling Group Member shall not utilize in their efforts to market the Contracts, any written brochure, prospectus, descriptive literature, printed and published material, audio-visual material or standard letters unless such material has been provided preprinted by AGL or Distributor or unless AGL and Distributor have provided written approval for the use of such literature. Associated Agency and Selling Group Member jointly and severally hold AGL, Distributor and their affiliates harmless from any liability arising from the use of any material which either (a) has not been specifically approved in writing by AGL, or (b) although previously approved, has been disapproved by AGL or Distributor, in writing for further use. (4) PROSPECTUSES Selling Group Member and Associated Agency warrant that solicitation for the sale of SEC registered insurance products will be made by use of a currently effective prospectus, that a prospectus will be delivered concurrently with each sales presentation and that no statements shall be made to a client superseding or controverting any statement made in the prospectus. AGL and Distributor shall furnish Selling Group Member and Associated Agency, at no cost to Selling Group Member or Associated Agency, reasonable quantities of prospectuses to aid in the solicitation of Contracts. (5) SELLING GROUP MEMBER COMPLIANCE Selling Group Member shall be solely responsible for the approval of suitability determinations for the purchase of any Contract or the selection of any investment option thereunder, in compliance with federal and state securities laws and shall supervise Associated Agency and Sales Persons in determining client suitability. Selling Group Member shall hold AGL and Distributor harmless from any financial claim resulting from improper suitability decisions. Selling Group Member will fully comply with the requirements of the NASD and of the 1934 Act and such other applicable federal and state laws and will establish rules, procedures, and supervisory and inspection techniques necessary to diligently supervise the activities of its NASD registered representatives who are state insurance licensed agents or solicitors of AGL, in connection with offers and sales of the Contracts. Such supervision shall include providing, or arranging for, initial and periodic training in knowledge of the Contracts. Upon request by Distributor or AGL, Selling Group Member will furnish appropriate records as are necessary to establish diligent supervision and client suitability. Selling Group Member shall fully cooperate in any insurance or securities regulatory examination, investigation, or proceeding or any judicial proceeding with respect to AGL, Distributor, Selling Group Member, and Associated Agency and their respective affiliates, agents and representatives to the extent that such examination, investigation, or proceeding arises in connection with the Contracts. Selling Group Member shall immediately notify Distributor if its broker-dealer registration or the registration of any of its Sales Persons is revoked, suspended, or terminated. 3 (6) ASSOCIATED AGENCY AND SALES PERSON COMPLIANCE Associated Agency will fully comply with the requirements of state insurance laws and applicable federal laws and will establish rules and procedures necessary to diligently supervise the activities of the Sales Persons. Upon request by Distributor or AGL, Selling Group Member will furnish appropriate records as are necessary to establish such supervision. Associated Agency and Sales Persons shall be responsible for making suitability determinations for the purchase of any Contract or the selection of any investment option thereunder, in compliance with federal and state securities laws. Associated Agency shall fully cooperate in any insurance or securities regulatory examination, investigation, or proceeding or any judicial proceeding with respect to AGL, Distributor, Selling Group Member, and Associated Agency and their respective affiliates, agents and representatives to the extent that such examination, investigation, or proceeding arises in connection with the Contracts. Associated Agency shall immediately notify Distributor if its insurance license or the license of any of its Sales Persons is revoked, suspended, or terminated. Associated Agency agrees to maintain documentation regarding the background investigation of individuals conducted prior to appointment during the period the individual is appointed by the Company and shall provide such information to the Company as may be required by valid request of any regulatory authority. (7) AGL COMPLIANCE AGL represents that the prospectus(es) and registration statement(s) relating to the Contracts contain no untrue statements of material fact or omission to state a material fact, the omission of which makes any statement contained in the prospectus and registration statement misleading. AGL agrees to indemnify Associated Agency and Selling Group Member from and against any claims, liabilities and expenses which may be incurred by any of those parties under the Securities Act of 1933 ("1933 Act"), the 1934 Act, the Investment Company Act of 1940, common law, or otherwise, and that arises out of a breach of this paragraph. AGL further represents that: (i) All contract forms, applications and other documents relating to the Contracts offered or to be offered by AGL which are required by applicable law to be filed with and/or approved by public officials or governmental agencies have been or will be so filed and will not be offered until necessary approvals have been received by AGL, and all such Contracts, forms, applications and other documents do comply and will comply in all material respects with the applicable laws, rules and regulations of the jurisdictions in which the Contracts will be offered. 4 (ii) All promotional materials, instructional guides and training materials issued or approved by AGL and provided to Selling Group Member: (a) are and will, to the best of AGL's knowledge, be true, accurate and complete in all material respects; (b) do not and will not contain any false or misleading statements of material fact known to AGL, or omit any material fact, known to AGL, necessary to make the statements contained therein not misleading in light of the circumstances under which they are made; (c) do and will fully and adequately disclose all material terms and conditions, limitations and restrictions, known to AGL; and (d) comply and will comply with all applicable laws and regulations of those jurisdictions in which the Contracts will be offered. (iii) The Contracts set froth in Schedule A will qualify, at the time that the Contracts are first offered, for treatment as insurance contracts under applicable sections of the Internal Revenue Code such that state and federal taxes due on the interest and earnings on the Contracts will be deferred until withdrawal by the contract owner, or other person so designated to make such withdrawal. (iv) The Contracts, or any interest in the separate account of AGL related thereto, which constitutes a "security" for purposes of the of 1933 Act, will be duly registered with the SEC and any state where such registration is required, prior to offering the related Contracts and any interest in the separate account of AGL related thereto, and AGL, and the separate account of AGL related to such Contracts, will comply in all material respects with applicable federal and state securities laws with respect to such Contracts or any interests in the separate account related thereto. (8) COMPENSATION AGL will remit to Associated Agency compensation as set forth in Schedule B hereto. (9) CUSTOMER SERVICE, COMPLAINTS, AND INDEMNIFICATION The parties agree that AGL may contact by mail or otherwise, any client, agent, account executive, or employee of Associated Agency or other individual acting in a similar capacity if deemed appropriate by AGL, in the course of normal customer service for existing Contracts, in the investigation of complaints, or as required by law. The parties agree to cooperate fully in the investigation of any complaint. Selling Group Member, Associated Agency, and Sales Persons agree to hold harmless and indemnify Distributor and AGL against any and all claims, liabilities and expenses incurred by either Distributor or AGL, and arising out of or based upon any alleged or untrue statement of Selling Group Member, Associated Agency or Sales Person other than statements contained in 5 the approved sales material for any Contract, or in the registration statement or prospectus for any Contract. AGL hereby agrees to indemnify and hold harmless Selling Group Member, Associated Agency, and each of their respective employees, controlling persons, officers or directors against any losses, expenses (including reasonable attorneys' fees and court costs), damages or liabilities to which Selling Group Member or such affiliates, controlling persons, officers or directors become subject, under the 1933 Act or otherwise, insofar as such losses, expenses, damages or liabilities (or actions or inactions in respect thereof) arise out of or are based upon AGL's performance, non-performance or breach of this Agreement, or are based upon any untrue statement contained in, or material omission from, the prospectus for any of the Contracts. The provisions of this Section (9) shall survive the expiration or other termination of this Agreement. (10) FIDELITY BOND Associated Agency represents that all directors, officers, employees and Sales Persons of Associated Agency licensed pursuant to this Agreement or who have access to funds of AGL are and will continue to be covered by a blanket fidelity bond including coverage for larceny, embezzlement and other defalcation, issued by a reputable bonding company. This bond shall be maintained at Associated Agency's expense. Such bond shall be at least equivalent to the minimal coverage required under the NASD Rules of Fair Practice, and endorsed to extend coverage to life insurance and annuity transactions. Associated Agency acknowledges that AGL may require evidence that such coverage is in force and Associated Agency shall promptly give notice to AGL of any notice of cancellation or change of coverage. Associated Agency assigns any proceeds received from the fidelity bond company to AGL to the extent of AGL's loss due to activities covered by the bond. If there is any deficiency, Associated Agency will promptly pay AGL that amount on demand. Associated Agency indemnifies and holds harmless AGL from any deficiency and from the cost of collection. (11) LIMITATIONS OF AUTHORITY The Contract forms are the sole property of AGL. No person other than AGL has the authority to make, alter or discharge any policy, Contract, certificate, supplemental contract or form issued by AGL. No party, other than AGL, has the right to waive any provision with respect to any Contract or policy; give or offer to give, on behalf of AGL, any tax or legal advice related to the purchase of a Contract or policy; or make any settlement of any claim or bind AGL or any of its affiliates in any way. No person, other than AGL, has the authority to enter into any proceeding in a court of law or before a regulatory agency in the name of or on behalf of AGL. (12) ARBITRATION AND AUDIT 6 The parties agree that any controversy between or among them arising out of their business or pursuant to this Agreement that cannot be settled by agreement shall be taken to arbitration as set forth herein. Such arbitration will be conducted according to the securities arbitration rules then in effect, of the American Arbitration Association, NASD, or any registered national securities exchange. Arbitration may be initiated by serving or mailing a written notice. The notice must specify which rules will apply to the arbitration. This specification will be binding on all parties. The arbitrators shall render a written opinion, specifying the factual and legal bases for the award, with a view to effecting the intent of this Agreement. The written opinion shall be signed by a majority of the arbitrators. In rendering the written opinion, the arbitrators shall determine the rights and obligations of the parties according the substantive and procedural laws of the State of Texas. Accordingly, the written opinion of the arbitrators will be determined by the rule of law and not by equity. The decision of the majority of the arbitrators shall be final and binding on the parties and shall be enforced by any court of competent jurisdiction. Each party shall, upon reasonable prior written notice to the other party, have the right to audit the books and records of the other party regarding information directly related to this Agreement, during the other party's normal business hours or by appointment, at such times as the auditing party reasonably deems necessary. The party being audited shall permit reasonable access to any of its facilities or any of its affiliates' facilities in which information pertaining to this Agreement is being processed or stored. Upon the auditing party's request, the other party shall provide reasonable assistance in performing the audit, including any audit required or requested by any federal, state, or local regulatory authority having jurisdiction over the auditing party's business. The auditing party shall reimburse the party being audited for its reasonable out-of-pocket costs and expenses incurred in connection with the audit. The provisions of this Section (12) shall survive the expiration or other termination of this Agreement for a period of two years from the date of such expiration or other termination of this Agreement. (13) TRADEMARKS Without prior written consent from the other party, neither party shall use, or authorize any other person to use the other party's names, logos, trademarks, tradenames, service marks or other intellectual property or those of its affiliates. If such consent is granted, then the party which has received such consent shall use only those names, logos, trademarks, tradenames, service marks and other intellectual property that are specifically enumerated in the consent and only in conjunction with the offer and sale of the Contracts pursuant to this Agreement. (14) CONFIDENTIALITY (A) Each party agrees that, during the term of this Agreement and at all times thereafter, neither party will disclose to any unaffiliated person, firm, corporation or other entity, nor use for its own account, any of the other party's trade secrets 7 or confidential information, as defined below, including, without limitation, the terms of this Agreement, non-public program materials; member or customer lists; proprietary information; information as to the other party's business methods, operations or affairs, or the processes and systems used in its operations and affairs; or the processes and systems used in any aspect of the operation of its business; all whether now known or subsequently learned by it. Nothing in this Agreement shall require either party to keep confidential any information that: (i) The party can prove was known to it prior to any disclosure by the other; (ii) Is or becomes publicly available through no fault of the party; (iii) The party can prove was independently developed by it outside the scope of this Agreement and with no access to any confidential or proprietary information of the other party; (iv) Is required to be produced pursuant to judicial or administrative process or subpoena; and/or (v) Is mutually agreed upon by both parties to this Agreement. (B) Notwithstanding the information above, "Confidential Information" shall mean: (1) information regarding a party's, or such other party's affiliates, financial condition, information systems, business operations, plans and strategies, customers and prospective customers, marketing and distribution plans, and methods and techniques; (2) information that is marked "confidential", "proprietary" or in like words, or that is summarized in writing as being confidential prior to or promptly after disclosure to the other party; (3) any and all related research; and (4) any and all designs, ideas, concepts, and technology embodied therein. Notwithstanding the information above, Confidential Information shall specifically include any information regarding customers that is provided to AGL hereunder and any information concerning premium, losses, profitability, expiration dates, and insured demographics (C) Each party hereto acknowledges and agrees that monetary damages would not be a sufficient or adequate remedy for any breach or anticipated breach of this Section (14) and that, in addition to any other legal or equitable remedies which may be available, each party shall be entitled to specific performance and injunctive relief for any breach or anticipated breach of this Section (14). (D) If this Agreement expires or is terminated, each party within sixty (60) days after such termination will return to the other party any and all copies, in whatever form or medium, of any material disclosing any of the other party's trade secrets or confidential information as described above, then in its possession or control. No such materials shall be used for any purpose outside the performance or 8 enforcement of this Agreement except to the extent required by law or order of a court, by order of a regulatory or administrative agency, or by order of an arbitrator appointed under this Agreement. (E) The provisions of this Section (14) shall survive the expiration or other termination of this Agreement. (15) GENERAL PROVISIONS (A) Waiver Failure of any of the parties to promptly insist upon strict compliance with any of the obligations of any other party under this Agreement will not be deemed to constitute a waiver of the right to enforce strict compliance. (B) Independent Contractors Selling Group Member and Associated Agency are independent contractors and not employees or subsidiaries of AGL. AGSI is a wholly - owned subsidiary of AGL. Selling Group Member and Associated Agency are not employees or subsidiaries of Distributor. (C) Independent Assignment No assignment, other than to an affiliate, of this Agreement or of commissions or other payments under this Agreement shall be valid without prior written consent of AGL and Distributor. Notwithstanding this provision, any assignment of this Agreement or of commissions or other payments under this Agreement, shall not be valid without notice given to the other parties to this Agreement within a reasonable amount of time prior to the assignment. (D) Notice Any notice pursuant to this Agreement may be given electronically (other than vocally by telephone) or by mail, postage paid, transmitted to the last address communicated by the receiving party to the other parties to this Agreement. (E) Severability To the extent this Agreement may be in conflict with any applicable law or regulation, this Agreement shall be construed in a manner consistent with such law or regulation. The invalidity or illegality of any provisions of this Agreement shall not be deemed to affect the validity or legality of any other provision of this Agreement. 9 (F) Amendment This Agreement may be amended only in writing and signed by all parties. No amendment will impair the right to receive commissions as accrued with respect to Contracts issued and applications procured prior to the amendment. (G) Termination This Agreement may be terminated by any party upon 30 days' prior written notice. It may be terminated, for cause, by any party immediately. Termination of this Agreement shall not impair the right to receive commissions accrued with respect to applications procured prior to the termination except as otherwise specifically provided in Schedule B. (H) TEXAS LAW THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS. (I) This Agreement replaces and supersedes any other agreement or understanding related to the Contracts, between or among the parties to this Agreement. By signing below, the undersigned agree to have read and be bound by the terms and conditions of this Agreement. Date: ---------------------- 10 Selling Group Member: McDonald Investments, Inc. ---------------------------------------------------- (broker-dealer) Address: 800 Superior Avenue ---------------------------------------------------- Cleveland, Ohio 44114 ---------------------------------------------------- Signature: ---------------------------------------------------- Name & Title: ---------------------------------------------------- Associated Agency: KeyCorp Insurance Agency USA Inc. ---------------------------------------------------- (primary insurance agency affiliation) Address: 127 Public Square, 8/th/ Floor ---------------------------------------------------- Cleveland, Ohio 44114-1306 ---------------------------------------------------- Signature: ---------------------------------------------------- Name & Title: ---------------------------------------------------- American General Securities Incorporated 2727 Allen Parkway Houston, Texas 77019 Signature: ---------------------------------------------------- Name & Title: ---------------------------------------------------- American General Life Insurance Company 2727-A Allen Parkway Houston Texas 77019 Signed By: ---------------------------------------------------- Name & Title ---------------------------------------------------- 11 Schedule A - PRODUCTS Associated Agency's authority as a soliciting agent of AGL shall be for the following product(s): Key Legacy Plus (Policy Form No. 99616) 12 Schedule B - COMMISSIONS The Commissions Schedule below is subject to the terms and conditions of the Agreement to which it is attached. In no event shall AGL be liable for payment of any commissions with respect to any solicitation made, in whole or in part, by any person not appropriately licensed and appointed prior to the commencement of the solicitation. 1. ANNUAL COMMISSIONS TO BE PAID TO INSURANCE AGENCY. ------------------------------------------------- (a) For a Policy Issued Based on Simplified Underwriting. ---------------------------------------------------- For a Policy issued based on simplified underwriting, compensation will be paid based on either (i) Percent of Premium, (ii) Policy Accumulation Value (Trail) or (iii) a combination of Percent of Premium and Policy Accumulation Value. (i) Compensation based on Percent of Premium. ---------------------------------------- 6% of premiums paid. (ii) Compensation based on Accumulation Value. ---------------------------------------- . Non-Modified Endowment Contract Policies. Beginning with the ---------------------------------------- first Policy year, a trail commission of 1.05% of each Policy's accumulation value (reduced by any outstanding loans) in the variable investment options. The trail commission will be reduced by 0.20% beginning in Policy Year 11. Thus, the schedule in effect is as follows: (i) 1.05% of each Policy's accumulation value (reduced by any outstanding loans) in the variable investment options for Policy years 1 through 10; and (2) 0.85% of each Policy's accumulation value (reduced by any outstanding loans) in the variable investment options for Policy years 11 through 15. . Modified Endowment Contract Policies. Beginning with the first ------------------------------------ Policy year, a trail commission of 1.05% of each Policy's accumulation value (reduced by any outstanding loans) in the variable investment options. The trail commission will be reduced by 0.10% beginning in Policy Year 6. Thus, the schedule in effect is as follows: (i) 1.05% of each Policy's accumulation value (reduced by any outstanding loans) in the variable investment options for Policy years 1 through 5; and (2) 0.95% of each Policy's accumulation value (reduced by any outstanding loans) in the variable investment options for Policy years 6 through 10. (iii) Compensation based on a combination of Percent of Premium and ------------------------------------------------------------- Accumulation Value. ------------------ 13 5% of premiums paid, plus a trail commission of 0.10% of each Policy's accumulation value (reduced by any outstanding loans) in the variable investment options; (b) For a Policy Issued Based on Full Underwriting. ---------------------------------------------- For a Policy issued based on full underwriting, compensation will be paid based on either (i) Percent of Premium or (ii) Policy Accumulation Value (Trail). (i) Compensation based on Percent of Premium. ---------------------------------------- . 6% of premiums paid in the first Policy year through Policy Year 3 up to the Target Premium; and . 3% of premiums paid in Policy years 4+ up to the Target Premium. (ii) Compensation based on Accumulation Value. Beginning with the ---------------------------------------- first Policy year, a trail commission of 2.50% of each Policy's accumulation value (reduced by any outstanding loans) in the variable investment options. The trail commission will be reduced by 1.50% beginning in Policy year 2, with further reductions of 0.50% in Policy year 11 and 0.25% in Policy year 21. Thus, the schedule in effect is as follows: (i) 2.50% of each Policy's accumulation value (reduced by any outstanding loans) in the variable investment options for Policy year 1; (ii) 1.00% of each Policy's accumulation value (reduced by any outstanding loans) in the variable investment options for Policy years 2 through 10; (iii) 0.50% of each Policy's accumulation value (reduced by any outstanding loans) in the variable investment options for Policy years 11 through 20; and (iv) 0.25% of each Policy's accumulation value (reduced by any outstanding loans) in the variable investment options for Policy years 21+. 2. TARGET PREMIUM. -------------- The Target Premium is the maximum amount of premium to which the first year commission rate applies. Commissions paid on premiums received in excess of the Target Premium are paid at the excess rate. The Target Premium is an amount calculated in accordance with the method of calculation and rates from the American General Life Target Premium schedules. AGL may change the Target Premium schedules from time to time. The Target Premium applicable to a particular coverage shall be determined from the schedule in force when the first premium for such coverage is entered as paid in accounting records of AGL. 14 3. TRAIL COMMISSIONS: WHEN PAID. ---------------------------- The annual trail commissions, as set forth in above, are calculated on a quarterly basis and are applied to the entire unloaned accumulation value on each quarterly Policy anniversary. Payment will be made at the end of the calendar quarter immediately following the corresponding quarterly Policy anniversary. For example, for Policies issued November 1, 1999, the first trail payment is based on the unloaned accumulation value as of February 1, 2000, but is not payable until the calendar quarter ending March 31, 2000, and mailed shortly thereafter. 4. CHARGEBACKS. ----------- The following commission chargebacks shall apply on Policy surrenders: (a) 100% of commissions paid on a Policy surrendered during the first Policy year; and (b) 50% of commissions paid on a Policy surrendered during the second Policy year; This commission chargeback schedule shall only apply to compensation paid based on Percent of Premium. 5. CHANGE OF BROKER-DEALER. ----------------------- A Policy owner may elect to change representation to another broker-dealer subsequent to the sale of the Policy, solely in the Policy owner's discretion. After such change, further compensation paid for the Policy will be paid to the new broker-dealer. 6. GUIDELINES AND COMMISSIONS ON INTERNAL EXCHANGES. ------------------------------------------------ Generally, no commissions will be earned on the initial exchange of any AGL contract or any contract issued by a company which is affiliated with AGL's Key Legacy Plus. All subsequent premium payments will receive commissions calculated in accordance with the administrative rules established by AGL in its sole discretion and in effect at the time of the exchange. Schedule C - Affiliated Agencies 15 . KeyCorp Insurance Agency USA Inc., an Ohio corporation . KeyCorp Insurance Agency USA Inc., an Idaho corporation . KeyCorp Insurance Agency, Inc., a New York corporation . KIA (Ohio) Agency, Inc., an Ohio corporation . McD Gradism Agency, Inc., an Ohio corporation . McD Agency PA Inc., a Pennsylvania corporation 16 EX-8.H 3 AMERICAN GENERAL/BISYS PARTICIPATION AGREEMENT Exhibit (8)(h) PARTICIPATION AGREEMENT AMONG AMERICAN GENERAL LIFE INSURANCE COMPANY, AMERICAN GENERAL SECURITIES INCORPORATED, THE VICTORY VARIABLE INSURANCE FUNDS AND BISYS FUND SERVICES LIMITED PARTNERSHIP DATED AS OF DECEMBER 9, 1999 PARTICIPATION AGREEMENT THIS AGREEMENT, made and entered into as of the 9th day of DECEMBER, 1999 ("Agreement"), by and among AMERICAN GENERAL LIFE INSURANCE COMPANY, a Texas life insurance company ("AGL") (on behalf of itself and its "Separate Account," defined below), AMERICAN GENERAL SECURITIES INCORPORATED, a Texas corporation ("AGSI"), the principal underwriter and distributor with respect to the Policies referred to below, __THE VICTORY VARIABLE INSURANCE FUNDS, an unincorporated business trust organized under the laws of the state of Delaware, (the "Fund"), and BISYS FUND SERVICES LIMITED PARTNERSHIP, an Ohio limited partnership, (the "Distributor"), the Fund's principal underwriter (collectively, the "Parties"). WITNESSETH THAT: WHEREAS the Distributor and the Fund desire that shares of the Fund's portfolios (the "Series"; reference herein to the "Fund" includes reference to each of the Series of the Fund as to the extent the context requires) be made available by the Distributor to serve as underlying investment media for those variable insurance products (the "Policies") of AGL that are the subject of AGL's Form N-4 and/or Form S-6 registration statement filed with the Securities and Exchange Commission (the "SEC"), and to be offered through AGSI. NOW, THEREFORE, in consideration of the mutual benefits and promises contained herein, the Fund and the Distributor will make shares in the Series available to AGL for this purpose at net asset value and with no sales charges, all subject to the following provisions: Section 1. Introduction ------------------------ 1.1 Availability of Separate Account Divisions. ------------------------------------------ AGL represents that its Separate Account(s) (the "Separate Account(s)") is and will continue to be available to serve as an investment vehicle for its Policies. The Policies provide for the allocation of net amounts received by AGL to separate series (the "Divisions"; reference herein to the "Separate Account" includes reference to each Division to the extent the context requires) of the Separate Account for investment in the shares of corresponding Series of the Fund that are made available through the Separate Account to act as underlying investment media. Other series of the Fund may become subject to this Agreement, upon mutual agreement of the parties. AGL will not unreasonably deny any request by the Distributor to create new Divisions corresponding to such other Series. 1.2 Broker-Dealer Registration. -------------------------- The Distributor and AGSI each represents and warrants that it is and will remain duly registered as a broker-dealer with the SEC under the Securities Exchange Act of 1934, as amended (the "1934 Act"), and is a member in good standing of the National Association of Securities Dealers, Inc. (the "NASD"). Section 2. Processing Transactions ----------------------------------- 2.1 The Fund agrees, as provided in its Registration Statement, to make available to the Separate Account, and any Division, shares of the Series for investment of purchase payments of the Policies allocated to the Separate Account. 2.2 The Fund agrees to sell to AGL those shares of the Series which AGL orders. Orders which are sent by AGL to the Fund and received by the Fund by 9:00 a.m. Central time, will be executed by the Fund at the net asset value determined on the prior Business Day. Any orders received by the Fund after 9:00 a.m. and prior to 3:00 p.m. Central time, will be executed by the Fund at the net asset value next computed pursuant to the rules of the SEC. For purposes of this Section 2.2, the Fund hereby appoints AGL as its designee for receipt of such orders from the Separate Account and receipt by such designee shall constitute receipt by the Fund; provided that the Fund receives notice from AGL by telephone or facsimile (or by such other means as the Fund and AGL may agree in writing) of receipt of such orders by 9:00 a.m. Central time on the next following Business Day. "Business Day" shall mean any day on which the New York Stock 2 Exchange is open for trading and on which the Fund calculates its net asset value pursuant to the rules of the SEC. 2.3 The Fund agrees to redeem, on AGL's request, any full or fractional shares of the Fund held by AGL, executing such requests on each Business Day at the net asset value next computed after receipt by the Fund or its designee of the request for redemption, in accordance with the provisions of this Agreement and the Fund's Registration Statement. For purposes of this Section 2.3, the Fund hereby appoints AGL as its designee for receipt of requests for redemption from the Separate Account and receipt by such designee shall constitute receipt by the Fund; provided that the Fund receives notice from AGL by telephone or facsimile (or by such other means as the Fund and AGL may agree in writing) of receipt of such request for redemption by 9:00 a.m. Central time on the next following Business Day. 2.4 In the event that AGL's order results in a net purchase of Series shares, AGL shall pay for Series shares on the same Business Day that the notice of order to purchase the Fund shares is made in accordance with the provisions of this section. If AGL's order requests a net redemption resulting in a payment of redemption proceeds to AGL, the Fund shall normally pay and transmit the proceeds of redemptions of Series shares on the same Business Day that the notice of a redemption order is received in accordance with the provisions of this Agreement, unless doing so would require the Fund to dispose of Series securities or otherwise incur additional costs. In any event, proceeds shall be wired to AGL within three (3) Business Days or such longer period permitted by the Investment Company Act of 1940, as amended (the "1940 Act") or the rules, orders or regulations thereunder, and the Fund shall notify the person designated in writing by AGL as the recipient for such notice of such delay by 5:00 p.m. Central time the same Business Day that AGL transmits the redemption order to the Fund. If AGL's order requests the application of redemption proceeds from the redemption of shares to the purchase of shares of another fund advised by Adviser (as defined below), the Fund shall so apply such proceeds the same Business Day that AGL transmits such order to the Fund. Any payment made pursuant to this Section 2.4 shall be in federal funds transmitted by wire. 3 2.5 The Fund will provide to AGL closing net asset value per share for the Series after the close of trading each Business Day. In any event, the Fund shall use its best efforts to make the net asset value per share for each Series available by 6:00 p.m. Central time each Business Day, and as soon as reasonably practicable after the net asset value per share for each Series is calculated, and shall calculate such net asset value in accordance with the Fund's Registration Statement. Any material error in the calculation of the net asset value of the Series shall be reported immediately to AGL. 2.6 At the end of each Business Day, AGL shall use the information described in Section 2.5 to calculate Separate Account unit values for the day. Using these unit values, AGL shall process each such Business Day's Separate Account transactions based on requests and premiums received by it by the earlier of 4:00 p.m. Eastern time or the close of trading on the floor of the New York Stock Exchange (currently 4:00 p.m. New York time) to determine the net dollar amount of the Fund shares which shall be purchased or redeemed at that day's closing net asset value per share. The net purchase or redemption orders so determined shall be transmitted to the Fund by AGL by 9:00 a.m. Central time on the Business Day next following AGL's receipt of such requests and premiums in accordance with the terms of Sections 2.2 and 2.3 hereof. Orders will be sent directly, via facsimile (or by such other means as the Fund and AGL may agree in writing), to the Fund or such other person as the Fund may designate. 2.7 The Fund shall furnish, on or before the exdividend date, notice to AGL of any income dividends or capital gain distributions payable on the shares of any Series. AGL hereby elects to receive all such income dividends and capital gain distributions as are payable on a Series' shares in additional shares of the Series, but reserves the right to revoke the election and to receive all such income dividends and capital gain distributions in cash. The Fund shall notify AGL or its designee of the number of shares so issued as payment of such dividends and distributions. 2.8 The Fund may refuse to sell shares of any Series to any person or suspend or terminate the offering of the shares of or liquidate any Series if such action is required by law or by regulatory authorities having jurisdiction or is, in the sole discretion of the Board of Trustees of the Fund (the "Board of Trustees"), acting in good faith and in light of its duties under federal and any 4 applicable state laws, deemed necessary, desirable or appropriate and in the best interests of the shareholders of such Series. The Fund further reserves the right to pay any portion of a redemption in kind of portfolio securities of any Series if the Fund's Board of Trustees determines that it would be detrimental to the best interests of the shareholders to make a redemption wholly in cash. 2.9 Issuance and transfer of Series shares will be by book entry only. Stock certificates will not be issued to AGL or the Separate Account. Shares ordered from the Series will be recorded in appropriate book entry titles for the Separate Account. 2.10 Each Party has the right to rely on information or confirmations provided by each other Party (or by any affiliate of each other Party) and shall not be liable in the event that an error is a result of any misinformation supplied by any other Party or any such affiliate. If a mistake is caused in supplying such information or confirmations, which results in a reconciliation with incorrect information, the amount required to make a Policy owner's or participant's account whole shall be borne by the Party providing the incorrect information. Section 3. Costs and Expenses ------------------------------ 3.1 General. ------- Except as otherwise specifically provided herein, each Party will bear all expenses incident to its performance under this Agreement. 3.2 Expense allocations. -------------------- (a) The Fund will pay the cost of keeping its registration of shares under the Securities Act of 1933, as amended (the "1933 Act") and its registration as a management investment company under the 1940 Act, current and effective. AGL will pay the cost of registering the Separate Account as a unit investment trust under the 1940 Act and registering units of interest under the Policies under the 1933 Act and keeping such registrations current and effective. 5 (b) At least annually, the Fund or its designee shall provide AGL with the current prospectus, statement of additional information and any supplements thereto for the shares of the Series in the form of "camera ready" copy as set in type or, at the request of AGL, as a diskette in the form sent to the financial printer. The prospectuses provided by the Fund shall be limited to only those Series of the Fund that are made available through the Separate Account to serve as underlying investments. The Fund shall be responsible for providing the prospectus and/or statement of additional information in the format (i.e., "camera ready" or diskette) in which it is accustomed to formatting prospectuses and/or statements of additional information. The Distributor shall bear the expense of providing the prospectus and/or statement of additional information, and any supplements thereto, in such format (e.g. typesetting expenses), and AGL shall bear the expense of adjusting or changing the format to conform with any of its prospectuses and/or statements of additional information. At AGL's option and expense, once a year (or more frequently if the prospectus and/or statement of additional information for the shares is supplemented or amended), AGL may cause the Fund's prospectus and/or statement of additional information to be printed separately and/or together in one document with the prospectus and/or statement of additional information for other investment companies and/or for the Policies. AGL shall be responsible for the costs of printing the Fund's prospectus and/or statement of additional information, either separately or in combination as aforesaid, and distribution to existing Policy owners whose Policies are funded by such shares and to prospective purchasers of Policies. (c) The Fund and AGL will each bear one-half of the costs of preparing, filing with the SEC and setting for printing the Fund's periodic reports to shareholders, the Fund proxy material and other shareholder communications (collectively "Fund Reports") provided to existing owners under the Policies (collectively, "Participants") and AGL will bear the costs of delivering the Fund Reports to Participants. (d) AGL will bear the costs of preparing, filing with the SEC, setting for printing, printing and delivering to Participants the Separate Account's prospectus, statement of additional information and any supplements thereto (collectively, the "Separate Account Prospectus"), periodic reports to Participants, voting instruction solicitation material, and other Participant 6 communications. 3.3 Parties to Cooperate. -------------------- The Fund, AGL, AGSI and the Distributor each agrees to cooperate with the others, as applicable, in arranging to print, mail and/or deliver combined or coordinated prospectuses or other materials of the Fund and Separate Account. Section 4. Legal Compliance ---------------------------- 4.1 Tax Laws. -------- (a) The Fund represents and warrants that each Series is currently qualified as a regulated investment company ("RIC") under Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"), and represents that it will make every effort to qualify and to maintain qualification of each Series as a RIC. The Fund or the Distributor will notify AGL immediately upon having a reasonable basis for believing that a Series has ceased to so qualify or that it might not so qualify in the future. (b) AGL represents and warrants that the Policies are currently and at the time of issuance will be treated as life insurance policies under applicable provisions of the Code and that it will make every effort to maintain such treatment. AGL will notify the Fund and the Distributor immediately upon having a reasonable basis for believing that any of the Policies have ceased to be so treated or that they might not be so treated in the future. (c) The Fund represents and warrants that each Series is currently in compliance with the diversification requirements set forth in Section 817(h) of the Code and Section 1.817-5 of the regulations under the Code, and the Fund represents that it will make every effort to maintain each Series' compliance with such diversification requirements. The Fund or the Distributor will notify AGL immediately upon having a reasonable basis for believing that a Series has ceased to so comply or that a Series might not so comply in the future. 7 (d) AGL represents and warrants that the Separate Account is a "segregated asset account" and that interests in the Separate Account are offered exclusively through the purchase of or transfer into a "variable contract," within the meaning of such terms under Section 817(h) of the Code and the regulations thereunder. AGL will make every effort to continue to meet such definitional requirements, and it will notify the Fund and the Distributor immediately upon having a reasonable basis for believing that such requirements have ceased to be met or that they might not be met in the future. quarter. (e) The Fund represents that, under the terms of its investment advisory agreements with Key Asset Management Company (the "Adviser"), the Adviser is and will be responsible for managing the Fund in compliance with the Fund's investment objectives, policies and restrictions as set forth in the Fund Prospectus. The Fund represents that these objectives, policies and restrictions do and will include operating as a RIC in compliance with Subchapter M of the Code and Section 817(h) of the Code and regulations thereunder. The Fund has adopted and will maintain procedures for ensuring that the Fund is managed in compliance with Subchapter M and Section 817(h) and regulations thereunder. On request, the Fund shall also provide AGL with such materials, cooperation and assistance as may be reasonably necessary for AGL or any appropriate person designated by AGL to review from time to time the procedures and practices of the Adviser or each sub-investment adviser to the Fund for ensuring that the Fund is managed in compliance with Subchapter M and Section 817(h) and regulations thereunder. In the event of any noncompliance regarding its status as a RIC, the Fund will pursue those efforts necessary to enable each affected Series to qualify once again for treatment as a RIC in compliance with Subchapter M, including cooperation in good faith with AGL. If the Fund does not so cure the noncompliance regarding its status under Section 817(h), the Fund will cooperate in good faith with AGL's efforts to obtain a ruling and closing agreement, as provided in Revenue Procedure 92-25 issued by the Internal Revenue Service (or any applicable ruling or procedure subsequently issued by the Internal Revenue Service), that the Series satisfies Section 817(h) for the period or periods of non-compliance. 8 4.2 Insurance and Certain Other Laws. -------------------------------- (a) The Distributor and the Fund make no representation as to whether any aspect of the Fund's operations complies with the insurance laws or regulations of the various states. The Fund will use reasonable efforts to comply with any applicable state insurance laws or regulations, to the extent specifically requested in writing by AGL. (b) AGL represents and warrants that (i) it is an insurance company duly organized, validly existing and in good standing under the insurance laws of the State of Texas and the regulations thereunder, and has full corporate power, authority and legal right to execute, deliver and perform its duties and comply with its obligations under this Agreement, (ii) it has legally and validly established and maintains the Separate Account as a segregated asset account under Article 3.75 of the Texas Insurance Code, and (iii) the Policies comply in all material respects with all other applicable federal and state laws and regulations. (c) AGL and AGSI represent and warrant that AGSI is a business corporation duly organized, validly existing, and in good standing under the laws of the State of Texas and has full corporate power, authority and legal right to execute, deliver, and perform its duties and comply with its obligations under this Agreement. (d) The Distributor represents and warrants that it is a limited partnership duly organized, validly existing, and in good standing under the laws of the State of Ohio and has full power, authority and legal right to execute, deliver, and perform its duties and comply with its obligations under this Agreement. (e) The Fund represents and warrants that the Fund is a business trust duly organized, validly existing, and in good standing under the laws of the state of Delaware and has full power, authority, and legal right to execute, deliver, and perform its duties and comply with its obligations under this Agreement. 4.3 Securities Laws. --------------- 9 (a) AGL represents and warrants that (i) it has registered the Separate Account as a unit investment trust in accordance with the provisions of the 1940 Act to serve as a segregated investment account for its variable life insurance policies, including the Policies, (ii) the Separate Account does and will comply in all material respects with the requirements of the 1940 Act and the rules thereunder, (iii) the Separate Account's 1933 Act registration statement relating to the Policies, together with any amendments thereto, will at all times comply in all material respects with the requirements of the 1933 Act and the rules thereunder,(iv) the Separate Account Prospectus will at all times comply in all material respects with the requirements of the 1933 Act and the rules thereunder; and (v) interests in the Separate Account pursuant to the Policies will be registered under the 1933 Act to the extent required by the 1933 Act and the Policies will be duly authorized for issuance and sold in compliance with all applicable federal and state laws and that the sale of the Policies will comply in all material respects with state insurance suitability requirements. (b) The Fund represents and warrants that (i) Fund shares sold pursuant to this Agreement will be registered under the 1933 Act to the extent required by the 1933 Act, (ii) the Fund is and will remain registered under the 1940 Act to the extent required by the 1940 Act, and (iii) the Fund will amend the registration statement for its shares under the 1933 Act and itself under the 1940 Act from time to time as required in order to effect the continuous offering of its shares. (c) The Fund represents and warrants that (i) the Fund does and will comply in all material respects with the requirements of the 1940 Act and the rules thereunder, (ii) its 1933 Act registration statement, together with any amendments thereto, will at all times comply in all material respects with the requirements of the 1933 Act and rules thereunder, and (iii) the Fund Prospectus will at all times comply in all material respects with the requirements of the 1933 Act and the rules thereunder. (d) The Fund will register and qualify its shares for sale in accordance with the laws of any state or other jurisdiction only if and to the extent reasonably deemed advisable by the Fund, AGL or any other life insurance company utilizing the Fund. (e) AGL represents and warrants that its directors, officers, and employees, if any, dealing with the money and/or securities of the Fund are and shall continue to be at all times 10 covered by a blanket fidelity bond or similar coverage in an amount not less than $2 million. The aforesaid bond shall include coverage for larceny and embezzlement and shall be issued by a reputable bonding company. (f) The Fund represents and warrants that its directors, officers, and employees, if any, dealing with the money and/or securities of the Fund are and shall continue to be at all times covered by a blanket fidelity bond or similar coverage in an amount not less than the minimal coverage as required currently by Rule 17g-1 of the 1940 Act or related provisions as may be promulgated from time to time. The aforesaid bond shall include coverage for larceny and embezzlement and shall be issued by a reputable bonding company. 4.4 Notice of Certain Proceedings and Other Circumstances. ----------------------------------------------------- (a) The Fund shall promptly notify AGL of (i) the issuance by any court or regulatory body of any stop order, cease and desist order, or other similar order with respect to the Fund's registration statement under the 1933 Act or the Fund Prospectus, (ii) any request by the SEC for any amendment to such registration statement or Fund Prospectus (other than SEC Staff comments on filings received in the ordinary course of business), (iii) the initiation of any proceedings for that purpose or for any other purpose relating to the registration or offering of the Fund's shares, or (iv) any other action or circumstances that may prevent the lawful offer or sale of Fund shares in any state or jurisdiction, including, without limitation, any circumstances in which (x) the Fund's shares are not registered and, in all material respects, issued and sold in accordance with applicable state and federal law or (y) such law precludes the use of such shares as an underlying investment medium of the Policies issued or to be issued by AGL. The Distributor and the Fund will make every reasonable effort to prevent the issuance of any stop order, cease and desist order or similar order and, if any such order is issued, to obtain the lifting thereof at the earliest possible time. (b) AGL or AGSI shall promptly notify the Fund of (i) the issuance by any court or regulatory body of any stop order, cease and desist order, or other similar order with respect to the Separate Account's registration statement under the 1933 Act relating to the Policies or the 11 Separate Account Prospectus, (ii) any request by the SEC for any amendment to such registration statement or Separate Account prospectus, (iii) the initiation of any proceedings for that purpose or for any other purpose relating to the registration or offering of the Separate Account interests pursuant to the Policies, (iv) any other action or circumstances that prevent the lawful offer or sale of said interests in any state or jurisdiction, including without limitation, any circumstances in which said interests are not registered and in all material respects issued and sold in accordance with applicable state and federal law. AGL and AGSI will make every reasonable effort to prevent the issuance of any stop order, cease and desist order or similar order and, if any such order is issued, to obtain the lifting thereof at the earliest possible time. 4.5 AGL to Provide Documents. ------------------------ AGL will provide to the Fund one complete copy of all SEC registration statements, Separate Account Prospectuses, annual and semi-annual reports, any preliminary and final voting instruction solicitation material, applications for exemptions, requests for no-action letters, and all amendments to any of the above, that relate to the Separate Account or the Policies, contemporaneously with the filing of such document with the SEC or other regulatory authorities. 4.6 Fund to Provide Documents. ------------------------- The Fund will provide to AGL one complete copy of all SEC registration statements, Fund Prospectuses, annual and semi-annual reports, any preliminary and final proxy material, applications for exemptions, requests for no-action letters, and all amendments to any of the above, that relate to the Fund or its shares, contemporaneously with the filing of such document with the SEC or other regulatory authorities. 4.7 Sales Literature ---------------- (a) AGL will furnish, or will cause to be furnished, to the Fund and Distributor for review, each piece of sales literature or other promotional material in which the Fund, or any Series thereof, or Adviser is named, before such material is submitted to any regulatory body for review, and in any event, at least fifteen (15) Business Days prior to its use. No such material will 12 be used if the Fund or Distributor objects to its use in writing within fifteen (15) Business Days after receipt of such material. (b) Advertising and sales literature with respect to AGL, the Separate Account and/or the Policies prepared by the Fund, Distributor or any affiliate thereof will be submitted to AGL for review before such material is submitted to any regulatory body for review, and in any event, at least fifteen (15) Business Days prior to its use. No such material will be used if AGL objects to its use in writing within fifteen (15) Business Days after receipt of such material. (c) The Fund and its affiliates and agents shall not give any information or make any representations on behalf of AGL or concerning AGL, the Separate Account or the Policies issued by AGL, other than the information or representations contained in a registration statement or prospectus for such Policies, as such registration statement and prospectus may be amended or supplemented from time to time, or in reports of the Separate Account or reports prepared for distribution to owners of such Policies, or in sales literature or other promotional material approved by AGL or its designee, without the written permission of AGL. (d) AGL and its affiliates and agents shall not give any information or make any representations on behalf of the Fund or concerning the Fund other than the information or representations contained in a Registration Statement or prospectus for the Fund, as such Registration Statement and prospectus may be amended or supplemented from time to time, or in reports of the Fund or reports prepared for distribution to owners of shares of the Fund or for owners of the Policies, or in sales literature or other promotional material approved by the Fund or its designee, without the written permission of the Fund. (e) For purposes of this Agreement, the phrase "sales literature or other promotional material" or words of similar import include, without limitation, advertisements (such as material published, or designed for use, in a newspaper, magazine or other periodical, radio, television, electronic media, telephone or tape recording, videotape display, signs or billboards, motion pictures or other public media), sales literature (such as any written communication 13 distributed or made generally available to customers or the public, including brochures, circulars, research reports, market letters, form letters, seminar texts, or reprints or excerpts of any other advertisement, sales literature, or published article), educational or training materials or other communications distributed or made generally available to some or all agents or employees, registration statements, prospectuses, statements of additional information, shareholder reports and proxy materials, and any other material constituting sales literature or advertising under National Association of Securities Dealers, Inc. ("NASD") rules, the 1940 Act or the 1933 Act. (f) AGL will bear the cost of printing and delivering to prospective purchasers of the Policies Fund and Separate Account sales literature or other promotional material and the cost of filing any such materials with, and obtaining approval from, any state insurance regulatory authorities. Section 5. Mixed and Shared Funding ------------------------------------ 5.1 General. ------- The Fund has obtained an order, and AGL has received and reviewed, a copy of the amended and restated application for exemptive relief filed by the Fund and certain affiliates on ________________, ________________ with the SEC and the Exemptive Order issued by the SEC on ___________________________, _______ in response thereto (Securities and Exchange Commission Release No._________________ the "Mixed and Shared Funding Order") exempting it from certain provisions of the 1940 Act and rules thereunder so that the Fund may be available for investment by certain other entities, including, without limitation, separate accounts funding variable life insurance policies and variable annuity contracts, separate accounts of insurance companies unaffiliated with AGL and trustees of qualified pension and retirement plans ("Mixed and Shared Funding"). The Parties recognize that the SEC has imposed terms and conditions for such orders that are substantially identical to many of the provisions of this Section 5. The Parties represent and warrant that they will comply with the terms and conditions of the SEC order, whether or not recited in this Section 5. 14 5.2 Disinterested Directors. ----------------------- The Fund agrees that the Board of Trustees shall at all times consist of Trustees, a majority of whom (the "Disinterested Directors") are not interested persons of the Adviser or the Distributor within the meaning of Section 2(a)(19) of the 1940 Act and the rules thereunder and as modified by any applicable orders of the SEC, except that if this condition is not met by reason of the death, disqualification, or bona fide resignation of any Trustee or Trustees, then the operation of this condition shall be suspended (a) for a period of 45 days if the vacancy or vacancies may be filled by the Board of Trustees; (b) for a period of 60 days if a vote of shareholders is permitted to fill the vacancy or vacancies; or (c) for such longer period as the SEC may permit. 5.3 Monitoring for Material Irreconcilable Conflicts. ------------------------------------------------ The Fund agrees that the Board of Trustees will monitor for the existence of any material irreconcilable conflict between the interests of the Participants of all separate accounts of life insurance companies utilizing the Fund, including the Separate Account. The concept of a "material irreconcilable conflict" is not defined by the 1940 Act or the rules thereunder, but the Parties recognize that such a conflict may arise for a variety of reasons, including, without limitation: (a) an action by any state insurance or other regulatory authority; (b) a change in applicable federal or state insurance, tax or securities laws or regulations, or a public ruling, private letter ruling, no- action or interpretative letter, or any similar action by insurance, tax or securities regulatory authorities; (c) an administrative or judicial decision in any relevant proceeding; (d) the manner in which the investments of any Series are being managed; (e) a difference in voting instructions given by variable insurance life insurance policy and variable annuity contract participants or by participants of different life insurance companies utilizing the Fund; or 15 (f) a decision by a life insurance company utilizing the Fund to disregard the voting instructions of participants. AGL will report any potential or existing conflicts of which it becomes aware to the Fund's Board of Trustees. AGL will assist the Board in carrying out its responsibilities under the Mixed and Shared Funding Order by providing the Board with all information reasonably necessary for the Board to consider any issues raised. This assistance shall include, but is not limited to, an obligation by AGL to (i) inform the Board whenever the voting instructions of the Policy owners or Participants are disregarded, and (ii) to submit to the Board such reports, materials or data as the Board may reasonably request so that the Board may fully carry out the obligations imposed upon it by the Mixed and Shared Funding Order, and such reports, materials and data shall be submitted more frequently if deemed appropriate by the Board. AGL will carry out its responsibilities under this paragraph with a view only to the interests of the Policy owners and Participants. 5.4 Conflict Remedies. ----------------- (a) It is agreed that if it is determined by a majority of the members of the Board of Trustees or a majority of the Disinterested Trustees that a material irreconcilable conflict exists affecting AGL, AGL will, at its own expense and to the extent reasonably practicable (as determined by a majority of the Disinterested Trustees), take whatever steps are necessary to remedy or eliminate the material irreconcilable conflict, which steps may include, but are not limited to: (i) withdrawing the assets allocable to the separate account from the Fund or any series and reinvesting such assets in a different investment medium, including another series of the Fund or another investment company, or submitting the question whether such segregation should be implemented to a vote of all affected Participants and, as appropriate, segregating the assets of any particular group (e.g., variable life insurance contract owners, variable annuity contract owners or all variable contract owners and participants of one or more life insurance companies utilizing the Fund) that votes in favor of such segregation, or offering to the 16 affected variable contract owners or participants the option of making such a change; and (ii) establishing a new registered investment company of the type defined as a "Management Company" in Section 4(3) of the 1940 Act or a new separate account that is operated as a Management Company. (b) If the material irreconcilable conflict arises because of AGL's decision to disregard Participant voting instructions and that decision represents a minority position or would preclude a majority vote, AGL may be required, at the Fund's election, to withdraw the Separate Account's investment in the Fund. No charge or penalty will be imposed as a result of such withdrawal. Any such withdrawal must take place within six months after the Fund gives notice to AGL that this provision is being implemented, and until such withdrawal the Distributor and Fund shall continue to accept and implement orders by AGL for the purchase and redemption of shares of the Fund. (c) If a material irreconcilable conflict arises because a particular state insurance regulator's decision applicable to AGL conflicts with the majority of other state regulators, then AGL will withdraw the Separate Account's investment in the Fund within six months after the Fund's Board of Directors informs AGL that it has determined that such decision has created a material irreconcilable conflict, and until such withdrawal the Distributor and Fund shall continue to accept and implement orders by AGL for the purchase and redemption of shares of the Fund. (d) AGL agrees that any remedial action taken by it in resolving any material irreconcilable conflict will be carried out at its expense and with a view only to the interests of Participants. (e) For purposes hereof, a majority of the Disinterested Directors will determine whether or not any proposed action adequately remedies any material irreconcilable conflict. In no event, however, will the Fund or the Distributor be required to establish a new funding medium for 17 any Policies. AGL will not be required by the terms hereof to establish a new funding medium for any Policies if any offer to do so has been declined by vote of a majority of Participants materially adversely affected by the material irreconcilable conflict. 5.5 Notice to AGL. ------------- The Fund will promptly make known in writing to AGL the Board of Trustees' determination of the existence of a material irreconcilable conflict, a description of the facts that give rise to such conflict and the implications of such conflict. 5.6 Information Requested by Board of Trustees. ------------------------------------------ AGL will at least annually submit to the Board of Trustees of the Fund such reports, materials or data as the Board of Trustees may reasonably request so that the Board of Trustees may fully carry out the obligations imposed upon it by the provisions hereof, and said reports, materials and data will be submitted at any reasonable time deemed appropriate by the Board of Trustees. All reports received by the Board of Trustees of potential or existing conflicts, and all Board of Trustees actions with regard to determining the existence of a conflict, notifying life insurance companies utilizing the Fund of a conflict, and determining whether any proposed action adequately remedies a conflict, will be properly recorded in the minutes of the Board of Trustees or other appropriate records, and such minutes or other records will be made available to the SEC upon request. 5.7 Compliance with SEC Rules. ------------------------- If, at any time during which the Fund is serving as an investment medium for variable life insurance policies, 1940 Act Rules 6e-3(T) or, if applicable, 6e-2 are amended or Rule 6e-3 is adopted to provide exemptive relief with respect to mixed and shared funding, the Parties agree that they will comply with the terms and conditions thereof and that the terms of this Section 5 shall be deemed modified if and only to the extent required in order also to comply with the terms and conditions of such exemptive relief that is afforded by any of said rules that are applicable. Section 6. Termination ----------------------- 18 6.1 Events of Termination. --------------------- Subject to Section 6.4 below, this Agreement will terminate as to a Series: (a) at the option of AGL, the Distributor or the Fund upon (I) at least six months' advance written notice to the other Parties unless a shorter time period is agreed to by the parties, (b)at the option of the Fund upon (i) at least sixty days advance written notice to the other parties, and (ii) the approval by (x) a majority of the Disinterested Directors or (y) a majority vote of the shares of the affected Series that are held in the corresponding Divisions of the Separate Account (pursuant to the procedures set forth in Section 10 of this Agreement for voting Series shares in accordance with Participant instructions);or (c) at the option of the Fund upon written notice upon institution of formal proceedings against AGL or AGSI by the SEC, the NASD, any state insurance regulator or any other regulatory body regarding AGL's duties under this Agreement or related to the sale of the Policies, the operation of the Separate Account, or the purchase of the Fund shares, if, in each case, the Fund reasonably determines that such proceedings, or the facts on which such proceedings may be based, have a material likelihood of imposing material adverse consequences on the Series to be terminated; or (d) at the option of AGL upon written notice upon institution of formal proceedings against the Fund, the Adviser or any sub-investment adviser to the Fund, or the Distributor by the NASD, the SEC, or any state securities or insurance department or any other regulatory body, if, in each case, AGL reasonably determines that such proceedings, or the facts on which such proceedings may be based, have a material likelihood of imposing material adverse consequences on AGL, AGSI or the Division corresponding to the Series to be terminated; or (e) at the option of any Party upon occurrence without written notice in the event that (i) the Series's shares are not registered and, in all material respects, issued and sold in accordance with applicable state and federal law or (ii) such law precludes the use of such shares 19 as an underlying investment medium of the Policies issued or to be issued by AGL; or (f) upon termination of the corresponding Division's investment in the Series pursuant to Section 5 hereof; or (g) at the option of AGL upon written notice if the Series ceases to qualify as a RIC under Subchapter M of the Code or under successor or similar provisions, or if AGL reasonably believes that the Series may fail to so qualify; or (h) at the option of AGL upon written notice if the Series fails to comply with Section 817(h) of the Code or with successor or similar provisions, or if AGL reasonably believes that the Series may fail to so comply. (i) at the option of the Fund upon written notice if the Policies cease to qualify as annuity contracts or life insurance contracts, as applicable, under the Code, or if the Fund reasonably believes that the Policies may fail to so qualify; or (j) at the option of the Fund, upon AGL's breach of any material provision of this Agreement, which breach has not been cured to the satisfaction of the Fund within thirty (30) days after written notice of such breach is delivered to AGL; or (k) at the option of AGL, upon the Fund's breach of any material provision of this Agreement, which breach has not been cured to the satisfaction of AGL within thirty (30) days after written notice of such breach is delivered to the Fund; or (l) at the option of the Fund upon written notice, if the Policies are not registered, issued or sold in accordance with applicable federal and/or state law and any applicable rules and regulations thereunder; or (m) effective immediately in the event the agreement is assigned without the prior 20 written consent of all parties; or (n) effective immediately in the event the Distributor ceases to be the distributor for the Funds, unless a successor distributor of the Fund agrees to assume and perform all of the obligations of the Distributor hereunder. 6.2 Series to Remain Available. -------------------------- Except (i) as necessary to implement Participant initiated transactions, (ii) as required by state insurance laws or regulations, (iii) as required pursuant to Section 5 of this Agreement, or (iv) with respect to any Series as to which this Agreement has terminated, AGL shall not (x) redeem Fund shares attributable to the Policies (as opposed to Fund shares attributable to AGL's assets held in the Separate Account), or (y) prevent Participants from allocating payments to or transferring amounts from a Series that was otherwise available under the Policies, until, in either case, 90 calendar days after AGL shall have notified the Fund or Distributor of its intention to do so. 6.3 Survival of Warranties and Indemnifications. ------------------------------------------- All warranties and indemnifications will survive the termination of this Agreement. 6.4 Continuance of Agreement for Certain Purposes. --------------------------------------------- If any Party terminates this Agreement with respect to any Series pursuant to Section 6.1 hereof, this Agreement shall nevertheless continue in effect as to any shares of that Series that are outstanding as of the date of such termination (the "Initial Termination Date"). This continuation shall extend to the earlier of the date as of which the Separate Account owns no shares of the affected Series or a date (the "Final Termination Date") six months following the Initial Termination Date, except that (i) AGL may, by written notice to the other Parties, shorten said six month period in the case of a termination pursuant to Sections 6.1(d), 6.1(e) 6.1(g) 6.1(k) or 6.1(m); (ii) the Fund may, by written notice to the other Parties, shorten said 6 month period in the case of a termination pursuant to Sections 6.1(b), 6.1(c), 6.1(f), 6.1(h), 6.1(i), 6.1(j) 6.1(l) or 6.1(m); and (iii) the Distributor will no longer be deemed a party to this Agreement after the Initial Termination Date in the case of a termination pursuant to Section 6.1(n). 21 Section 7. Parties to Cooperate Respecting Termination ------------------------------------------------------- The Parties agree to cooperate and give reasonable assistance to one another in taking all necessary and appropriate steps for the purpose of ensuring that the Separate Account owns no shares of a Series after the Final Termination Date with respect thereto, or, in the case of a termination pursuant to Section 6.1(a), the termination date specified in the notice of termination. Section 8. Assignment ---------------------- This Agreement may not be assigned, except with the written consent of each other Party. Section 9. Notices ------------------- Notices and communications required or permitted by Section 2 hereof will be given by means mutually acceptable to the Parties concerned. Each other notice or communication required or permitted by this Agreement will be given to the following persons at the following addresses and facsimile numbers, or such other persons, addresses or facsimile numbers as the Party receiving such notices or communications may subsequently direct in writing: American General Life Insurance Company 2929 Allen Parkway Houston, Texas Attn: General Counsel FAX: 713-831-1106 American General Securities Incorporated 2727 Allen Parkway Houston, Texas 77019 Attn: F. Paul Kovach, Jr. FAX: 713-831-3366 22 The Victory Variable Insurance Funds c/o BISYS Fund Services Limited Partnership 3435 Stelzer Road, Suite 1000 Columbus, Ohio 43219 Attn: William J. Tomko FAX: 614-470-8715 With a copy to: Key Asset Management 127 Public Square Cleveland, Ohio 44114 Attn: Kathleen Dennis FAX: 216-689-9193 BISYS Fund Services Limited Partnership 3435 Stelzer Road, Suite 1000 Columbus, Ohio 43219 Attn: William J. Tomko FAX: 614-470-8715 Section 10. Voting Procedures ------------------------------ Subject to the cost allocation procedures set forth in Section 3 hereof, AGL will distribute all proxy material furnished by the Fund to Participants and will vote Fund shares in accordance with instructions received from Participants. AGL will vote Fund shares that are (a) not attributable to Participants or (b) attributable to Participants, but for which no instructions have been received, in the same proportion as Fund shares for which said instructions have been received from Participants. AGL agrees that it will disregard Participant voting instructions only to the extent (i) it would be permitted to do so pursuant to Rule 6e-3(T)(b)(15)(iii) under the 1940 Act if the Policies were variable life insurance policies subject to that rule or (ii) it is permitted under applicable state insurance laws affecting the Fund. AGL will be responsible for assuring that the Separate Account calculates voting privileges in a manner consistent with that of other participating life insurance companies that utilize the Fund. Section 11. Foreign Tax Credits -------------------------------- The Fund agrees to consult in advance with AGL concerning any decision to elect or not to elect pursuant to Section 853 of the Code to pass through the benefit of any foreign tax credits to 23 its shareholders. Section 12. Indemnification ---------------------------- 12.1 Of Fund and Distributor by AGL. ------------------------------ (a) Except to the extent provided in Sections 12.1(b) and 12.1(c), below, AGL agrees to indemnify and hold harmless the Fund and the Distributor, each of their respective affiliates, and each of their directors and officers, employees and agents, and each person, if any, who controls the Fund or the Distributor within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this Section 12.1) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of AGL) or actions in respect thereof (including, to the extent reasonable, legal and other expenses), to which the Indemnified Parties may become subject under any statute, regulation, at common law or otherwise, insofar as such losses, claims, damages, liabilities, actions, or settlements are related to the sale or acquisition of the Fund's shares or the Policies and: (i) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Separate Account's 1933 Act registration statement, the Separate Account Prospectus, the Policies or, to the extent prepared by AGL or AGSI, or agents thereof, sales literature or advertising for the Policies (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided that this agreement to indemnify shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to AGL or AGSI, or agents thereof by or on behalf of the Fund, the Distributor or the Adviser for use in the Separate Account's 1933 Act registration statement, the Separate Account Prospectus, the Policies, or sales literature or advertising (or any amendment or supplement to 24 any of the foregoing) or otherwise for use in connection with the sale of the Policies or Fund shares; or (ii) arise out of or as a result of any other statements or representations (other than statements or representations contained in the Fund's 1933 Act registration statement, Fund Prospectus, sales literature or advertising of the Fund, or any amendment or supplement to any of the foregoing, not supplied for use therein by or on behalf of AGL or AGSI) or wrongful conduct of AGL or AGSI or persons under their control (including, without limitation, their employees and "Associated Persons," as that term is defined in paragraph (m) of Article I of the NASD's By-Laws), in connection with the sale or distribution of the Policies or Fund shares; or (iii) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Fund's 1933 Act registration statement, Fund Prospectus, sales literature or advertising of the Fund, or any amendment or supplement to any of the foregoing, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading if such a statement or omission was made in reliance upon and in conformity with information furnished to the Fund by or on behalf of AGL or AGSI for use in the Fund's 1933 Act registration statement, Fund Prospectus, sales literature or advertising of the Fund, or any amendment or supplement to any of the foregoing; or (iv) arise as a result of any failure by AGL or AGSI to perform the obligations, provide the services and furnish the materials required of them under the terms of this Agreement, or any material breach of 25 any representation and/or warranty made by AGL or AGSI in this Agreement or arise out of or result from any other material breach of this Agreement by AGL or AGSI. (b) AGL shall not be liable under this indemnification provision with respect to any losses, claims, damages, liabilities or actions to which an Indemnified Party would otherwise be subject by reason of willful misfeasance, bad faith, or gross negligence in the performance by that Indemnified Party of its duties or by reason of its reckless disregard of obligations or duties under this Agreement or to the Distributor or to the Fund. (c) AGL shall not be liable under this indemnification provision with respect to any action against an Indemnified Party unless such Indemnified Party shall have notified AGL in writing within a reasonable time after the summons or other first legal process giving information of the nature of the action shall have been served upon such Indemnified Party (or after such Indemnified Party shall have received notice of such service on any designated agent), but failure to notify AGL of any such action shall not relieve AGL from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of this indemnification provision. In case any such action is brought against an Indemnified Party, AGL shall be entitled to participate, at its own expense, in the defense of such action. AGL also shall be entitled to assume the defense thereof, with counsel approved by the Indemnified Party named in the action, which approval shall not be unreasonably withheld. After notice from AGL to such Indemnified Party of AGL's election to assume the defense thereof, the Indemnified Party will cooperate fully with AGL and shall bear the fees and expenses of any additional counsel retained by it, and AGL will not be liable to such Indemnified Party under this Agreement for any legal or other expenses subsequently incurred by such Indemnified Party independently in connection with the defense thereof, other than reasonable costs of investigation. 12.2 Of AGL and AGSI by Distributor and Fund. --------------------------------------- (a) Except to the extent provided in Sections 12.2(b) and 12.2 (c) hereof, the Distributor (but only with respect to the matters described in clauses (i), (ii) and (iii) below) and the 26 Fund (but only with respect to the matters described in clause (iv) below) agree to indemnify and hold harmless AGL, AGSI, each of their respective affiliates, and each of their directors and officers, employees and agents, and each person, if any, who controls AGL or AGSI, within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this Section 12.2) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of the Distributor) or actions in respect thereof (including, to the extent reasonable, legal and other expenses) to which the Indemnified Parties may become subject under any statute, regulation, at common law or otherwise, insofar as such losses, claims, damages, liabilities, actions, or settlements are related to the sale or acquisition of the Fund's shares or the Policies and: (i) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Fund's 1933 Act registration statement, Fund Prospectus, sales literature or advertising of the Fund or, to the extent not prepared by AGL or AGSI or agents thereof, sales literature or advertising for the Policies (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, if such statements or omission was made in relaince upon and in conformity with information furnished by or on behalf of the Distributor for use in the Fund's registration statement, the Fund's Prospectus, Fund sales literature or advertising, or sales literature or advertising covering the Policies or any amendments or supplements to any of the foregoing. (ii) arise out of or as a result of any other statements or representations (other than statements or representations contained in the Separate Account's 1933 Act registration statement, Separate Account Prospectus, sales literature or advertising for the Policies, or any 27 amendment or supplement to any of the foregoing, not supplied for use therein by or on behalf of the Distributor, Fund or Adviser) or the wrongful conduct of the Distributor, or persons under its control (including, without limitation, their employees and Associated Persons), in connection with the sale or distribution of the Policies or Fund shares; or (iii) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Separate Account's 1933 Act registration statement, Separate Account Prospectus, sales literature or advertising covering the Policies, or any amendment or supplement to any of the foregoing, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, if such statement or omission was made in reliance upon and in conformity with information furnished to AGL or AGSI by or on behalf of the Distributor for use in the Separate Account's 1933 Act registration statement, Separate Account Prospectus, sales literature or advertising covering the Policies, or any amendment or supplement to any of the foregoing; or arise as a result of any failure by the Distributor to perform the obligations, provide the services and furnish the materials required of them under the terms of this Agreement, or any material breach of any representation and/or warranty made by the Distributor in this Agreement or arise out of or result from any other material breach of this Agreement by the Distributor; (iv) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the prospectus covering the Policies, or any amendment or supplement to any of the foregoing, or 28 the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, if such statement or omission was made in reliance upon and in conformity with information furnished to AGL or AGSI by or on behalf of the Fund for use in the prospectus covering the Policies, or any amendment or supplement to any of the foregoing; or arise as a result of any failure by the Fund to perform the obligations, provide the services and furnish the materials required of it under the terms of this Agreement, or any material breach of any representation and/or warranty made by the Fund in this Agreement or arise out of or result from any other material breach of this Agreement by the Fund. (b) Except to the extent provided in Sections 12.2 (c) and 12.2(d) hereof, the Fund agrees to indemnify and hold harmless the Indemnified Parties from and against any and all losses, claims, damages, liabilities (including amounts paid in settlement thereof with the written consent of the Fund) or actions in respect thereof (including, to the extent reasonable, legal and other expenses) to which the Indemnified Parties may become subject directly or indirectly under any statute, at common law or otherwise, insofar as such losses, claims, damages, liabilities or actions directly or indirectly result from or arise out of the failure of any Series to operate as a regulated investment company in compliance with (i) Subchapter M of the Code and regulations thereunder or (ii) Section 817(h) of the Code and regulations thereunder, including without limitation, any income taxes and related penalties, rescission charges, liability under state law to Participants asserting liability against AGL or AGSI pursuant to the Policies, the costs of any ruling and closing agreement or other settlement with the IRS, and the cost of any substitution by AGL of shares of another investment company or portfolio for those of any adversely affected Series as a funding medium for each Separate Account that AGL reasonably deems necessary or appropriate as a result of the noncompliance. (c) The Fund and the Distributor shall not be liable under this indemnification provision with respect to any losses, claims, damages, liabilities or actions to which an Indemnified Party would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or 29 negligence in the performance by that Indemnified Party of its duties or by reason of its reckless disregard of obligations and duties under this Agreement or to AGL, AGSI or the Separate Account. (d) The Fund and the Distributor shall not be liable under this indemnification provision with respect to any action against an Indemnified Party unless such Indemnified Party shall have notified the Fund and the Distributor in writing within a reasonable time after the summons or other first legal process giving information of the nature of the action shall have been served upon such Indemnified Party (or after such Indemnified Party shall have received notice of such service on any designated agent), but failure to notify the Distributor of any such action shall not relieve the Distributor from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of this indemnification provision. In case any such action is brought against an Indemnified Party, the Distributor will be entitled to participate, at its own expense, in the defense of such action. The Distributor also shall be entitled to assume the defense thereof, with counsel approved by the Indemnified Party named in the action, which approval shall not be unreasonably withheld. After notice from the Distributor to such Indemnified Party of the Distributor's election to assume the defense thereof, the Indemnified Party will cooperate fully with the Distributor and shall bear the fees and expenses of any additional counsel retained by it, and the Distributor will not be liable to such Indemnified Party under this Agreement for any legal or other expenses subsequently incurred by such Indemnified Party independently in connection with the defense thereof, other than reasonable costs of investigation. 12.3 Effect of Notice. ---------------- Any notice given by the indemnifying Party to an Indemnified Party referred to in Section 12.1 or 12.2 above of participation in or control of any action by the indemnifying Party will in no event be deemed to be an admission by the indemnifying Party of liability, culpability or responsibility, and the indemnifying Party will remain free to contest liability with respect to the claim among the Parties or otherwise. 12.4 Successors. ---------- 30 A successor by law of any Party shall be entitled to the benefits of the indemnification contained in this Section 12. Section 13. Applicable Law --------------------------- This Agreement will be construed and the provisions hereof interpreted under and in accordance with Texas law, without regard for that state's principles of conflict of laws. Section 14. Execution in Counterparts -------------------------------------- This Agreement may be executed simultaneously in two or more counterparts, each of which taken together will constitute one and the same instrument. Section 15. Severability ------------------------- If any provision of this Agreement is held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement will not be affected thereby. Section 16. Rights Cumulative ------------------------------ The rights, remedies and obligations contained in this Agreement are cumulative and are in addition to any and all rights, remedies and obligations, at law or in equity, that the Parties are entitled to under federal and state laws. Section 17. Headings -------------------- The Table of Contents and headings used in this Agreement are for purposes of reference only and shall not limit or define the meaning of the provisions of this Agreement. Section 18. Limitation of Liability ----------------------------------- It is understood and expressly stipulated that neither the shareholders of shares of any Series nor the 31 Trustees or officers of the Fund or any Series shall be personally liable hereunder. No Series shall be liable for the liabilities of any other Series. All persons dealing with the Fund or a Series must look solely to the property of the Fund or that Series, respectively, for enforcement of any claims against the Fund or that Series. It is also understood that each of the Series shall be deemed to be entering into a separate Agreement with AGL so that it is as if each of the Series had signed a separate Agreement with AGL and that a single document is being signed simply to facilitate the execution and administration of the Agreement. Section 19 ---------- No provision of this Agreement may be amended or modified in any manner except by a written agreement properly authorized and executed by all Parties. 32 IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed in their names and on their behalf by and through their duly authorized officers signing below. AMERICAN GENERAL LIFE INSURANCE COMPANY By:_________________________________ Title:______________________________ AMERICAN GENERAL SECURITIES INCORPORATED By:_________________________________ Title:______________________________ THE VICTORY VARIABLE INSURANCE FUNDS By:_________________________________ Title:______________________________ BISYS FUND SERVICES LIMITED PARTNERSHIP BISYS Fund Services, Inc. Its General Partner By:_________________________________ Title:______________________________ 33 EX-8.I 4 SHAREHOLDER SERVICES AGREEMENT Exhibit (8)(i) SHAREHOLDER SERVICES AGREEMENT THIS SHAREHOLDER SERVICES AGREEMENT is made and entered into as of February 1, 2000 by and between AMERICAN GENERAL LIFE INSURANCE COMPANY (the "Company"), and AMERICAN CENTURY INVESTMENT MANAGEMENT, INC. ("ACIM"). WHEREAS, the Company offers to the public certain group and individual variable annuity and variable life insurance contracts (the "Contracts"); and WHEREAS, the Company wishes to make available as investment options under the Contracts VP Balanced, VP Income & Growth, VP International and VP Value (the "Funds"), each of which is a series of mutual fund shares registered under the Investment Company Act of 1940, as amended, and issued by American Century Variable Portfolios, Inc. (the "Issuer"); and WHEREAS, on the terms and conditions hereinafter set forth, ACIM desires to make shares of the Funds available as investment options under the Contracts and to retain the Company to perform certain administrative services on behalf of the Funds, and the Company is willing and able to furnish such services; NOW, THEREFORE, the Company and ACIM agree as follows: 1. Transactions in the Funds. Subject to the terms and conditions of this Agreement, ACIM will cause the Issuer to make shares of the Funds available to be purchased, exchanged, or redeemed, by or on behalf of the Accounts (defined in Section 7(a) below) through a single account per Fund at the net asset value applicable to each order. The Funds' shares shall be purchased and redeemed on a net basis in such quantity and at such time as determined by the Company to satisfy the requirements of the Contracts for which the Funds serve as underlying investment media. Dividends and capital gains distributions will be automatically reinvested in full and fractional shares of the Funds. 2. Administrative Services. The Company agrees to provide all administrative services for the Contract owners, including but not limited to those services specified in EXHIBIT A (the "Administrative Services"). Neither ACIM nor the Issuer shall be required to provide Administrative Services for the benefit of Contract owners. The Company agrees that it will maintain and preserve all records as required by law to be maintained and preserved in connection with providing the Administrative Services, and will otherwise comply with all laws, rules and regulations applicable to the marketing of the Contracts and the provision of the Administrative Services. Upon written request, the Company will provide ACIM or its representatives reasonable information regarding the quality of the Administrative Services being provided and its compliance with the terms of this Agreement. 1 3. Timing of Transactions. ACIM hereby appoints the Company as agent for the Funds for the limited purpose of accepting purchase and redemption orders for Fund shares from the Contract owners. On each day the New York Stock Exchange (the "Exchange") is open for business (each, a "Business Day"), the Company may receive instructions from the Contract owners for the purchase or redemption of shares of the Funds ("Orders"). Orders received and accepted by the Company prior to the close of regular trading on the Exchange (the "Close of Trading") on any given Business Day (currently, 4:00 p.m. Eastern time) and transmitted to the Funds' transfer agent by 10:00 a.m. Eastern time on the next following Business Day will be executed at the net asset value determined as of the Close of Trading on the Business Day on which the Orders are received and accepted by the Company. The day as of which an Order is executed by the Funds' transfer agent pursuant to the provisions set forth above is referred to herein as the "Trade Date". All orders are subject to acceptance or rejection by ACIM or the Funds in the sole discretion of either of them. 4. Processing of Transactions. (a) If transactions in Fund shares are to be settled through the National Securities Clearing Corporation's Mutual Fund Settlement, Entry, and Registration Verification (Fund/SERV) system, the terms of the FUND/SERV AGREEMENT, between Company and American Century Services Corporation, shall apply. (b) If transactions in Fund shares are to be settled directly with the Funds' transfer agent, the following provisions shall apply: (1) By 6:30 p.m. Eastern time on each Business Day, ACIM (or one of its affiliates) will provide to the Company via facsimile or other electronic transmission acceptable to the Company the Funds' net asset value, dividend and capital gain information and, in the case of income funds, the daily accrual for interest rate factor (mil rate), determined at the Close of Trading. (2) By 10:00 a.m. Eastern time on each Business Day, the Company will provide to ACIM via facsimile or other electronic transmission acceptable to ACIM a report stating whether the instructions received by the Company from Contract owners by the Close of Trading on the prior Business Day resulted in the Accounts being a net purchaser or net seller of shares of the Funds. As used in this Agreement, the phrase "other electronic transmission acceptable to ACIM" includes the use of remote computer terminals located at the premises of the Company, its agents or affiliates, which terminals may be linked electronically to the computer system of ACIM, its agents or affiliates (hereinafter, "Remote Computer Terminals"). (3) Upon the timely receipt from the Company of the report described in (2) above, the Funds' transfer agent will execute the purchase or redemption transactions (as the case may be) at the net asset value computed as of the Close of Trading on the Trade Date. Payment for net purchase transactions shall be made by wire transfer to the applicable Fund custodial account designated by the Funds on the Business Day next following the Trade Date. Such wire transfers shall be initiated by the Company's bank prior to 4:00 p.m. Eastern time and received by the Funds prior to 6:00 p.m. Eastern time on the Business Day next following the Trade Date ("T+1"). If payment for a purchase Order is not timely received, such Order will be, at ACIM's option, either (i) 2 executed at the net asset value determined on the Trade Date, and the Company shall be responsible for all costs to ACIM or the Funds resulting from such delay, or (ii) executed at the net asset value next computed following receipt of payment. Payments for net redemption transaction s shall be made by wire transfer by the Issuer to the account(s) designated by the Company on T+2; provided, however, the Issuer reserves the right to settle redemption - -------- ------- transactions within the time period set forth in the applicable Fund's then- current prospectus. On any Business Day when the Federal Reserve Wire Transfer System is closed, all communication and processing rules will be suspended for the settlement of Orders. Orders will be settled on the next Business Day on which the Federal Reserve Wire Transfer System is open and the original Trade Date will apply. (4) ACIM shall provide written confirmation to the Company of the amount of shares traded and the associated cost per share (net asset value) total trade amount and the outstanding share balances held by the Account as of the end of each Business Day. Such information will be furnished by 1:00 p.m. Eastern time on the next Business Day. (5) ACIM shall use its best efforts to furnish same day notice by 6:30 p.m. Eastern time (by wire or telephone, followed by written confirmation) to the Company of any dividends or capital gain distributions payable on the Fund's shares. The Company hereby elects to receive all such dividends and capital gain distributions as are payable on the Fund shares in additional shares of the Fund. The Company reserves the right to revoke this election and to receive all such dividends and capital gain distributions in cash. ACIM shall notify the Company of the number of shares so issued as payment of such dividends and distributions. ACIM shall use its best efforts to furnish the Company with at least ten (10) business days' advance notice of the day such dividend(s) and distribution(s) are expected to be paid. (c) In the event adjustments are required to correct any error in the computation of the net asset value of any Fund's shares at the shareholder level as a result of a pricing error that is deemed to be material under the pricing policy of the Fund's Board of Directors or which ACIM otherwise deems necessary to correct at the shareholder level, ACIM shall notify the Company as soon as practicable after discovering the need for those adjustments which result in a reimbursement to the Accounts. Notification shall be made by facsimile or by direct or indirect systems access acceptable to the Company. (1) If one or more of the Accounts received amounts from any Fund in excess of the amounts to which it otherwise would have been entitled prior to an adjustment for an error, the Company will use its best efforts to collect such excess amounts from the applicable Accounts. (2) If an adjustment is to be made in accordance with subsection (a) above to correct an error which has caused an Account to receive an amount less than that to which it is entitled, the Fund shall use its best efforts to make all necessary adjustments to the number of shares owned in the account and/or distribute to the Company the amount of such underpayment for credit to the Accounts. (3) For purposes of making adjustments as provided above, the Funds will apply the same standards to all shareholders. 3 5. Prospectus and Proxy Materials. (a) ACIM shall provide the Company with copies of the Issuer's prospectuses, proxy materials, periodic fund reports to shareholders and other materials that are required by law to be sent to the Issuer's shareholders. In addition, ACIM shall provide the Company with a sufficient quantity of prospectuses of the Funds to be used in conjunction with the transactions contemplated by this Agreement, together with such additional copies of the Issuer's prospectuses as may be reasonably requested by Company. If the Company provides for pass-through voting by the Contract owners, or if the Company determines that pass-through voting is required by law, ACIM will provide the Company with a sufficient quantity of proxy materials for each, as directed by the Company. (b) The cost of preparing, printing and shipping of the prospectuses, proxy materials, periodic fund reports, statements of additional information and other materials of the Issuer to the Company shall be paid by ACIM or its agents or affiliates; provided, however, that if at any time ACIM or its agent -------- ------- reasonably deems the usage by the Company of such items to be excessive, it may, prior to the delivery of any quantity of materials in excess of what is deemed reasonable, request in writing, no later than 15 business days prior to the date that the Company and ACIM have agreed on for delivering such material to the Company, that the Company demonstrate the reasonableness of such usage. If ACIM believes, in good faith, that the reasonableness of such usage has not been adequately demonstrated, it may request that the party responsible for such excess usage pay the cost of printing (including press time) and delivery of any excess copies of such materials. Unless the Company agrees to make such payments, ACIM may refuse to supply such additional materials and ACIM shall be deemed in compliance with this Section 5 if it delivers to the Company at least the number of prospectuses and other materials as may be required by the Issuer under applicable law. (c) If requested by the Company, in lieu of providing printed copies of the Fund prospectus and/or Fund reports, ACIM shall provide camera-ready film or computer diskettes containing the Fund prospectus and/or Fund reports and such other assistance as is reasonably necessary in order for the Company to have the prospectus for the Contracts and the Fund prospectus printed together in one document or separately or have the Fund prospectus printed in combination with other fund companies' prospectuses and/or for the Company to have the reports for the Contracts and the Fund reports printed together in one document or separately or have the Fund reports printed in combination with other fund companies' reports. (d) The cost of any distribution of prospectuses, proxy materials, periodic fund reports and other materials of the Issuer to the Contract owners shall be paid by the Company and shall not be the responsibility of ACIM or the Issuer. 6. Compensation and Expenses. (a) The Accounts shall be the sole shareholder of Fund shares purchased for the Contract owners pursuant to this Agreement (the "Record Owner"). The Record Owner shall properly 4 complete any applications or other forms required by ACIM or the Issuer from time to time. (b) ACIM acknowledges that it will derive a substantial savings in administrative expenses, such as a reduction in expenses related to postage, shareholder communications and recordkeeping, by virtue of having a single shareholder account per Fund for the Accounts rather than having each Contract owner as a shareholder. In consideration of the Administrative Services and performance of all other obligations under this Agreement by the Company, ACIM will pay the Company a fee (the "Administrative Services Fee") equal to 25 basis points (0.25%) per annum of the average aggregate amount invested by the Company under this Agreement. (c) The payments received by the Company under this Agreement are for administrative and shareholder services only and do not constitute payment in any manner for investment advisory services or for costs of distribution. (d) For the purposes of computing the payment to the Company contemplated by this Section 6, the average aggregate amount invested by the Company on behalf of the Accounts in the Funds over a one month period shall be computed by totaling the Company's aggregate investment (share net asset value multiplied by total number of shares of the Funds held by the Company) on each Business Day during the month and dividing by the total number of Business Days during such month. (e) ACIM will calculate the amount of the payment to be made pursuant to this Section 6 at the end of each calendar quarter and will make such payment to the Company within 30 days thereafter. The check for such payment will be accompanied by a statement showing the calculation of the amounts being paid by ACIM for the relevant months and such other supporting data as may be reasonably requested by the Company and shall be mailed to: American General Life Insurance Company 2727-A Allen Parkway Houston, Texas 77019 Attention: Variable Products Accounting Phone No.: (713) 831-3388 Fax No.: (713) 831-8269 5 7. Representations. (a) The Company represents and warrants that (i) this Agreement has been duly authorized by all necessary corporate action and, when executed and delivered, shall constitute the legal, valid and binding obligation of the Company, enforceable in accordance with its terms; (ii) it has established Separate Account VL-R (the "Accounts"), each of which is a duly authorized and established separate account under Texas Insurance law, and has registered each Account as a unit investment trust under the Investment Company Act of 1940 (the "1940 Act") to serve as an investment vehicle for the Contracts; (iii) each Contract provides for the allocation of net amounts received by the Company to an Account for investment in the shares of one or more specified investment companies selected among those companies available through the Account to act as underlying investment media; (iv) selection of a particular investment company is made by the Contract owner under a particular Contract, who may change such selection from time to time in accordance with the terms of the applicable Contract; and (v) the activities of the Company contemplated by this Agreement comply in all material respects with all provisions of federal and state securities laws applicable to such activities. (b) ACIM represents that (i) this Agreement has been duly authorized by all necessary corporate action and, when executed and delivered, shall constitute the legal, valid and binding obligation of ACIM, enforceable in accordance with its terms; (ii) the prospectus of each Fund complies in all material respects with federal and state securities laws, and (iii) shares of the Issuer are registered and authorized for sale in accordance with all federal and state securities laws. (c) The Company represents and warrants that the Contracts are or will be registered under the 1933 Act; that the Contracts will be issued and sold in compliance in all material respects with all applicable federal and state laws and that the sale of the Contracts shall comply in all material respects with state insurance suitability requirements. The Company further represents and warrants that it is an insurance company duly organized and in good standing under applicable law. (d) ACIM represents that the Funds are currently qualified as Regulated Investment Companies under Subchapter M of the Internal Revenue Code of 1986, as amended, (the "Code") and that it will make every effort to maintain such qualification (under Subchapter M or any successor or similar provision) and that it will notify the Company immediately upon having a reasonable basis for believing that it has ceased to so qualify or that it might not so qualify in the future. (e) Subject to the Fund's compliance with applicable diversification requirements, the Company represents that the Contracts are currently treated as endowment, annuity or life insurance contracts, under applicable provisions of the Code and that it will make every effort to maintain such treatment and that it will notify the Fund and ACIM immediately upon having a reasonable basis for believing that the Contracts have ceased to be so treated or that they might not be so treated in the future. (f) ACIM represents and warrants that all of its directors, officers, employees, 6 investment advisers, and other individuals/entities dealing with the money or securities of the Fund are and shall continue to be at all times covered by a blanket fidelity bond or similar coverage for the benefit of the Fund in an amount not less than the minimal coverage as required currently by Rule 17g-(1) of the 1940 Act or related provisions as may be promulgated from time to time. The aforesaid Bond shall include coverage for larceny and embezzlement and shall be issued by a reputable bonding company. (g) The Company represents and warrants that all of its directors, officers, employees, investment advisers, and other entities dealing with the money or securities of the Fund are and shall continue to be at all times covered by a blanket fidelity bond or similar coverage for the benefit of the Fund, in an amount not less than five million dollars ($5 million). The aforesaid Bond shall include coverage for larceny and embezzlement and shall be issued by a reputable bonding company. (h) ACIM represents and warrants that the Fund will at all times invest money from the Contracts in such a manner as to ensure that the Contracts will be treated as variable contracts under the Code and the regulations issued thereunder. Without limiting the scope of the foregoing, ACIM represents and warrants that the Fund will at all times comply with Section 817(h) of the Code of Treasury Regulation 1.817-5, relating to the diversification requirements for variable annuity, endowment, or life insurance contracts and any amendments or other modifications to such Section or Regulations. 8. Additional Covenants and Agreements. (a) Each party shall comply with all provisions of federal and state laws applicable to its respective activities under this Agreement. All obligations of each party under this Agreement are subject to compliance with applicable federal and state laws. (b) Each party shall promptly notify the other parties in the event that it is, for any reason, unable to perform any of its obligations under this Agreement. (c) The Company covenants and agrees that all Orders accepted and transmitted by it hereunder with respect to each Account on any Business Day will be based upon instructions that it received from the Contract owners, in proper form prior to the Close of Trading of the Exchange on that Business Day. The Company shall time stamp all Orders or otherwise maintain records that will enable the Company to demonstrate compliance with Section 8(c) hereof. (d) The Company covenants and agrees that all Orders transmitted to the Issuer, whether by telephone, telecopy, or other electronic transmission acceptable to ACIM, shall be sent by or under the authority and direction of a person designated by the Company as being duly authorized to act on behalf of the owner of the Accounts. ACIM shall be entitled to rely on the existence of such authority and to assume that any person transmitting Orders for the purchase, redemption or transfer of Fund shares on behalf of the Company is "an appropriate person" as used in Sections 8-107 and 8-401 of the Uniform Commercial Code with respect to the transmission of instructions regarding Fund shares on behalf of the owner of such Fund shares. The Company shall maintain the 7 confidentiality of all passwords and security procedures issued, installed or otherwise put in place with respect to the use of Remote Computer Terminals and assumes full responsibility for the security therefor. The Company further agrees to be responsible for the accuracy, propriety and consequences of all data transmitted to ACIM by the Company by telephone, telecopy or other electronic transmission acceptable to ACIM. (e) The Company agrees that, to the extent it is able to do so, it will use its best efforts to give equal emphasis and promotion to shares of the Funds as is given to other underlying investments of the Accounts, subject to applicable Securities and Exchange Commission rules. In addition, the Company shall not impose any fee, condition, or requirement for the use of the Funds as investment options for the Contracts that operates to the specific prejudice of the Funds vis-a-vis the other investment media made available for the Contracts --------- by the Company. (f) The Company shall not, without the written consent of ACIM, make representations concerning the Issuer or the shares of the Funds except those contained in the then-current prospectus for the Funds and in current printed sales literature approved by ACIM or the Issuer. (g) ACIM shall not, without the written consent of the Company, make representations concerning the Company or the Contracts except those contained in the then-current prospectus for the Contracts and any other current printed sales literature approved by the Company. (h) Advertising and sales literature with respect to the Issuer or the Funds prepared by the Company or its agents, if any, for use in marketing shares of the Funds as underlying investment media to Contract owners shall be submitted to ACIM for review and approval before such material is used. 9. Use of Names. Except as otherwise expressly provided for in this Agreement, neither ACIM nor any of its affiliates or the Funds shall use any trademark, trade name, service mark or logo of the Company, or any variation of any such trademark, trade name, service mark or logo, without the Company's prior written consent, the granting of which shall be at the Company's sole option. Except as otherwise expressly provided for in this Agreement, the Company shall not use any trademark, trade name, service mark or logo of the Issuer, ACIM or any of its affiliates or any variation of any such trademarks, trade names, service marks, or logos, without the prior written consent of either the Issuer or ACIM, as appropriate, the granting of which shall be at the sole option of ACIM and/or the Issuer. 8 10. Proxy Voting. (a) The Company shall provide pass-through voting privileges to all Contract owners so long as the SEC continues to interpret the 1940 Act as requiring such privileges. The Company reserves the right to vote Fund shares held in the Accounts in its own right, to the extent permitted by law. Participating companies (as defined in Section 12(a) below) shall be responsible for assuring that each of their respective separate accounts participating in the Funds calculate voting privileges as set forth herein. (b) The Company will distribute to Contract owners all proxy material furnished by ACIM and will vote shares in accordance with instructions received from such Contract owners. The Company shall vote Fund shares for which no voting instructions are received in the same proportion as shares for which such instructions have been received. The Company and its agents shall not oppose or interfere with the solicitation of proxies for Fund shares held for such Contract owners. 11. Indemnity. (a) ACIM agrees to indemnify and hold harmless the Company and its officers, directors, employees, agents, affiliates and each person, if any, who controls the Company within the meaning of the Securities Act of 1933 (collectively, the "Indemnified Parties" for purposes of this Section 11(a)) against any losses, claims, expenses, damages or liabilities (including amounts paid in settlement thereof) or litigation expenses (including legal and other expenses) (collectively, "Losses"), to which the Indemnified Parties may become subject, insofar as such Losses result from a breach by ACIM of a material provision of this Agreement. ACIM will reimburse any legal or other expenses reasonably incurred by the Indemnified Parties in connection with investigating or defending any such Losses. ACIM shall not be liable for indemnification hereunder if such Losses are attributable to the gross negligence or misconduct of the Company in performing its obligations under this Agreement. (b) The Company agrees to indemnify and hold harmless ACIM and the Issuer, and their respective officers, directors, employees, agents, affiliates and each person, if any, who controls Issuer or ACIM within the meaning of the Securities Act of 1933 (collectively, the "Indemnified Parties" for purposes of this Section 11(b)) against any Losses to which the Indemnified Parties may become subject, insofar as such Losses result from a breach by the Company of a material provision of this Agreement or the use by any person of the Remote Computer Terminals. The Company will reimburse any legal or other expenses reasonably incurred by the Indemnified Parties in connection with investigating or defending any such Losses. The Company shall not be liable for indemnification hereunder if such Losses are attributable to the gross negligence or misconduct of ACIM or the Issuer in performing their obligations under this Agreement. 9 (c) Promptly after receipt by an indemnified party hereunder of notice of the commencement of action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party hereunder, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Section 11. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish to, assume the defense thereof, with counsel satisfactory to such indemnified party, and after notice from the indemnifying party to such indemnified party of its election to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section 11 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. (d) If the indemnifying party assumes the defense of any such action, the indemnifying party shall not, without the prior written consent of the indemnified parties in such action, settle or compromise the liability of the indemnified parties in such action, or permit a default or consent to the entry of any judgment in respect thereof, unless in connection with such settlement, compromise or consent, each indemnified party receives from such claimant an unconditional release from all liability in respect of such claim. 12. Potential Conflicts (a) The Company has received a copy of an application for exemptive relief, as amended, filed by the Issuer on December 21, 1987, with the SEC and the order issued by the SEC in response thereto (the "Shared Funding Exemptive Order"). The Company has reviewed the conditions to the requested relief set forth in such application for exemptive relief. As set forth in such application, the Board of Directors of the Issuer (the "Board") will monitor the Issuer for the existence of any material irreconcilable conflict between the interests of the contract owners of all separate accounts ("Participating Companies") investing in funds of the Issuer. An irreconcilable material conflict may arise for a variety of reasons, including: (i) an action by any state insurance regulatory authority; (ii) a change in applicable federal or state insurance, tax, or securities laws or regulations, or a public ruling, private letter ruling, no- action or interpretative letter, or any similar actions by insurance, tax or securities regulatory authorities; (iii) an administrative or judicial decision in any relevant proceeding; (iv) the manner in which the investments of any portfolio are being managed; (v) a difference in voting instructions given by variable annuity contract owners and variable life insurance contract owners; or (vi) a decision by an insurer to disregard the voting instructions of contract owners. The Board shall promptly inform the Company if it determines that an irreconcilable material conflict exists and the implications thereof. (b) The Company will report any potential or existing conflicts of which it is aware to the Board. The Company will assist the Board in carrying out its responsibilities under the Shared Funding Exemptive Order by providing the Board with all information reasonably necessary for the Board to consider any issues raised. This includes, but is not limited to, an obligation by the Company to inform the Board whenever contract owner voting instructions are disregarded. 10 (c) If a majority of the Board, or a majority of its disinterested Board members, determines that a material irreconcilable conflict exists with regard to contract owner investments in a Fund, the Board shall give prompt notice to all Participating Companies. If the Board determines that the Company is responsible for causing or creating said conflict, the Company shall at its sole cost and expense, and to the extent reasonably practicable (as determined by a majority of the disinterested Board members), take such action as is necessary to remedy or eliminate the irreconcilable material conflict. Such necessary action may include but shall not be limited to: (i) withdrawing the assets allocable to the Accounts from the Fund and reinvesting such assets in a different investment medium or submitting the question of whether such segregation should be implemented to a vote of all affected contract owners and as appropriate, segregating the assets of any appropriate group (i.e., annuity contract owners, life insurance contract owners, or variable contract owners of one or more Participating Companies) that votes in favor of such segregation, or offering to the affected contract owners the option of making such a change; and/or (ii) establishing a new registered management investment company or managed separate account. (d) If a material irreconcilable conflict arises as a result of a decision by the Company to disregard its contract owner voting instructions and said decision represents a minority position or would preclude a majority vote by all of its contract owners having an interest in the Issuer, the Company at its sole cost, may be required, at the Board's election, to withdraw an Account's investment in the Issuer and terminate this Agreement; provided, however, that such withdrawal and termination shall be limited to the extent required by the foregoing material irreconcilable conflict as determined by a majority of the disinterested members of the Board. (e) For the purpose of this Section 12, a majority of the disinterested Board members shall determine whether or not any proposed action adequately remedies any irreconcilable material conflict, but in no event will the Issuer be required to establish a new funding medium for any Contract. The Company shall not be required by this Section 12 to establish a new funding medium for any Contract if an offer to do so has been declined by vote of a majority of the Contract owners materially adversely affected by the irreconcilable material conflict. 13. Termination; Withdrawal of Offering. This Agreement may be terminated by either party upon 180 days' prior written notice to the other parties. Notwithstanding the above, the Issuer reserves the right, upon less than 180 days' prior written notice, to suspend sales of shares of any Fund, in whole or in part, or to make a limited offering of shares of any of the Funds in the event that (A) any regulatory body commences formal proceedings against the Company, ACIM, affiliates of ACIM, or the Issuer, which proceedings ACIM reasonably believes may have a material adverse impact on the ability of ACIM, the Issuer or the Company to perform its obligations under this Agreement or (B) in the judgment of ACIM, declining to accept any additional instructions for the purchase or sale of shares of any such Fund is warranted by market, economic or political conditions. 11 Notwithstanding the foregoing, this Agreement may be terminated immediately (i) by any party as a result of any other breach of this Agreement by another party, which breach is not cured within 30 days after receipt of notice from the other party, or (ii) by any party upon a determination that continuing to perform under this Agreement would, in the reasonable opinion of the terminating party's counsel, violate any applicable federal or state law, rule, regulation or judicial order. Notwithstanding the foregoing, the Company may terminate this Agreement immediately: (1) upon written notice to ACIM based upon the Company's good faith determination that shares of the Fund are not reasonably available to meet the requirements of the Contracts; (ii) upon written notice to ACIM in the event that the Fund ceases to qualify as a regulated investment company under Subchapter M of the Code or under any successor or similar provision, or if the Company reasonably believes that the Fund may fail to do so qualify; (iii) upon written notice to ACIM in the event that the Fund fails to meet the diversification requirements set forth in the Code; or (iv) upon 60 days' written notice to ACIM that the Company will substitute Fund shares with the shares of another investment company for the Contracts for which the Fund shares have been selected to serve as the underlying investment medium, subject to compliance with applicable regulations of the SEC. Termination of this Agreement shall not affect the obligations of the parties to make payments under Section 4 for Orders received by the Company prior to such termination and shall not affect the Issuer's obligation to maintain the Accounts as set forth by this Agreement. Following termination, ACIM shall not have any Administrative Services payment obligation to the Company (except for payment obligations accrued but not yet paid as of the termination date). 14. Non-Exclusivity. Each of the parties acknowledges and agrees that this Agreement and the arrangement described herein are intended to be non-exclusive and that each of the parties is free to enter into similar agreements and arrangements with other entities. 15. Survival. The provisions of Section 9 (use of names) and Section 11 (indemnity) of this Agreement shall survive termination of this Agreement. 16. Amendment. Neither this Agreement, nor any provision hereof, may be amended, waived, discharged or terminated orally, but only by an instrument in writing signed by all of the parties hereto. 17. Notices. All notices and other communications hereunder shall be given or made in writing and shall be delivered personally, or sent by telex, telecopier, express delivery or registered 12 or certified mail, postage prepaid, return receipt requested, to the party or parties to whom they are directed at the following addresses, or at such other addresses as may be designated by notice from such party to all other parties. To the Company: American General Life Insurance Company 2929 Allen Parkway Houston, Texas 77019 Attention: General Counsel (713) 831-4754 (office number) (713) 831-1106 (telecopy number) To the Issuer or ACIM: American Century Investment Management, Inc. 4500 Main Street Kansas City, Missouri 64111 Attention: Charles A. Etherington, Esq. (816) 340-4051 (office number) (816) 340-4964 (telecopy number) Any notice, demand or other communication given in a manner prescribed in this Section 17 shall be deemed to have been delivered on receipt. 18. Successors and Assigns. This Agreement may not be assigned without the written consent of all parties to the Agreement at the time of such assignment. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective permitted successors and assigns. 19. Counterparts. This Agreement may be executed in any number of counterparts, all of which taken together shall constitute one agreement, and any party hereto may execute this Agreement by signing any such counterpart. 20. Severability. In case any one or more of the provisions contained in this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. 21. Entire Agreement. This Agreement, including the attachments hereto, constitutes the entire agreement between the parties with respect to the matters dealt with herein, and supersedes all previous agreements, written or oral, with respect to such matters. 13 22. Foreign Tax Credits. ACIM agrees to consult with the Company concerning whether the Fund qualifies to provide a foreign tax credit pursuant to Section 853 of the Code. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date set forth above. AMERICAN GENERAL LIFE INSURANCE AMERICAN CENTURY INVESTMENT COMPANY MANAGEMENT, INC. By:___________________________ By:___________________________ Name:_________________________ William M. Lyons Title:________________________ Executive Vice President 14 EXHIBIT A ADMINISTRATIVE SERVICES Pursuant to the Agreement to which this is attached, the Company shall perform all administrative and shareholder services required or requested under the Contracts with respect to the Contract owners, including, but not limited to, the following: 1. Maintain separate records for each Contract owner, which records shall reflect the units purchased and redeemed and unit balances of such Contract owners. The Company will maintain a single master account with each Fund on behalf of the Contract owners and such account shall be in the name of the Company (or its nominee) as the record owner of shares owned by the Contract owners. 2. Disburse or credit to the Contract owners all proceeds of redemptions of shares of the Funds and all dividends and other distributions not reinvested in shares of the Funds. 3. Prepare and transmit to the Contract owners, as required by law or the Contracts, periodic statements showing the total number of units owned by the Contract owners as of the statement closing date, purchases and redemptions of Fund shares by the Contract owners during the period covered by the statement and the dividends and other distributions paid during the statement period (whether paid in cash or reinvested in Fund shares), and such other information as may be required, from time to time, by the Contracts. 4. Transmit purchase and redemption orders to the Funds on behalf of the Contract owners in accordance with the procedures set forth in Section 4 to the Agreement. 5. Distribute to the Contract owners copies of the Funds' prospectus, proxy materials, periodic fund reports to shareholders and other materials that the Funds are required by law or otherwise to provide to their shareholders or prospective shareholders. 6. Maintain and preserve all records as required by law to be maintained and preserved in connection with providing the Administrative Services for the Contracts. A-1 EX-8.JI 5 SALES AGREEMENT Exhibit (8)(j)(i) SALES AGREEMENT THIS AGREEMENT is made by an between NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST ("TRUST"), a Massachusetts business trust, NEUBERGER & BERMAN MANAGEMENT INCORPORATED ("N&B MANAGEMENT"), a New York corporation, and AMERICAN GENERAL LIFE INSURANCE COMPANY ("LIFE COMPANY"), a life insurance company organized under the laws of the State of Texas. WHEREAS, TRUST is registered with the Securities and Exchange Commission ("SEC") under the Investment Company Act of 1940 ("'40 Act") as an open-end diversified management investment company; and WHEREAS, TRUST is organized as a series fund, comprised of several Portfolios which are listed on Appendix A hereto; and WHEREAS, TRUST was initially organized to act as the funding vehicle for certain variable life insurance and/or variable annuity contracts ("variable contracts") offered by life insurance companies through separate accounts of such life insurance companies and now also offers its shares to certain qualified pension and retirement plans; and WHEREAS, N&B MANAGEMENT is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940 and as a broker-dealer under the Securities Exchange Act of 1934, as amended; and WHEREAS, N&B MANAGEMENT is the investment adviser to the TRUST and the distributor of the shares of the TRUST; and WHEREAS, LIFE COMPANY has established or will establish one or more separate accounts ("Separate Accounts") to offer variable contracts and is desirous of having the TRUST as one of the underlying funding vehicles for such variable contracts; and WHEREAS, to the extent permitted by applicable insurance laws and regulations, LIFE COMPANY intends to purchase shares of TRUST to fund the aforementioned variable contracts and the TRUST is authorized to sell such shares to LIFE COMPANY at net asset value; NOW, THEREFORE, in consideration of their mutual promises, LIFE COMPANY, TRUST and N&B MANAGEMENT agree as follows: 1. TRUST will make available to the designated Separate Accounts of LIFE COMPANY shares of the selected Portfolios for investment of purchase payments of variable contracts allocated to the designated Separate Accounts as provided in the TRUST's Prospectus. 2. TRUST represents and warrants that all shares of the Portfolios of TRUST will be sold only to other insurance companies which have agreed to participate in TRUST to fund their separate accounts and/or to certain qualified pension and other retirement plans, all in accordance with the requirements of Section 817(h) of the Internal Revenue Code of 1986, as amended ("Code") and Treasury Regulation 1.817-5. Shares of the Portfolios of TRUST will not be sold directly to the general public. 3. (a) TRUST agrees to sell to LIFE COMPANY those shares of the selected Portfolios of TRUST which LIFE COMPANY orders, executing such orders on a daily basis at the net asset value next computed after receipt by TRUST or its designee of the order for the shares of TRUST. For purposes of this Section 3(a), LIFE COMPANY shall be the designee of TRUST for receipt of such orders from LIFE COMPANY and receipt by such designee shall constitute receipt by TRUST; provided that TRUST receives notice of such order by 9:30 a.m. New York time on the next following Business Day. "Business Day" shall mean any day on which the New York Stock Exchange is open for trading and on which TRUST calculates its net asset value pursuant to the rules of the SEC. (b) TRUST agrees to redeem for cash, on LIFE COMPANY's request, any full or fractional shares of TRUST held by LIFE COMPANY, executing such requests on a daily basis at the net asset value next computed after receipt by TRUST or its designee of the request for redemption. For purposes of this Section 3(b), LIFE COMPANY shall be the designee of TRUST for receipt of requests for redemption from LIFE COMPANY and receipt by such designee shall constitute receipt by TRUST; provided that TRUST receives notice of such request for redemption by 9:30 a.m. New York time on the next following Business Day. (c) TRUST shall make the net asset value per share for the selected Portfolio)s) available to LIFE COMPANY on a daily basis as soon as reasonably practical after the net asset value per share is calculated but shall use its best efforts to make such net asset value available by 6:15 p.m. New York time. If the TRUST provides LIFE COMPANY with the incorrect share net asset value information through no fault of LIFE COMPANY, LIFE COMPANY on behalf of the Separate Accounts, shall be entitled to an adjustment to the number of shares purchased or redeemed to reflect the correct share net asset value. Any error in the calculation of net asset value, dividend and capital gain information greater than or equal to $.01 per share of the TRUST, shall be reported immediately upon discovery to LIFE COMPANY. Any error of a lesser amount shall be corrected in the next Business Day's net asset value per share for the TRUST. (d) At the end of each Business Day, LIFE COMPANY shall use the information described in Section 3(c) to calculate Separate Account unit values for the day. Using these unit values, LIFE COMPANY shall process each such Business Day's Separate Account transactions based on requests and premiums received by it by the close of trading on the floor of the New York Stock Exchange (currently 4:00 p.m. New York time) to determine the net dollar amount of TRUST shares which shall be purchased or redeemed at that day's closing net asset value per share. The net purchase of redemption orders so determined shall be transmitted to the TRUST by LIFE COMPANY by 9:30 a.m. New York Time on the Business Day next following LIFE COMPANY's receipt of such requests and premiums in accordance with the terms of Sections 3(a) and 3(b) hereof. (e) If LIFE COMPANY's order requests the purchase of TRUST shares, LIFE COMPANY shall pay for such purchase by wiring federal funds to the TRUST or its designated custodial account on the day the order is transmitted by LIFE COMPANY. If LIFE COMPANY's order requests a net redemption resulting in a payment of redemption proceeds to LIFE COMPANY, the TRUST shall wire the redemption proceeds to LIFE COMPANY by the next Business Day, unless doing so would require the TRUST to dispose of portfolio securities or otherwise incur additional costs, but in such event, proceeds shall be wired to LIFE COMPANY within seven days and the TRUST shall notify the person designated in writing by LIFE COMPANY as the recipient for such notice of such delay by 3:00 p.m. New York Time the same Business Day that LIFE COMPANY transmits the redemption order to the TRUST. If LIFE COMPANY's order requests the application of redemption proceeds from the redemption of shares to the purchase of shares of another fund managed or distributed by N&B MANAGEMENT, the TRUST shall so apply such proceeds the same Business Day that LIFE COMPANY transmits such order to the TRUST. 4. (a) TRUST will bear the printing costs (or duplicating costs with respect to the statement of additional information) and mailing costs associated with the delivery of the following TRUST (or individual portfolio) documents, and any supplements thereto, to existing variable contract owners of LIFE COMPANY: (i) prospectuses and statements of additional information; (ii) annual and semi-annual reports; and (iii) proxy materials. LIFE COMPANY will submit any bills for printing, duplicating and/or mailing costs, relating to the TRUST documents described above, to the TRUST for reimbursement by the TRUST. LIFE COMPANY shall monitor such costs and shall use its best efforts to control these costs. LIFE COMPANY will provide the TRUST on a semi-annual basis, or more frequently as reasonably requested by the TRUST, with a current tabulation of the number of existing variable contract owners of LIFE COMPANY whose variable contract values are invested in the TRUST. This tabulation will be sent to the TRUST in the form of a letter signed by a duly authorized officer of LIFE COMPANY attesting to the accuracy of the information contained in the letter. (b) TRUST will provide LIFE COMPANY, with respect to prospective variable contract owners of LIFE COMPANY, the following TRUST (or individual Portfolio) documents, and any supplements thereto: (i) camera ready copy of the current prospectus for printing by the LIFE COMPANY; (ii) a copy of the statement of additional information suitable for duplication; (iii) camera ready copy of proxy material suitable for printing; and (iv) camera ready copy of the annual and semi-annual reports for printing by the LIFE COMPANY. 5. (a) LIFE COMPANY will furnish, or will cause to be furnished, to the TRUST and N&B MANAGEMENT, each piece of sales literature or other promotional material in which the TRUST or N&B MANAGEMENT is named, at least 15 Business Days prior to its intended use. No such material will be used if the TRUST or N&B MANAGEMENT objects to its use in writing within 10 Business Days after receipt of such material. (b) The TRUST and N&B MANAGEMENT will furnish, or will cause to be furnished, to LIFE COMPANY, each piece of sales literature or other promotional material in which LIFE COMPANY is named, at least 15 Business Days prior to its intended use. No such material will be used if LIFE COMPANY objects to its use in writing within 10 Business Days after receipt of such material. (c) For purposes of this Agreement, the phrase "sales literature or other promotional material" or words of similar import include, without limitation, advertisements (such as material published, or designed for use, in a newspaper, magazine or other periodical, radio, television, telephone or tape recording, videotape display, signs or billboards, motion pictures or other public media), sales literature (such as any written communication distributed or made generally available to customers or the public, including brochures, circulars, research reports, market letters, form letters, seminar texts, or reprints or excerpts of any other advertisement, sales literature, or published article), educational or training materials or other communications distributed or made generally available to some or all agents or employees, registration statements, prospectuses, statements of additional information, shareholder reports and proxy materials, and any other material constituting sales literature or advertising under National Association of Securities Dealers, Inc. rules, the Act or the Securities Act of 1933 ("'33 Act"). 6. Each Portfolio of the TRUST will comply with Section 817(h) of the Code and Treasury Regulation 1.817-5, relating to the diversification requirements for variable annuity, endowment, or life insurance contracts and any amendments or other modifications to such Section or Regulations. In the event the TRUST becomes aware that any Portfolio of the TRUST has failed to comply, it will take all reasonable steps (a) to notify LIFE COMPANY of such failure, and (b) to adequately diversify the Portfolio so as to achieve compliance. 7.(a) LIFE COMPANY agrees to indemnify and hold harmless TRUST and N&B MANAGEMENT and each trustee of the Board of Trustees of TRUST and officers and each person, if any, who controls TRUST and each of the directors and officers of N&B MANAGEMENT and each person, if any, who controls N&B MANAGEMENT within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this Section 7) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of LIFE COMPANY, which consent shall not be unreasonably withheld) or litigation (including legal and other expenses), to which the Indemnified Parties may become subject under any statute, regulation at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements are related to the sale or holding of TRUST's shares or the variable contracts and: (i) arise out of or are based upon any untrue statements or alleged untrue statements of any material fact contained in the Registration Statement or prospectus for the variable contracts or contained in the variable contracts or sales literature for the variable contracts (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that this agreement to indemnify shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to LIFE COMPANY by or on behalf of TRUST or N&B MANAGEMENT for use in the Registration Statement or prospectus for the variable contracts or in the variable contracts or sales literature (or any amendment or supplement) or otherwise for use in connection with the sale of the variable contracts or TRUST shares; or (ii) arise out of or as a result of statements or representations (other than statements or representations contained in the Registration Statement, prospectus or sales literature of TRUST not supplied by LIFE COMPANY, or persons under its control) or wrongful conduct of LIFE COMPANY or persons under its control, with respect to the sale or distribution of the variable contracts or TRUST shares; or (iii) arise out of any untrue statement or alleged untrue statement of a material fact contained in a Registration Statement, prospectus, or sales literature of TRUST or any amendment thereof or supplement thereto or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to TRUST for inclusion therein by or on behalf of LIFE COMPANY; or (iv) arise as a result of any failure by LIFE COMPANY to substantially provide the services and furnish the materials under the terms of this Agreement; or (v) arise out of or result from any material breach of any representation and/or warranty made by LIFE COMPANY in this Agreement or arise out of or result from any other material breach of this Agreement by LIFE COMPANY, as limited by and in accordance with the provisions of Sections 7(b) and 7(c) hereof. (b) LIFE COMPANY shall not be liable under this indemnification provision with respect to any losses, claims, damages, liabilities or litigation incurred or assessed against an Indemnified Party as such may arise from such Indemnified Party's willful misfeasance, bad faith, or gross negligence in the performance of such Indemnified Party's duties or by reason of such Indemnified Party's reckless disregard of obligations or duties under this Agreement or to TRUST, whichever is applicable. (c) LIFE COMPANY shall not be liable under this indemnification provision with respect to any claim made against an Indemnified Party unless such Indemnified Party shall have notified LIFE COMPANY in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon such Indemnified Party (or after such Indemnified Party shall have received notice of such service on any designated agent), but failure to notify LIFE COMPANY of any such claim shall not relieve LIFE COMPANY from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of this indemnification provision. In case any such action is brought against an Indemnified Party, LIFE COMPANY shall be entitled to participate at its own expense in the defense of such action. LIFE COMPANY also shall be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from LIFE COMPANY to such party of LIFE COMPANY's election to assume the defense thereof, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and LIFE COMPANY will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation. 8. (a) N&B MANAGEMENT agrees to indemnify and hold harmless LIFE COMPANY and each of its directors and officers and each person, if any, who controls LIFE COMPANY within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this Section 8) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of N&B MANAGEMENT, which consent shall not be required with respect to any settlement pursuant to a "Procedure" referred to in paragraph 8.(d) below), or litigation (including legal and other expenses) to which the Indemnified Parties may become subject under any statute, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements are related to the sale or holding of the TRUST's shares or the variable contracts and: (i) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or prospectus or sales literature of TRUST (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that this agreement to indemnify shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to N&B MANAGEMENT or TRUST by or on behalf of LIFE COMPANY for use in the Registration Statement or prospectus for TRUST or in sales literature (or any amendment or supplement) or otherwise for use in connection with the sale of the variable contracts or TRUST shares; or (ii) arise out of or as a result of statements or representations (other than statements or representations contained in the Registration Statement, prospectus or sales literature for the variable contracts not supplied by N&B MANAGEMENT or persons under its control) or wrongful conduct of TRUST, its adviser or N&B MANAGEMENT or persons under their control, with respect to the sale or distribution of the variable contracts or TRUST shares; or (iii) arise out of any untrue statement or alleged untrue statement of a material fact contained in a Registration Statement, prospectus, or sales literature covering the variable contracts, or any amendment thereof or supplement thereto or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to LIFE COMPANY for inclusion therein by or on behalf of TRUST or N&B MANAGEMENT; or (iv) arise as a result of (a) a failure by TRUST to substantially provide the services and furnish the materials under the terms of this Agreement; or (b) a failure by TRUST to comply with the diversification requirements of Section 817(h) of the Code; or (c) a failure by TRUST to qualify as a Regulated Investment Company under Subchapter M of the Code; (v) arise out of or result from any material breach of any representation and/or warranty made by N&B MANAGEMENT in this Agreement or arise out of or result from any other material breach of this Agreement by N&B MANAGEMENT, as limited by and in accordance with the provisions of Sections 8(b) and 8(c) hereof. (b) N&B MANAGEMENT shall not be liable under this indemnification provision with respect to any losses, claims, damages, liabilities or litigation to which an Indemnified Party would otherwise be subject by reason of such Indemnified Party's willful misfeasance, bad faith, or gross negligence in the performance of such Indemnified Party's duties or by reason of such Indemnified Party's reckless disregard of obligations and duties under this Agreement or to LIFE COMPANY. (c) N&B MANAGEMENT shall not be liable under this indemnification provision with respect to any claim made against an Indemnified Party unless such Indemnified Party shall have notified N&B MANAGEMENT in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon such Indemnified Party (or after such Indemnified Party shall have received notice of such service on any designated agent), but failure to notify N&B MANAGEMENT of any such claim shall not relieve N&B MANAGEMENT from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of this indemnification provision. In case any such action is brought against the Indemnified Parties, N&B MANAGEMENT shall be entitled to participate at its own expense in the defense thereof. N&B MANAGEMENT also shall be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from N&B MANAGEMENT to such party of N&B MANAGEMENT's election to assume the defense thereof, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and N&B MANAGEMENT will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation. (d) In the event of an occurrence described in (iv) (b) or (c) of paragraph 8. (a) above, the parties hereto agree to cooperate fully in connection with any efforts by LIFE COMPANY to comply with (a) procedures set forth in Internal Revenue Service Revenue Procedure 92-25 by which LIFE COMPANY may request the relief described in Section 1.817-5(a)(2) of the income tax regulations, to the effect that the Internal Revenue Service treat the investments of the Separate Account as satisfying the diversification requirements of Section 817(h) of the Code and the regulations thereunder for periods during which there was an inadvertent failure to satisfy those requirements or (b) any modifications or alternatives to such procedures that the Treasury Department implements in the future. (The procedures described in clause (a) and (b) of the preceding sentence are referred to herein as the "Procedures".) Such cooperation shall include, but not be limited to, a full documentation of the actions that caused the diversification failure and any reasons why the failure was inadvertent. LIFE COMPANY shall consult with N&B MANAGEMENT as to how to minimize any liability that may arise as a result of the Procedure, including, without limitation, demonstrating, pursuant to Section 1.817-5(a) (2) of the income tax regulations, to the Commissioner of the Internal Revenue Service that such failure was inadvertent. LIFE COMPANY shall permit N&B MANAGEMENT and its legal and accounting advisors to participate (at N&B MANAGEMENT's Expense) in any conferences, settlement discussions or other administrative proceedings with the Internal Revenue Service in connection with the Procedure. Any written materials to be submitted by LIFE COMPANY to the Internal Revenue Service in connection with the Procedure (including, without limitation, any such materials to be submitted to the Internal Revenue Service pursuant to Section 1.817-5(a)(2) of the income tax regulations), shall be provided in draft by LIFE COMPANY to N&B MANAGEMENT (together with any supporting information or analysis) prior to their submission. LIFE COMPANY shall provide N&B MANAGEMENT and its advisors with such cooperation as N&B MANAGEMENT shall reasonably request (including, without limitation, by permitting N&B MANAGEMENT and its accounting and legal advisors to review the relevant books and records of LIFE COMPANY) in order to facilitate N&B MANAGEMENT's review of any written submissions provided to it pursuant to the preceding clause or its assessment of the validity or amount of any claim against it arising from the Procedure. 9.(a) LIFE COMPANY and its agents will not, in connection with the sale of TRUST shares, give any information or make any representations on behalf of the TRUST or concerning the TRUST or N&B MANAGEMENT other than the information or representations contained in a registration statement or prospectus for the TRUST, as it may be amended or supplemented from time to time, or in published reports for the TRUST which are in the public domain or approved by the TRUST or N&B MANAGEMENT for distribution, or in sales literature or other promotional material approved by the TRUST or N&B MANAGEMENT. (b) Neither TRUST nor N&B MANAGEMENT will give any information or make any representations regarding LIFE COMPANY, or in connection with the sale of the variable contracts, without the prior written approval of LIFE COMPANY. 10. TRUST represents and warrants that TRUST shares sold pursuant to this Agreement shall be registered under the 1933 Act and duly authorized for issuance, and shall be issued, in compliance in all material respects with applicable law, and that TRUST is and shall remain registered under the '40 Act for so long as required thereunder. TRUST further represents and warrants that TRUST currently qualifies and will make every effort to continue to qualify as a Regulated Investment Company under Subchapter M of the Code, and to maintain such qualification (under Subchapter M or any successor or similar provision), and that TRUST will notify LIFE COMPANY immediately upon having a reasonable basis for believing that it has ceased to so qualify or that it might not so qualify in the future. The TRUST will register and qualify its shares for sale in accordance with the laws of the various states only if and to the extent deemed advisable by the TRUST or N&B MANAGEMENT. 11. TRUST will provide LIFE COMPANY with at least one complete copy of all prospectuses, statements of additional information, annual and semi-annual reports, proxy statements, exemptive applications and all amendments or supplements to any of the above that relate to the Portfolios promptly after the filing of each such document with the SEC or other regulatory authority. LIFE COMPANY will provide TRUST with at least one complete copy of all prospectuses, statements of additional information, annual and semi-annual reports, proxy statements, exemptive applications and all amendments or supplements to any of the above that related to a separate account promptly after the filing of each such document with the SEC or other regulatory authority. 12. LIFE COMPANY agrees to inform the Board of Trustees of TRUST of the existence of or any potential for any material irreconcilable conflict of interest between the interests of the contract owners of the Separate Accounts of LIFE COMPANY investing in the TRUST and/or any other separate account of any other insurance company investing in TRUST upon LIFE COMPANY having knowledge of same. Any material irreconcilable conflict may arise for a variety of reasons, including: (a) an action by any state insurance regulatory authority; (b) a change in applicable federal or state insurance, tax, or securities laws or regulations, or a public ruling, private letter ruling, or any similar action by insurance, tax or securities regulatory authorities; (c) an administrative or judicial decision in any relevant proceeding; (d) the manner in which the investments of any Portfolio are being managed; (e) a difference in voting instructions given by variable annuity contract owners and variable life insurance contract owners or by contract owners of different life insurance companies utilizing TRUST; or (f) a decision by a participating life insurance company to disregard the voting instructions of contract owners. LIFE COMPANY will be responsible for assisting the Board of Trustees of TRUST in carrying out its responsibilities by providing the Board with all information reasonably necessary for the Board to consider any issue raised including information as to a decision by LIFE COMPANY to disregard voting instructions of contract owners. It is agreed that if it is determined by a majority of the members of the Board of Trustees of TRUST or a majority of its disinterested Trustees that a material irreconcilable conflict exists affecting LIFE COMPANY, LIFE COMPANY shall, at its own expense, take whatever steps are necessary to remedy or eliminate the irreconcilable material conflict, which steps may include, but are not limited to, (a) withdrawing the assets allocable to some or all of the Separate Accounts from TRUST or any Portfolio and reinvesting such assets in a different investment medium, including another Portfolio of the TRUST or submitting the questions of whether such segregation should be implemented to a vote of all affected contract owners and, as appropriate, segregating the assets of any particular group (i.e. annuity contract owners, life insurance contract owners or qualified contract owners) that votes in favor of such segregation, or offering to the affected contract owners the option of making such a change; (b) establishing a new registered management investment company or managed separate account. If a material irreconcilable conflict arises because of LIFE COMPANY's decision to disregard contract owner voting instructions and that decision represents a minority position or would preclude a majority vote, the LIFE COMPANY may be required, at the TRUST's election, to withdraw its Separate Account's investment in TRUST. No charge or penalty will be imposed against a Separate Account of LIFE COMPANY as a result of such a withdrawal. LIFE COMPANY agrees that any remedial action taken by it in resolving any material conflicts of interest will be carried out with a view only to the interests of contract owners. For purposes hereof, a majority of the disinterested members of the Board of Trustees of TRUST shall determine whether or not any proposed action adequately remedies any material irreconcilable conflict. In no event will TRUST be required to establish a new funding medium for any variable contracts. LIFE COMPANY shall not be required by the terms hereof to establish a new funding medium for any variable contracts if an offer to do so has been declined by vote of a majority of affected contract owners. TRUST agrees to inform LIFE COMPANY of the existence of or any potential for any material irreconcilable conflict of interest between the interests of the contractowners of the Separate Accounts of LIFE COMPANY investing in TRUST and/or any other separate account of any other insurance company investing in TRUST (upon TRUST having knowledge of same). Any material irreconcilable conflict may arise for a variety of reasons, including: (a) an action by any state insurance regulatory authority; (b) a change in applicable federal or state insurance, tax, or securities laws or regulations, or a public ruling, private letter ruling, or any similar action by insurance, tax, or securities regulatory authorities; (c) an administrative or judicial decision in any relevant proceeding; (d) the manner in which the investments of any Portfolio are being managed; (e) a difference in voting instructions given by variable annuity contract owners and variable life insurance contract owners or by contract owners of different participating life insurance companies utilizing TRUST; or (f) a decision by a participating life insurance company to disregard the voting instructions of contract owners. The Board of Trustees of TRUST shall promptly inform LIFE COMPANY if it determines that an irreconcilable material conflict exists and the implications thereof. 13. LIFE COMPANY shall provide pass-through voting privileges, as provided in this paragraph, to all variable contract owners so long as the staff of the SEC continues to interpret the '40 Act to require such pass-through voting privileges for variable contract owners. LIFE COMPANY shall be responsible for assuring that each of its Separate Accounts participating in TRUST calculates voting privileges in a manner consistent with other life companies utilizing TRUST provided that each participating life insurance company enters into an agreement containing a provision or provisions, which do not vary in any material respects, from the terms of Section 12 hereof. It is a condition of this Agreement that LIFE COMPANY will vote shares for which it has not received voting instructions as well as shares attributable to it in the same proportion as it votes shares for which it has received instructions. 14. This Agreement shall terminate automatically in the event of its assignment unless made with the written consent of LIFE COMPANY and TRUST. 15. (a) This Agreement shall be effective as of the date hereof and shall continue in force until terminated in accordance with the provisions herein. (b) This Agreement shall terminate without penalty at the option of the terminating party in accordance with the following provisions: (i) At the option of LIFE COMPANY or the TRUST at any time from the date hereof upon 180 days' notice, unless a shorter time is agreed to by the parties; (ii) At the option of LIFE COMPANY, if TRUST shares are not reasonably available to meet the requirements of the variable contracts as determined by LIFE COMPANY. Prompt notice of election to terminate shall be furnished by LIFE COMPANY, said termination to be effective ten days after receipt of notice unless the TRUST makes available a sufficient number of shares to reasonably meet the requirements of the variable contracts within said ten-day period; (iii) At the option of LIFE COMPANY, upon the institution of formal proceedings against the TRUST by the SEC, the National Association of Securities Dealers, Inc., or any other regulatory body, the expected or anticipated ruling, judgment or outcome of which would, in LIFE COMPANY's reasonable judgment, materially impair the TRUST's ability to meet and perform the TRUST's obligations and duties hereunder. Prompt notice of election to terminate shall be furnished by LIFE COMPANY with said termination to be effective upon receipt of notice; (iv) At the option of LIFE COMPANY, upon a good faith determination, or at the option of the TRUST upon a determination by a majority of the Board, or a majority of disinterested Board members, that an irreconcilable material conflict exists among the interests of (i) owners of variable contacts issued by participating life insurance companies; or (ii) the interest of participating life insurance companies, with said termination to be effective upon receipt of notice; (v) At the option of the TRUST, upon the institution of formal proceedings against LIFE COMPANY by the SEC, the National Association of Securities Dealers, Inc., or any other regulatory body, the expected or anticipated ruling, judgment or outcome which would, in the TRUST's reasonable judgment, materially impair LIFE COMPANY's ability to meet and perform its obligations and duties hereunder. Prompt notice of election to terminate shall be furnished by the TRUST with said termination to be effective upon receipt of notice; (vi) At the option of the TRUST, if the TRUST shall determine in its sole judgment reasonably exercised in good faith, that LIFE COMPANY has suffered a material adverse change in its business or financial condition or is the subject of material adverse publicity and such material adverse change or material adverse publicity is likely to have a material adverse impact upon the business and operation of the TRUST and N&B MANAGEMENT, the TRUST shall have notified LIFE COMPANY in writing of such determination and its intent to terminate this Agreement, and, if after consideration of the actions taken by LIFE COMPANY and any other changes in circumstances since the giving of such notice, the determination of the TRUST shall continue to apply on the sixtieth (60/th/) day since giving of such notice, then such sixtieth day shall be the effective date of termination; (vii) At the option of LIFE COMPANY after having been notified by the TRUST of a termination or proposed termination of the Investment Advisory Agreement between the TRUST and N&B MANAGEMENT or its successors, which notice the TRUST shall provide promptly to LIFE COMPANY, the effective date of termination of the Agreement to be as determined by LIFE COMPANY; (viii) At the option of LIFE COMPANY, in the event the TRUST's shares are not registered, issued or sold in accordance with applicable federal law, or such law precludes the use of such shares of the underlying investment medium of variable contracts issued or to be issued by LIFE COMPANY. Prompt notice of election to terminate shall be furnished by LIFE COMPANY with said termination to be effective upon receipt of notice; (ix) At the option of the TRUST upon a reasonable determination by the Board in good faith that it is no longer advisable and in the best interests of shareholders for the TRUST to continue to operate pursuant to this Agreement. Prompt notice of election to terminate shall be furnished by the TRUST with said termination to be effective 90 days after receipt of notice; (x) At the option of the TRUST if the variable contracts cease to qualify as annuity contracts or life insurance contracts, as applicable, under the Code, or if the TRUST reasonably believes that the variable contacts may fail to so qualify, with said termination to be effective upon receipt of notice; (xi) At the option of LIFE COMPANY, upon the TRUST's breach of any material provision of this Agreement, which breach has not been cured to the satisfaction of LIFE COMPANY within ten days after written notice of such breach is delivered to the TRUST; (xii) At the option of the TRUST, upon LIFE COMPANY's breach of any material provision of this Agreement, which breach has not been cured to the satisfaction of the TRUST within ten days after written notice of such breach is delivered to LIFE COMPANY; (xiii) At the option of the TRUST, if the variable contracts are not registered, issued or sold in accordance with applicable federal and/or state law. Termination shall be effective immediately upon such occurrence without notice; or (xiv) At the option of LIFE COMPANY, if LIFE COMPANY shall determine, in its sole judgment reasonably exercised in good faith, that the TRUST is the subject of material adverse publicity and such material adverse publicity is likely to have a material adverse impact on the sale of the variable contracts and/or the operations or business reputation of LIFE COMPANY, the LIFE COMPANY shall have notified TRUST in writing of such determination and its intent to terminate this Agreement, and, if after consideration of the actions taken by TRUST and any other changes in circumstances since the giving of such notice, the determination of the LIFE COMPANY shall continue to apply on the sixtieth (60/th/) day since giving of such notice, then such sixtieth day shall be the effective date of termination. (c) Notwithstanding any termination of this Agreement pursuant to Section 15(b) hereof, the TRUST at its option may elect to continue to make available the TRUST's existing shares and additional TRUST shares, as provided below, for so long as the TRUST desires pursuant to the terms and conditions of this Agreement, for all variable contracts in effect on the effective date of termination of this Agreement (hereinafter referred to as "Existing Contracts"). Specifically, without limitation, if the TRUST so elects to make additional TRUST shares available, the owners of the Existing Contracts or LIFE COMPANY, whichever shall have legal authority to do so, shall be permitted to reallocate investments in the TRUST, redeem investments in the TRUST and/or invest in the TRUST upon the payment of additional premiums under the Existing Contracts. In the event of a termination of this Agreement pursuant to Section 15(b) hereof, the TRUST and N&B MANAGEMENT, as promptly as is practicable under the circumstances, shall notify LIFE COMPANY whether the TRUST shall elect to continue to make TRUST shares available after such termination. If TRUST shares continue to be made available after such termination, the provisions of this Agreement shall remain in effect and thereafter either the TRUST or LIFE COMPANY may terminate the agreement, as so continued pursuant to this Section 15(c), upon prior written notice to the other party such notice to be for a period that is reasonable under the circumstances but, if given by the TRUST, need not be for more than six months. In determining whether to elect to continue to make available existing or additional TRUST shares, the TRUST shall act in good faith, giving due consideration to the interests of existing shareholders, including holders of Existing Contracts. 16. This Agreement shall be subject to the provisions of the '40 Act and the rules and regulations thereunder, including any exemptive relief therefrom and the orders of the SEC setting forth such relief. 17. It is understood by the parties that this Agreement is not to be deemed an exclusive arrangement. 18. This Agreement is made by TRUST pursuant to authority granted by the Trustees, and the obligations created hereby are not binding on any of the Trustees or shareholders of TRUST individually, but bind only the property of TRUST. Executed this 7/th/ day of July, 1994. NEUBERGER & BERMAN ADVISER MANAGEMENT TRUST ATTEST: CLAUDIA A. BRANDON By: STANLEY EGENER ----------------------- -------------------------------- Stanley Egener, chairman AMERICAN GENERAL LIFE INSURANCE COMPANY ATTEST: STEVEN A. GLOVER By: LAWRENCE S. AUSTER ------------------------ -------------------------------- Lawrence S. Auster, Sr. Vice President NEUBERGER & BERMAN MANAGEMENT INCORPORATED ATTEST: ELLEN METZGER By: MICHAEL J. WEINER ------------------------ -------------------------------- Michael J. Weiner APPENDIX A Balanced Portfolio Partners Portfolio EX-8.JII 6 ASSIGNMENT AND MODIFICATION AGREEMENT Exhibit (8)(j)(ii) ASSIGNMENT AND MODIFICATION AGREEMENT This Agreement is made by and between Neuberger & Berman Advisers Management Trust ("Trust"), a Massachusetts business trust, Neuberger & Berman Management Incorporated ("N&B Management"), a New York corporation, Neuberger & Berman Advisers Management Trust ("Successor Trust"), a Delaware business trust, Advisers Managers Trust ("Managers Trust") and American General Life Insurance Company ("Life Company"), a life insurance company organized under the laws of the State of Texas. WHEREAS, the Life Company has previously entered into a Sales Agreement dated July 7, 1994 (the "Sales Agreement") with the Trust and N&B Management regarding the purchase of shares of the Trust by Life Company; and WHEREAS, as part of the reorganization into a "master-feeder" fund structure (the "Reorganization"), the Trust will be converted into the Successor Trust, a Delaware business trust; and WHEREAS, as part of the Reorganization, each Portfolio of the Trust will transfer all of its assets to the corresponding Portfolio of the Successor Trust ("Successor Portfolio") and each Successor Portfolio will invest all of its net investable assets in a corresponding series of Managers Trust; and WHEREAS, as part of the Reorganization, an Order under Section 6(c) of the Investment Company Act of 1940 ("40 Act") is expected to be issued by the Securities and Exchange Commission ("SEC") granting exemptions from Sections 9(a), 13(a), 15(a) and 15(b) of the `40 Act and Rules 6e-2(b)(15) and 6e- 3(T)(b)(15) thereunder; and WHEREAS, the Order is expected to require that certain conditions (the "Conditions") as set forth in the Notice (Investment Company Act Release No. 21003 (April 12, 1995)) be made a part of the Sales Agreement; and WHEREAS, the parties hereto desire to assign the Sales Agreement from the Trust to the Successor Trust, to modify the Sales Agreement to include the Conditions and to rename the Sales Agreement; and WHEREAS, Managers Trust will become a party to the Sales Agreement as modified hereby, due to and for purposes of its obligations under the Conditions. NOW THEREFORE, in consideration of their mutual promises, Trust, N&B Management, Successor Trust, Managers Trust and Life Company agree as follows: 1. The Sales Agreement is hereby assigned by the Trust to the Successor Trust. 1 2. Pursuant to such assignment, the Successor Trust hereby accepts all rights and benefits of the Trust under the Sales Agreement and agrees to perform all duties and obligations of the Trust under the Sales Agreement. Upon the effectiveness of this Assignment and Modification Agreement, the Trust will be released from all obligations and duties under the Sales Agreement. 3. The Sales Agreement is hereby modified to include the Conditions as follows: Sections 12 and 13 of the Sales Agreement are replaced by the following: 12. a) The Board of Trustees of each of the Successor Trust and Managers Trust (the "Boards") will monitor the Successor Trust and Managers Trust, respectively, (collectively the "Funds") for the existence of any material irreconcilable conflict between the interest of the contract owners of all insurance company separate accounts investing in the Funds. A material irreconcilable conflict may arise for a variety of reasons, including: (a) state insurance regulatory authority action; (b) a change in applicable federal or state insurance, tax, or securities laws or regulations, or a public ruling, private letter ruling, or any similar action by insurance, tax, or securities regulatory authorities; c) an administrative or judicial decision in any relevant proceeding; (d) the manner in which the investments of the Funds are being managed; (e) a difference in voting instructions given by variable annuity and variable life insurance contract owners or by contract owners of different participating insurance companies; or (f) a decision by a participating insurance company to disregard voting instructions of contract owners. b) Life Company, other participating insurance companies, N&B Management (or any other manager or administrator of the Funds), and any qualified pension and retirement plan that executes a fund participation agreement upon becoming an owner of 10% or more of the assets of the Funds (collectively, "Participants") will report any potential or existing conflicts to the Boards. Participants will be responsible for assisting the appropriate Board in carrying out its responsibilities under these Conditions by providing the Board with all information reasonably necessary for it to consider any issues raised. This responsibility includes, but is not limited to, an obligation by each Participant to inform the Board whenever variable contract owner voting instructions are disregarded. These responsibilities will be carried out with a view only to the interests of the contract owners. c) If a majority of the Board of a Fund or a majority of its disinterested trustees or directors, determines that a material irreconcilable conflict exists, the relevant Participant, at its expense and to the extent reasonably practicable (as determined by a majority of disinterested trustees or directors), will take any steps necessary to remedy or eliminate the irreconcilable material conflict, including: (a) withdrawing the assets allocable to some or all of the separate accounts from the Funds or any series thereof and reinvesting those assets in a different investment medium, which may include another series of the Successor Trust or Managers Trust, or another investment company or submitting the question as to whether such segregation should be implemented to a vote of all affected variable contract owners and, as appropriate, segregating the assets of any appropriate group (i.e., variable annuity or variable annuity contract owners of one or more Participants) that 2 votes in favor of such segregation, or offering to the affected variable contract owners the option of making such a change; and (b) establishing a new registered management investment company or managed separate account. If a material irreconcilable conflict arises because of a Participant's decision to disregard contract owner voting instructions, and that decision represents a minority position or would preclude a majority vote, the Participant may be required, at the election of the relevant Fund, to withdraw its separate account's investment in such Fund, and no charge or penalty will be imposed as a result of such withdrawal. The responsibility to take remedial action in the event of a Board determination of an irreconcilable material conflict and to bear the cost of such remedial action shall be a contractual obligation of all Participants under their agreements governing their participation in the Funds. The responsibility to take such remedial action shall be carried out with a view only to the interests of the contract owners. For the purposes of Condition (c), a majority of the disinterested members of the applicable Board shall determine whether or not any proposed action adequately remedies any irreconcilable material conflict, but in no event will the relevant Fund or N&B Management (or any other investment adviser of the Funds) be required to establish a new funding medium for any variable contract. Further, no Participant shall be required by this condition (c) to establish a new funding medium for any variable contract if any offer to do so has been declined by a vote of a majority of contract owners materially affected by the irreconcilable material conflict. d) Any Board's determination of the existence of an irreconcilable material conflict and its implications shall be made known promptly and in writing to all Participants. 13. a) Participants will provide pass-through voting privileges to all contract owners so long as the SEC continues to interpret the `40 Act as requiring pass-through voting privileges for variable contract owners. This condition will apply to UIT-separate accounts investing in the Successor Trust and to managed separate accounts investing in Managers Trust to the extent a vote is required with respect to matters relating to Managers Trust. Accordingly, the Participants, where applicable, will vote shares of a Fund held in their separate accounts in a manner consistent with voting instructions timely received from variable contract owners. Participants will be responsible for assuring that each of their separate accounts that participates in the Funds calculates voting privileges in a manner consistent with other Participants. The obligation to calculate voting privileges in a manner consistent with all other separate accounts investing in the Funds will be a contractual obligation of all Participants under the agreements governing participation in the Funds. Each Participant will vote shares for which it has not received timely voting instructions, as well as shares it owns, in the same proportion as its votes those shares for which it has received voting instructions. b) If and to the extent Rule 6e-2 and Rule 6e-3(T) are amended, or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the `40 Act or the rules thereunder with respect to mixed and shared funding on terms and conditions materially different from any 3 exemptions granted in the order requested, then the Successor Trust, Managers Trust and/or the Participants, as appropriate, shall take such steps as may be necessary to comply with Rule 6e-2 and Rule 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such Rules are applicable. c) No less than annually, the Participants shall submit to the Boards such reports, materials or data as such Boards may reasonably request so that the Boards may fully carry out the obligations imposed upon them by these Conditions. Such reports, materials, and data shall be submitted more frequently if deemed appropriate by the applicable Boards. 4. The Sales Agreement shall be renamed Fund Participation Agreement. 5. This Assignment and Modification Agreement shall be effective on May 1, 1995, the closing date of the conversion. In the event of a conflict between the terms of this Assignment and Modification Agreement and the terms of the Sales Agreement, the terms of this Assignment and Modification Agreement shall control. 6. All other terms and conditions of the Sales Agreement remain in full force and effect. Executed this 1st day of May, 1995. Neuberger & Berman Advisers Management Trust (a Massachusetts business trust) Attest:/s/ CLAUDIA A. BRANDON By:/s/ STANLEY EGENER ------------------------ ---------------------------- Stanley Egener, Chairman Neuberger & Berman Advisers Management Trust (a Delaware business trust) Attest:/s/ CLAUDIA A. BRANDON By:/s/ STANLEY EGENER ------------------------ --------------------------- Stanley Egener, Chairman 4 Advisers Managers Trust Attest:/s/ CLAUDIA A. BRANDON By:/s/ STANLEY EGENER ---------------------------- -------------------------- Neuberger & Berman Management Incorporated Attest:/s/ ELLEN METZGER By:/s/ MICHAEL J. WEINER ---------------------------- ------------------------- Michael J. Weiner American General Life Insurance Company Attest:/s/ STEVEN A. GLOVER By:/s/ JAMES W. LOVERIDGE ---------------------------- ------------------------- Steven A. Glover James W. Loveridge Assistant Secretary Vice President 5 EX-8.Q 7 LETTER RE: AMT SERVICES AGREEMENT Exhibit (8)(q) DRAFT MR 011100 - --------------- February 1, 2000 Don Ward Senior Vice President American General Life Insurance Company 2727-A Allen Parkway Houston, Texas 77019 Re: AMT Services Agreement Dear Mr. Ward: This letter sets forth the terms and conditions of the services agreement between Neuberger Berman Management Inc. ("NBMI") and American General Life Insurance Company (the "Company"), effective as of the 1st day of February, 2000. The Company, NBMI, Neuberger Berman Advisers Management Trust (the "Trust") and Advisers Managers Trust have entered into a Sales Agreement, dated the 7th day of July, 1994, as may be amended from time to time (the "Participation Agreement"), pursuant to which the Company, on behalf of certain of its separate accounts (the "Separate Accounts"), purchases shares ("Shares") of certain Portfolios of the Trust ("Portfolios") to serve as an investment vehicle under certain variable annuity and/or variable life insurance contracts ("Variable Contracts") offered by the Company, which Portfolios may be one of several investment options available under the Variable Contracts. NBMI recognizes that in the course of soliciting applications for its Variable Contracts and in servicing owners of the Variable Contracts, the Company and its agents that are registered representatives of broker-dealers provide information about the Trust and its Portfolios (and Series of Advisers Managers Trust) from time to time, answer questions concerning the Trust and its Portfolios (and Series), including questions respecting Variable Contract owners' interests in one or more Portfolios, and provide services respecting investments in the Portfolios. NBMI desires that the efforts of the Company and its agents in providing written and oral information and services regarding the Trust to current and prospective Variable Contract owners shall continue. Accordingly, the following represents the collective intention and understanding of the services agreement between NBMI and the Company. The Company and/or its affiliates agree to provide services ("Services") to current and prospective owners Don Ward 02/02/2000 Page 2 of Variable Contracts including, but not limited to: teleservicing support in connection with the Portfolios; delivery and responding to inquires respecting Trust prospectuses, reports, notices, proxies and proxy statements and other information respecting the Portfolios (but not including services paid for by the Trust such as printing and mailing); facilitation of the tabulation of Variable Contract owners' votes in the event of a meeting of Trust shareholders; maintenance of Variable Contract records reflecting Shares purchased and redeemed and Share balances, and the conveyance of that information to the Trust, its transfer agent, or NBMI as may be reasonably requested; provision of support services including providing information about the Trust and its Portfolios (and Series of Advisers Managers Trust) and answering questions concerning the Trust and its Portfolios (and Series), including questions respecting Variable Contract owners' interests in one or more Portfolios; provision and administration of Variable Contract features for the benefit of Variable Contract owners participating in the Trust including fund transfers, dollar cost averaging, asset allocation, portfolio rebalancing, earnings sweep, and pre-authorized deposits and withdrawals; and provision of other services as may be agreed upon from time to time. In consideration of the Services, NBMI agrees to pay to the Company a service fee at an annual rate equal to 15 basis points (0.15%) of the average daily value of the shares of the Portfolios ("Shares") held in American General Life Insurance Company Separate Account VL-R. For purposes of computing the payment to the Company under this paragraph, the average daily value of Shares held in Separate Accounts over a monthly period shall be computed by totaling such Separate Accounts' aggregate investment (Share net asset value multiplied by total number of Shares held by such Separate Accounts) on each business day during the calendar month, and dividing by the total number of business days during such month. NBMI shall calculate the payment to the Company under this paragraph by at the end of each calendar month and pay all fees to the Company within thirty (30) business days after the last day of each month. NBMI shall send all payments to the attention of : Coyia Richter or Joyce Tang at the ------- address for the Company listed above. - ------------------------------------- In lieu of requesting that the Company indicate its Tax Identification Number ("TIN") on Form W-9, NBMI hereby requests that the Company furnish NBMI its TIN and acknowledge that the number shown below in this Section 2.3 is its correct TIN. The Company acknowledges that the following number is its correct TIN: 25-0598210 Employer Identification Number: 25-0598210 This services agreement shall remain in full force and effect for an initial term of one year, and shall automatically renew for successive one year periods. The services agreement may be terminated by either 2 Don Ward 02/02/2000 Page3 the Company or NBMI upon 60 days' written notice to the other, and shall terminate automatically upon redemption of all Shares held in Separate Accounts, upon termination of the Participation Agreement, or upon assignment of the Participation Agreement by either the Company or NBMI, or if required by law. Nothing in this services agreement shall amend, modify or supersede any contractual terms, obligations or covenants among or between any of the Company, NBMI, the Trust or Advisers Managers Trust previously or currently in effect, including those contractual terms, obligations or covenants contained in the Participation Agreement. If this services agreement is consistent with your understanding of the matters we discussed concerning the Company's provision of the Services, please sign below, whereupon this letter shall constitute a binding agreement between us. Very truly yours, NEUBERGER BERMAN MANAGEMENT INC. By:__________________________ Name: Peter Sundman Title: Senior Vice President Acknowledged and Agreed to: AMERICAN GENERAL LIFE INSURANCE COMPANY By:____________________________ Name: Don Ward Title: Senior Vice President 3 EX-8.R 8 AGREEMENT Exhibit (8)(r) AGREEMENT THIS AGREEMENT ("Agreement") made as of _____________, 199_, is by and between _________________________________________, a _________ corporation ("Adviser") and AMERICAN GENERAL LIFE INSURANCE COMPANY, a Texas corporation ("AGL"). W I T N E S S E T H: WHEREAS, each of the investment companies listed on Schedule One hereto ------------ ("Schedule One," as the same may be amended from time to time), is registered as ------------ an open-end management investment company under the Investment Company Act of 1940, as amended (the "Act") (such investment companies are hereinafter collectively called the "Funds," or each a "Fund"); and WHEREAS, each of the Funds is available as an investment vehicle for AGL for its separate account to fund variable life insurance and variable annuity contracts ("Contracts") listed on Schedule Two hereto ("Schedule Two," as the same may be ------------ ------------ amended from time to time); and WHEREAS, AGL has entered into a participation agreement dated ___________, 199_, among AGL, American General Securities Incorporated, Adviser, and the Funds (the "Participation Agreement," as the same may be amended from time to time); and WHEREAS, Adviser provides, among other things, investment advisory and/or administrative services to the Funds; and WHEREAS, Adviser desires AGL to provide the administrative services specified in the attached Exhibit A ("Administrative Services"), in connection with the --------- Contracts for the benefit of persons who maintain their ownership interests in the separate account, whose interests are included in the master account ("Master Account") referred to in paragraph 1 of Exhibit A ("Shareholders"), and --------- AGL is willing and able to provide such Administrative Services on the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises and mutual covenants hereinafter contained, each party hereto severally agrees as follows: 1. AGL agrees to perform the Administrative Services specified in Exhibit A --------- hereto for the benefit of the Shareholders. 2. AGL represents and agrees that it will maintain and preserve all records as required by law to be maintained and preserved in connection with providing the Administrative Services, and will otherwise comply with all laws, rules and regulations applicable to the Administrative Services. 3. AGL agrees to provide copies of all the historical records relating to transactions between the Funds and Shareholders, and all written communications and other related materials regarding the Fund(s) to or from such Shareholders, as reasonably requested by Adviser or its representatives (which representatives, include, without limitation, its auditors, legal counsel or the Underwriter, as the case may be), to enable Adviser or its representatives to monitor and review the Administrative Services performed by AGL, or comply with any request of the board of directors, or trustees or general partners (collectively, the "Directors") of any Fund, or of a governmental body, self-regulatory organization or Shareholder. In addition, AGL agrees that it will permit Adviser, the Funds or their representatives, to have reasonable access to its personnel and records in order to facilitate the monitoring of the quality of the Administrative Services. 4. AGL may, with the consent of Adviser, contract with or establish relationships with other parties for the provision of the Administrative Services or other activities of AGL required by this Agreement, or the Participation Agreement, provided that AGL shall be fully responsible for the acts and omissions of such other parties. 5. AGL hereby agrees to notify Adviser promptly if for any reason it is unable to perform fully and promptly any of its obligations under this Agreement. 6. AGL hereby represents and covenants that it does not, and will not, own or hold or control with power to vote any shares of the Funds which are registered in the name of AGL or the name of its nominee and which are maintained in AGL variable annuity or variable life insurance accounts. AGL represents further that it is not registered as a broker-dealer under the Securities Exchange Act of 1934, as amended (the"1934 Act"), and it is not required to be so registered, including as a result of entering into this Agreement and performing the Administrative Services, and other obligations of AGL set forth in this Agreement. 7. The provisions of the Agreement shall in no way limit the authority of Adviser, or any Fund or Underwriter to take such action as any of such parties may deem appropriate or advisable in connection with all matters relating to the operations of any of such Funds and/or sale of its shares. 8. In consideration of the performance of the Administrative Services by AGL with respect to the Platinum Contracts, beginning on the date hereof and during the term of the Participation Agreement, Adviser agrees to pay AGL an annual fee which shall equal .20% of the value of each Fund's assets in the Contracts maintained in the Master Account for the Shareholders (excluding all assets invested during the guarantee periods available under the Platinum Contracts). The determination of applicable assets shall be made by averaging assets in applicable Funds as of the last Valuation Date (as defined in the prospectus relating to the Platinum Contracts) of each month falling within the applicable calendar year. The foregoing fee will be paid by Adviser to AGL on a calendar year basis, and in this regard, payment of such fee will be made by Adviser to AGL within thirty (30) days following the end of each calendar year. Notwithstanding anything in this Agreement or the Participation Agreement appearing to the contrary, the payments by Adviser to AGL relate solely to the performance by AGL of the Administrative Services described herein only, and do not constitute payment in any manner 2 for services provided by AGL to AGL policy or contract owners, or to any separate account organized by AGL, or for any investment advisory services, or for costs associated with the distribution of any variable annuity or variable life insurance contracts. 9. AGL shall indemnify and hold harmless each of the Funds, Adviser and Underwriter and each of their respective officers, Directors, employees and agents from and against any and all losses, claims, damages, expenses, or liabilities that any one or more of them may incur including without limitation reasonable attorneys' fees, expenses and costs arising out of or related to the performance or non-performance by AGL of the Administrative Services under this Agreement. 10. This Agreement may be terminated without penalty at any time by AGL or by Adviser as to one or more of the Funds collectively, upon one hundred and eighty days (180) written notice to the other party. Notwithstanding the foregoing, the provisions of paragraphs 2, 3, 9 and 11 of this Agreement, shall continue in full force and effect after termination of this Agreement. This Agreement shall not require AGL to preserve any records (in any medium or format) relating to this Agreement beyond the time periods otherwise required by the laws to which AGL or the Funds are subject provided that such records shall be offered to the Funds in the event AGL decides to no longer preserve such records following such time periods. 11. After the date of any termination of this Agreement in accordance with paragraph 10 of this Agreement, no fee will be due with respect to any amounts in the Platinum Contracts first placed in the Master Account for the benefit of Shareholders after the date of such termination. However, notwithstanding any such termination, Adviser will remain obligated to pay AGL the fee specified in paragraph 8 of this Agreement, with respect to the value of each Fund's average daily net assets maintained in the Master Account with respect to the Platinum Contracts as of the date of such termination, for so long as such amounts are held in the Master Account and AGL continues to provide the Administrative Services with respect to such amounts in conformity with this Agreement. This Agreement, or any provision hereof, shall survive termination to the extent necessary for each party to perform its obligations with respect to amounts for which a fee continues to be due subsequent to such termination. 12. AGL understands and agrees that the obligations of Adviser under this Agreement are not binding upon any of the Funds, upon any of their Board members or upon any shareholder of any of the Funds. 13. It is understood and agreed that in performing the services under this Agreement AGL, acting in its capacity described herein, shall at no time be acting as an agent for Adviser, Underwriter or any of the Funds. AGL agrees, and agrees to cause its agents, not to make any representations concerning a Fund except those contained in the Fund's then-current prospectus; in current sales literature furnished by the Fund, Adviser or Underwriter to AGL; in the then current prospectus for a variable annuity contract or variable life insurance policy issued by AGL or then current sales literature with respect to such variable annuity contract or variable life insurance policy, approved by Adviser. 3 14. This Agreement, including the provisions set forth herein in paragraph 8, may only be amended pursuant to a written instrument signed by the party to be charged. This Agreement may not be assigned by a party hereto, by operation of law or otherwise, without the prior written consent of the other party. 15. This Agreement shall be governed by the laws of the State of Illinois, without giving effect to the principles of conflicts of law of such jurisdiction. 16. This Agreement, including Exhibit A, Schedule One and Schedule Two, --------- ------------ ------------ constitutes the entire agreement between the parties with respect to the matters dealt with herein and supersedes any previous agreements and documents with respect to such matters. The parties agree that Schedule One and/or Schedule Two may be replaced from time to time with a new Schedule One and/or Schedule Two to accurately reflect any changes in the Funds available as investment vehicles and/or the Contracts available, under the Participation Agreement, respectively. 4 IN WITNESS HEREOF, the parties hereto have executed and delivered this Agreement as of the date first above written. AMERICAN GENERAL LIFE INSURANCE COMPANY By:_________________________ Authorized Signatory _______________________ Print or Type Name ____________________________ By:_________________________ Authorized Signatory _______________________ Print or Type Name 5 SCHEDULE ONE Investment Company Name: Fund Name(s): - ----------------------- ------------ SCHEDULE TWO List of Contracts . Key Legacy Plus, Form No. 99616 EXHIBIT A Pursuant to the Agreement by and among the parties hereto, AGL shall perform the following Administrative Services: 1. Maintain separate records for each Shareholder, which records shall reflect shares purchased and redeemed for the benefit of the Shareholder and share balances held for the benefit of the Shareholder. AGL shall maintain the Master Account with the transfer agent of the Fund on behalf of Shareholders and such Master Account shall be in the name of AGL or its nominee as the record owner of the shares held for such Shareholders. 2. For each Fund, disburse or credit to Shareholders all proceeds of redemptions of shares of the Fund and all dividends and other distributions not reinvested in shares of the Fund or paid to the Separate Account holding the Shareholders' interests. 3. Prepare and transmit to Shareholders periodic account statements showing the total number of shares held for the benefit of the Shareholder as of the statement closing date (converted to interests in the Separate Account), purchases and redemptions of Fund shares for the benefit of the Shareholder during the period covered by the statement, and the dividends and other distributions paid for the benefit of the Shareholder during the statement period (whether paid in cash or reinvested in Fund shares). 4. Transmit to Shareholders proxy materials and reports and other information received by AGL from any of the Funds and required to be sent to Shareholders under the federal securities laws and, upon request of the Fund's transfer agent, transmit to Shareholders material Fund communications deemed by the Fund, through its Board of Directors or other similar governing body, to be necessary and proper for receipt by all Fund beneficial shareholders. 5. Transmit to the Fund's transfer agent purchase and redemption orders on behalf of Shareholders. 6. Provide to the Funds, or to the transfer agent for any of the Funds, or any of the agents designated by any of them, such periodic reports as shall reasonably be concluded to be necessary to enable each of the Funds and its Underwriter to comply with any applicable State Blue Sky requirements. EX-10.E 9 VARIABLE APPLICATION
EXHIBIT 10(e) AMERICAN GENERAL LIFE INSURANCE COMPANY ("AGL") Home Office: Houston, Texas VARIABLE UNIVERSAL LIFE INSURANCE SUPPLEMENTAL APPLICATION (This supplement must accompany the appropriate application for life insurance.) - ------------------------------------------------------------------------------------------------------------------------------------ PART 1. APPLICANT INFORMATION - ------------------------------------------------------------------------------------------------------------------------------------ Supplement to the application on the life of ________________ JOHN DOE_______________________, dated _____________________________. - ------------------------------------------------------------------------------------------------------------------------------------ PART 2. INITIAL ALLOCATION PERCENTAGES - ------------------------------------------------------------------------------------------------------------------------------------ INVESTMENT OPTIONS: In the "Premium Allocation" column, indicate how each premium received is to be allocated. In the "Deduction Allocation" column, indicate which investment options are to be used for the deduction of monthly account charges. Total allocations in each column must equal 100%. Use whole percentages only. Premium Deduction Premium Deduction Divisions Allocation Allocation Divisions Allocation Allocation - --------- ---------- ---------- --------- ---------- ---------- [AIM VARIABLE INSURANCE FUNDS, INC. PUTNAM VARIABLE TRUST AIM V.I. International Equity (81) 100% 100% Putnam VT Diversified Income (87) ___% ___% AMERICAN CENTURY VARIABLE PORTFOLIOS, INC. FRANKLIN TEMPLETON VARIABLE INSURANCE VP Value (82) ___% ___% PRODUCTS TRUST AMERICAN GENERAL SERIES PORTFOLIO CO. Franklin Small Cap (88) ___% ___% Money Market (83) ___% ___% TEMPLETON VARIABLE PRODUCTS SERIES FUND MFS(R) VARIABLE INSURANCE TRUST Templeton Inernational (89) ___% ___% MFS Total Return (84) ___% ___% VAN KAMPEN LIFE INVESTMENT TRUST NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST Emerging Growth (90) ___% ___% Partners Portfolio (85) ___% ___% VICTORY VARIABLE INSURANCE FUNDS OPPENHEIMER VARIABLE ACCOUNT FUNDS Diversified Stock (91) ___% ___% Oppeneimer High Income (86) ___% ___% Investment Quality Bond (92) ___% ___% Small Cap Opportunity (93) ___% ___% Other: ________________________________ ___% ___%] - ------------------------------------------------------------------------------------------------------------------------------------ PART 3. DOLLAR COST AVERAGING - ------------------------------------------------------------------------------------------------------------------------------------ DOLLAR COST AVERAGING: ($5,000 minimum beginning accumulation value) An amount can be systematically transferred from the [Money Market (83)] and transferred to one or more of the investment divisions below. Please refer to the prospectus for more information on the Dollar Cost Averaging option. DAY OF THE MONTH FOR TRANSFERS: __________________________ (Choose a day of the month between 1-28.) FREQUENCY OF TRANSFERS: [_] Monthly [_] Quarterly [_] Semiannually [_] Annually TRANSFER $__________________ ($100 minimum, whole dollars only) from the [Money Market (83)] to the following division(s): [AIM V.I. International Equity (81) $______ Templeton International (89) $______ VP Value (82) $______ Emerging Growth (90) $______ MFS Total Return (84) $______ Diversified Stock (91) $______ Partners Portfolio (85) $______ Investment Quality Bond (92) $______ Oppenheimer High Income (86) $______ Small Cap Opportunity (93) $______ Putnam VT Diversified Income (87) $______ Other: ________________________________ $______] Franklin Small Cap (88) $______ - ------------------------------------------------------------------------------------------------------------------------------------ PART 4. AUTOMATIC REBALANCING - ------------------------------------------------------------------------------------------------------------------------------------ AUTOMATIC REBALANCING: ($5,000 minimum beginning accumulation value) Variable division assets will be automatically rebalanced based on the premium percentages designated in Part 2. Please refer to the prospectus for more information on the Automatic Rebalancing option. [_] CHECK HERE FOR AUTOMATIC REBALANCING. FREQUENCY: [_] Quarterly [_] Semiannually [_] Annually NOTE: Automatic Rebalancing is not available if the Dollar Cost Averaging option has been chosen. - ------------------------------------------------------------------------------------------------------------------------------------ PAGE 1 of 2 AGLC 0091
AMERICAN GENERAL LIFE INSURANCE COMPANY Home Office: Houston, Texas - --------------------------------------------------------------------------------------------------------------------------------- PART 5. TELEPHONE AUTHORIZATION - --------------------------------------------------------------------------------------------------------------------------------- I (or we, if Joint Owners), hereby authorize American General Life Insurance Company ("AGL") to act on telephone instructions to transfer values among the variable divisions and to change allocations for future purchase payments and monthly deductions given by: (INITIAL APPROPRIATE BOX BELOW.) [ ] Policy Owner(s) ONLY -- if Joint Owners, either of us acting independently. [ ] Policy Owner(s) OR the Agent/Registered Representative who is appointed to represent AGL and the firm authorized to service my policy. AGL and any person designated by this authorization will not be responsible for any claim, loss or expense based upon telephone instructions received and acted on in good faith, including losses due to telephone instruction communication errors. AGL's liability for erroneous transfers and allocations, unless clearly contrary to instructions received, will be limited to correction of the allocations on a current basis. If an error, objection or other claim arises due to a telephone transaction, I will notify AGL in writing within five working days from receipt of confirmation of the transaction from AGL. I understand that this authorization is subject to the terms and provisions of my variable universal life insurance policy and its related prospectus. This authorization will remain in effect until my written notice of its revocation is received by AGL at its home office. [ ] INITIAL HERE TO DECLINE THE ABOVE TELEPHONE AUTHORIZATION. - --------------------------------------------------------------------------------------------------------------------------------- PART 6. MODIFIED ENDOWMENT CONTRACT - --------------------------------------------------------------------------------------------------------------------------------- If any premium payment causes the policy to be classified as a modified endowment contract under Section 7702A of the United States Internal Revenue Code, there may be potentially adverse U.S. tax consequences. Such consequences include: (1) withdrawals or loans being taxed to the extent of gain; and (2) a 10% penalty tax on the taxable amount. In order to avoid modified endowment status, I request any excess premium that could cause such status to be refunded. [ ] YES [ ] NO - --------------------------------------------------------------------------------------------------------------------------------- PART 7. SUITABILITY (All questions must be answered.) - --------------------------------------------------------------------------------------------------------------------------------- YES NO --- -- 1. Have you, the Proposed Insured or Owner (if different), received the variable universal life insurance policy prospectus and the prospectuses describing the investment options? [ ] [ ] (If "yes," please furnish the Prospectus dates.) Variable Universal Life Insurance Policy Prospectus: ___________________ Supplements (if any): ___________________ 2. Do you understand that under the Policy applied for: a. THE AMOUNT OR DURATION OF THE DEATH BENEFIT MAY INCREASE OR DECREASE, DEPENDING ON THE INVESTMENT EXPERIENCE OF THE SEPARATE ACCOUNT? [ ] [ ] b. THE POLICY VALUES MAY INCREASE OR DECREASE, DEPENDING ON THE INVESTMENT EXPERIENCE OF THE SEPARATE ACCOUNT AND CERTAIN EXPENSE DEDUCTIONS? [ ] [ ] c. The policy is designed to provide life insurance coverage and to allow for the accumulation of values in the Separate Account? [ ] [ ] 3. Do you believe the Policy you selected meets your insurance and investment objectives and your anticipated financial needs? [ ] [ ] - --------------------------------------------------------------------------------------------------------------------------------- Signed at: Any Town USA Date: 10/1/99 _________________________________________________________________________ ___________________________________ CITY STATE John Doe X______________________________________________________________ X______________________________________________________________ SIGNATURE OF PRIMARY PROPOSED INSURED SIGNATURE OF REGISTERED REPRESENTATIVE X______________________________________________________________ ______________________________________________________________ SIGNATURE OF OWNER (if different from Proposed Insured) PRINT NAME OF BROKER/DEALER X______________________________________________________________ SIGNATURE OF JOINT OWNER (if applicable) - ---------------------------------------------------------------------------------------------------------------------------------- AGLC 0091 Page 2 of 2
EX-10.F 10 SERVICE REQUEST FORM EXHIBIT 10(f) SERVICE REQUEST K E Y L E G A C Y - --------------------- Plus - --------------------- AMERICAN GENERAL LIFE - -------------------------------------------------------------------------------- KEY LEGACY PLUS--VARIABLE DIVISIONS AIM Variable Insurance Funds, Inc. * Division 81 - AIM V.I. International Equity Fund American Century Variable Portfolios, Inc. * Division 82 - VP Value Fund American General Series Portfolio Company * Division 83 - Money Market Fund MFS(R)-Variable Insurance Trust * Division 84 - MFS Total Return Series Neuberger Berman Advisers Management Trust * Division 85 - Partners Portfolio Oppenheimer Variable Account Funds * Division 86 - Oppenheimer High Income Fund/VA Putnam Variable Trust * Division 87 - Putnam VT Diversified Income Fund Franklin Templeton Variable Insurance Products Trust * Division 88 - Franklin Small Cap Fund Templeton Variable Products Series Fund * Division 89 - Templeton International Fund Van Kampen Life Investment Trust * Division 90 - Emerging Growth Portfolio Victory Variable Insurance Funds * Division 91 - Diversified Stock Fund * Division 92 - Investment Quality Bond Fund * Division 93 - Small Cap Opportunity Fund
AMERICAN AMERICAN GENERAL LIFE INSURANCE COMPANY ("AGL") | GENERAL Complete and return this request to: ----------------------------------------------- | FINANCIAL GROUP Variable Universal Life Operations A Subsidiary of American General Corporation PO Box 4880 Houston, TX 77210-4880 ----------------------------------------------- (888) 436-4963 or Houston, Texas Hearing Impaired (TDD): (888) 436-5258 Toll Free Fax: (877) 445-3098 VARIABLE UNIVERSAL LIFE INSURANCE SERVICE REQUEST - ------------------------------------------------------------------------------------------------------------------------------------ [ ] POLICY 1.| POLICY #:___________________________________________________ INSURED:_________________________________ IDENTIFICATION | | ADDRESS:________________________________________________________________________ New Address (yes)(no) COMPLETE THIS SECTION | FOR ALL REQUESTS. | Primary Owner (If other than insured):__________________________________________ | | Address:________________________________________________________________________ New Address (yes)(no) | | Primary Owner's S.S. No. or Tax I.D. No._____________________________ Phone Number: ( )____ - ______ | | Joint Owner (If applicable):____________________________________________________ | | Address:________________________________________________________________________ New Address (yes)(no) - ----------------------------------------------------------------------------------------------------------------------------------- [ ] NAME 2.| CHANGE | Change Name Of: (Circle One) Insured Owner Payor Beneficiary | Complete this section if | Change Name From: (First, Middle, Last) Change Name To: (First, Middle, Last) the name of the Insured, | Owner, Payor or Beneficiary| _________________________________________ _________________________________________________ has changed. (Please note,| this does not change the | Insured, Owner, Payor or | Reason for Change: (Circle One) Marriage Divorce Correction Other (Attach copy of legal proof) Beneficiary designation) | - ----------------------------------------------------------------------------------------------------------------------------------- [ ] MODE OF PREMIUM 3.| PAYMENT/BILLING | Indicate frequency and premium amount desired: $______ Annual $______ Semi-Annual $_______ Quarterly METHOD CHANGE | | $______ Monthly (Bank Draft Only) Use this section to change | the billing frequence and/ | Indicate billing method desired:_____ Direct Bill ______ Pre-Authorized Bank Draft (attach a Bank Draft or method of premium pay- | Authorization Form and "Void" Check) ment. Note, however, that | AGL will not bill you on a | Start Date: ______/______/_____ direct monthly basis. Refer| to your policy and its | related prospectus for | further information | concerning minimum premiums| and billing options. | - ----------------------------------------------------------------------------------------------------------------------------------- [ ] LOST POLICY 4.| CERTIFICATE | I/we hereby certify that the policy of insurance for the listed policy has been ____LOST_____DESTROYED | _____OTHER. Complete this section if | Unless I/we have directed cancellation of the policy, I/we request that a: applying for a Certificate | of Insurance or duplicate | _________ Certificate of Insurance at no charge policy to replace a lost or| misplaced policy. If a full| _________ Full duplicate policy at a charge of $25 duplicate policy is being | requested, a check or money| be issued to me/us. If the original policy is located, I/we will return the Certificate or duplicate order for $25 payable to | policy to AGL for cancellation. AGL must be submitted with| this request. | - ----------------------------------------------------------------------------------------------------------------------------------- [ ] DOLLAR COST 5.| Designate the day of the month for transfers:_________(choose a day from 1-28) AVERAGING | ($5,000 minimum initial | Frequency of transfers (check one): _______Monthly _______Quarterly ______Semi-Annually _____Annually accumulation value) An | amount may be deducted | I want: $___________($100 minimum) taken from the Money Market Division (83) and transferred to the periodically from the | following Division(s): Money Market Division and | placed in one or more of | AIM Variable Insurance Funds, Inc. Franklin Templeton Variable Insurance Products Trust the Divisions listed. | $_________(81) AIM V.I. International Equity $________(88) Franklin Small Cap Please refer to the pros- | American Century Variable Portfolios, Inc. Templeton Variable Products Series Fund pectus for more infor- | $_________(82) VP Value $________(89) Templeton International mation on the Dollar Cost | MFS(R) Variable Insurance Trust Van Kampen Life Investment Trust Averaging Option. | $_________(84) MFS Total Return Series $________(90) Emerging Growth This option is not | Neuberger Berman Advisers Management Trust Victory Variable Insurance Funds available while the | $_________(85) Partners Portfolio $________(91) Diversified Stock Automatic Rebalancing | Oppenheimer Variable Account Funds $________(92) Investment Quality Bond option is in use. | $_________(86) Oppenheimer High Income $________(93) Small Cap Opportunity | Putnam Variable Trust | $_________(87) Putnam VT Diversified Income | | ________INITIAL HERE TO REVOKE DOLLAR COST AVERAGING ELECTION. - ----------------------------------------------------------------------------------------------------------------------------------- PAGE 2 OF 4
- ------------------------------------------------------------------------------------------------------------------------------------ [ ] TELEPHONE 6.| I(/we if Joint Owners) hereby authorize AGL to act on telephone instructions to transfer values among PRIVILEGE | Divisions and to change allocations for future purchase payments and monthly deductions. AUTHORIZATION | | Complete this section if | Initial the designation you prefer: you are applying for or | revoking current telephone| __________Policy Owner(s) only--If Joint Owners, either one acting independently. privileges. | | __________Policy Owner(s) or Agent/Registered Representative who is appointed to represent AGL and the | firm authorized to service my policy. | | AGL and any person designated by this authorization will not be responsible for any claim, loss or | expense based upon telephone transfer or allocation instructions received and acted upon in good faith, | including losses due to telephone instruction communication errors. AGL's liability for erroneous | transfers or allocations, unless clearly contrary to instructions received, will be limited to | correction of the allocations on a current basis. If an error, objection or other claim arises due to a | telephone transaction, I will notify AGL in writing within five working days from the receipt of the | confirmation of the transaction from AGL. I understand that this authorization is subject to the terms | and provisions of my policy and its related prospectus. This authorization will remain in effect until | my written notice of its revocation is received by AGL at the address printed on the top of this | service request form. | |___________INITIAL HERE TO REVOKE TELEPHONE PRIVILEGE AUTHORIZATION. - ----------------------------------------------------------------------------------------------------------------------------------- [ ] CORRECT AGE 7.| | Name of Insured for whom this correction is submitted:___________________________________ | Use this section to correct| Correct DOB: ________/________/________ the age of any person | covered under this policy. | Proof of the correct date | of birth must accompany | this request. | - ----------------------------------------------------------------------------------------------------------------------------------- [ ] TRANSFER OF 8.| (Division Name or Number) (Division Name or Number) ACCUMULATED VALUES | | | Transfer $________ or ______% from_______________________________to__________________________________ Use this section if you | want to move money between | Transfer $________ or ______% from_______________________________to__________________________________ divisions. If a transfer | causes the balance in any | Transfer $________ or ______% from_______________________________to__________________________________ division to drop below | $500, AGL reserves the | Transfer $________ or ______% from_______________________________to__________________________________ right to transfer the | remaining balance. | Transfer $________ or ______% from_______________________________to__________________________________ Amounts to be transferred | should be indicated in | Transfer $________ or ______% from_______________________________to__________________________________ dollar or percentage | amounts, maintaining | Transfer $________ or ______% from_______________________________to__________________________________ consistency throughout. | There is a $500 minimum | Transfer $________ or ______% from_______________________________to__________________________________ amount for division | transfers. | Transfer $________ or ______% from_______________________________to__________________________________ | | Transfer $________ or ______% from_______________________________to__________________________________ - ----------------------------------------------------------------------------------------------------------------------------------- [ ] CHANGE IN 9.| INVESTMENT DIVISION PREM % DED % INVESTMENT DIVISION PREM % DED % ALLOCATION | AIM Variable Insurance Funds, Inc. Putnam Variable Trust PERCENTAGES | (81) AIM V.I. International Equity ______ ______ (87) Putnam VT Diversified Income | American Century Variable Portfolios, Inc. ______ ______ Use this section to | (82) VP Value ______ ______ Franklin Templeton Variable Insurance indicate how premiums or | American General Series Portfolio Company Products Trust monthly deductions are to | (83) Money Market ______ ______ (88) Franklin Small Cap ______ ______ be allocated. Total | MFS(R) Variable Insurance Trust Templeton Variable Products Series Fund allocation in each | (84) MFS Total Return Series ______ ______ (89) Templeton International ______ ______ column must equal 100%; | Neuberger Berman Advisers Management Trust Van Kampen Life Investment Trust whole numbers only. | (85) Partners Portfolio ______ ______ (90) Emerging Growth ______ ______ | Oppenheimer Variable Account Funds Victory Variable Insurance Funds | (86) Oppenheimer High Income ______ ______ (91) Diversified Stock ______ ______ (92) Investment Quality Bond ______ ______ (93) Small Cap Opportunity ______ ______ - ----------------------------------------------------------------------------------------------------------------------------------- PAGE 3 OF 4
AGLC 0092
- ------------------------------------------------------------------------------------------------------------------------------------ | [ ] AUTOMATIC 10.| Indicate frequency: _______ Quarterly ______ Semi-Annually ______ Annually REBALANCING | | (Division Name or Number) (Division Name or Number) | ($5,000 minimum | _______% _______________________________________ : _________% __________________________________: accumulation value) Use | this section to apply for | _______% _______________________________________ : _________% __________________________________: or make changes to | Automatic Rebalancing of | _______% _______________________________________ : _________% __________________________________: the divisions. | Please refer to the | _______% _______________________________________ : _________% __________________________________: prospectus for more | information on the | _______% _______________________________________ : _________% __________________________________: Automatic Rebalancing | Option. This option is not | _______% _______________________________________ : _________% __________________________________: available while the Dollar | Cost Averaging Option is | in use. | _________INITIAL HERE TO REVOKE AUTOMATIC REBALANCING ELECTION. - ----------------------------------------------------------------------------------------------------------------------------------- [ ] REQUEST FOR 11.| _________I request a partial surrender of $_________ or ________% of the net cash surrender value. PARTIAL | SURRENDER/ | _________I request a loan in the amount of $________. POLICY LOAN | | _________I request the maximum loan amount available from my policy. Use this section to apply | for a partial surrender | Unless you direct otherwise below, proceeds are allocated according to the deduction allocation or policy loan. If | percentages in effect, if available; otherwise they are taken pro-rata from the Variable Divisions applying for a partial | in use. surrender, be sure to | complete the Notice of | ______________________________________________________________________________________________________ Withholding section of this| Service Request in addition| ______________________________________________________________________________________________________ to this section. | The minimum surrender | ______________________________________________________________________________________________________ amount is $500. There will | be a charge not to exceed | ______________________________________________________________________________________________________ 2% of the amount withdrawn | or $25. | ______________________________________________________________________________________________________ Refer to your policy and | its related prospectus for | further information. | - ------------------------------------------------------------------------------------------------------------------------------------ [ ] NOTICE OF 12.| The taxable portion of the distribution you receive from your variable universal life insurance policy WITHHOLDING | is subject to federal income tax withholding unless you elect not to have withholding apply. | Withholding of state income tax may also be required by your state of residence. You may elect not to Complete this section if | have withholding apply by checking the appropriate box below. If you elect not to have withholding you have applied for a | apply to your distribution or if you do not have enough income tax withheld, you may be responsible for partial surrender in | payment of estimated tax. You may incur penalties under the estimated tax rules, if your withholding Section 11. | and estimated tax are not sufficient. | | Check one: _______ I do want income tax withheld from this distribution. | | _______ I do not want income tax withheld from this distribution. | - ------------------------------------------------------------------------------------------------------------------------------------ [ ] AFFIRMATION/ 13.| CERTIFICATION: Under penalties of perjury, I certify: (1) that the number shown on this form is my SIGNATURE | correct taxpayer identification number and; (2) that I am not subject to backup withholding under | Section 3406(a)(1)(C) of the Internal Revenue Code. The Internal Revenue Service does not require your Complete this section for | consent to any provision of this document other than the certification required to avoid backup ALL requests. | withholding. | | Dated at __________________________________ this _________ day of ________________________, __________. | (MONTH) (YEAR) | | X_________________________________________________ X_____________________________________________ | SIGNATURE OF OWNER SIGNATURE OF WITNESS | | X_________________________________________________ X_____________________________________________ | SIGNATURE OF JOINT OWNER SIGNATURE OF WITNESS | | X_________________________________________________ X_____________________________________________ | SIGNATURE OF ASSIGNEE SIGNATURE OF WITNESS | | | - ----------------------------------------------------------------------------------------------------------------------------------- PAGE 4 OF 4
AGLC 0092 EX-2.A 11 PAULETTA P. COHN CONSENT American Exhibit (2)(a) General LIFE COMPANIES 2929 Allen Parkway (A40-04), Houston, Texas 77019 Pauletta P. Cohn Deputy General Counsel Direct Line (713) 831-1230 FAX (713) 620-3878 E-mail: pcohn@aglife.com January 21, 2000 American General Life Insurance Company 2727-A Allen Parkway Houston, TX 77019 Dear Ladies and Gentlemen: As Deputy General Counsel of American General Life Companies, I have acted as counsel to American General Life Insurance Company (the "Company") in connection with the filing of Pre-effective Amendment No. 1 to the Registration Statement on Form S-6, File Nos. 333-89897 and 811-08561 ("Registration Statement") for Separate Account VL-R ("Separate Account VL-R") of the Company with the Securities and Exchange Commission. The Registration Statement relates to the proposed issuance of Key Legacy Plus - Variable (policy form No. 99616) flexible premium variable life insurance policies by the Company ("Policies"). Net premiums received under the Policies are allocated by the Company to Separate Account VL-R to the extent directed by owners of the Policies. Net premiums under other policies that may be issued by the Company may also be allocated to Separate Account VL-R. The Policies are designed to provide retirement protection and are to be offered in the manner described in the prospectus and the prospectus supplements included in the Registration Statement. The Policies will be sold only in jurisdictions authorizing such sales. In connection with rendering this opinion, I have examined and am familiar with originals or copies, certified or otherwise identified to my satisfaction, of the corporate records of the Company and all such other documents as I have deemed necessary or appropriate as a basis for the opinion expressed herein and have assumed that prior to the issuance or sale of any Policies, the Registration Statement, as finally amended, will be effective. American General Life Insurance Company January 21, 2000 Page 2 Based on and subject to the foregoing and the limitations, qualifications, exceptions and assumptions set forth herein, I am of the opinion that: l. The Company is a corporation duly organized and validly existing under the laws of the State of Texas. 2. Separate Account VL-R was duly established and is maintained by the Company pursuant to the laws of the State of Texas, under which income, gains and losses, whether or not realized, from assets allocated to Separate Account VL-R, are, in accordance with the Policies, credited to or charged against Separate Account VL-R without regard to other income, gains or losses of the Company. 3. Assets allocated to Separate Account VL-R will be owned by the Company. The Company is not a trustee with respect thereto. The Policies provide that the portion of the assets of Separate Account VL-R equal to the reserves and other Policy liabilities with respect to Separate Account VL-R will not be chargeable with liabilities arising out of any other business the Company may conduct. The Company reserves the right to transfer assets of Separate Account VL-R in excess of such reserves and other Policy liabilities to the general account of the Company. 4. When issued and sold as described above, the Policies (including any units of Separate Account VL-R duly credited thereunder) will be duly authorized and will constitute validly issued and binding obligations of the Company in accordance with their terms. I am admitted to the bar in the State of Texas, and I do not express any opinion as to the laws of any other jurisprudence. This opinion is being furnished in accordance with the requirements of Item 601(b)(5), Regulation S-K of the Securities Act of 1933 and I hereby consent to the use of this opinion as an exhibit to the Registration Statement. Sincerely, /s/ PAULETTA P. COHN --------------------------- PPC:mlc EX-2.B 12 AMGEN ACTUARY CONSENT Exhibit 2(b) Writer's Direct Number (713) 831-2738 January 20, 2000 American General Life Insurance Company 2727-A Allen Parkway Houston, Texas 77019 Dear Ladies and Gentlemen: This opinion is furnished in connection with the Registration Statement on Form S-6, File No. 333-89897 ("Registration Statement") of Separate Account VL-R ("Separate Account VL-R") of American General Life Insurance Company ("AGL") covering an indefinite number of units of interest in Separate Account VL-R under Key Legacy Plus (policy form No. 99616) flexible premium variable life insurance policies ("Policies"). Net premiums received under the Policies may be allocated to Separate Account VL-R as described in the prospectus included in the Registration Statement. I participated in the preparation of the Policies and I am familiar with their provisions. I am also familiar with the description contained in the prospectus. In my opinion: The Illustrations of Hypothetical Policy Benefits appearing on page 17 of the Prospectus (the "Illustrations") are consistent with the provisions of the Policies. The assumptions upon which these Illustrations are based, including the current charges and the currently planned .25% and .50% reductions in the daily charges after a specified number of years, are stated in the prospectus and are reasonable. The Policies have not been designed so as to make the relationship between premiums and benefits, as shown in the Illustrations, appear disproportionately more favorable to prospective purchasers of Policies for preferred risk (the best risk class offered by AGL) non-tobacco user males age 45, than to prospective purchasers of Policies for males at other ages within this risk class or any other risk class, or for females. The particular Illustrations shown were not selected for the purpose of making the relationship appear more favorable. I hereby consent to the use of this opinion as an exhibit to the Registration Statement and to the reference to my name under the heading "Accounting and Actuarial Experts" in the prospectus. /s/ ROBERT M.BEUERLEIN ---------------------------- Robert M. Beuerlein Senior Vice President & Chief Actuary EX-6 13 IND. AUDITORS CONSENT Exhibit 6 CONSENT OF INDEPENDENT AUDITORS We consent to the reference made to our firm under the caption "Independent Auditors" and to the use of our report dated February 16, 1999, as to American General Life Insurance Company, in Pre-Effective Amendment No. 1 to the Registration Statement (Form S-6, Nos. 333-89897 and 811-08561) of American General Life Insurance Company. /s/ ERNST & YOUNG LLP -------------------- ERNST & YOUNG LLP Houston, Texas January 19, 2000 -----END PRIVACY-ENHANCED MESSAGE-----