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PLATINUM INVESTOR(SM)
Flexible Premium Variable Life Insurance Policies (the "Policies") Issued by
The United States Life Insurance Company in the City of New York ("USL")
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ADMINISTRATIVE CENTER: HOME OFFICE: PREMIUM PAYMENTS:
<S> <C> <C>
(Express Delivery) 125 Maiden Lane (Express Delivery)
2727-A Allen Parkway New York, New York 10038-4992 The United States Life Insurance
Houston, Texas 77019-2191 1-212-709-6000 Company in the City of New York
1-800-251-3720; 1-713-831-3913 c/o Southwest Bank of Texas
Fax: 1-713-620-3371 4400 Post Oak Parkway
(Except premium payments) Houston, Texas 77027
Attention: Lockbox Processing
(U.S. Mail) (U.S. Mail)
VUL Administration The United States Life Insurance
P.O. Box 4880 Company in the City of New York
Houston, Texas 77210-4880 P.O. Box 4728, Dept. L
Houston, Texas 77210-4728
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This booklet is called the "prospectus."
Investment options. The USL declared fixed interest account is the fixed
investment option for these Policies. You can also use USL's Separate Account
USL VL-R ("Separate Account") to invest in the following variable investment
options. You may change your selections from time to time:
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- --------------------------------------------------------------------------------------------------------------------------
AIM Variable Insurance American General Series Dreyfus Variable MFS Variable Insurance
Funds, Inc. Portfolio Company Investment Fund Trust
.AIM V.I. International .International Equities .Quality Bond .MFS Emerging Growth
Equity Fund Fund Portfolio Series
.AIM V.I. Value Fund .MidCap Index Fund .Small Cap Portfolio
.Money Market Fund
.Stock Index Fund
The Variable Annuity Life Massachusetts Financial
A I M Advisors, Inc.* Insurance Company* The Dreyfus Corporation * Services Company*
- -----------------------------------------------------------------------------------------------------------------------
Morgan Stanley Dean Putnam Variable Trust SAFECO Resource Van Kampen Life
Witter Universal Funds, Inc. .Putnam VT Diversified Series Trust Investment Trust
.Equity Growth Portfolio/1/ Income Fund .Equity Portfolio .Strategic Stock Portfolio
.High Yield Portfolio/2/ .Putnam VT Growth .Growth Portfolio
and Income Fund
.Putnam VT International
/1/Morgan Stanley Dean Witter Growth and Income Fund Van Kampen Asset
Investment Management Inc.* SAFECO Asset Management Inc.*
/2/Miller Anderson & Sherrerd, Putnam Investment Management
LLP* Management, Inc.* Company*
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
* The Investment Adviser of the investment option
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Separate prospectuses contain more information about the mutual funds
("Funds" or "Mutual Funds") in which we invest the amounts that you allocate to
any of the above-listed investment options (other than our declared fixed
interest account option). 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 USL representative or from us at our Administrative
Center listed above.
Other choices you have. During the insured person's lifetime, you may,
within limits, (1) request a change 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 8.
Right to return. If for any reason you are not satisfied with your Policy,
you may return it to us and we will return you the greater of (i) all premiums
paid or (ii) your accumulation value plus any taxes or charges that have been
deducted. To exercise your right to return your Policy, you must mail it
directly to the Administrative Center address shown on the first page of this
prospectus or return it to the USL representative through whom you purchased the
Policy within 10 days after you receive it. 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 option and allocated to your chosen 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 (Policy Form No. 97600N). 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 November 10, 1999.
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GUIDE TO THIS PROSPECTUS
This prospectus contains information that you should know before you
purchase a Platinum Investor(SM) variable life 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:
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<CAPTION>
Pages to See
Basic Questions You May Have in this Prospectus
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. What are the Policies?...................................................... 1 - 2
. How can I invest money in a Policy?......................................... 5 - 6
. How will the value of my investment in a Policy change over time?........... 6 - 7
. What is the basic amount of insurance ("death benefit") that USL pays
when the insured person dies?............................................... 7 - 8
. What charges will USL deduct from my investment in a Policy?................ 8 - 10
. What charges and expenses will the Mutual Funds deduct from
amounts I invest through my Policy?......................................... 10 - 12
. Must I invest any minimum amount in a Policy?............................... 12 - 13
. How can I change my Policy's investment options?............................ 13
. How can I change my Policy's insurance coverage?............................ 13 - 14
. What additional rider benefits might I select?.............................. 14 - 15
. How can I access my investment in a Policy?................................. 15 - 17
. Can I choose the form in which USL pays out the proceeds from my
Policy?..................................................................... 17 - 18
. To what extent can USL vary the terms and conditions of the Policies
in particular cases?........................................................ 18
. How will my Policy be treated for income tax purposes?...................... 18
. How do I communicate with USL?.............................................. 19 - 20
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3
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Illustrations of a hypothetical policy. Starting on page 20, 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 USL representative can also provide
you with a similar sample illustration that is more tailored to your own
circumstances and wishes.
Additional information. You may find the answers to any other questions
you have under "Additional Information" beginning on page 23, or in the forms of
our Policy and riders. A table of contents for the "Additional Information"
portion of this prospectus also appears on page 23. You can obtain copies of
our Policy and rider forms from (and direct any other questions to) your USL
representative or our Administrative Center (shown on the first page of this
prospectus).
Financial statements. We have included certain financial statements of USL
in this prospectus. 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 end of this prospectus (page 50, 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.
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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 first premium varies depending
on the specifics of your Policy and the insured person. (Policies issued with
automatic premium payment plans may have different minimums.) 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. These tax
law requirements are summarized further under "Tax Effects" beginning on page
24. 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.
Ways to pay premiums. You can pay premiums by check or money order drawn on a
U.S. bank in U.S. dollars and made payable to "The United States Life Insurance
Company in the City of New York," or "USL." Premiums after the first premium
should be sent directly to the appropriate address shown on your billing
statement. If you do not receive a billing statement, send your premium
directly to the address for premium payments shown on the first page of this
prospectus. 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 USL representative or
from our Administrative Center shown on the first page of this prospectus.
We have a premium financing program available for certain qualified
applicants. If you intend to make an initial premium payment of at least
$50,000 and you have a net worth of at least $3,000,000, you may qualify under
this program. For more information, you may contact your registered
representative or our Administrative Center at 1-800-677-3311.
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.
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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 (but not to our declared fixed interest
account option). 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 on any day of the month except the 29th, 30th or
31st. (The term "valuation period" is described on page 33.) 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.
Automatic rebalancing. This feature automatically rebalances the proportion
of your accumulation value in each investment option under your Policy (other
than our declared fixed interest account option) 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.
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 beginning on page 8, under "Deductions from each
premium payment." We invest the rest in one or more of the investment options
you have selected from the list on the front cover of this prospectus. We call
the amount that is at any time invested under your Policy your "accumulation
value."
Your investment options. We invest the accumulation value that you have
allocated to any investment option (except our declared fixed interest account
option) in shares of a Mutual Fund that follows investment practices, policies
and objectives that are appropriate to that option. 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 be reduced by certain charges that we deduct.
We describe these charges beginning on page 8, under "What charges will USL
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 USL representative or from our Administrative Center.
6
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We invest any accumulation value you have allocated to our declared fixed
interest account option as part of our general assets. We credit a fixed rate
of interest on that accumulation value, which we declare from time to time. We
guarantee that this will be at an effective annual rate of at least 4%. Although
this interest increases the amount of any accumulation value that you have in
our declared fixed interest account option, such accumulation value will also be
reduced by any charges that are allocated to this option under the procedures
described under "Allocation of charges" on page 10. The "daily charge"
described on page 8 and the charges and expenses of the Mutual Funds discussed
on pages 10 - 12 below do not apply to our declared fixed interest account
option.
Policies are "non-participating." You will not be entitled to any dividends
from USL.
What is the basic amount of insurance ("death benefit") that USL pays when the
insured person dies?
Your specified amount of insurance. In your application to buy a Platinum
Investor 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 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.
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:
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TABLE OF ALTERNATIVE BASIC DEATH BENEFITS AS A PERCENTAGE MULTIPLE OF POLICY
ACCUMULATION VALUE
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INSURED
PERSON'S 40 or
AGE*: Under 45 50 55 60 65 70 75 to 90 95+
%: 250% 215% 185% 150% 130% 120% 115% 105% 100%
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__________________________________
* Nearest birthday at the beginning of the Policy year in which the insured
person dies. The percentages are interpolated for ages that are not shown here.
What charges will USL deduct from my investment in a Policy?
Deductions from each premium payment. We deduct from each premium a charge
for the tax that is then applicable to us in your state or other jurisdiction.
Taxes currently range from .75% to 3.5%. You are not permitted to deduct the
amount of these taxes on your income tax return. We also currently deduct an
additional 2.5% from each after-tax premium payment. We use this 2.5% deduction
primarily to pay our distribution expenses and to a lesser extent our
administrative expenses, other taxes, licenses and fees related to the Policy.
We have the right at any time to increase this additional charge to not more
than 5% on all future premium payments.
Daily charge. We make a daily deduction at an annual effective rate of .75%
of your accumulation value that is then being invested in any of the investment
options (other than our declared fixed interest option). After a Policy has
been in effect for 10 years, we will reduce the rate of the charge to a maximum
of .50%, and after 20 years, we will further reduce the charge to a maximum of
.25%. The daily deduction charges, including the current charge of .75%, are
the maximums we may charge; we may charge less, but we can never charge more.
Flat monthly charge. We will deduct $6 per month from your accumulation
value. Also, we have the right to raise this charge at any time to not more
than $12 per month.
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 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.
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. Our
current rates are lower for insured persons in most age and risk classes,
although we have the right at any time to raise these rates to not more than the
guaranteed maximum.
8
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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.
Similarly, our current cost of insurance rates are generally lower for non-
smokers than smokers, and lower for persons that have other highly favorable
health characteristics, as compared to those that do not. On the other hand,
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.
Finally, our current cost of insurance rates are lower for Policies having a
specified amount of at least $1,000,000 on the day the charge is deducted. This
means that if your specified amount for any reason decreases from $1,000,000 or
more to less than $1,000,000, your subsequent cost of insurance rates will be
higher under your Policy than they otherwise would be. The reverse is also
true. 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.
Under New York law, a portion of our cost of insurance rates is used to
recover acquisition costs associated with issuing your Policy. Such charges are
higher in the early policy years.
Under New York law, any changes in the cost of insurance rates, interest
rates, mortality and expense charges, percentage of premium charges or the
monthly administration fee will be based on our expectations as to investment
earnings, mortality, persistency and expenses (including, reinsurance costs and
applicable tax charges.) Such changes in policy cost factors will be determined
in accordance with procedures and standards on file with the New York Insurance
Department and will be determined at least every five years.
Monthly charges for additional benefit riders. We will deduct charges monthly
from your accumulation value, if you select certain additional benefit riders.
These are described beginning on page 14, under "What additional rider benefits
might I select?"
Surrender charge. The Policies have a surrender charge that applies for the
first 10 Policy years (and the first 10 years after any requested increase in
the Policy's specified amount). The amount of the surrender charge depends on
the age and other insurance characteristics of the insured person. The maximum
amount of the surrender charge will be shown on pages 23 and 24 of the Policy.
It may initially be as high as $40 per $1,000 of specified amount or as low as
$1.80 per $1,000 of specified amount (or any increase in the specified amount).
Any amount of surrender charge decreases automatically by a constant amount each
year beginning in the fourth year of its 10 year period referred to above until,
in the eleventh year, it is zero.
We will deduct the entire amount of any then applicable surrender charge from
the accumulation value at the time of a full surrender of a Policy. Upon a
requested decrease in such a Policy's specified amount of coverage, we will
deduct any remaining amount of the surrender charge that was associated with the
specified amount that is canceled. This includes any specified amount decrease
that, as described under "Partial surrender" beginning on page 15,
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results from any requested partial surrender. For this purpose, we deem the most
recent increases of specified amount to have been canceled first.
Transaction Fee. We will charge you the lesser of 5% of the surrender amount
or a $25 fee for each partial surrender you make.
Charge for taxes. We can make a charge in the future for 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.
Transfer Charges. We also reserve the right to charge a fee of $25.00 for each
transfer in excess of 12 during a policy year. Any such suspension or charge
will be administered in a nondiscriminatory manner. The $25.00 charge will not
apply to transfers made under the Dollar Cost Averaging or Automatic Rebalancing
provisions.
Allocation of charges. You may choose the investment options from which we
deduct all monthly charges. If you do not choose or have enough accumulation
value in the investment options you select, we will deduct these charges in
proportion to the amount of accumulation value you then have in each investment
option. Any surrender charge upon a decrease in specified amount that is
requested under a Platinum Investor Policy will be allocated in the same manner
as if it were a monthly deduction.
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 the return you will earn on any accumulation value
that you have invested in that Fund. These charges and expenses are as
follows:
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THE MUTUAL FUNDS' ANNUAL EXPENSES/1/ (as a percentage of average net assets)
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Fund Other Fund Total Fund
Management Operating Operating
Fees (After Expenses (After Expenses (After
Expense Expense Expense
Name of Fund Reimbursement) 12b-1 Fees Reimbursement) Reimbursement)
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The following funds of AIM Variable
Insurance Funds, Inc./(1)/
AIM V.I. International Equity Fund 0.75% 0.16% 0.91%
AIM V.I. Value Fund 0.61% 0.05% 0.66%
The following funds of American General
Series Portfolio Company:/(1)/
International Equities Fund 0.35% 0.05% 0.40%
MidCap Index Fund 0.32% 0.04% 0.36%
Money Market Fund 0.50% 0.04% 0.54%
Stock Index Fund 0.27% 0.04% 0.31%
The following funds of Dreyfus Variable
Investment Fund:/(1)/
Quality Bond Portfolio 0.65% 0.08% 0.73%
Small Cap Portfolio 0.75% 0.02% 0.77%
The following series of MFS Variable
Insurance Trust:/(1)/
MFS Emerging Growth Series 0.75% 0.10% 0.85%
The following portfolios of Morgan
Stanley Dean Witter Universal
Funds, Inc./(1)/
Equity Growth Portfolio /(2)/ 0.09% 0.76% 0.85%
High Yield Portfolio /(2)/ 0.15% 0.65% 0.80%
The following portfolios of Putnam Variable
Trust: Class "IB" Funds
Putnam VT Diversified Income 0.50% 0.11% 0.08% 0.69%
Fund/(3)/ 0.35% 0.11% 0.03% 0.49%
Putnam VT Growth and Income Fund/(3)/
Putnam VT International Growth 0.59% 0.11% 0.14% 0.84%
and Income Fund/(3)/
(footnotes on next page)
</TABLE>
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<TABLE>
<CAPTION>
Fund Other Fund Total Fund
Management Operating Operating
Fees (After Expenses (After Expenses (After
Expense Expense Expense
Name of Fund Reimbursement) 12b-1 Fees Reimbursement) Reimbursement)
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The following portfolios of SAFECO
Resources Series Trust:/(1)/
Equity Portfolio 0.74% 0.04% 0.78%
Growth Portfolio 0.74% 0.06% 0.80%
The following portfolio of Van Kampen
Life Investment Trust:/(1)/
Strategic Stock Portfolio/(2)/ 0.00% 0.65% 0.65%
</TABLE>
_____________________________
/1/ The Mutual Funds' advisers or administrators have entered into service
agreements with USL. Under these arrangements, the advisers or
administrators pay fees to USL for certain administrative services. The
fees do not have a direct relationship to the Mutual Funds' Annual
Expenses. (See "Service Agreements.")
/2/Management fees and other expenses as shown for fiscal year 1998 would
have been the percentages shown below without certain voluntary expense
reimbursements from the investment adviser. Current and future fees and
expenses may vary from the fiscal year 1998 fees and expenses.
<TABLE>
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Management Other Total
Fees Expenses Annual Expenses
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Morgan Stanley Dean Witter
Equity Growth Portfolio 0.55% 0.76% 1.31%
High Yield Portfolio 0.50% 0.65% 1.15%
Van Kampen
Strategic Stock Portfolio 0.50% 0.75% 1.25%
</TABLE>
/3/The prospectus for Putnam Variable Trust under "Distribution Plan"
discusses this 12b-1 fee.
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 this amount or any other
specific amounts of premiums is not mandatory. You need to invest enough to
ensure that your Policy's accumulation value, less any indebtedness and
after your monthly deductions, stays above zero. The less you invest, the
more likely it is that your Policy's accumulation value, less any
indebtedness and after your monthly deductions, could fall to zero, as a
result of the deductions we periodically make from your accumulation value.
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Policy lapse and reinstatement. If your Policy's accumulation value does
fall to zero, we will notify you and give you a grace period 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 and all riders 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.
How can I change my Policy's investment options?
Future premium payments. You may at any time change the investment options
in which your future premiums 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. 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," beginning on page 38. Also, you may not in any one Policy year
make transfers out of our declared fixed interest account option that aggregate
more than 25% of the accumulation value you had invested in that option at the
beginning of that Policy year.
You may make transfers at any time, except that transfers out of our
declared fixed interest account option must be made within 60 days after a
Policy anniversary. We will not honor any request received outside that period.
Market timing. The Policies are not designed for professional market
timing organizations or other entities using programmed and frequent transfers.
We may not unilaterally terminate or discontinue transfer privileges. However,
we reserve the right to suspend such privileges for a reasonable period.
Maximum number of investment options. We can at any time limit the number
of investment options you may use. Our current rule is that you cannot use more
than 18 different options over the life of your Policy.
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. For example, 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. Also, a new amount of surrender charge
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applies to the specified amount increase. These amounts are the same as they
would be if we were instead issuing the same amount of additional coverage as a
new Policy.
Decrease in coverage. After the first Policy year, you may request a
reduction in the specified amount of coverage, but not below certain minimums.
The minimum is $100,000 (or, if greater, the minimum amount that the tax law
requires. At the time of a decrease under such a Policy, we will deduct from
the Policy's accumulation value an amount of any remaining surrender charge. If
there is not sufficient accumulation value to pay the surrender charge at the
time you request a reduction, the decrease will not be allowed. We compute the
amount we deduct in the manner described on page 32, under "Decreases in the
specified amount."
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 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.
What additional rider benefits might I select?
You can request that your Policy include the additional rider benefits
described below. For most of the riders that you choose, a charge, which will
be shown on page 3 of your Policy, will be deducted from your accumulation value
on each monthly deduction date. Eligibility for and changes in these benefits
are subject to our rules and procedures as in effect from time to time. More
details are included in the form of each rider, which we suggest that you review
if you choose any of these benefits.
. Accidental Death Benefit Rider, which pays an additional death benefit
------------------------------
if the insured person dies from certain accidental causes.
. Children's Insurance Benefit Rider, which provides term life insurance
----------------------------------
coverage on the eligible children of the person insured under the
Policy. This rider is convertible into any other insurance (except for
term coverage) available for conversions, under our published rules at
the time of conversion.
. Waiver of Monthly Deduction Rider, under which we will waive all
---------------------------------
monthly charges under your Policy and riders that we otherwise would
deduct from your accumulation value, so long as the insured person is
totally disabled (as defined in the rider). While we are paying
benefits under this rider we will not permit you to request any
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<PAGE>
increase in the specified amount of your Policy's coverage. However,
loan interest will not be paid for you under this rider, and the
Policy could, under certain circumstances, lapse for nonpayment of
loan interest.
Tax consequences of additional rider benefits. Adding or deleting riders,
or increasing or decreasing coverage under existing riders can have tax
consequences. See "Tax Effects" starting on page 24. You should consult a
qualified tax adviser.
How can I access my investment in a Policy?
Full surrender. You may at any time surrender your Policy in full. If you
do, we will pay you the accumulation value, less any Policy loans, less any
surrender charge that then applies. We call this your "cash surrender value."
Because of the surrender charge, it is unlikely that your Policy will have any
cash surrender value during at least the first year.
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.
. If we reduce your Policy's specified amount because you have requested
a partial surrender while the Option 1 death benefit is in effect, we
will deduct the same amount of surrender charge, if any, that would
have applied if you had requested such specified amount decrease
directly. See "Decreases in the specified amount," on page 32.
. We will not permit a partial surrender if it would cause your Policy
to fail to qualify as life insurance under the tax laws or if it would
cause your specified amount to fall below the minimum allowed.
. 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.
Option to Exchange Policy During First 18 Months. Under New York law, at
any time during the first 18 months from the Date of Issue of your Policy, and
while the Policy is in force on a premium paying basis, it may be exchanged for
any general account fixed benefit plan of life insurance offered by us, subject
to the following conditions:
. the new policy will be issued with the same Date of Issue, insurance
age, and risk classification as your Policy;
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<PAGE>
. the amount of insurance will be the same as the initial amount of
insurance under your Policy;
. the new policy may include any additional benefit rider included in
this policy if such rider is available for issue with the new policy;
. the exchange will be subject to an equitable premium or cash value
adjustment that takes appropriate account of the premiums and cash
values under the original and new policies; and
. evidence of insurability will not be required for the exchange.
Right to Convert in the Event of a Material Change in Investment Policy.
Under New York law, if there is a material change in the investment policy of
the Separate Account USL VL-R which has been approved by the Superintendent of
the New York Department of Insurance, and you object to such change, you shall
have the option to convert, without evidence of insurability, to a general
account fixed benefit life insurance policy within 60 days after the later of:
(1) the effective date of such change in investment policy; or (2) the receipt
of the notice of the options available.
Policy loans. You may at any time borrow from us an amount equal to your
Policy's cash surrender value (less our estimate of three months' charges and
less the interest that will be payable on your loan through your next Policy
anniversary.) The minimum amount of each loan is $500, or, if less, the entire
remaining borrowable amount under your Policy.
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%, payable in arrears. 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 $100) 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. Any loan repayments go first to repay all loans that were taken
from our declared fixed interest account option. 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.
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<PAGE>
Preferred loan interest rate. We will credit a higher interest rate 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%.
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.
Can I choose the form in which USL pays out the proceeds from my Policy?
Choosing a payment option. You may choose to receive the full proceeds
from the Policy (and any riders) 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%.
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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 USL vary the terms and conditions of the Policies in
particular cases?
Listed below are some variations we may make in the terms of a Policy. Any
variations will be made only in accordance with uniform rules that we establish.
Policies purchased through "internal rollovers." We maintain published
rules that describe the procedures necessary to replace the other life insurance
we issue with one of the Policies. Not all types of other insurance we issue
are eligible to be replaced with one of the Policies. 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 a Platinum Investor 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.
Variations in expenses or risks. USL may vary the charges and other terms
of the Policies where special circumstances result in sales or administrative
expenses, mortality risks, or other risks that are different from those normally
associated with the Policies. The New York Insurance Department may have to
give its prior approval to some of these changes.
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.
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<PAGE>
How do I communicate with USL?
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.
General. You should mail or express checks and money orders for premium
payments and loan repayments directly to the appropriate address shown on your
billing statement. If you do not receive a billing statement, send your premium
directly to the address for premium payments shown on the first page of this
prospectus.
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;
. change of allocation percentages for policy deductions;
. loan repayments or charges;
. change of death benefit option or manner of death benefit payment;
. increase or decrease in specified amount;
. addition or cancellation of, or other action with respect to, any
rider benefits;
. election of a payment option for Policy proceeds; and
. tax withholding elections.
You should mail or express these requests to our Administrative Center 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 Administrative Center.
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 also obtain these forms from our
19
<PAGE>
Administrative Center or from your USL representative. Each communication must
include your name, Policy number and, if you are not the insured person, that
person's name. We cannot process any requested action that does not include all
required information.
ILLUSTRATIONS OF HYPOTHETICAL POLICY BENEFITS
To help explain how our Policies work, we have prepared the following
tables:
Page to see in this
Table Prospectus
----------
Death Benefit Option 1 - Current Charges 22
Death Benefit Option 1 - Guaranteed Maximum Charges 22
The tables show how death benefits, accumulation values, and cash surrender
values ("Policy benefits") under sample Platinum Investor Policies 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 and who is a better-than-
average mortality risk in other respects as well. Planned premium payments of
$1,368 for an initial $100,000 of specified amount of coverage are assumed to be
paid at the beginning of each Policy year for the Platinum Investor Policy. The
samples assume no Policy loan has been taken. The differences between the
accumulation values and the cash surrender values for the first 10 years in the
tables for the Platinum Investor version are that version's surrender charges.
Although the tables below do not include examples of a Policy with an
Option 2 death benefit, such a Policy would have higher death benefits, lower
cash surrender values, and a greater risk of lapse.
Separate tables are included to show both current and guaranteed maximum
charges for the Platinum Investor Policy. The charges assumed in the following
tables include:
. a daily charge at an annual effective rate of .75% for the first 10
Policy years (for both current and guaranteed maximum charges);
. a daily charge at an annual effective rate of .50% after 10 Policy
years (for both current and guaranteed maximum charges);
. a daily charge at an annual effective rate of .25% after 20 Policy
years (for both current and guaranteed maximum charges);
. a charge for state premium tax ranging from .75% to 3.5% of each
premium payment, depending on the state, assumed to be 2.5% (for both
current and guaranteed maximum charges);
. a charge of 2.5% and 5.0% from each after-tax premium payment for
current charges and guaranteed maximum charges, respectively;
20
<PAGE>
. the current monthly insurance charges and guaranteed maximum monthly
insurance charges for current charges and guaranteed maximum charges,
respectively; and
. a flat monthly charge of $6 and $12 for current charges and
guaranteed maximum charges, respectively.
The charges assumed by both the current and guaranteed maximum charge
tables also include Mutual Fund expenses of 0.67% 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 10 - 12. 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 .76% of aggregate Mutual Fund assets. The total assumed tax charges for
all of the tables are 2.5% of premiums.
Preliminary Information Statement and Policy Summary. We will provide you
with a Buyer's Guide and a preliminary information statement describing some of
the values and benefits of your Policy at the time of policy application. We
will also provide you with a policy summary at the time that your Policy is
delivered demonstrating the values and benefits contained in your Policy as
issued.
21
<PAGE>
<TABLE>
<CAPTION>
Platinum Investor
-----------------
Planned Premium $1,368.00 Initial Specified Amount $100,000
Death Benefit Option 1
Male Age 45
Preferred risk Non-Tobacco User
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%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 100,000 100,000 100,000 893 958 1,023 0 0 0
2 100,000 100,000 100,000 1,752 1,938 2,132 384 570 764
3 100,000 100,000 100,000 2,591 2,954 3,349 1,223 1,586 1,981
4 100,000 100,000 100,000 3,386 3,985 4,663 2,189 2,788 3,466
5 100,000 100,000 100,000 4,162 5,056 6,109 3,136 4,030 5,083
6 100,000 100,000 100,000 4,919 6,168 7,701 4,064 5,313 6,846
7 100,000 100,000 100,000 5,668 7,336 9,467 4,984 6,652 8,783
8 100,000 100,000 100,000 6,388 8,539 11,405 5,875 8,026 10,892
9 100,000 100,000 100,000 7,089 9,791 13,545 6,747 9,449 13,203
10 100,000 100,000 100,000 7,773 11,095 15,909 7,602 10,924 15,738
15 100,000 100,000 100,000 11,092 18,760 32,629 11,092 18,760 32,629
20 100,000 100,000 100,000 13,666 28,059 60,426 13,666 28,059 60,426
<CAPTION>
Platinum Investor
-----------------
Planned Premium $1,368.00 Initial Specified Amount $100,000
Death Benefit Option 1
Male Age 45
Preferred risk Non-Tobacco User
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%
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 100,000 100,000 100,000 658 715 772 0 0 0
2 100,000 100,000 100,000 1,275 1,429 1,591 0 61 223
3 100,000 100,000 100,000 1,851 2,143 2,463 483 775 1,095
4 100,000 100,000 100,000 2,375 2,846 3,383 1,178 1,649 2,186
5 100,000 100,000 100,000 2,849 3,538 4,357 1,823 2,512 3,331
6 100,000 100,000 100,000 3,273 4,219 5,392 2,418 3,364 4,537
7 100,000 100,000 100,000 3,637 4,877 6,484 2,953 4,193 5,800
8 100,000 100,000 100,000 3,929 5,500 7,629 3,416 4,987 7,116
9 100,000 100,000 100,000 4,152 6,087 8,834 3,810 5,745 8,492
10 100,000 100,000 100,000 4,293 6,626 10,098 4,122 6,455 9,927
15 100,000 100,000 100,000 3,612 8,383 17,616 3,612 8,383 17,616
20 0 100,000 100,000 0 7,069 27,397 0 7,069 27,397
</TABLE>
The values in both tables will change if premiums are paid in different amounts
or frequencies.
The investment results are examples only and are not a representation of past
or future investment results. Actual investment results may be more or less
than those shown in both tables.
22
<PAGE>
ADDITIONAL INFORMATION
A general overview of the Policies appears at pages 1 through 22. The
additional information that follows gives more details, but generally does not
repeat what is set forth above.
<TABLE>
<CAPTION>
page to
see in this
Contents of Additional Information Prospectus
- ---------------------------------- ----------
<S> <C>
USL.................................................... 23
Separate Account USL VL-R.............................. 24
Tax Effects............................................ 24
Voting Privileges...................................... 30
Your Beneficiary....................................... 30
Assigning Your Policy.................................. 31
More About Policy Charges.............................. 31
Effective Date of Policy and Related Transactions...... 33
More About Our Declared Fixed Interest Account Option.. 35
Distribution of the Policies........................... 35
Payment of Policy Proceeds............................. 37
Adjustments to Death Benefit........................... 38
Additional Rights That We Have......................... 38
Performance Information................................ 39
Our Reports to Policy Owners........................... 40
USL's Management....................................... 40
Principal Underwriter's Management..................... 44
Legal Matters.......................................... 45
Independent Auditors................................... 45
Actuarial Expert....................................... 45
Service Agreements..................................... 46
Certain Potential Conflicts............................ 46
Year 2000 Considerations............................... 46
</TABLE>
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 50, 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.
USL
USL is a stock life insurance company, which was organized under the laws of
the State of New York on February 25, 1850. USL is an indirect, wholly-owned
subsidiary of American General Corporation, a diversified financial services
holding company engaged primarily in the insurance business. The commitments
under the Policies are USL's, and American General Corporation has no legal
obligation to back those commitments.
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USL 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. USL's membership in IMSA applies only to USL and
not its products.
Separate Account USL VL-R
We hold the Mutual Fund shares in which any of your accumulation value is
invested in our Separate Account USL VL-R. Separate Account USL 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 August 8, 1997 under New York law.
For record keeping and financial reporting purposes, Separate Account USL
VL-R is divided into 17 separate "divisions," which correspond to the 17
variable investment options available since the inception of the Policy. The 17
divisions are currently available under certain variable life policies offered
by an affiliate of USL. 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 the Separate Account are our property. The assets in the
Separate Account would be available only to satisfy the claims of owners of the
Policies, to the extent they have allocated their accumulation value to the
Separate Account. Our other creditors could reach only those Separate Account
assets (if any) that are in excess of the amount of our reserves and other
contract liabilities under the Policies with respect to the Separate Account.
USL also issues variable annuities through its Separate Account USL VA-R,
which is also a registered investment company.
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. A Platinum Investor 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 Policies 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
24
<PAGE>
. increases in your Policy's accumulation value as a result of interest
or investment experience will not be subject to federal income tax
unless and until there is a distribution from your Policy, such as a
surrender or a partial surrender.
The federal income tax consequences of a distribution from your Policy can be
affected by whether your Policy is determined to be a "modified endowment
contract" as defined under Section 7702A of the Code (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 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 or the selection of additional rider benefits. 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 specified amount you request
or, in some cases, a partial surrender or termination of additional benefits
under a rider.) 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.
25
<PAGE>
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 tax "basis" in your Policy. (Your tax 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 tax basis in
your Policy.
On the maturity date or upon full surrender, any excess in the amount of
proceeds we pay (including amounts we use to discharge any Policy loan) over
your tax 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 "income
out first" before recovery of your tax 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 tax basis in the Policy. For
modified endowment contracts, your tax 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 U.S. Treasury Department has authority to prescribe additional
rules to prevent avoidance of "income out 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 income 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 tax basis in the Policy, will be subject to
federal income tax and, unless an exception applies, the 10% penalty tax.
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Distributions that occur during a Policy year in which your Policy becomes
a modified endowment contract, and during any subsequent Policy years, will be
taxed as described in the two preceding paragraphs. In addition, distributions
from a Policy within two years before it becomes a modified endowment contract
also will be subject to tax in this manner. This means that a distribution made
from a Policy that is not a modified endowment contract could later become
taxable as a distribution from a modified endowment contract. The Treasury
Department has been authorized to prescribe rules which would treat similarly
other distributions made in anticipation of a policy becoming a modified
endowment contract.
Policy lapses and reinstatements. A Policy which has lapsed may have the
tax consequences described above, even though you may be able to reinstate that
Policy. For tax purposes, some reinstatements may be treated as the purchase of
a new insurance contract.
Terminal illness rider. Amounts received under an insurance policy on the
life of an individual who is terminally ill, as defined by the tax law, are
generally excludable from the payee's gross income. We believe that the
benefits provided under our terminal illness rider meet the law's definition of
terminally ill and can qualify for this income tax exclusion. This exclusion
does not apply, however, to amounts paid to someone other than the insured
person, if the payee has an insurable interest in the insured person's life
because the insured is a director, officer or employee of the payee or by reason
of the insured person being financially interested in any trade or business
carried on by the payee.
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 USL 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 a separate
account 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 the separate account, 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 USL, and not the owner of
a Policy, would be considered the owner of the assets of our separate
account.
Estate and generation skipping taxes. If the insured person is the
Policy's owner, the death benefit under a Platinum Investor 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
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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 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 Platinum Investor Policies are
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.
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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 USL VL-R in our
federal income tax return, but we currently pay no income tax on the separate
account'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 division for taxes. We reserve
the right to make a charge in the future for taxes incurred; for example, a
charge to the separate account for income taxes we incur that are allocable to
the Policies.
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 our
separate account or allocable to the Policies.
Certain Mutual Funds in which your accumulation value is invested may elect
to pass through to USL taxes withheld by foreign taxing jurisdictions on foreign
source income. Such an election will result in additional taxable income and
income tax to USL. 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 USL.
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.
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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 USL
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 USL 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.
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. USL 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.
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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, if we agree. 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 complete notice of the assignment in
good order. We are not responsible for the validity of the assignment. An
absolute assignment is a change of ownership. All collateral assignees of
record must consent to any full surrender, partial surrender, loan or payment
from a Policy under a terminal illness rider. 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 Policies are designed to
cover, in total, our direct and indirect costs of selling, administering and
providing benefits under the Policies. They are also designed, in total, to
compensate us for the risks we assume and services that we provide under the
Policies. 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 Policies require us to provide will exceed what we
currently project).
If the charges that we collect from the Policies exceed our total costs in
connection with the Policies, we will earn a profit. Otherwise we will incur a
loss.
The current charges that we deduct from premiums have been designed to
compensate us for taxes we have to pay to the state where you live when we
receive a premium from you, as well as similar federal taxes we incur as a
result of premium payments, and certain distribution expenses. The current flat
monthly charge that we deduct has been designed primarily to compensate us for
the continuing administrative functions we perform in connection with the
Policies. The current
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monthly insurance charge has been designed primarily to provide funds out of
which we can make payments of death benefits under the Policies as insured
persons die.
Any excess from the charges discussed in the preceding paragraph, as well
as revenues from the daily charge, are 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 sales commissions and other
marketing 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 risks we assume under the Policies; or
. otherwise to be retained by us as profit.
The surrender charge has also been designed primarily for these purposes.
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 Policies. 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 (including Platinum Investor
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 8.
Decreases in the specified amount. An amount of any remaining surrender
charge will be deducted upon a decrease in specified amount. If:
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. there have been no previous specified amount increases, the amount we
deduct will bear the same proportion to the total surrender charge
then applicable as the amount of the specified amount decrease bears
to the Policy's total specified amount. The remaining amount of
surrender charge that we could impose at a future time, however, will
also be reduced proportionally.
. there have been increases in specified amount, we decrease first
those portions of specified amount that were most recently
established. We also deduct any remaining amount of the surrender
charge that was established with that portion of specified amount
(which we pro-rate if less than that entire portion of specified
amount is being canceled).
Miscellaneous. Each of the distributors or advisers of the Mutual Funds
listed on page 1 of this prospectus reimburses us, on a quarterly basis, for
certain administrative, Policy, and Policy owner support expenses, up to an
annual rate of 0.25% of the average daily net asset value of shares of the
Mutual Funds purchased by the divisions at the instruction of owners. 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 by the Mutual Funds, the
divisions or the owners.
Effective Date of Policy and Related Transactions
Valuation dates, times, and periods. We generally compute values under
Policies on each day that the New York Stock Exchange is open for business
except, with respect to any investment option, days on which the related Mutual
Fund does not value its shares. We call each such day a "valuation date."
We compute policy values as of 4:00 p.m., Eastern 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. 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 minimum first 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 $300,000 provided the insured person meets
certain medical and risk requirements. The terms and conditions of this coverage
are described in our
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"Limited Temporary Life Insurance Agreement." You can obtain a copy from our
Administrative Center by writing to the appropriate address shown on the first
page of this prospectus or from your USL 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 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.
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 or decreases you request in the specified amount of
insurance, and reinstatements of Policies that have 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;
. 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 USL 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
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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.
More About Our Declared Fixed Interest Account Option
Our general account. Our general account assets are all of our assets that
we do not hold in legally segregated separate accounts. Our general account
supports our obligations to you under your Policy's declared fixed interest
account option. Because of applicable exemptions, no interest in this option
has been registered under the Securities Act of 1933, as amended. Neither our
general account nor our declared fixed interest account is an investment company
under the Investment Company Act of 1940. We have been advised that the staff
of the SEC has not reviewed the disclosures that are included in this prospectus
for your information about our general account or our declared fixed interest
account option. Those disclosures, however, may be subject to certain generally
applicable provisions of the federal securities laws relating to the accuracy
and completeness of statements made in prospectuses.
How we declare interest. We can at any time change the rate of interest we
are paying on any accumulation value allocated to our declared fixed interest
account option, but it will always be at an effective annual rate of at least
4%.
Under these procedures, it is possible that, at any time, different
interest rates will apply to different portions of your accumulation value,
depending on when each portion was allocated to our declared fixed interest
account option. Any charges, partial surrenders, or loans that we take from any
accumulation value that you have in our declared fixed interest account option
will be taken from each portion in reverse chronological order based on the date
that accumulation value was allocated to this option.
Distribution of the Policies
American General Securities Incorporated ("AGSI") is the principal
underwriter of the Policies. AGSI is a wholly-owned subsidiary of American
General Life Insurance Company. 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
USL's Separate Account USL VA-R and for American General Life Insurance
Company's Separate Accounts A, D and VL-R, and Separate Account E of American
General Life Insurance Company of New York, which is a wholly-owned subsidiary
of American General Life Insurance Company. 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
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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 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 sales of the
Policies may vary with the sales agreement, but is generally not expected to
exceed:
. 90% of the premiums paid in the first Policy year up to a "target"
amount;
. 4% of the premiums not in excess of the target amount paid in each of
Policy years 2 through 10;
. 2.5% of all premiums in excess of the target amount paid in any of
Policy years 1 through 10; and
. .25% annually of the Policy's accumulation value (reduced by any
outstanding loans) in the investment options after Policy year 1.
The target amount is an amount of level annual premium that would be necessary
to support the benefits under your Policy, based on certain assumptions that we
believe are reasonable.
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 as long as additional premium is paid on the increase.
At our sole discretion, we may pay certain broker-dealers an additional
expense allowance payment of up to 5% of first year target premium. In the
event that the broker-dealer personally produces any particular policy, and we
determine that such broker-dealer qualifies in the aggregate for some additional
expense allowance payment, such broker-dealer would only be eligible to receive
an additional expense allowance payment of up to 1% (instead of the 5% stated
above) of first year target premium as to that policy.
Whether or not a particular broker-dealer may be eligible to receive this
discretionary payment will, at a minimum, depend upon the ratio of the broker-
dealers total production offset by our expenses relative to such production. In
the event that we determine, in our sole discretion, that a particular broker-
dealer is eligible for an additional expense allowance payment, such
broker-
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dealer will ensure that none of the additional expense allowance payment is
passed on to a registered representative.
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 8 of the
prospectus. Each broker-dealer firm 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 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 of declared fixed interest account option proceeds. We have the
right, however, to defer payment or transfers of amounts out of our declared
fixed interest account option for up to six months. If we delay more than 30
days in paying you such amounts, we will pay interest of at least 3% a year from
the date we receive all items we require to make the payment.
Delay for check clearance. We reserve the right to defer payment of that
portion of your accumulation value that is attributable to a payment made by
check for a reasonable period of time (not to exceed 15 days) to allow the check
to clear the banking system.
Delay of separate account 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 USL 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 values for any of the foregoing reasons, all delayed
transactions will be processed at the next values that we do compute.
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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.
. 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.
. We cannot challenge an additional benefit rider that provides benefits
if the insured person becomes totally disabled, after two years from
the later of the Policy's date of issue or the date the additional
benefit rider becomes effective.
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 loan 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.
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.
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 on a pro-rata basis to any other
investment options you then are using, if the accumulation value in an
investment option is below $500 for any other reason;
. change the underlying Mutual Fund that any investment option uses or
make any new Mutual Fund available to you;
38
<PAGE>
. add or delete investment options, combine two or more investment
options, or withdraw assets relating to Platinum Investor from one
investment option and put them into another;
. make any changes required to comply with the requirements of any
investment option;
. operate the separate account, or one or more investment options, in
any other form the law allows, including a form that allows us to make
direct investments. Our separate account 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 the Separate Account USL 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 Fund in which it invests. The performance information shown may reflect
the deduction of one or more charges, such as the premium charge or surrender
charge, and we generally expect to exclude cost 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 USL's financial strength or claims-paying ability as
determined by firms that analyze and rate insurance companies and by nationally
recognized statistical rating organizations.
39
<PAGE>
Performance information for any division reflects the performance of a
hypothetical Policy and is 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.
USL's Management:
The directors, executive officers, and (to the extent responsible for
variable life operations) the other principal officers of USL are listed below.
Name Business Experience Within Past Five Years
- -------------------------------------------------------------------------------
Rodney O. Martin, Jr. Director and Chairman of the Board of USL since June
1997. President and CEO of American General Life
Insurance Company (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 (1990-
1995).
Donald W. Britton President of USL since September 1999. Director of USL
since June 1999. 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).
William M. Keeler President and Chief Executive Officer - Group Insurance
Operations of USL since June 1998. President and Chief
Executive Officer of American General Indemnity
Company, USLIFE Agency Services and American General
Assurance Company, Schaumburg, Illinois since July
1998. President and Chief Executive Officer of USLIFE
Indemnity Company (May 1995 - May 1998.)
David J. Dietz President and Chief Executive Officer - Individual
Insurance Operations of USL since September 1997.
Director of USL since November 1997. President of
Prudential Select Life, Newark New Jersey (August 1990
- September 1997).
40
<PAGE>
David A. Fravel Executive Vice President of USL since September 1998
and a Director of USL since November 1997. Director and
Senior Vice President of American General Life
Insurance Company since November 1996. Elected
Executive Vice President in April, 1998. Senior Vice
President Massachusetts Mutual, Springfield, Missouri
(March 1996-June 1996); Vice President, New Business,
Connecticut Mutual Life, Hartford, Connecticut
(December 1978-March 1996).
John V. LaGrasse Director of USL since September 1999. Executive Vice
President and Chief Technology Officer of USL since
June 1998. Director, Senior Vice President and Chief
Systems Officer of American General Life Insurance
Company since August 1996. Elected Executive Vice
President in July, 1998. Prior thereto, Director of
Citicorp Insurance Services, Inc., Dover, Delaware
(1986-1996).
Paul L. Mistretta Executive Vice President of USL since September 1999.
Executive Vice President of American General Life
Insurance Company since July 1999. Senior Vice
President of First Colony Life Insurance, Lynchburg,
Virginia (1992 - July 1999).
Brian D. Murphy Executive Vice President of USL since September 1999.
In April 1998 named as Senior Vice President-Insurance
Operations of American General Life Insurance Company.
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).
Gary D. Reddick Executive Vice President of USL since June 1998 and
Director of USL since March 1999. Executive Vice
President of American General Life Insurance Company
since April 1998 and Director since October 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 General Counsel of USL since December 1998. Secretary
of USL since June 1999 and Executive Vice President
since September 1999. 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).
41
<PAGE>
Wayne A. Barnard Senior Vice President of USL since September 1998.
Senior Vice President of American General Life
Insurance Company since November 1997 and Vice
President since February, 1991.
Robert M. Beuerlein Senior Vice President and Chief Actuary of USL since
September 1999. 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).
Don L. Bolen Senior Vice President - Dallas Service Center of USL
since June 1999. Vice President of USL from 1990.
Felix C. Curcuru Senior Vice President of USL since 1967.
Ross D. Friend Senior Vice President and Chief Compliance Officer of
USL since November 1998. In July 1998 named as Senior
Vice President and Chief Compliance Officer of American
General Life Insurance Company. 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).
William F. Guterding Senior Vice President and Chief Underwriting Officer of
USL since October of 1991.
Kevin Harty Senior Vice President and Chief Agency Officer of USL
since January 1995. Vice President of Sales for
Security Mutual Life Insurance Company, Binghamton, New
York. (January 1989 - December 1994).
Robert F. Herbert, Jr. Senior Vice President of USL since September 1998 and a
Director of USL since June 1997. Director, Senior Vice
President and Treasurer of American General Life
Insurance Company since May 1996, and Controller and
Actuary from June 1988 to May 1996.
William J. Leary Senior Vice President - Sales and Marketing of USL
since June 1999. Vice President of Aetna U.S.
Healthcare, Hartford, Connecticut (1995 -1999). Vice
President of Healthnetwork, Oakbrook, Illinois (1994 -
1995).
Simon J. Leech Senior Vice President, Houston Service Center of USL
since September 1998. In July 1997 named as Senior Vice
President-Houston Service
42
<PAGE>
Center for American General Life Insurance Company.
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.
Randy J. Marash Senior Vice President and Actuary of USL since July
1991.
Robert Stuchiner Senior Vice President - Marketing of USL since
September 1998. Chief Marketing Office of TowerMark
Brokerage Services, Inc., New York, New York (September
1990 - September 1998).
R. Stephen Watson Senior Vice President and Chief Administrative Officer
of USL since 1997 and a Director of USL since August
1997. Vice President and Chief Administrative Officer
of American General Life Insurance Company of New York,
Syracuse, New York (1995 - 1997). Director of Insurance
Administration, American General Finance, Evansville,
Indiana (1991 -1995).
William A. Bacas Director of USL since June 1997. Partner with Bacas &
Krogmann, Attorneys at Law, Glens Falls, NY since 1972.
James P. Corcoran Director of USL since September 1999. Partner with
Cadwalader, Wickersham & Taft, New York, New York
(1995 - 1998). Partner with Donovan, Leisure, Newton &
Irvine, New York, New York (1992- 1995).
John R. Corcoran Director of USL since June 1997. Currently retired.
Various positions, including Vice President of Sales,
for Mutual Life of New York, New York, New York (1956 -
1996).
Patricia O. Ewers Director of USL since June 1997. President of Pace
University, New York, New York since 1990.
Thomas H. Fox Director of USL since June 1997. Director of American
General Life Insurance Company since 1995 and Director
of Swiss Re America Holding Corporation, New York, New
York since 1992.
William J. O'Hara, Jr. Director of USL since June 1997. Chief Executive
Officer of A J Tech, Vista, California since 1997.
President of William J. O'Hara, New York, New York
(1992 - 1996).
George B. Trotta Director of USL since June 1997. Currently retired.
Senior Vice President of Metropolitan Life Insurance
Company, New York, New York (1982- 1995).
43
<PAGE>
The principal business address of each officer listed above is our Home
Office; except that the street number for Messrs. Fravel, LaGrasse, Martin,
Reddick, Britton and Zurek is 2929 Allen Parkway, the street number for Mr.
Friend is 2727 Allen Parkway, the street address for Messrs. Herbert, Barnard,
Mistretta, Murphy, Beuerlein and Leech is 2727-A Allen Parkway, the street
address for Messrs. Keeler, Curcuru, Leary and Marash is 3600 Rt. 66, Neptune,
New Jersey and the street address for Mr. Bolen is 6363 Forest Park Road,
Dallas, Texas 75235.
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
2727 Allen Parkway Officer
Houston, TX 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
Royce G. Imhoff, II Director
American General Life Companies
2727-A Allen Parkway
Houston, Texas 77019
Michael M. Nicholson Director
Franklin Life Insurance Company
#1 Franklin Square
Springfield, IL 62713-0001
John A. Kalbaugh Vice President -
American General Life Companies Chief Marketing Officer
2727 Allen Parkway
Houston, TX 77019
44
<PAGE>
Robert M. Roth Vice President -
American General Securities Incorporated Administration and Compliance,
2727 Allen Parkway Treasurer and Secretary
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
2727-A Allen Parkway Officer
Houston, TX 77019
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 USL VL-R.
Pauletta P. Cohn, Esquire, Associate General Counsel of American General Life
Companies, an affiliate of USL, has opined as to the validity of the Policies.
Independent Auditors
The financial statements of USL for the years 1996, 1997 and 1998 have been
audited by Ernst & Young LLP, independent auditors and the interim financial
statements as of June 30, 1999 for USL have been reviewed by Ernst & Young LLP,
as set forth in their reports appearing elsewhere in this prospectus. Such
financial statements have been included in this prospectus in reliance upon the
reports of Ernst & Young LLP given upon the authority of such firm as experts in
accounting and auditing. Ernst & Young LLP is located at 99 Wood Avenue South,
P.O. Box 751, Iselin, NJ 08830-0471.
Actuarial Expert
Actuarial matters have been examined by Robert M. Beuerlein, who is Senior
Vice President and Chief Actuary of USL. 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.
45
<PAGE>
Service Agreements
American General Life Companies ("AGLC") is party to an existing general
services agreement with USL. AGLC, an affiliate of American General Life
Insurance Company, is a corporation incorporated in Delaware on November 24,
1997. Pursuant to this agreement, AGLC provides services to USL, including most
of the administrative, data processing, systems, customer services, product
development, actuarial, auditing, accounting and legal services for USL and the
Platinum Investor Policies.
We have entered into administrative services agreements with the advisers
or administrators for the Mutual Funds. We receive fees for the administrative
services we perform. These fees do not result in any additional charges under
the Policies that are not described under "What charges will USL deduct from my
investment in a Policy?"
Certain Potential Conflicts
The Mutual Funds sell shares to separate accounts of insurance companies,
both affiliated and not affiliated with USL. 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.
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
USL, has 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 September 30, 1999, these activities had been substantially
completed, making our critical systems Year 2000 ready.
46
<PAGE>
We will continue to test our systems throughout 1999 to maintain Year 2000
readiness. In addition, we currently are implementing plans for the century
transition. These plans include a freeze on system modifications from November
1999 through January 2000. Other activities include the creation of rapid
response teams to address problems, and limiting vacations for certain business
and technical personnel.
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. As of September 30,
1999, these activities have been substantially completed. Where necessary,
critical third party dependencies have been included in our contingency plans.
Due to the various stages of Year 2000 readiness for these critical third-party
dependencies, our testing activities related to critical third parties will
extend throughout 1999.
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 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. As
of September 30, 1999, these activities have been substantially completed. The
contingency plans will continue to be 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, and
contingency plans, we believe that we will experience at most isolated and minor
disruptions of business processes following the turn of the century. Such
disruptions are not expected to have a material effect on 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 unforseen circumstances in completing its
plans, the Year 2000 issues could have a material adverse impact on our
operations following the turn of the century.
47
<PAGE>
Costs. Through September 30, 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.
48
<PAGE>
FINANCIAL STATEMENTS
The financial statements of USL contained in this prospectus should be
considered to bear only upon the ability of USL to meet its obligations under
Platinum Investor Policies. They should not be considered as bearing upon the
investment experience of Separate Account USL VL-R. No financial statements of
Separate Account USL VL-R are included because, at the date of this prospectus,
Separate Account USL VL-R had not yet commenced operations and had no assets or
liabilities.
Financial Statements of Page to
The United States Life Insurance Company See in this
in the City of New York Prospectus
----------
Report of Ernst & Young LLP, Independent Auditors Q-1
Unaudited Balance Sheets as of six months ended June 30, 1999 Q-2
Unaudited Income Statement as of six months ended June 30, 1999 Q-4
Unaudited Statements of Comprehensive Income as of
six months ended June 30, 1999 Q-5
Unaudited Statements of Shareholder's Equity as of
six months ended June 30, 1999 Q-6
Unaudited Statements of Cash Flows as of
six months ended June 30, 1999 Q-7
Notes to Financial Statements Q-8
Report of Ernst & Young LLP, Independent Auditors F-3
Balance Sheets as of December 31, 1998 and 1997 F-4
Income Statements for the years ended
December 31, 1998, 1997 and 1996 F-6
Statements of Comprehensive Income for
the years ended December 31, 1998, 1997 and 1996 F-7
Statements of Shareholder's Equity for the years
ended December 31, 1998, 1997 and 1996 F-8
Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 F-9
Notes to Financial Statements F-10
49
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholder
The United States Life Insurance Company
in the City of New York
We have reviewed the accompanying balance sheet of The United States Life
Insurance Company in the City of New York as of June 30, 1999, and the related
statements of income and cash flows for the six-month periods ended June 30,
1999 and 1998. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, which will be
performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheets of The United States Life Insurance Company in the
City of New York as of December 31, 1998 and 1997, and the related statements of
income, shareholder's equity and cash flows for each of the three years in the
period ended December 31, 1998, and in our report dated April 23, 1999, we
expressed an unqualified opinion on those financial statements. In our opinion,
the information set forth in the accompanying balance sheet as of December 31,
1998, is fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.
August 5, 1999 /s/ ERNST & YOUNG LLP
---------------------
ERNST & YOUNG LLP
Q-1
<PAGE>
The United States Life Insurance Company in the City of New York
Unaudited Balance Sheets
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1999 1998
--------------------------------
(In Thousands)
<S> <C> <C>
ASSETS
Investments:
Fixed maturity securities, at fair value
(amortized cost $1,796,713 in 1999 and $1,835,225 $2,047,519
$1,897,758 in 1998)
Equity securities, at fair value (cost $568 in
1999 and $568 in 1998) 581 584
Mortgage loans on real estate 100,173 84,387
Policy loans 84,036 84,412
Investment real estate 3,955 6,101
Other long-term investments 13,045 1,385
Short-term investments 130,126 3,005
--------------------------------
Total investments 2,167,141 2,227,393
Cash 56,964 5,045
Indebtedness from affiliates 2,126 6,832
Accrued investment income 36,486 37,227
Accounts and premiums receivable 120,522 231,863
Reinsurance recoverable 712,714 620,661
Deferred policy acquisition costs 135,250 98,552
Property and equipment 4,314 4,318
Other assets 20,227 12,886
--------------------------------
Total assets $3,255,744 $3,244,777
================================
</TABLE>
Q-2
<PAGE>
The United States Life Insurance Company in the City of New York
Unaudited Balance Sheets
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1999 1998
-----------------------------------
(In Thousands)
<S> <C> <C>
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Future policy benefits
Life and Annuity $1,702,228 $1,729,001
Accident & Health 508,812 407,942
Other policy claims and benefits payable 115,789 116,912
Other policyholders' funds 109,864 108,159
Federal income taxes (24,105) (6,614)
Indebtedness to affiliates 46,002 1,848
Ceded reinsurance payable 242,287 245,576
Other liabilities 93,281 118,339
-----------------------------------
Total liabilities 2,794,158 2,721,163
-----------------------------------
Shareholder's equity:
Common stock, $2 par value, 1,980,658 shares
authorized, issued, and outstanding 3,961 3,961
Additional paid-in capital 8,361 8,361
Accumulated other comprehensive income 11,712 53,394
Retained earnings 437,552 457,898
-----------------------------------
Total shareholder's equity 461,586 523,614
-----------------------------------
Total liabilities and shareholder's equity $3,255,744 $3,244,777
===================================
</TABLE>
Q-3
<PAGE>
The United States Life Insurance Company in the City of New York
Unaudited Statements of Income
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
1999 1998
--------------------------------------
(In Thousands)
<S> <C> <C>
Revenues:
Premiums and other considerations $ 97,459 $346,534
Net investment income 84,923 95,237
Net realized investment gains 6,716 72
(losses)
Other 3,222 2,500
--------------------------------------
Total revenues 192,320 444,343
--------------------------------------
Benefits and expenses:
Benefits 94,222 290,500
Operating costs and expenses 52,636 120,382
--------------------------------------
Total benefits and expenses 146,858 410,882
--------------------------------------
Income before income tax expense 45,462 33,461
Income tax expense 15,808 10,988
--------------------------------------
Net income $ 29,654 $ 22,473
======================================
</TABLE>
Q-4
<PAGE>
The United States Life Insurance Company in the City of New York
Unaudited Statements of Comprehensive Income
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
1999 1998
-------------------------------------
(In Thousands)
<S> <C> <C>
Net income $ 29,654 $ 22,473
-------------------------------------
Other comprehensive income:
Gross change in unrealized (losses)
gains on securities (pretax: 1999:
$(66,791); 1998: $(1,019)) (43,414) (662)
Less: gains (losses) realized in net 1,732 (19)
income
-------------------------------------
Change in net unrealized (losses) gains
on securities (pretax: 1999:
$(64,127); 1998: $(1,048)) (41,682) (681)
-------------------------------------
Comprehensive (loss) income $ (12,028) $ 21,792
=====================================
</TABLE>
Q-5
<PAGE>
The United States Life Insurance Company in the City of New York
Unaudited Statements of Shareholder's Equity
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
1999 1998
-----------------------------------
(In Thousands)
<S> <C> <C>
Common stock:
Balance at beginning of year $ 3,961 $ 3,961
Change during period - -
-----------------------------------
Balance at end of period 3,961 3,961
-----------------------------------
Additional paid-in capital:
Balance at beginning of year 8,361 8,361
Change during period - -
-----------------------------------
Balance at end of period 8,361 8,361
-----------------------------------
Accumulated other comprehensive income:
Balance at beginning of year 53,394 53,830
Change in unrealized gains (losses) on
securities (41,682) (436)
-----------------------------------
Balance at end of period 11,712 53,394
-----------------------------------
Retained earnings:
Balance at beginning of year 457,898 483,349
Net income (loss) 29,654 (25,451)
Dividends paid (50,000) -
-----------------------------------
Balance at end of period 437,552 457,898
-----------------------------------
Total shareholder's equity $461,586 $523,614
===================================
</TABLE>
Q-6
<PAGE>
The United States Life Insurance Company in the City of New York
Unaudited Statements of Cash Flows
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
1999 1998
--------------------------------------------
(In Thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 29,654 $ 22,473
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Change in accounts and premiums receivable 111,522 34
Change in future policy benefits 80,408 (26,950)
Amortization of policy acquisition costs 22,240 33,248
Policy acquisition costs deferred (15,789) (33,132)
Change in other policyholders' funds 5,086 10,961
Provision for deferred income tax expense 6,062 (1,231)
Depreciation 723 698
Amortization (1,046) (854)
Change in indebtedness to/from affiliates 4,760 (5,593)
Change in reinsurance balances (95,342) (1,946)
Net (gain) loss on sale of investments (6,091) (72)
Other, net (33,919) 14,277
--------------------------------------------
Net cash (used in) provided by operating activities 108,268 11,913
--------------------------------------------
INVESTING ACTIVITIES
Purchases of investments and loans made (1,283,540) (1,225,746)
Sales or maturities of investments and receipts from
repayment of loans 1,240,121 1,262,163
Sales and purchases of property, equipment, and
software, net (719) (1,135)
--------------------------------------------
Net cash (used in) provided by investing activities (44,138) 35,282
--------------------------------------------
FINANCING ACTIVITIES
Policyholder account deposits 67,767 67,535
Policyholder account withdrawals (74,078) (153,635)
Dividends paid (50,000) -
Short-term collateralized financings - 47,338
Affiliate borrowings 44,100 -
--------------------------------------------
Net cash provided by (used in) financing activities (12,211) (38,762)
--------------------------------------------
(Decrease) increase in cash 51,919 8,433
Cash at beginning of period 5,045 4,834
--------------------------------------------
Cash at end of period $ 56,964 $ 13,267
============================================
</TABLE>
Interest paid amounted to approximately $167 thousand and $7 thousand for the
six months ended June 30, 1999 and 1998 respectively.
Q-7
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements
June 30, 1999
BASIS OF PRESENTATION
The financial statements for the interim periods herein are unaudited. However,
they have been prepared in accordance with generally accepted accounting
principles for interim financial information and in the opinion of management,
such information reflects all adjustments considered necessary for a fair
presentation. Operating results for the interim period are not necessarily
indicative of the results to be expected for the full year.
These financial statements should be read in conjunction with the audited
financial statements and notes of the Company for the year ended December 31,
1998.
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to current year
presentation.
Q-8
<PAGE>
FINANCIAL STATEMENTS
THE UNITED STATES LIFE INSURANCE COMPANY IN THE CITY OF NEW YORK
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
F-1
<PAGE>
The United States Life Insurance Company in the City of New York
Financial Statements
Years ended December 31, 1998, 1997, and 1996
CONTENTS
<TABLE>
<S> <C>
Report of Independent Auditors....... F-3
Audited Financial Statements
Balance Sheets....................... F-4
Statements of Income................. F-6
Statements of Comprehensive Income... F-7
Statements of Shareholder's Equity... F-8
Statements of Cash Flows............. F-9
Notes to Financial Statements........ F-10
</TABLE>
F-2
<PAGE>
[ERNST & YOUNG LLP LOGO] . 787 Seventh Avenue . Phone: 212 773 3000
New York, New York 10019
Report of Independent Auditors
Board of Directors and Stockholder
The United States Life Insurance Company
in the City of New York
We have audited the accompanying balance sheets of The United States Life
Insurance Company in the City of New York (an indirectly wholly owned subsidiary
of American General Corporation) as of December 31, 1998 and 1997, and the
related 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 disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The United States Life
Insurance Company in the City of New York at December 31, 1998 and 1997, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
New York, New York ---------------------
April 23, 1999 ERNST & YOUNG LLP
Ernst & Young LLP is a member of Ernst & Young International, Ltd.
F-3
<PAGE>
The United States Life Insurance Company in the City of New York
Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
------------------------------
<S> <C> <C>
(In Thousands)
ASSETS
Investments:
Fixed maturity securities, at fair value
(amortized cost - $1,897,758 in 1998 and
$2,215,928 in 1997) $2,047,519 $2,352,376
Equity securities, at fair value (cost - $568 in
1998 and $568 in 1997) 584 578
Mortgage loans on real estate 84,387 60,565
Policy loans 84,412 87,726
Investment real estate 6,101 7,731
Other long-term investments 1,385 971
Short-term investments 3,005 55,908
------------------------------
Total investments 2,227,393 2,565,855
Cash 5,045 4,834
Indebtedness from affiliates 6,832 1,711
Accrued investment income 37,227 44,050
Accounts and premiums receivable 231,863 64,717
Reinsurance recoverable 620,661 58,479
Deferred policy acquisition costs 98,552 185,243
Property and equipment 4,318 1,971
Other assets 12,886 9,702
------------------------------
Total assets $3,244,777 $2,936,562
==============================
</TABLE>
See accompanying notes.
F-4
<PAGE>
<TABLE>
<CAPTION>
December 31
1998 1997
-------------------------------
<S> <C> <C>
(In Thousands)
LIABILITIES AND SHAREHOLDER'S EQUITY
Liabilities:
Future policy benefits
Life and Annuity $1,729,001 $1,876,294
Accident & Health 407,942 186,879
Other policy claims and benefits payable 116,912 115,712
Other policyholders' funds 109,130 86,400
Federal income taxes (7,585) 32,457
Indebtedness to affiliates 1,848 4,746
Ceded reinsurance payable 245,576 5,127
Other liabilities 118,339 79,446
-------------------------------
Total liabilities 2,721,163 2,387,061
-------------------------------
Shareholder's equity:
Common stock, $2 par value, 1,980,658 shares
authorized, issued, and outstanding 3,961 3,961
Additional paid-in capital 8,361 8,361
Accumulated other comprehensive income 53,394 53,830
Retained earnings 457,898 483,349
-------------------------------
Total shareholder's equity 523,614 549,501
-------------------------------
Total liabilities and shareholder's equity $3,244,777 $2,936,562
===============================
</TABLE>
See accompanying notes.
F-5
<PAGE>
The United States Life Insurance Company in the City of New York
Statements of Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-----------------------------------------------
<S> <C> <C> <C>
(In Thousands)
Revenues:
Premiums and other considerations $594,155 $666,173 $609,582
Net investment income 185,838 189,262 195,687
Net realized investment (losses)
gains (3,951) (3,116) 3,836
Other 4,901 26,576 8,355
-----------------------------------------------
Total revenues 780,943 878,895 817,460
-----------------------------------------------
Benefits and expenses:
Benefits 514,020 594,021 559,396
Operating costs and expenses 221,115 212,977 225,291
Loss on reinsurance settlements 59,878 - -
Litigation settlement 30,689 - -
Change in control costs - 6,955 -
-----------------------------------------------
Total benefits and expenses 825,702 813,953 784,687
-----------------------------------------------
(Loss) income before income tax
(benefit) expense (44,759) 64,942 32,773
Income tax (benefit) expense (19,308) 22,700 10,943
-----------------------------------------------
Net (loss) income $(25,451) $ 42,242 $ 21,830
===============================================
</TABLE>
See accompanying notes.
F-6
<PAGE>
The United States Life Insurance Company in the City of New York
Statements of Comprehensive Income
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
----------------------------------------------
<S> <C> <C> <C>
(In Thousands)
Net (loss) income $(25,451) $42,242 $ 21,830
----------------------------------------------
Other comprehensive (loss) income:
Gross change in unrealized (losses)
gains on securities (pretax: 1998:
$(4,920); 1997: $46,905; 1996:
($73,462)) (3,198) 30,488 (47,750)
Less: (losses) gains realized in
net income (2,762) 2,060 1,812
----------------------------------------------
Change in net unrealized (losses)
gains on securities (pretax: 1998:
$(671); 1997: $43,735; 1996:
($76,249) (436) 28,428 (49,562)
----------------------------------------------
Comprehensive (loss) income $(25,887) $70,670 $(27,732)
==============================================
</TABLE>
See accompanying notes.
F-7
<PAGE>
The United States Life Insurance Company in the City of New York
Statements of Shareholder's Equity
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-----------------------------------------------
<S> <C> <C> <C>
(In Thousands)
Common stock:
Balance at beginning of year $ 3,961 $ 3,961 $ 3,961
Change during year - - -
-----------------------------------------------
Balance at end of year 3,961 3,961 3,961
-----------------------------------------------
Additional paid-in capital:
Balance at beginning of year 8,361 8,361 8,361
Change during year - - -
-----------------------------------------------
Balance at end of year 8,361 8,361 8,361
-----------------------------------------------
Accumulated other comprehensive
income:
Balance at beginning of year 53,830 25,402 74,964
Change in unrealized (losses) gains
on securities (436) 28,428 (49,562)
-----------------------------------------------
Balance at end of year 53,394 53,830 25,402
-----------------------------------------------
Retained earnings:
Balance at beginning of year 483,349 441,107 419,277
Net (loss) income (25,451) 42,242 21,830
-----------------------------------------------
Balance at end of year 457,898 483,349 441,107
-----------------------------------------------
Total shareholder's equity $ 523,614 $549,501 $478,831
===============================================
</TABLE>
See accompanying notes.
F-8
<PAGE>
The United States Life Insurance Company in the City of New York
Statements of Cash Flows
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
--------------------------------------------------------------------
<S> <C> <C> <C>
(In Thousands)
OPERATING ACTIVITIES
Net (loss) income $ (25,451) $ 42,242 $ 21,830
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Change in accounts and premiums receivable (167,146) (6,977) (7,385)
Change in future policy benefits 174,629 82,006 64,811
Amortization of policy acquisition costs 66,331 58,583 85,536
Policy acquisition costs deferred (62,766) (62,651) (63,041)
Change in other policyholders' funds 22,573 21,783 11,452
Provision for deferred income tax expense (45,403) (995) 1,992
Depreciation 1,327 1,100 1,024
Amortization (1,734) (2,360) (2,306)
Change in indebtedness to/from affiliates (8,019) 3,415 732
Change in reinsurance balances (321,733) (9,492) (8,537)
Net (gain) loss on sale of investments 3,951 3,116 (3,836)
Other, net 118,537 39,806 26,497
--------------------------------------------------------------------
Net cash (used in) provided by operating
activities (244,904) 169,576 128,769
--------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of investments and loans made (2,833,731) (2,407,890) (1,246,498)
Sales or maturities of investments and receipts
from repayment of loans 3,183,379 2,507,408 1,280,163
Sales and purchases of property, equipment, and
software, net (3,674) 274 (1,861)
--------------------------------------------------------------------
Net cash provided by investing activities 345,974 99,792 31,804
--------------------------------------------------------------------
FINANCING ACTIVITIES
Policyholder account deposits 131,386 135,668 133,763
Policyholder account withdrawals (232,245) (407,383) (307,065)
--------------------------------------------------------------------
Net cash (used in) financing activities (100,859) (271,715) (173,302)
--------------------------------------------------------------------
Increase (decrease) in cash 211 (2,347) (12,729)
Cash at beginning of year 4,834 7,181 19,910
--------------------------------------------------------------------
Cash at end of year $ 5,045 $ 4,834 $ 7,181
====================================================================
</TABLE>
Interest paid amounted to approximately $5.3 million in 1998. There was no
interest paid in 1997 or 1996.
See accompanying notes.
F-9
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements
December 31, 1998
NATURE OF OPERATIONS
The United States Life Insurance Company in the City of New York (the "Company")
is domiciled in the State of New York. The Company is a wholly owned subsidiary
of USLIFE Corporation. Through the acquisition of USLIFE Corporation by American
General Corporation (the "Parent Company") on June 17, 1997, American General
Corporation became the ultimate parent of the Company.
The Company offers a broad portfolio of individual life and annuity products as
well as group and credit insurance.
The individual life line of business includes universal life, level term, whole
life and interest sensitive whole life as well as annuities. These individual
and annuity products are sold primarily to affluent markets, generally through
independent general agencies and producers as well as financial institutions.
The Company also provides products for preferred international markets and other
target markets through lower cost distribution channels.
Group insurance products include group life, accidental death & dismemberment
("AD&D"), dental, vision and disability coverage and are sold through
independent general agents and producers as well as third party administrators.
These products are marketed nationwide to employers, professional and affinity
associations. The Company also offers managed care medical products to small
employers in four states (New York, New Jersey, Colorado and Illinois).
1. ACCOUNTING POLICIES
1.1 PREPARATION OF FINANCIAL STATEMENTS
The financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP"). Transactions with the Parent Company
and other subsidiaries of the Parent Company are not eliminated from the
financial statements of the Company.
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.
1.2 INSURANCE CONTRACTS
The insurance contracts accounted for in these financial statements include both
long-duration and short-duration contracts.
Long-duration contracts include traditional whole life, endowment, guaranteed
renewable term life, universal life, limited payment, and investment contracts.
Long-duration
F-10
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
1.2 INSURANCE CONTRACTS (CONTINUED)
contracts generally require the performance of various functions and services
over a period of more than one year.
Short-duration contracts include group major medical, dental, term life, AD&D,
excess major medical, hospital indemnity and long-term and short-term disability
policies. Short-term contracts generally require the performance of various
functions and services over a period of one year or less.
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.
1.3 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.
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.
F-11
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
1.3 INVESTMENTS (CONTINUED)
POLICY LOANS
Policy loans are reported at unpaid principal balance.
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.
1.4 DEFERRED POLICY ACQUISITION COSTS ("DPAC")
Certain costs of writing an insurance policy, including commissions,
underwriting, and marketing expenses, are deferred and reported as DPAC.
DPAC associated with interest-sensitive life contracts is charged to expense in
relation to the estimated gross profits of those contracts. DPAC associated with
insurance investment contracts is effectively charged off over the period ending
one year beyond the surrender charge period. DPAC associated with all other
insurance contracts is charged to expense over the premium-paying period or as
the premiums are earned over the life of the contract.
DPAC is adjusted for the impact on estimated future gross profits as if net
unrealized gains (losses) on securities had been realized at the balance sheet
date. The impact of this adjustment is included in accumulated other
comprehensive income within shareholder's equity.
The Company reviews the carrying amount of DPAC on at least an annual basis.
Management considers estimated future gross profits or future premiums, future
lapse
F-12
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
1.4 DEFERRED POLICY ACQUISITION COSTS ("DPAC") (CONTINUED)
rates, expected mortality/morbidity, interest earned and credited rates,
persistency, and expenses in determining whether the carrying amount is
recoverable.
1.5 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 1.4).
For all other contracts, premiums are recognized when due.
1.6 POLICY AND CONTRACT CLAIMS RESERVES
The Company's insurance and annuity liabilities relate to both long-duration and
short-duration contracts. The contracts normally cannot be changed or canceled
by the Company during the contract period.
For long-duration contracts such as interest-sensitive life and insurance
investment contracts, reserves equal the sum of the policy account balance and
deferred revenue charges. Reserves for other long-duration 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 2.2% to 11.25% at December 31, 1998.
Short-duration contracts are rated based on attained age and are guaranteed
issue and thus not subject to the normal wear-off mortality/morbidity patterns.
No policy reserves other than unearned premium reserves are held. The unearned
premium reserve is based on gross premium and is calculated on a pro rata basis.
Incurred but not reported claim reserves are based upon patterns demonstrated
through run-out studies. Reserves for open long-term disability claims are based
on the 1964 and 1985 Commissioner Disability Tables, modified for company
experience. The interest assumption is 6%.
1.7 REINSURANCE
The Company limits its exposure to loss on any single insured to $1.5 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. The Company remains obligated
for amounts ceded in the
F-13
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
1. ACCOUNTING POLICIES (CONTINUED)
1.7 REINSURANCE (CONTINUED)
event that the reinsurers do not meet their obligations.
A recoverable is recorded for the portion of benefits paid and insurance
liabilities that have been reinsured. The cost of reinsurance is recognized over
the life of the reinsured policies using assumptions consistent with those used
to account for the underlying policies.
Benefits paid and future policy benefits related to ceded insurance contracts
are recorded as reinsurance recoverables. 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.
1.8 PARTICIPATING POLICY CONTRACTS
Participating life insurance accounted for approximately 36.7%, 33.2%, and 24.3%
of individual life insurance in force at December 31, 1998, 1997 and 1996
respectively.
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 $2.4 million, $2.6 million and $2.8 million in 1998, 1997 and
1996 respectively.
1.9 INCOME TAXES
The Company was acquired by American General Corporation on June 17, 1997.
Following the acquisition, the Company will file a separate life company federal
income tax return for five years.
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.
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
accumulated other comprehensive income in shareholder's equity.
F-14
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
1.10 CHANGES IN ACCOUNTING AND REPORTING STANDARDS
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 results of operations or financial
position.
Effective January 1, 1998, the Company adopted SFAS 132, Employers' Disclosures
about Pension and Other Postretirement Benefits, which revised disclosure
requirements for employers' pension and other retiree benefits. SFAS 132 did not
change the measurement or recognition of pension or other postretirement benefit
plans. The Company has restated disclosures for earlier years presented, as
required under SFAS 132.
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 results of operations or
financial position.
F-15
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
2. INVESTMENTS
2.1 INVESTMENT INCOME
Investment income by type of investment was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Investment income:
Fixed maturities $176,449 $176,714 $183,290
Equity securities 49 49 49
Mortgage loans on real estate 5,766 7,277 7,644
Investment real estate 1,556 1,365 1,530
Policy loans 5,521 5,683 5,649
Other long-term investments 310 652 1,691
Short-term investments 2,742 1,280 1,164
Investment income from affiliates 57 - -
---------------------------------------------
Gross investment income 192,450 193,020 201,017
Investment expenses 6,612 3,758 5,330
---------------------------------------------
Net investment income $185,838 $189,262 $195,687
=============================================
</TABLE>
2.2 NET REALIZED INVESTMENT GAINS (LOSSES)
Realized gains (losses) by type of investment were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------
(In Thousands)
<S> <C> <C> <C>
Fixed maturities:
Gross gains $ 2,860 $ 6,704 $ 15,241
Gross losses (7,111) (3,534) (12,230)
------------------------------------------------
Total fixed maturities (4,251) 3,170 3,011
Equity securities - - (259)
Other investments 300 (6,286) 1,084
------------------------------------------------
Net realized investment gains
(losses) before tax (3,951) (3,116) 3,836
Income tax expense (benefit) (1,383) (1,090) 1,344
------------------------------------------------
Net realized investment gains
(losses) after tax $(2,568) $(2,026) $ 2,492
================================================
</TABLE>
F-16
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to 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 1.3). Amortized cost and fair value at
December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
-------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
DECEMBER 31, 1998
Fixed maturity securities:
Corporate securities:
Investment-grade $1,626,339 $131,810 $(1,684) $1,756,465
Below investment-grade 112,767 3,415 (1,173) 115,009
Mortgage-backed securities* 50,036 912 - 50,948
U.S. government obligations 19,968 4,238 - 24,206
Foreign governments 79,794 11,944 - 91,738
State and political
subdivisions 6,469 139 - 6,608
Redeemable preferred stocks 2,385 160 - 2,545
-------------------------------------------------------------
Total fixed maturity
securities $1,897,758 $152,618 $(2,857) $2,047,519
=============================================================
Equity securities $ 568 $ 25 $ (9) $ 584
=============================================================
</TABLE>
*Primarily include pass-through securities guaranteed by the U.S. government and
government agencies.
F-17
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
2. INVESTMENTS (CONTINUED)
2.3 FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAIN LOSS VALUE
-----------------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Fixed maturity securities:
Corporate securities:
Investment-grade $1,969,450 $118,880 $(1,019) $2,087,311
Below investment-grade 113,181 2,745 (426) 115,500
Mortgage-backed securities* 3,725 459 - 4,184
U.S. government obligations 20,916 3,001 (24) 23,893
Foreign governments 96,162 12,254 - 108,416
State and political
subdivisions 9,992 293 (1) 10,284
Redeemable preferred stock 2,502 286 - 2,788
-----------------------------------------------------------------
Total fixed maturity
securities $2,215,928 $137,918 $(1,470) $2,352,376
=================================================================
Equity securities $ 568 $ 22 $ (12) $ 578
=================================================================
</TABLE>
*Primarily include pass-through securities guaranteed by the U.S. government and
government agencies.
F-18
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to 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:
<TABLE>
<CAPTION>
1998 1997
-------------------------------
(In Thousands)
<S> <C> <C>
Gross unrealized gains $152,643 $137,940
Gross unrealized losses (2,866) (1,482)
DPAC and other fair value adjustments (67,632) (53,643)
Deferred federal income taxes (28,751) (28,985)
-------------------------------
Net unrealized gains on securities $ 53,394 $ 53,830
===============================
</TABLE>
The contractual maturities of fixed maturity securities at December 31, 1998 and
1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
------------------------------------------------------------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
Fixed maturity
securities, excluding
mortgage-backed
securities:
Due in one year or
less $ 193,010 $ 196,606 $ 91,283 $ 91,461
Due after one year
through five years 551,151 579,964 762,673 795,257
Due after five years
through ten years 357,288 382,038 521,239 542,858
Due after ten years 746,273 837,963 837,008 918,616
Mortgage-backed
securities 50,036 50,948 3,725 4,184
------------------------------------------------------------
Total fixed maturity
securities $1,897,758 $2,047,519 $2,215,928 $2,352,376
============================================================
</TABLE>
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 $587.3 million,
$576.2 million, and $404.5 million during 1998, 1997, and 1996, respectively.
F-19
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to 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:
<TABLE>
<CAPTION>
OUTSTANDING PERCENT OF PERCENT
AMOUNT TOTAL NONPERFORMING
--------------------------------------------------
(In Millions)
<S> <C> <C> <C>
DECEMBER 31, 1998
Geographic distribution:
South Atlantic $16 19.0% - %
Pacific 7 8.3 27.6
Mid-Atlantic 32 38.1 -
East North Central 14 16.7 -
Mountain 3 3.6 -
West South Central 5 6.0 -
East South Central - - -
West North Central 1 1.2 -
New England 11 13.1 -
Allowance for losses (5) (6.0) -
-------------------------------
Total $84 100.0% 2.4%
===============================
Property type:
Office $39 46.4% - %
Retail 28 33.3 6.5
Industrial 16 19.0 -
Apartments 2 2.4 -
Other 4 4.9 -
Allowance for losses (5) (6.0) -
-------------------------------
Total $84 100.0% 2.4%
===============================
</TABLE>
F-20
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to 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 $ 2 3.3% -%
Pacific 2 3.3 95.5
Mid-Atlantic 39 65.0 -
East North Central 9 15.0 -
Mountain 4 6.7 -
West South Central 3 5.0 -
East South Central - - -
West North Central 1 1.7 -
New England 5 8.3 -
Allowance for losses (5) (8.3) -
-------------------
Total $60 100.0% 3.1%
===================
Property type:
Office $15 25.0% -%
Retail 28 46.7 6.5
Industrial 15 25.0 -
Apartments 2 3.3 -
Other 5 8.3 -
Allowance for losses (5) (8.3) -
-------------------
Total $60 100.0% 3.1%
===================
F-21
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
2. INVESTMENTS (CONTINUED)
2.5 INVESTMENT SUMMARY
Investments of the Company were as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
-----------------------------------------------------------------------------------------------
CARRYING CARRYING
COST FAIR VALUE AMOUNT COST FAIR VALUE AMOUNT
-----------------------------------------------------------------------------------------------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities:
Bonds:
United States government and
government agencies and
authorities $ 19,968 $ 24,206 $ 24,206 $ 20,916 $ 23,893 $ 23,893
States, municipalities, and
political subdivisions 6,469 6,608 6,608 9,992 10,284 10,284
Foreign governments 79,794 91,738 91,738 96,162 108,416 108,416
Public utilities 320,947 345,320 345,320 392,640 411,186 411,186
Mortgage-backed securities 50,036 50,948 50,948 3,725 4,184 4,184
All other corporate bonds 1,418,159 1,526,154 1,526,154 1,689,991 1,791,625 1,791,625
Redeemable preferred stocks 2,385 2,545 2,545 2,502 2,788 2,788
-----------------------------------------------------------------------------------------------
Total fixed maturities 1,897,758 2,047,519 2,047,519 2,215,928 2,352,376 2,352,376
Equity securities:
Nonredeemable preferred stocks 568 584 584 568 578 578
-----------------------------------------------------------------------------------------------
Total fixed maturities and
equity securities 1,898,326 $2,048,103 2,048,103 2,216,496 $2,352,954 2,352,954
========== ==========
Mortgage loans on real estate* 84,387 84,387 60,565 60,565
Investment real estate 6,101 6,101 7,731 7,731
Policy loans 84,412 84,412 87,726 87,726
Other long-term investments 1,385 1,385 971 971
Short-term investments 3,005 3,005 55,908 55,908
---------- --------------------------- ----------
Total investments $2,077,616 $2,227,393 $2,429,397 $2,565,855
========== =========================== ==========
</TABLE>
* Amount is net of allowance for losses of $5 million at both December 31,
1998 and 1997.
F-22
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to 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 $185,243 $197,572 $199,268
Capitalization 62,766 62,651 63,041
Amortization (66,331) (58,583) (85,536)
Effect of unrealized gains (losses)
on securities (13,832) (15,656) 20,799
Effect of realized gains (losses) (85) (741) -
Reinsurance transfer (69,209) - -
---------------------------------------
Balance at December 31 $ 98,552 $185,243 $197,572
=======================================
On January 29, 1996, USLIFE Corporation announced that the Company would
discontinue new sales of traditional indemnity major medical products. Further,
it would only offer major medical coverage through managed care plans in
selected markets where it has both a significant presence and an appropriate
managed care network in place, while continuing to provide full support and
service to all existing indemnity customers regardless of location.
Concurrently, USLIFE Corporation announced that it would carefully monitor
persistency experience of its group insurance lines in order to determine
whether financial statement adjustments would become necessary.
Recoverability of deferred policy acquisition costs depends on future revenues
and gross profits from the business to which it relates. Evaluation of this
asset, as well as the reserve for policy benefits, requires assumptions as to
the amount and timing of these future revenues and gross profits. USLIFE
Corporation's continuing study disclosed that persistency on this business
deteriorated to a point that a revision in assumptions was necessary.
During the second quarter of 1996, the Company recorded a pre-tax charge of
$49.6 million to recognize revised assumptions reflecting current experience on
its traditional indemnity group major medical and related products, including
group life insurance cases sold in tandem with these major medical policies. The
charge includes a $37.2 million writedown of deferred policy acquisition costs
on this block of business and a related adjustment of the reserve for policy
benefits amounting to $12.4 million which is included in Benefits in the
accompanying statements of income. The charge, on an after-tax basis, amounts to
$32.3 million. The impact of this charge on 1996 pre-tax results of the group
life and group health lines was $6.2 million and $43.4 million, respectively.
F-23
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
4. OTHER ASSETS
Other assets consisted of the following:
DECEMBER 31
1998 1997
----------------------
(In Thousands)
Prepaid expenses $ 9,225 $7,384
Deferred systems costs 1,218 -
Supply inventory 826 1,298
Other 1,617 1,020
----------------------
Total other assets $12,886 $9,702
======================
5. FEDERAL INCOME TAXES
5.1 TAX LIABILITIES
Income tax liabilities were as follows:
DECEMBER 31
1998 1997
----------------------
(In Thousands)
Current tax payable $ 6,208 $ 613
Deferred tax liabilities, applicable to:
Net income (42,544) 2,859
Net unrealized investment gains 28,751 28,985
----------------------
Total deferred tax liabilities (13,793) 31,844
----------------------
Total current and deferred tax (assets) liabilities $ (7,585) $32,457
======================
F-24
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to 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:
<TABLE>
<CAPTION>
1998 1997
-------------------------------
(In Thousands)
<S> <C> <C>
Deferred tax liabilities applicable to:
Deferred policy acquisition costs $ 32,544 $ 40,279
Basis differential of investments 54,056 49,421
Other 8,619 26,940
-----------------------
Total deferred tax liabilities 95,219 116,640
Deferred tax assets applicable to:
Policy reserves (56,269) (69,968)
Other (52,743) (14,828)
-----------------------
Total deferred tax assets before valuation
allowance (109,012) (84,796)
Valuation allowance - -
-----------------------
Total deferred tax assets, net of valuation
allowance (109,012) (84,796)
-----------------------
Net deferred tax (assets) liabilities $ (13,793) $ 31,844
=======================
</TABLE>
A portion of life insurance income earned prior to 1984 is not taxable unless it
exceeds certain statutory limitations or is distributed as dividends. Such
income, accumulated in policyholders' surplus accounts, totaled $37.8 million at
December 31, 1998 and 1997. At current corporate rates, the maximum amount of
tax on such income is approximately $13.2 million. Deferred taxes on these
accumulations are not required because no distributions are expected.
F-25
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
5. FEDERAL INCOME TAXES (CONTINUED)
5.2 TAX EXPENSE
Components of income tax (benefit) expense for the years were as follows:
1998 1997 1996
------------------------------------
(In Thousands)
Current tax expense $ 26,095 $23,695 $ 8,951
Deferred tax (benefit) expense:
Deferred policy acquisition cost 2,673 749 (5,314)
Policy reserves (12,552) 3,160 (3,027)
Basis differential of investments 132 (3,168) 595
Litigation settlement (10,272) - -
Reinsurance transaction (22,133) - -
Other, net (3,251) (1,736) 9,738
------------------------------------
Total deferred tax (benefit) expense (45,403) (995) 1,992
------------------------------------
Income tax (benefit) expense $(19,308) $22,700 $10,943
====================================
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 $(15,666) $22,730 $11,471
Tax-exempt investment income (121) (134) (149)
Other (3,521) 104 (379)
------------------------------------
Income tax (benefit) expense $(19,308) $22,700 $10,943
====================================
F-26
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
5. FEDERAL INCOME TAXES (CONTINUED)
5.3 TAXES PAID
Income taxes paid amounted to approximately $20.5 million, $17.2 million, and
$13.8 million in 1998, 1997, and 1996, respectively.
5.4 TAX RETURN EXAMINATIONS
The Internal Revenue Service ("IRS") has completed examinations of the Company's
tax returns through 1991. The IRS is currently examining tax returns for 1992
through 1994. Although the final outcome of any issues raised in examination is
uncertain, the Company believes that the ultimate liability, including interest,
will not materially exceed amounts recorded in the financial statements.
6. TRANSACTIONS WITH AFFILIATES
American General Corporation and certain affiliated companies provide services
to the Company, principally data processing, investment management, professional
and administrative services. During 1998 and 1997 the Company incurred $25.3
million and $20.5 million, respectively, for these services. In addition, the
Company provides services to certain affiliated companies. During 1998 and 1997
the Company was reimbursed $3.5 million and $6.1 million, respectively, for
these services.
The Company periodically borrows funds from the Parent Company under an
intercompany short-term borrowing agreement entered into during 1997. These
borrowings are on demand and are unsecured. Interest is charged on the average
borrowing based on the commercial paper rate. At December 31, 1998, no amounts
were outstanding under the borrowing agreement.
Affiliated accounts receivable were $6.8 million and $1.7 million in 1998 and
1997, respectively.
Following regulatory approval from the necessary authorities, the Company
reinsured 49% of its credit life and credit accident and health business to
American General Assurance Company, an affiliate, effective January 1, 1998.
This transaction resulted in the cession of approximately 218,000 life policies
representing $379.5 million of insurance in-force and approximately 41,000 A&H
policies. Assets of approximately $10 million were transferred, which resulted
in a pretax loss of approximately $4 million.
Following regulatory approval from the necessary authorities, the Company also
reinsured 49% of its New York and 100% of its non-New York group life (excluding
permanent policies), group accident and health, and individual accident and
health business to American General Assurance Company effective October 1, 1998.
This transaction resulted in the cession of approximately 21,000 life policies
representing
F-27
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
6. TRANSACTIONS WITH AFFILIATES (CONTINUED)
$32.6 billion of insurance in-force and approximately 24,000 A&H policies.
Assets of approximately $254 million were transferred. The Company received a
$13 million ceding commission on this transaction, which resulted in a pretax
loss of approximately $56 million.
The losses on these transactions resulted from the pricing of the business to
yield a competitive market return.
Amounts recoverable of $400 million and amounts payable of $106 million,
relating to this affiliated reinsurance, are included under the captions
"Reinsurance recoverable" and "Ceded reinsurance payable" in the balance sheets
at December 31, 1998.
7. ACCIDENT AND HEALTH RESERVES
Activity in the liability for unpaid claims and claim adjustment expenses for
the Company's accident and health coverage is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
---------------------------------------
(In Thousands)
<S> <C> <C> <C>
Balance as of January 1, net of reinsurance recoverable $ 85,974 $ 72,744 $ 55,450
---------------------------------------
Reinsurance settlements (1) (43,736) - -
---------------------------------------
Add: Incurred losses (2) 179,158 263,015 278,413
---------------------------------------
Deduct: Paid losses related to:
Current year 78,575 82,470 87,119
Prior years 123,039 167,315 174,000
---------------------------------------
Total paid losses 201,614 249,785 261,119
---------------------------------------
Balance as of December 31, net of reinsurance recoverable 19,782 85,974 72,744
Reinsurance recoverable 45,419 1,413 1,094
---------------------------------------
Balance as of December 31, gross of reinsurance recoverable $ 65,201 $ 87,387 $ 73,838
=======================================
</TABLE>
(1) See Note 6.
(2) Substantially all of the Company's incurred claims and claim adjustment
expenses relate to the respective current year.
F-28
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
7. ACCIDENT AND HEALTH RESERVES (CONTINUED)
The liability for unpaid claims and claim adjustment expenses relating to the
Company's accident and health business is based on the estimated amount payable
on claims reported prior to the date of the balance sheets which have not yet
been settled: claims reported subsequent to the date of the balance sheets which
have been incurred during the period than ended, and an estimate (based on past
experience) of incurred but unreported claims relating to such periods.
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.
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) $ 193 $ 1,065 $ 2,031
Interest cost 1,205 2,593 2,652
Expected return on plan assets (1,714) (3,331) (2,421)
Amortization (309) (418) (47)
-----------------------------------
Pension (income) expense $ (625) $ (91) $ 2,215
===================================
Discount rate on benefit obligation 7.00% 7.25% 7.60%
Rate of increase in compensation 4.25% 4.00% 6.00%
levels
Expected long-term rate of return on
plan assets 10.25% 10.00% 7.50%
F-29
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
8. BENEFIT PLANS (CONTINUED)
8.1 PENSION PLANS (CONTINUED)
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) $18,022 $26,337
Plan assets at fair value 18,110 23,757
--------------------
Plan assets at fair value in excess of (less 88 (2,580)
than) PBO
Other unrecognized items, net (198) 3,154
--------------------
(Accrued) prepaid pension expense $ (110) $ 574
====================
The change in PBO was as follows:
1998 1997
--------------------
(In Thousands)
PBO at January 1 $26,337 $27,245
Service and interest costs 1,398 3,658
Benefits paid (915) (870)
Actuarial loss (gain) 638 (932)
Transfers and other (9,436) (2,764)
--------------------
PBO at December 31 $18,022 $26,337
====================
The change in the fair value of plan assets was as follows:
1998 1997
--------------------
(In Thousands)
Fair value of plan assets at January 1 $23,757 $22,222
Actual return on plan assets 1,175 2,405
Benefits paid (915) (870)
Transfers (5,907) -
--------------------
Fair value of plan assets at December 31 $18,110 $23,757
====================
F-30
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
8. BENEFIT PLANS (CONTINUED)
8.2 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, with 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.
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 (benefit) in 1998, 1997, and 1996 was $(290)
thousand, $(43) thousand, and $440 thousand, respectively. The accrued liability
for postretirement benefits was $3.7 million and $13.7 million at December 31,
1998 and 1997, respectively. These liabilities were discounted at the same rates
used for the pension plans.
9. 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 $2,048 $2,048 $2,353 $2,353
Mortgage loans on real
estate $ 91 $ 84 $ 68 $ 61
Policy loans $ 84 $ 84 $ 86 $ 88
Indebtedness from
affiliates $ 7 $ 7 $ 2 $ 2
Liabilities:
Insurance investment
contracts $ 541 $ 560 $ 737 $ 732
F-31
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
9. 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.
INDEBTEDNESS FROM AFFILIATES
Indebtedness from affiliates is composed of accounts receivable from
affiliates. Due to the short-term nature of accounts receivable, fair value
is assumed to equal carrying value.
INSURANCE INVESTMENT CONTRACTS
Fair value of insurance investment contracts was estimated using cash flows
discounted at market interest rates.
F-32
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
10. STATUTORY FINANCIAL INFORMATION; DIVIDEND PAYING CAPABILITY
The Company's statutory basis financial statements are prepared in accordance
with accounting practices prescribed or permitted by the State of New York
Insurance Department. "Prescribed" statutory accounting practices include state
laws, regulations and general administrative rules, as well as a variety of
publications by the NAIC. "Permitted" statutory accounting practices encompass
all accounting practices that are not prescribed; such practices may differ from
state to state, from company to company within a state, and may change in the
future. There were no material permitted practices utilized by the Company in
1998, 1997 or 1996.
In 1998, the NAIC adopted codified statutory accounting principles
("Codification"). Codification will likely change, to some extent, prescribed
accounting practices and may result in changes to the accounting practices that
the Company uses to prepare its statutory financial statements. Codification
will require adoption by the various states before it becomes the prescribed
statutory basis of accounting for insurance companies domesticated within those
states. Accordingly, before Codification becomes effective for the Company, the
State of New York must adopt Codification as the prescribed basis of accounting
on which domestic insurers must report their statutory basis results to the
Insurance Department. At this time, it is unclear whether the State of New York
will adopt Codification.
Policyholder's surplus and net income, as reported to the domiciliary state
insurance department in accordance with its prescribed or permitted statutory
accounting practices is summarized as follows:
1998 1997 1996
--------------------------------------
(In Thousands)
Statutory net income for the year $ 31,151 $ 24,961 $ 13,132
Statutory surplus at year-end $212,130 $218,111 $180,405
Statutory accounting practices require acquisition costs on new business
(including commissions and underwriting and issue costs) to be charged to
expense when incurred. Regulatory net income includes income (loss) attributed
to participating policyholders of $(6.0) million, $(6.8) million and $(8.4)
million in 1998, 1997 and 1996, respectively, with the 1998, 1997 and 1996
losses primarily a result of higher levels of sales of participating term
insurance products. Regulatory equity capital includes capital attributed to
participating policyholders of $(37.0) million, $(24.9) million and $(13.3)
million at December 31, 1998, 1997 and 1996 respectively. Capital attributed to
participating policyholders is not available for payment of dividends to
shareholders.
F-33
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
10. STATUTORY FINANCIAL INFORMATION; DIVIDEND PAYING CAPABILITY (CONTINUED)
The Company is subject to New York Business Corporation Law, which imposes
restrictions on shareholder dividends. In addition, New York State Insurance Law
requires that no dividend may be declared without prior approval of the State of
New York Insurance Department. New York Law also states that no New York
domiciled company shall declare or distribute dividends to shareholders which
exceeds the lesser of: (1) 10% of surplus as regards policyholders or (2) 100%
of adjusted net investment income, unless the superintendent approves a greater
dividend payment. The Company did not pay any dividends in 1998, 1997 or 1996.
11. LEASES
The Company has various leases, substantially all of which are for office space
and facilities. At December 31, 1998 the future minimum rental commitments under
all of the Company's noncancellable leases were as follows:
YEAR ENDED OFFICE
DECEMBER 31 SPACE EQUIPMENT TOTAL
- -------------------------------------------------------------------------
(In Thousands)
1999 $ 4,892 $452 $ 5,344
2000 4,693 183 4,876
2001 4,685 93 4,778
2002 4,517 - 4,517
2003 4,368 - 4,368
Thereafter 5,342 - 5,342
----------------------------------------
Total $28,497 $728 $29,225
========================================
Rent expense incurred in 1998, 1997 and 1996 was $4.6 million, $3.6 million and
$3.7 million, respectively.
12. COMMITMENTS AND CONTINGENCIES
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.
F-34
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
In conjunction with the proposed settlements, the Company recorded a charge of
$30.7 million ($19.9 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.
The litigation liability was reduced by payments of $1.3 million, and the
remaining balance of $29.4 million was included in other liabilities on the
Company's balance sheet at December 31, 1998.
In addition to the charges recorded in 1998, the Company will incur additional
expenses for claim administration, outside counsel and actuarial services, and
regulatory expenses, related to the resolution of the litigation, which will be
recorded as incurred. Such expenses are not expected to have a material adverse
effect on the Company's financial position or results of operations.
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 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.
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 $876 thousand and
$1.1 million, respectively, for guaranty fund assessments, and applied $236
thousand and $293 thousand, respectively, for premium tax deductions. The
Company has recorded receivables of $352 thousand and $334 thousand at December
31, 1998 and 1997, respectively, for expected recoveries against the payment of
future premium taxes. Expenses incurred for guaranty fund assessments were $191
thousand, $358 thousand, and $557 thousand in 1998, 1997, and 1996,
respectively.
F-35
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
13. REINSURANCE
Reinsurance transactions for the years ended December 31, 1998, 1997, and 1996
were as follows:
1998 1997 1996
-----------------------------------------------
(In Thousands)
LIFE INSURANCE IN FORCE
Gross $70,948,300 $61,407,508 $52,300,927
Assumed - 11,314,869 9,773,886
Ceded 44,441,277 9,321,704 5,674,223
-----------------------------------------------
Net $26,507,023 $63,400,673 $56,400,590
===============================================
Life and Annuity Premiums
Gross $ 214,384 $ 178,251 $ 154,569
Assumed 22,020 26,171 24,468
Ceded 58,924 19,332 5,467
-----------------------------------------------
Net $ 177,480 $ 185,090 $ 173,570
===============================================
A&H PREMIUMS
Written
Gross $ 459,562 $ 422,886 $ 379,171
Assumed 170,120 1,704 2,190
Ceded 285,628 16,243 12,281
-----------------------------------------------
Net $ 344,054 $ 408,347 $ 369,080
===============================================
Earned
Gross $ 452,348 $ 403,717 $ 378,390
Assumed 168,331 1,503 2,190
Ceded 276,313 15,616 12,252
-----------------------------------------------
Net $ 344,366 $ 389,604 $ 368,328
===============================================
Reinsurance recoverable on paid losses was approximately $10.6 million, $2.4
million, and $3.7 million at December 31, 1998, 1997, and 1996, respectively.
Reinsurance recoverable on unpaid losses was approximately $81.7 million, $3.2
million, and $3.1 million at December 31, 1998, 1997, and 1996, respectively.
The effect of reinsurance on benefits to policyholders and beneficiaries was
$131 million, $13 million, and $20 million during 1998, 1997, and 1996,
respectively.
The Company terminated its participation in both the Federal Employee Government
Life Insurance (FEGLI) and State Government Life Insurance (SGLI) pools in 1998.
The assumed premiums for these pools in 1998 were $19.5 million and $2.5
million, respectively.
F-36
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
13. REINSURANCE (CONTINUED)
The Company participates in several reinsurance pools. These pools are managed
and administered by reinsurance intermediaries on behalf of the Company. The
pools involved various coverages including life, medical and disability.
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, these activities
had been completed for substantially all of the Company's critical systems,
making them Year 2000 ready. Vendor upgrades for a small number of systems were
either completed in the first quarter 1999 or are expected to be completed by
June 30, 1999; therefore, activities (3) through (5) are ongoing for some
systems.
The Company will continue to test its systems throughout 1999 to maintain Year
2000 readiness. In addition, the company is developing plans for the century
transition, which will restrict systems modifications from November 1999 through
January 2000, create rapid response teams to address problems and limit
vacations for key technical personnel.
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
F-37
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
14. YEAR 2000 CONTINGENCY (UNAUDITED) (CONTINUED)
THIRD PARTY RELATIONSHIPS (CONTINUED)
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 April 30, 1999,
AGC has identified and assessed its critical third party dependencies, including
those related to the Company. Of these critical dependencies, approximately 300
have been assessed to have a high probability of failure and have been covered
in the Company's contingency planning efforts. Due to the various stages of Year
2000 readiness for these critical third-party dependencies, the Company's
testing activities with critical third parties will extend throughout 1999.
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 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 those
critical processes that rank high in consequence and probability of failure; and
(4) complete the applicable contingency plans. These plans will be tested during
the second and third quarters of 1999.
RISKS AND UNCERTAINTIES
Based on its plans to make internal systems ready for Year 2000, to deal with
third party relationships, and to develop contingency actions, 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 Year 2000
readiness is not achieved due to the Company's failure to maintain critical
systems as Year 2000 ready, failure of critical third parties to achieve Year
2000 readiness on a timely basis, failure of contingency plans to reduce Year
2000-related business failures, or other unforeseen circumstances in completing
the Company's plans, the Year 2000 issues could have a material adverse impact
on the Company's operations following the turn of the century.
F-38
<PAGE>
The United States Life Insurance Company in the City of New York
Notes to Financial Statements (continued)
14. YEAR 2000 CONTINGENCY (UNAUDITED) (CONTINUED)
COSTS
Through March 31, 1999, 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' 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-39
<PAGE>
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
Defined Term this Prospectus
- ------------ ---------------
accumulation value 6
Administrative Center 1
amount at risk 8
automatic rebalancing 6
basis 26
beneficiary 30
cash surrender value 15
close of business 33
Code 24
cost of insurance rates 9
daily charge 8
date of issue 34
death benefit 7
declared fixed interest account option 1
division 24
dollar cost averaging 5
Fund 2
full surrender 15
grace period 13
Home Office 1
investment option 1
lapse 13
loan, loan interest 16
maturity, maturity date 17
modified endowment contract 25
monthly deduction day 34
Monthly insurance charge 8
Mutual Fund 2
Option 1, 2 7
partial surrender 15
payment option 17
planned periodic premium 12
Platinum Investor 1
Policy 1
Policy Loan 16
Policy month, year 34
preferred loan interest 17
50
<PAGE>
Page to see in this
Defined Term this Prospectus
- ------------ ---------------
premiums 5
premium payments 5
prospectus 1
reinstate, reinstatement 13
SEC 2
separate account 1
Separate Account USL VL-R 24
seven-pay test 25
specified amount 7
surrender 15
surrender charge 9
transfers 13
USL 23
valuation date 33
you 19
We have filed a registration statement relating to Separate Account USL 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.
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