[Graphic - PROSPECTUS - spelled out in large letters down the left column of
the page]
[USAA Logo Graphic]
USAA LIFE INSURANCE COMPANY
VARIABLE UNIVERSAL LIFE
AUGUST 31, 1998
<PAGE>
THIS PAGE INTENTIONALLY LEFT BLANK
<PAGE>
VARIABLE UNIVERSAL LIFE INSURANCE POLICY
Offered By Prospectus dated:
August 31, 1998
USAA LIFE INSURANCE COMPANY
9800 Fredericksburg Road, San Antonio, Texas 78288
Telephone: toll free 1-800-531-8303
This Prospectus describes a Variable Universal Life Insurance Policy
("Policy") that we are offering, through our Life Insurance Separate Account,
to individual members of the United Services Automobile Association ("USAA"),
the parent company of the USAA Group of Companies, as well as to the general
public.
The Policy offers you:
* Life insurance protection guaranteed by USAA Life. SEE "Policy
Benefits."
* 12 investment options, available through the Separate Account,
including Funds of USAA LIFE INVESTMENT TRUST, THE ALGER AMERICAN
FUND, SCUDDER VARIABLE LIFE INVESTMENT FUND, and BT INSURANCE
FUNDS TRUST. SEE "Investment Options" and the accompanying Fund
prospectuses for a description of the Funds.
* Flexible premium payments. SEE "Premium Payments."
Please read this Prospectus carefully and keep it for future reference.
Your Prospectus and Policy may reflect variations required by the laws of your
state. This Prospectus is not valid unless accompanied by the current
prospectuses for the Funds. Defined terms used in this Prospectus appear at
the beginning of this booklet.
ACCUMULATION UNITS OF THE VARIABLE FUND ACCOUNTS ARE NOT DEPOSITS OR
OTHER OBLIGATIONS OF, OR GUARANTEED BY, THE USAA FEDERAL SAVINGS BANK, ARE NOT
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC) OR ANY OTHER
GOVERNMENT AGENCY, ARE SUBJECT TO INVESTMENT RISKS, AND MAY LOSE VALUE.
THE SECURITIES AND EXCHANGE COMMISSION ("SEC") HAS NOT APPROVED OR
DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THE POLICIES ARE
SOLELY THE OBLIGATIONS OF USAA LIFE AND ARE NOT THE OBLIGATIONS OF, OR
GUARANTEED BY, ANY ONE ELSE. THE POLICY DOES NOT HAVE A MINIMUM GUARANTEED
CASH VALUE, WHICH MEANS THAT YOU BEAR THE ENTIRE INVESTMENT RISK THAT YOUR
POLICY CASH VALUE COULD DECLINE TO ZERO.
YOU MAY CANCEL THE POLICY WITHIN 10 DAYS AFTER RECEIVING IT, OR SUCH LONGER
PERIOD AS THE LAWS OF YOUR STATE MAY REQUIRE.
<PAGE>
THIS PAGE INTENTIONALLY LEFT BLANK
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
DEFINITIONS.................................................................3
THE POLICY AT A GLANCE......................................................7
QUESTIONS AND ANSWERS......................................................10
POLICY INFORMATION.........................................................14
POLICY ISSUANCE..........................................................14
Who May Purchase a Policy..............................................14
How to Purchase a Policy...............................................14
Effective Date of Your Policy..........................................14
PREMIUM PAYMENTS.........................................................14
Methods of Payment.....................................................14
Amount and Frequency of Payments.......................................15
ALLOCATION OF PREMIUMS...................................................15
Planned Periodic Premium Payments......................................16
Annual Target Premium Payment..........................................16
INVESTMENT OPTIONS.......................................................16
Additions or Changes to Investment Options.............................18
Voting Privileges......................................................18
Special Considerations.................................................19
POLICY LAPSE AND REINSTATEMENT...........................................19
Lapse..................................................................19
Grace Period...........................................................19
Guaranteed Death Benefit...............................................20
Reinstatement..........................................................20
CHARGES AND DEDUCTIONS...................................................21
Premium Charge.........................................................21
Monthly Deductions From Cash Value.....................................21
Separate Account Charges...............................................22
Transfer Charges.......................................................22
Surrender Charges......................................................22
Other Charges..........................................................23
Deduction of Charges...................................................23
DEATH BENEFIT............................................................23
Choosing Between Option A and Option B.................................24
Illustrations of Option A and Option B.................................24
Changing Your Death Benefit Option.....................................25
Changing Your Policy's Specified Amount................................25
OTHER POLICY BENEFITS....................................................26
Optional Insurance Benefits............................................26
Benefits at Maturity...................................................27
PAYMENT OF POLICY BENEFITS...............................................28
Payment of Death Benefit...............................................28
Payment of Maturity Benefit............................................28
Death Benefit Payment Options..........................................28
CASH VALUE...............................................................29
Calculating Your Value in the Variable Fund Accounts...................29
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
TRANSFER OF VALUE........................................................30
LOANS ...................................................................30
Loan Collateral........................................................31
Loan Interest..........................................................31
Repayment of Indebtedness..............................................31
Effect of Policy Loans.................................................31
SURRENDERS...............................................................32
Full Surrenders........................................................32
Partial Surrenders.....................................................32
TELEPHONE TRANSACTIONS...................................................33
DOLLAR COST AVERAGING PROGRAM............................................33
FREE LOOK RIGHT..........................................................34
POSTPONEMENT OF PAYMENTS.................................................34
MORE POLICY INFORMATION....................................................34
OWNERS AND BENEFICIARIES.................................................34
Owners.................................................................34
Beneficiaries..........................................................35
CALCULATING YOUR COST OF INSURANCE.......................................35
Net Amount at Risk.....................................................35
Net Amount at Risk - More Than One Rate Class..........................36
Cost of Insurance Rates................................................36
MINIMUM AMOUNT INSURED...................................................37
THE CONTRACT.............................................................37
INCONTESTABILITY.........................................................38
MISSTATEMENT OF AGE OR SEX...............................................38
SUICIDE EXCLUSION........................................................38
NON-PARTICIPATING POLICY.................................................39
REPORTS AND RECORDS......................................................39
PERFORMANCE INFORMATION....................................................40
OTHER INFORMATION..........................................................40
USAA LIFE................................................................40
Directors of USAA Life.................................................41
Officers (other than Directors)........................................42
SEPARATE ACCOUNT.........................................................44
POLICY DISTRIBUTION......................................................44
TAX MATTERS..............................................................45
Taxation of Policy Proceeds............................................45
Taxation of USAA Life..................................................50
STATE REGULATION OF USAA LIFE............................................50
LEGAL MATTERS............................................................50
EXPERTS..................................................................51
REGISTRATION STATEMENT...................................................51
FINANCIAL STATEMENTS.....................................................51
</TABLE>
2
<PAGE>
DEFINITIONS
IN THIS PROSPECTUS:
ACCUMULATION UNIT or UNIT means an accounting unit of measure that we use to
calculate values in each Variable Fund Account.
ADMINISTRATIVE CHARGE means a monthly charge deducted from the Policy's cash
value during the first Policy Year only. It compensates us for the start-up
expenses incurred in issuing the Policy. It is shown on the Policy Information
Page.
ANNIVERSARY means the same date each succeeding year as the Effective Date of
the Policy.
ANNUAL TARGET PREMIUM PAYMENT means an annual amount of premium payment that
we establish when we issue your Policy and that is shown on the Policy
Information Page. We use it to determine whether a premium charge will be
deducted from premium payments, whether a surrender charge is imposed on a
full surrender, and whether the Guaranteed Death Benefit applies.
BENEFICIARY means the person or entity designated to receive the death benefit
upon the Insured's death.
CASH SURRENDER VALUE means your Policy cash value less the surrender charge,
if any, payable on full surrender of your Policy.
CASH VALUE, on the Effective Date, means the Net Premium less the Monthly
Deduction for the following month. Thereafter, on any Valuation Date, cash
value means the sum of your Policy's value invested in the Variable Fund
Accounts plus, if applicable, any value transferred from the Separate Account
to USAA Life's general account to secure any Policy loan, plus any interest
earnings credited on the value held in the general account, less the amount of
any outstanding loan including any unpaid loan interest, and less any Monthly
Deductions, transfer charges, and partial surrender charges applied through
that date.
DATE OF RECEIPT means the date actually received at our Home Office, subject
to two exceptions: (1) if received on a date other than a Valuation Date, the
Date of Receipt will be the following Valuation Date; and (2) if received on a
Valuation Date after close of regular trading of the New York Stock Exchange,
the Date of Receipt will be the following Valuation Date.
DEATH BENEFIT means the benefit paid in accordance with the death benefit
option in effect on the Insured's death, reduced by any Indebtedness and any
due and unpaid Monthly Deductions, and increased by any optional insurance
benefits provided by rider.
DEATH BENEFIT OPTION means one of the two death benefit options that the
Policy provides, namely, Option A and Option B. Option A is the greater of the
current Specified Amount or the Minimum Amount Insured. Option B is the
greater of the current Specified Amount, plus the Policy's cash value, or the
Minimum Amount Insured.
EFFECTIVE DATE means the date we approve the application and issue your Policy
or the date we approve any increase in Specified Amount under your Policy. The
Effective Date is shown on the Policy Information Page.
3
<PAGE>
FREE LOOK PERIOD means the period of time required by state law during which
you may return the Policy for cancellation and receive a refund. If you
request cancellation of the Policy during the Free Look Period, we will refund
the greater of the premium payments you have paid or the value of the Variable
Fund Accounts as of the Date of Receipt of your request to cancel plus any
premium charge, Monthly Deduction and mortality and expense charge that we
have deducted. The Free Look Period is shown on the Policy Information Page.
FUND means an investment portfolio that has specific investment objectives and
policies and is offered by a Mutual Fund.
GUARANTEED DEATH BENEFIT means that we guarantee your Policy will not lapse
during the first five Policy Years and that we will pay a Death Benefit if you
have paid a sufficient amount of premium.
HOME OFFICE means USAA Life Insurance Company, USAA Building, 9800
Fredericksburg Road, San Antonio, Texas 78288.
INDEBTEDNESS means the sum of all unpaid Policy loans and any unpaid accrued
interest due on such loans.
INSURED means the person whose life is insured. The Insured is identified on
the Policy Information Page. The Insured may or may not be the Owner.
LAPSE means your Policy has terminated because of insufficient cash value from
which to deduct the Monthly Deduction and any loan interest then due. No
insurance coverage exists when your Policy has lapsed.
MAINTENANCE CHARGE means a monthly charge deducted from the Policy's cash
value. It compensates us for recurring administrative expenses related to the
maintenance of the Policy and the Separate Account. It is shown on the Policy
Information Page.
MATURITY DATE means the date that we will pay your Policy's cash value to you,
as long as the Policy has not terminated because of lapse, full surrender, or
the Insured's death. The Maturity Date is shown on the Policy Information
Page.
MONTHLY ANNIVERSARY means the same date of each succeeding month as the
Effective Date of your Policy.
MONTHLY DEDUCTION means a charge we make under your Policy each month against
the Policy's cash value. The charge is equal to:
1) the cost of insurance and any riders, plus
2) the administrative charge that is applied during the first 12
months that the Policy is in effect, plus
3) the maintenance charge.
MINIMUM AMOUNT INSURED means the amount of life insurance required by the
Internal Revenue Code to qualify your Policy as life insurance and to exclude
the Death Benefit from a Beneficiary's taxable income.
4
<PAGE>
MUTUAL FUND means an open-end investment company under federal securities law.
It may offer shares of several different Funds for investment.
NET ASSET VALUE means the current value of each Fund's total assets, less all
liabilities, divided by the total number of shares outstanding.
NET PREMIUM PAYMENT means the amount of a premium payment less the Policy's
premium charge.
NOTICE TO US means your signed statement that we receive at our Home Office
and that is in a form satisfactory to us.
OWNER means the person to whom we owe the rights and privileges of the Policy.
POLICY INFORMATION PAGE means the page that identifies certain information
about the Policy and specifies certain terms of the Policy.
POLICY YEAR means a period of 12 calendar months starting with the Effective
Date of the Policy, and each 12-month period thereafter. For example, if your
Policy was issued on July 15, your first Policy Year would end on the
following July 14. Each subsequent Policy Year would start on July 15 and end
on July 14.
PREMIUM CHARGE means an amount that we deduct from premium payments to
compensate us for sales charges and taxes related to the Policy.
SEPARATE ACCOUNT means the Life Insurance Account of USAA Life Insurance
Company. The Separate Account is an investment account established under Texas
law through which we invest the Net Premium Payments received for investment
in the Variable Fund Accounts under the Policy. The Separate Account is
divided into subdivisions called the Variable Fund Accounts. Each Variable
Fund Account invests the Net Premium Payments allocated to it in a particular
Fund. We own the assets of the Separate Account. To the extent that the assets
are equal to the reserves and other contractual liabilities, they are not
chargeable with liabilities arising out of any other business of ours. The
income, gains, and losses, realized or unrealized, from the assets of the
Separate Account are credited or charged against the Separate Account without
regard to other income, gains or losses of ours. The Separate Account is
registered as an investment company under federal securities law.
SPECIFIED AMOUNT means the minimum death benefit payable as long as the Policy
is in effect. It is also the amount of life insurance we issue. It is shown on
the Policy Information Page.
SURRENDER CHARGE means an amount that we may deduct from your Policy's cash
value if you surrender your Policy in full.
VALUATION DATE means any business day, Monday through Friday, on which the New
York Stock Exchange is open for regular trading, except
1) any day on which the value of the shares of a Fund is not
computed, or
2) any day during which no order for the purchase, surrender or
transfer of Accumulation Units is received.
VALUATION PERIOD means the period of time from the end of any Valuation Date
to the end of the next Valuation Date.
5
<PAGE>
VARIABLE FUND ACCOUNT means a subdivision of the Separate Account in which you
may invest Net Premium Payments. There are several Variable Fund Accounts
under the Policy. Each Variable Fund Account corresponds to a particular Fund.
Net Premium Payments allocated to a Variable Fund Account are invested in a
particular Fund. The Variable Fund Accounts are also referred to in this
Prospectus as Accounts.
WE, OUR, US, or USAA Life means USAA Life Insurance Company.
YOU, YOUR or YOURS refers to the Owner of the Policy.
6
<PAGE>
THE POLICY AT A GLANCE
The following is a snapshot of the Policy. Please refer to the remainder
of the Prospectus for further details and other information.
<TABLE>
<S> <C> <C>
-----------------------------------------------------------------------------
PREMIUM PAYMENTS AND WITHDRAWALS
-----------------------------------------------------------------------------
MINIMUM AMOUNTS
Initial Premium Depends on Specified Amount of insurance coverage
Subsequent Premiums Depends on Specified Amount of insurance coverage
Withdrawals None
-----------------------------------------------------------------------------
INSURANCE BENEFITS
-----------------------------------------------------------------------------
DEATH BENEFITS
Option A Greater of Specified Amount or Minimum Amount Insured
Option B Greater of Specified Amount plus cash value or Minimum Amount Insured
Minimum Coverage Required $100,000 ($25,000 for Insureds under age 18)
Minimum Increase or Decrease $25,000, subject to $50,000 minimum coverage amount ($25,000 for
in Coverage Insureds under age 18) with certain exceptions
OPTIONAL INSURANCE Accelerated Benefit for Terminal Illness
BENEFITS AVAILABLE Accidental Death Benefit
BY RIDER Children Term Life Insurance
Extended Maturity Date
Waiver of Monthly Deduction in Event of Permanent Disability
BENEFITS AT MATURITY Current Policy cash value
-----------------------------------------------------------------------------
POLICY CHARGES AND DEDUCTIONS
-----------------------------------------------------------------------------
PREMIUM CHARGE 3% from each premium payment received until 10 Annual Target Premium Payments paid
MONTHLY DEDUCTIONS FROM CASH VALUE
Cost of Insurance Charge(1)
(PER $1000 OF NET AMOUNT AT Issue Class Current Monthly Guaranteed Monthly(2)
RISK) Cost of Insurance Cost of Insurance
--------------- ----------------- ---------------------
Per (000) Per (000)
MINIMUM MONTHLY COST OF
INSURANCE RATES
MALE, AGE 9 Standard $0.08 $0.12
MALE, AGE 26 Preferred Ultra $0.05 $0.12
FEMALE, AGE 9 Standard $0.08 $0.12
FEMALE, AGE 32 Preferred Ultra $0.03 $0.11
MAXIMUM MONTHLY COST OF
INSURANCE RATES
MALE, AGE 99 Standard $63.03 $83.33
MALE, AGE 99 Preferred Ultra $27.84 $83.33
FEMALE, AGE 99 Standard $61.32 $83.33
FEMALE, AGE 99 Preferred Ultra $20.55 $83.33
ADMINISTRATIVE CHARGE $10 (applies only during first Policy Year)
MAINTENANCE CHARGE $5
TERMINAL ILLNESS RIDER None
ACCIDENTAL DEATH BENEFIT RIDER $.07 per $1,000 coverage
-----------------------------------------------------------------------------
<FN>
1 The cost of insurance charge for an Insured depends on the age, sex,
and rate class of the Insured. SEE "Calculating Your Cost of Insurance."
2 Based on the 1980 Commissioners Standard Ordinary Mortality Table.
</FN>
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
-----------------------------------------------------------------------------
CHILDREN TERM LIFE INSURANCE $.50 per $1,000 coverage
RIDER
EXTENDED MATURITY DATE RIDER None
WAIVER OF MONTHLY DEDUCTION Depends on age of Insured. The Waiver of Monthly Deduction rates are applied to the
RIDER amount of Monthly Deduction to be waived. The rates vary from a minimum of
$.05 per $1.00 of Monthly Deduction at ages 15-30 to a maximum of $.277 per
$1.00 of Monthly Deduction at age 59. The rates do not vary by underwriting class
or sex.
TRANSFER CHARGE $0 for first six transfers each Policy Year; $25 per transfer in excess of six per Policy Year
SEPARATE ACCOUNT
CHARGES
MORTALITY AND EXPENSE CHARGE 0.75% of net assets of Separate Account(3)
FEDERAL INCOME TAX CHARGE Currently none(4)
SURRENDER CHARGES
PARTIAL SURRENDER Lesser of $25 or 2% of amount withdrawn
FULL SURRENDER Maximum of 50% of Annual Target Premium Payment (declines each Policy Year to
MINIMUM AND MAXIMUM 0% after the 10th Policy Year)
SURRENDER CHARGES:
MINIMUM SURRENDER CHARGES
PER $1,000 OF INSURANCE
MALE, STANDARD Age 1 $2.41 at issue, grading to $0.00 after ten Policy Years
MALE, PREFERRED ULTRA Age 18 $1.76 at issue, grading to $0.00 after ten Policy Years
FEMALE, STANDARD Age 1 $2.45 at issue, grading to $0.00 after ten Policy Years
FEMALE, PREFERRED ULTRA Age 18 $1.53 at issue, grading to $0.00 after ten Policy Years
MAXIMUM SURRENDER CHARGES
PER $1,000 OF INSURANCE
MALE, STANDARD Age 80 $39.35 at issue, grading to $0.00 after ten Policy Years
MALE, PREFERRED ULTRA Age 80 $28.50 at issue, grading to $0.00 after ten Policy Years
FEMALE, STANDARD Age 80 $36.89 at issue, grading to $0.00 after ten Policy Years
FEMALE, PREFERRED ULTRA Age 80 $24.70 at issue, grading to $0.00 after ten Policy Years
-----------------------------------------------------------------------------
<FN>
3 The Mortality and Expense Charge is deducted on a daily basis at an
annual rate of 0.75% of the value of each Variable Fund Account.
4 There is currently no Federal Income Tax Charge deducted from the
assets of the Separate Account, because USAA Life does not currently incur any
income tax on the earnings or the realized capital gains attributable to the
Separate Account.
</FN>
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
FUND FEES AND OTHER EXPENSES
-----------------------------------------------------------------------------
Total Fund Total Fund
Other Expenses Other Expenses Operating Expenses Operating Expenses
Management Before Expense After Expense Before Expense After Expense
Fees Reimbursement Reimbursement Reimbursement Reimbursement(5)
---------- -------------- -------------- ------------------ ------------------
USAA LIFE
INVESTMENT TRUST
<S> <C> <C> <C> <C> <C>
MONEY MARKET FUND .20% .50% .15% .70% .35%
INCOME FUND .20% .32% .15% .52% .35%
GROWTH AND INCOME
FUND .20% .14% .14% .34% .34%
WORLD GROWTH FUND .20% .39% .39% .59% .59%
DIVERSIFIED ASSETS
FUND .20% .22% .15% .42% .35%
AGGRESSIVE GROWTH
FUND .50% .35% .20% .85% .70%
INTERNATIONAL FUND .65% .59% .45% 1.24% 1.10%
ALGER AMERICAN
FUND
GROWTH PORTFOLIO .75% .04% .04% .79% .79%
SCUDDER
VARIABLE LIFE
INVESTMENT FUND
CAPITAL GROWTH
PORTFOLIO CLASS A
SHARES .475% .035% .035% .51% .51%
BT INSURANCE
FUNDS TRUST
EQUITY 500 INDEX FUND .20% 2.58% .10% 2.78% .30%
SMALL CAP INDEX FUND .35% 2.92% .10% 3.27% .45%
EAFE(R) EQUITY INDEX
FUND .45% 2.30% .20% 2.75% .65%
-----------------------------------------------------------------------------
<FN>
5 The fee and expense figures shown with respect to each Fund are based
on amounts incurred during the most recent fiscal year. During this period,
certain expense reimbursement arrangements had the effect of reducing expenses
actually paid by certain Funds of the USAA Life Investment Trust, and the BT
Insurance Funds Trust, respectively. The expense reimbursement arrangements
for which USAA Life, out of its general account, has agreed to assume Fund
expenses to the extent that such expenses exceed, on an annual basis, .65% of
the monthly average net assets of the World Growth Fund, .70% of the monthly
average net assets of the Aggressive Growth Fund, 1.10% of the monthly average
net assets of the International Fund, and .35% of the monthly average net
assets o to a voluntary expense reimbursement arrangement, Bankers Trust
reimburses the BT Funds for certain expenses so that the Equity 500 Index
Fund, Small Cap Index Fund and EAFE(R) Equity Index Fund total operating
expenses will not exceed .30%, .45%, and .65%, respectively. Such expense
reimbursements may be terminated at the discretion of Bankers Trust.
</FN>
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
TRANSFERS
-----------------------------------------------------------------------------
<S> <C>
NUMBER OF FREE 6 per Policy Year
TRANSFERS
MINIMUM AMOUNT OF $250 (or remaining value in Variable Fund Account, if less)
TRANSFER
-----------------------------------------------------------------------------
LOANS
-----------------------------------------------------------------------------
MINIMUM LOAN None
ACCOUNT
MAXIMUM LOAN 85% of cash surrender value
AMOUNT
MAXIMUM INTEREST RATE 6% payable in advance, 4.5% preferred rate payable in advance
-----------------------------------------------------------------------------
</TABLE>
QUESTIONS AND ANSWERS
The following are answers to some basic questions about the Policy.
Please read the remainder of this Prospectus for further details.
WHAT KIND OF LIFE INSURANCE IS THE POLICY?
The Policy is a FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY. The
Policy is called "flexible premium" because it gives you the flexibility to
vary the amount and frequency of your premium payments, within certain limits.
SEE "Premium Payments." The Policy is called "variable" life insurance because
your cash value, your cost of insurance charges, and your life insurance
(death) benefits can vary according to your investment in one or more Variable
Fund Accounts. SEE "Cash Value," "Charges and Deductions - Monthly
Deductions," and "Death Benefit." Your investment experience in the Variable
Fund Accounts may be positive or negative. THE POLICY HAS NO MINIMUM
GUARANTEED CASH VALUE, WHICH MEANS YOU BEAR THE ENTIRE INVESTMENT RISK THAT
YOUR CASH VALUE COULD DECLINE TO ZERO.
HOW DO I BUY A POLICY?
You can buy a Policy by calling us at 1-800-531-8303 or by contacting
one of our regional offices. Our licensed insurance representatives can help
you complete an application and assist you through our application or
"underwriting" process, which normally involves a medical exam. We will issue
a Policy to you, provided you meet our requirements for insurability. We will
not issue a Policy that insures a person older than age 80. We also reserve
the right to reject an application for any reason. Insurance coverage under
your Policy begins on its Effective Date. SEE "Policy Issuance."
10
<PAGE>
HOW MUCH INSURANCE CAN I BUY?
The minimum amount of insurance you can buy is $100,000 ($25,000 if the
Insured is less than 18 years of age). We call the amount of insurance that
you specify on your application the "Specified Amount." Federal tax law limits
your ability to make certain amounts of large premium payments relative to
your Policy's Specified Amount and may impose penalties on amounts you take
out of your Policy if you do not observe certain additional requirements. SEE
"Premium Payments - Amount and Frequency of Payments" and "Tax Matters." We
will monitor your premium payments to be sure that you do not exceed permitted
amounts or inadvertently incur any tax penalties due to excess premium
payments. You can change the Specified Amount, at any time, subject to the
conditions described under "Death Benefit - Changing Your Policy's Specified
Amount."
WHAT INSURANCE PROTECTION DOES THE POLICY OFFER?
The Policy offers two types of insurance protection or "death benefit"
options. If you select the Option A death benefit, upon the Insured's death,
we will pay your beneficiary the greater of your Policy's Specified Amount or
the Minimum Amount Insured. If you select the Option B death benefit, upon the
Insured's death, we will pay your beneficiary the greater of the sum of your
Policy's Specified Amount and your cash value, on the one hand, or the Minimum
Amount Insured on the other. SEE " Death Benefit." As long as the Policy
remains in effect, under either option, the death benefit will never be less
than the Policy's Specified Amount, less any Indebtedness and any due and
unpaid Monthly Deductions.
In addition, you can add optional insurance death benefits to a Policy
by rider. SEE "Optional Insurance Benefits."
HOW MUCH ARE THE PREMIUM PAYMENTS?
Within certain limits, you have the flexibility to determine the amount
and timing of your premium payments to reflect your changing financial
conditions or objectives. We generally require a minimum initial premium to
issue a Policy, but we do not impose a minimum on your subsequent premium
payments. SEE "Premium Payments." You must, of course, maintain sufficient
cash value to keep your Policy in effect, which may require you to make
additional unscheduled premium payments. SEE "Policy Lapse and Reinstatement."
You will usually plan a periodic premium schedule when applying for a
Policy. If you wish, we will bill you for these amounts. However, you are not
required to follow this schedule. SEE "Premium Payments."
WHAT ARE THE CHARGES AND DEDUCTIONS?
We assess certain charges and deductions to support the operation of
your Policy and the Separate Account. Some charges apply to your premium
payments, some apply to your cash value, and others apply to the Separate
Account. In addition, we assess administrative fees for processing Policy
transactions, such as partial surrenders of cash value and transfer of value
among Variable Fund Accounts in excess of six free transfers per Policy Year.
SEE "The Policy At a Glance" and "Charges and Deductions."
11
<PAGE>
WHAT FACTORS AFFECT MY COST OF INSURANCE?
If you are the Insured, your cost of insurance will depend on your age,
sex, and rate class. The rate class that applies depends on your health,
whether you use tobacco, and other factors that we use to determine your
insurability. During the life of the Policy, the maximum monthly cost of
insurance charges will never exceed the guaranteed monthly cost of insurance
rates specified in your Policy. SEE "Calculating Your Cost of Insurance."
WHAT IS THE SEPARATE ACCOUNT?
The Separate Account is a segregated asset account of USAA Life that
supports the Policy's variable life insurance benefits. The Separate Account
consists of 12 Variable Fund Accounts, each of which invests in a
corresponding Fund. SEE "Investment Options."
WHAT ARE MY INVESTMENT CHOICES?
You may invest in up to 12 Variable Fund Accounts, each of which invests
exclusively in a corresponding Fund of the USAA Life Investment Trust
("Trust"), The Alger American Fund ("Alger Fund"), Scudder Variable Life
Investment Fund ("Scudder Fund"), or BT Insurance Funds Trust ("BT Fund"). SEE
"Investment Options."
HOW WILL MY POLICY'S CASH VALUE VARY?
Your Policy's cash value will vary on a daily basis to reflect the
investment experience of the Variable Fund Accounts. Your Policy's cash value
also will reflect the amount and frequency of premium payments, any partial
surrenders of cash value, any Policy loans and the charges and deductions
connected with the Policy. There is no minimum guaranteed cash value, which
means you bear the entire investment risk that your cash value could decline
to zero. SEE "Cash Value."
HOW MAY I ALLOCATE MY CASH VALUE?
You may allocate your cash value to any of the Variable Fund Accounts by
specifying on your Policy application how much of your Net Premium Payment you
would like us to apply to each Account. We will allocate your Net Premium
Payments in accordance with your allocation instructions on your application,
until you direct otherwise. You may change future allocations at any time by
telephone or by Notice to Us. You may allocate your Net Premium Payment in
increments as small as1/10th of one percent. SEE "Premium Payments."
CAN I TRANSFER VALUE AMONG INVESTMENT OPTIONS?
Yes. You can transfer value among the Variable Fund Accounts up to six
(6) times per Policy Year without charge. Each transfer above six (6) in a
Policy Year is subject to a $25 transfer charge. You may authorize transfers
by telephone or by Notice to Us. SEE "Telephone Transactions." Each transfer
must be at least $250, or the remaining value in the Variable Fund Account, if
less. SEE "Transfer of Value."
12
<PAGE>
HOW DO I ACCESS MY CASH VALUE?
You can partially or fully surrender the Policy for a portion or all of
its cash value, less any applicable charges, any Indebtedness, and any due and
unpaid Monthly Deductions. We assess an administrative charge equal to the
lesser of $25 or 2% of the amount withdrawn for each partial surrender paid.
We also assess a surrender charge for full surrenders. SEE "Surrenders" and
"Charges and Deductions - Surrender Charges." Partial surrenders and related
surrender charges will reduce your Policy's death benefit on a dollar for
dollar basis. SEE "Changing Your Policy's Specified Amount" under "Death
Benefits." Full surrenders will terminate the Policy. SEE "Tax Matters" for a
discussion of the tax consequences of surrenders.
CAN I BORROW AGAINST THE POLICY'S CASH VALUE?
Yes. You can borrow money from us by using your Policy as the sole
security for the loan. The most you can borrow against your Policy is 85% of
its cash surrender value. In some cases, we may reduce the amount you can
borrow. Interest on any loan is payable in advance at the maximum annual
interest rate of 6% (4.5% for preferred loans.). Lower rates may be available.
A loan, whether repaid or not, will have a permanent effect on the death
benefit and cash value of your Policy. SEE "Loans."
WHAT WILL CAUSE THE POLICY TO LAPSE WITHOUT VALUE?
Lapse will only occur when your cash value is insufficient to pay the
Monthly Deduction plus any loan interest then due and we do not receive
sufficient payment during the grace period. SEE "Lapse and Reinstatement."
WILL THE POLICY'S DEATH BENEFIT AND CASH VALUE BE TAXED?
The Policy is intended to meet the definition of a "life insurance
contract" under federal tax law. Therefore, the Policy's death benefit should
be fully excludable from the beneficiary's gross income if paid by reason of
the death of the Insured. In addition, any earnings on your investment in a
Variable Fund Account should not be taxable to you while the Policy is in
effect unless you surrender some or all of your Policy's cash value. We do not
intend this discussion to be tax advice. You should consult with your own tax
advisor before purchasing a Policy. SEE "Tax Matters."
CAN I OBTAIN PERSONALIZED ILLUSTRATIONS DEMONSTRATING HOW THE POLICY MIGHT
WORK?
Yes. We will furnish, upon request and at no charge, a personalized
illustration reflecting the proposed Insured's age, sex, and rate class. Where
applicable, we will also furnish upon request an illustration for a Policy
that is not affected by the sex of the Insured. We will base all such
personalized illustrations, to the extent appropriate, upon the methodology
and format of the form of illustration filed with the SEC. SEE "Registration
Statement."
DO I HAVE A "FREE LOOK" RIGHT TO EXAMINE THE POLICY?
Yes. You may cancel the Policy within 10 days after receiving it, or
such longer period as state law may require. USAA Life will refund the greater
of your premium payments or the value of the Variable Fund Accounts as of the
Date of Receipt of your cancellation request. SEE "Free Look Right."
13
<PAGE>
POLICY INFORMATION
POLICY ISSUANCE
WHO MAY PURCHASE A POLICY
Any individual of legal age in a state where the Policies may be
lawfully sold can apply to purchase a Policy. However, we will not issue a
Policy that insures a person who is over 80 years of age.
HOW TO PURCHASE A POLICY
To obtain a Policy, you must complete an application and submit it,
along with your initial premium payment (if required), to our Home Office. You
also must provide us with satisfactory evidence of your insurability as part
of the application or "underwriting" process. During the underwriting process,
we will normally ask you to complete a medical examination so that we can
assign you to an underwriting or "rate" class that we will use to determine
your cost of insurance charges.
After we complete our underwriting process, we will promptly notify you
of our decision regarding your application. We reserve the right to reject any
application for any reason. If we accept your application, the insurance
coverage provided by your Policy will begin as of the Effective Date. We may,
in our discretion, backdate the Effective Date of a Policy by up to six months
prior to the date of your application, if by doing so the Insured's issue age,
and hence your cost of insurance charges, would be lower. If we backdate a
Policy, your initial premium must include sufficient premium to cover the
backdating period. We will make Monthly Deductions for the period the Policy
is backdated. You will not receive any investment performance for the
backdating period.
EFFECTIVE DATE OF YOUR POLICY
Insurance coverage begins on the Policy's Effective Date. We will need
to receive your first premium payment to put your Policy into effect, unless
the Specified Amount you are applying for, plus any other insurance you
currently have with USAA Life, exceeds $500,000, in which case we will bill
you. If you pay your first full premium with your Policy application and we
issue the Policy as applied for, the Effective Date will ordinarily be the
date we approve the application and issue your Policy.
PREMIUM PAYMENTS
METHODS OF PAYMENT
We accept premium payments made by check or money order drawn on a U.S.
bank in U.S. dollars and made payable to "USAA Life Insurance Company" or
"USAA Life." We also accept premium payments made by bank draft, by wire, or
by exchange from another insurance company. All premium payments must be sent
directly to our Home Office. You can also use our Automatic Payment Plan to
have monthly premium payments automatically deducted from your bank account.
For further information about how to make premium payments by these methods
and any other method we may make available, please contact us by calling
1-800-531-8303.
14
<PAGE>
AMOUNT AND FREQUENCY OF PAYMENTS
You generally have the flexibility to determine the amount and frequency
of your premium payments. You must, however, maintain sufficient cash value to
keep your Policy in effect. SEE "Lapse and Reinstatement." In addition, you
must observe the limitations described below.
INITIAL PREMIUM PAYMENT. To issue a Policy, we generally require that
you provide us with an initial premium payment equal to at least one full
Planned Periodic Premium Payment, as specified in your Policy. If you have
elected to use our Automatic Payment Plan, the minimum initial premium payment
would equal two (2) monthly payments under the Plan.
MINIMUM AND MAXIMUM PREMIUM PAYMENTS. Except for your initial premium
payment, we do not require any minimum premium payment. However, at no time
may the total amount of your premium payments exceed the maximum amount
allowed by federal tax law, unless necessary to prevent lapse. We will monitor
your Policy's cash value and the amount of life insurance at risk to us that
is required to qualify the Policy as life insurance and to exclude the death
benefit from the beneficiary's taxable income. If a premium payment would
cause you to exceed the maximum amount allowed by federal tax law, we will
refund the excess premium payment to you. We also may invite you to apply,
subject to proof of insurability, to increase the Specified Amount of your
Policy. For more information, please refer to "Tax Matters."
ALLOCATION OF PREMIUMS
On your Policy application, you must specify how much of your Net
Premium Payments you want to allocate to each Variable Fund Account. You can
specify allocations in increments as small as 1/10th of one percent, provided
that the total amount of your allocations equals 100%.
PREMIUMS RECEIVED DURING THE APPLICATION PROCESS. We will hold your
initial premium payment in our general account during the application process.
During this time, we will not credit any earnings to you.
PREMIUMS RECEIVED DURING FREE LOOK PERIOD. We will allocate your initial
Net Premium Payment to the Money Market Variable Fund Account at the Account's
Accumulation Unit value next computed on the date we accept your application.
We will allocate any subsequent Net Premium Payment that you make during your
Free Look Period to the Money Market Variable Fund Account at the Account's
Accumulation Unit value next computed on the Date of Receipt of the payment.
SEE "Calculating Your Value in the Variable Fund Accounts." Your Net Premium
Payments will remain in the Money Market Variable Fund Account for the Free
Look Period plus five days. On the Valuation Date immediately following the
end of that period, we will allocate your Net Premium Payments, plus any
earnings, among the Variable Fund Accounts in accordance with the allocation
instructions specified on your Policy application, at the Accumulation Unit
value next computed on that Date.
PREMIUMS RECEIVED AFTER FREE LOOK PERIOD. We will allocate Net Premium
Payments that you make after your Free Look Period in accordance with the
allocation instructions specified on your Policy application, unless you
direct otherwise. We will credit your Net Premium Payments to the Variable
Fund Accounts on the Date of Receipt at the Accumulation Unit value next
computed on that Date.
15
<PAGE>
CHANGING YOUR ALLOCATIONS. You may change your allocation instructions
at any time by telephone or by Notice to Us. There are no charges or fees for
changing your allocation instructions. The allocation change will become
effective with the first premium payment we receive on or following the Date
of Receipt of your request.
PLANNED PERIODIC PREMIUM PAYMENTS
You may, for convenience, choose to make planned periodic premium
payments. Your Policy will show a schedule of planned periodic premium
payments and, if you like, we will send you premium notices at quarterly,
semi-annual, or annual intervals. To facilitate planned periodic premium
payments, we also will accept monthly premium payments through our Automatic
Payment Plan. You are not obligated to follow the schedule of planned periodic
premium payments and failing to do so will not itself cause your Policy to
lapse. Conversely, following the schedule will not guarantee that your Policy
will remain in effect, unless you have made enough premium payments to qualify
for the Guaranteed Death Benefit. SEE "Guaranteed Death Benefit."
ANNUAL TARGET PREMIUM PAYMENT
We will use the Annual Target Premium Payment specified in your Policy
to determine whether we will deduct a premium charge from your premium
payments or a surrender charge if you fully surrender. SEE "Premium Charge"
and "Surrender Charge" under "Charges and Deductions." We also will use the
Annual Target Premium Payment to determine whether the Guaranteed Death
Benefit applies. SEE "Guaranteed Death Benefit" under "Lapse and
Reinstatement." We determine the Annual Target Premium Payment actuarially
based on the age, sex and rate class of the Insured, and the insurance
benefits contained in the Policy.
INVESTMENT OPTIONS
Currently, you may invest, through the Separate Account, in up to 12
Funds. The Separate Account consists of 12 Variable Fund Accounts, seven of
which correspond to Funds of the Trust, three of which correspond to the BT
Fund, and one each of which corresponds to a Fund of the Alger Fund and the
Scudder Fund. You can invest in a Fund by allocating Net Premium Payments to
the corresponding Variable Fund Account.
USAA Investment Management Company ("USAA IMCO"), 9800 Fredericksburg
Road, San Antonio, Texas 78288, serves at the investment adviser to the Trust.
USAA IMCO is a wholly-owned indirect subsidiary of USAA. Bankers Trust
Company, 130 Liberty Street, New York, New York 10006, serves as the
investment manager of the BT Fund. Fred Alger Management, Inc., 75 Maiden
Lane, New York, New York 10038, serves as investment manager of the Alger
Fund's Growth Portfolio. Scudder Kemper Investments, Inc., Two International
Place, Boston, Massachusetts 02110, serves as the investment adviser to the
Scudder Fund's Capital Growth Portfolio. Neither Bankers Trust Company, Fred
Alger Management, Inc., nor Scudder, Kemper Investments, Inc. is affiliated
with USAA.
16
<PAGE>
A brief description of each Fund appears in the table below. For more
information, including a discussion of potential investment and other risks,
please refer to the accompanying prospectuses for the Funds.
<TABLE>
<S> <C>
-----------------------------------------------------------------------------
Fund Investment Objective
-----------------------------------------------------------------------------
USAA LIFE INVESTMENT TRUST
MONEY MARKET FUND Highest level of current income consistent with preservation of
capital and maintenance of liquidity
INCOME FUND Maximum current income without undue risk to principal
GROWTH AND INCOME FUND Capital growth and current income
WORLD GROWTH FUND Long-term capital appreciation
DIVERSIFIED ASSETS FUND Long-term capital growth, consistent with preservation of capital and
balanced by current income
AGGRESSIVE GROWTH FUND Appreciation of capital
INTERNATIONAL FUND Capital appreciation with current income as a secondary objective
THE ALGER AMERICAN FUND
Growth Portfolio Long-term capital appreciation
SCUDDER VARIABLE
LIFE INVESTMENT FUND
Capital Growth Portfolio - Maximize long-term capital growth from a portfolio consisting
Class A shares primarily of equity securities
BT INSURANCE FUNDS TRUST
Equity 500 Index Fund To replicate as closely as possible the performance of the Standard &
Poor's 500 Composite Stock Price Index before the deduction of
Fund expenses.
Small Cap Index Fund To replicate as closely as possible the performance of the Russell
2000 Index before the deduction of Fund expenses.
EAFE(R)Equity Index Fund To replicate as closely as possible the performance of the Morgan
Stanley Capital International Europe, Australia, Far East (EAFE)
Index before the deduction of Fund expenses.
-----------------------------------------------------------------------------
</TABLE>
17
<PAGE>
ADDITIONS OR CHANGES TO INVESTMENT OPTIONS
We may, from time to time, make additional Funds or Mutual Funds
available as investment options through corresponding Variable Fund Accounts.
We may do so when, for example, we believe marketing or investment conditions
warrant.
We also reserve the right, subject to compliance with applicable law, to
change the Funds that are or may be available as investment options. We may,
for example, eliminate or merge one or more Funds or substitute the shares of
a Fund for those of another Fund or Mutual Fund. We may do so, in our sole
discretion, if in our judgment further investment in any Fund would be
inappropriate in view of the purposes of the Policies. We will give you
written notice of the addition, elimination, merger, or substitution of any
Fund to the extent required by law. In any event, the Separate Account may
purchase other securities for other classes of policies.
In the event of any substitution or other change, we may, by appropriate
endorsement, make any changes in your Policy and any future policies as may be
necessary or appropriate to reflect the substitution or change. Also, we may
operate the Separate Account as a management company, we may deregister it
with the SEC in the event such registration is no longer required, or we may
combine it with other USAA Life separate accounts.
VOTING PRIVILEGES
From time to time, a Fund may seek shareholder approval on certain
matters. Each Variable Fund Account is a shareholder of the corresponding Fund
in which it invests. As the depositor of the Variable Fund Accounts, we are
entitled to vote the shares held by the Accounts. However, in our view,
applicable law currently requires us to vote the shares held by our Variable
Fund Accounts in accordance with instructions that we receive from Owners who
have a voting interest in the Funds. We presently intend to do so. We also
presently intend to vote shares on which we have received no instructions, as
well shares that we own that are not attributable to Policies, in the same
proportion as we vote shares for which we have received instructions. If,
however, applicable law changes or our view of the law changes, we may elect
to vote the Fund shares in our own right.
The number of Fund shares for which you may provide instructions depends
on your value in each corresponding Variable Fund Account, determined as of
the record date established by the Fund for determining shareholders. SEE
"Cash Value." We will send you voting instruction forms and related materials
at the appropriate time.
We may disregard your voting instructions under certain circumstances as
permitted by applicable law. In the event we disregard voting instructions, we
will include a summary of that action and the reasons for such action in the
next report to Owners.
18
<PAGE>
SPECIAL CONSIDERATIONS
The Scudder Fund, the Alger Fund, and the BT Fund offer shares to
separate accounts of unaffiliated life insurance companies to fund benefits
under variable annuity contracts and variable life insurance policies. The
Trust offers its shares to separate accounts of USAA Life to fund benefits
under the Policies and variable annuity contracts. We do not foresee any
disadvantage to Owners arising out of these arrangements. Nevertheless,
differences in treatment under tax and other laws, as well as other
considerations, could cause the interests of various purchasers of contracts
and policies to conflict. For example, violation of the federal tax laws by
one separate account investing in a Mutual Fund could cause the contracts or
policies funded through another separate account to lose their tax-deferred
status, unless remedial action were taken. If a material irreconcilable
conflict arises between separate accounts, a separate account may be required
to withdraw its participation in a Mutual Fund. If it becomes necessary for
any separate account to replace shares of a Mutual Fund with another
investment, the Mutual Fund may have to liquidate portfolio securities on a
disadvantageous basis. At the same time, the Scudder Fund, the Alger Fund, the
BT Fund, and USAA Life are subject to conditions imposed by the SEC that are
designed to prevent or remedy any conflict of interest. The Trust, which is
not subject to such conditions, has nevertheless adopted certain procedures
that substantially reflect and implement the substance of such conditions. In
this connection, the Board of Trustees of each Mutual Fund has the obligation
to monitor events in order to identify any material irreconcilable conflict
that may possibly arise and to determine what action, if any, should be taken
to remedy or eliminate the conflict.
POLICY LAPSE AND REINSTATEMENT
LAPSE
Your Policy will lapse at any time that your Policy cash value is
insufficient to pay the Monthly Deduction and any loan interest then due,
unless you have paid enough premiums to qualify for the Guaranteed Death
Benefit. SEE "Guaranteed Death Benefit." Any deduction for the cost of
insurance after lapse shall not be considered a reinstatement of the Policy
(or of any benefit provided by rider) nor a waiver by us of the lapse.
GRACE PERIOD
You have a grace period during which to provide us with sufficient
payment to keep your Policy in force. The grace period will begin on any
Monthly Anniversary when your Policy cash value is insufficient to cover the
Monthly Deduction for the following month and any loan interest then due. We
will notify you, and any assignee of record, of the date the grace period
expires and of the premium necessary to continue the Policy in effect. During
the grace period, you must submit enough premium to cover three (3) Monthly
Deductions and any loan interest due. The grace period is 61 days long and
begins on the date we send notice to you.
If you fail to pay the necessary premium within the grace period, all
insurance, including benefits provided by rider, terminates, and a Policy
lapse has occurred. If the Insured dies during the grace period, we will pay
the death benefit, less any due and unpaid Monthly Deductions and any loan
interest due through the month of death, to your beneficiary. We will not
refund any cash value remaining in the Policy at the beginning of the grace
period during the grace period or at lapse.
19
<PAGE>
GUARANTEED DEATH BENEFIT
You have the option to pay planned periodic premium payments based on
the Annual Target Premium Payment specified in your Policy. If on any Monthly
Anniversary during your first five (5) Policy Years the total premium you have
paid, less any partial surrenders, is equal to or greater than the Annual
Target Premium Payment specified in your Policy, adjusted to reflect the
number of Monthly Anniversaries that have occurred since the Policy's
Effective Date, then we guarantee that your Policy will not lapse, even if the
cash value is insufficient to pay for the Monthly Deduction and any loan
interest then due. The guaranteed death benefit is only available during the
first five (5) Policy Years.
To illustrate how the guaranteed death benefit works, let's assume your
Annual Target Premium Payment is $2,000. If you have paid an amount equal to
three and a half Annual Target Premium Payments or $7,000, your Policy will
not lapse, during the first three and a half Policy Years, even if your cash
value on any Monthly Anniversary during that period is insufficient to pay
your Monthly Deduction and any loan interest then due. The same would be true
on any Monthly Anniversary thereafter, until after the fifth Policy Year,
provided you have met the then applicable Annual Target Premium Payment
requirements. Conversely, if you have not met the applicable Annual Target
Premium Payment requirements on any Monthly Anniversary, the Guaranteed Death
Benefit would not apply and your Policy would lapse if your cash value is
insufficient to pay your Monthly Deduction and any loan interest then due.
If you change your Policy's Specified Amount within the first five (5)
Policy Years, we will declare a new Annual Target Premium Payment and use it
to determine whether the Guaranteed Death Benefit applies.
REINSTATEMENT
You may reinstate a lapsed Policy within five (5) years from the date of
lapse and before the Policy's maturity date. We will require the following for
reinstatement:
1. A completed written application for reinstatement;
2. Proof of insurability satisfactory to USAA Life;
3. Payment of premium sufficient to pay the estimated Monthly
Deductions for at least the three (3) Policy months beginning with
the effective date of reinstatement; and
4. Payment of, or agreement to reinstate, any Policy Indebtedness.
The effective date of the reinstated Policy will be the Monthly
Anniversary on or before approval date of reinstatement.
20
<PAGE>
Upon reinstatement, we will reinstate your Policy's death benefit to the
Specified Amount in effect at lapse, less, if applicable, any reinstated
Indebtedness. Your Policy's initial reinstated cash value will be the net
reinstated premium less the Monthly Deduction for the month following the
effective date of the reinstatement plus, if applicable, any reinstated
Indebtedness plus any interest earnings credited to the loan collateral held
in the general account. You will not receive any past performance during the
grace period.
One advantage of reinstating a lapsed Policy is that the first-year-only
administrative charge will not be repeated if it has already been paid. A
possible disadvantage of reinstatement is that any Policy Indebtedness must be
paid or reinstated.
CHARGES AND DEDUCTIONS
PREMIUM CHARGE
We deduct a 3% premium charge from each premium we receive to compensate
us for sales charges and taxes. The resulting Net Premium Payment is the
amount we allocate to the Variable Fund Accounts that you select.
We will deduct the premium charge from all of your premium payments
until the gross amount of premium payments we receive exceeds the sum of the
Annual Target Premium Payments payable over 10 years. If you increase or
decrease the Specified Amount, we will calculate a new Annual Target Premium
Payment for you and use it to determine whether the premium charge applies.
To illustrate how this charge works, if your Annual Target Premium
Payment is $2,000, we would no longer deduct the premium charge once you have
paid in premiums of $20,000 ($2,000 per Policy Year for 10 years).
MONTHLY DEDUCTIONS FROM CASH VALUE
On your Policy's Effective Date, and each Monthly Anniversary
thereafter, we will deduct certain monthly charges from your Policy's cash
value. SEE "Deduction of Charges." The Monthly Deduction will include your
cost of insurance charges, charges for any optional insurance benefits
provided by rider, an administrative charge, and a maintenance charge, as
described below.
COST OF INSURANCE CHARGES. Your monthly cost of insurance charges will
depend on a number of variables, including the Specified Amount of insurance
coverage and death benefit option you select (both of which affect the net
amount at risk to us), your cost of insurance RATE (which is based on the
Insured's age, sex, and rate class), and the investment experience of your
value in the Variable Fund Accounts. For more information on how we determine
your cost of insurance charges, SEE "Calculating Your Cost of Insurance."
CHARGES FOR OPTIONAL INSURANCE BENEFITS. The Monthly Deduction will
include charges for any optional insurance benefits added to the Policy by
rider. SEE "Optional Insurance Benefits."
21
<PAGE>
ADMINISTRATIVE CHARGE (FIRST POLICY YEAR ONLY). During your first twelve
Policy months only, we will deduct a monthly administrative charge of $10.
This charge compensates us for start-up administrative expenses that we incur
in issuing your Policy. These expenses include, for example, the cost of
processing your application, conducting a medical examination, determining
insurability and rate class, and establishing Policy records. The investment
advisers or other affiliates of certain Mutual Funds reimburse USAA Life for
the cost of administrative services provided to the Funds as investment
options under the Policies. Compensation is paid out of fee earnings, based on
a percentage of a Fund's average net assets attributable to a Policy.
RECURRING MAINTENANCE CHARGE. The Monthly Deduction will include a
recurring maintenance charge of $5. This charge compensates us for the
recurring administrative expenses related to the maintenance of your Policy
and of the Separate Account. These expenses include, for example, premium
notices and collection, recordkeeping, processing death benefit claims, Policy
changes, reporting, and overhead costs. This charge is guaranteed not to
increase during the life of the Policy.
SEPARATE ACCOUNT CHARGES
We deduct certain charges on a daily basis as a percentage of the value
of each Variable Fund Account of the Separate Account. These charges have the
affect of reducing your Policy's cash value.
MORTALITY AND EXPENSE CHARGE. We assess a daily charge of .00204% (equal
to 0.75% annual rate) against the values of each Variable Fund Account for
mortality and expense risks that we assume under the Policies. We guarantee
that this charge will not increase during the life of your Policy. The
mortality risk that we assume is that Insureds may live for a shorter period
of time than we estimate and, thus a greater amount of death benefits than
expected will be payable. The expense risk we assume is that expenses incurred
in issuing and administering the Policies will be greater than we estimate.
FEDERAL INCOME TAX CHARGE. Currently, we make no charge against the
Separate Account for federal income taxes that may be attributable to the
Separate Account. We may, however, make such a charge in the future, should it
be necessary. We also may make charges for other taxes, if any, attributable
to the Separate Account. SEE "Tax Matters."
TRANSFER CHARGES
We assess a $25 charge for each value transfer between Variable Fund
Accounts in excess of six (6) per Policy Year. SEE "Transfer of Value" and
"Deduction of Charges."
SURRENDER CHARGES
PARTIAL SURRENDER CHARGE. For each partial surrender of cash value, we
assess a charge equal to the lesser of $25 or 2% of the amount withdrawn. This
charge is also referred to as an "administrative processing fee." SEE "Partial
Surrenders" and "Deduction of Charges."
22
<PAGE>
FULL SURRENDER CHARGE. For full surrenders prior to the end of the 10th
Policy Year, we assess the surrender charge described below. The purpose of
the surrender charge is to compensate us for the expenses we incur in
distributing the Policies. The amount of the surrender charge will equal a
percentage of the Annual Target Premium Payment specified in your Policy,
regardless of the amount of premiums you actually pay. SEE "Annual Target
Premium Payment." The applicable percentage depends on when you surrender. As
shown in the table below, the applicable percentage declines each Policy Year
to 0% after the 10th Policy Year.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
SURRENDER CHARGE AS A % OF ANNUAL TARGET PREMIUM PAYMENT
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Policy Year 1 2 3 4 5 6 7 8 9 10 11+
Applicable % 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%
-----------------------------------------------------------------------------
</TABLE>
To illustrate how the surrender charge works, if your Annual Target
Premium Payment is $2,000 and you surrendered your Policy in full during the
first Policy Year, the surrender charge would be determined by multiplying 50%
times $2,000 = $1,000. Thus, in this example the surrender charge would be
$1,000.
If you increase or decrease your Policy's Specified Amount within the
first 10 Policy Years, we will declare a new Annual Target Premium Payment for
you, which we will use to determine the surrender charge. SEE "Changing Your
Policy's Specified Amount." However, we will not impose a surrender charge at
the time you decrease your Policy's Specified Amount.
OTHER CHARGES
The Variable Fund Accounts purchase shares of the Funds at the net asset
value of the shares. The net asset value reflects the investment management
fees and other expenses already deducted from each Fund's assets. These fees
and other expenses appear under "The Policy At a Glance." Please refer to the
accompanying prospectuses for the Funds for more information on these fees and
expenses.
DEDUCTION OF CHARGES
We will deduct the Monthly Deduction, any partial surrender charge, and
any transfer charge from your value in each Variable Fund Account in the same
proportion as each Variable Fund Account's value has to the total Policy cash
value. If you direct us in advance, we will permit you to specify from which
Variable Fund Account(s) you want the partial surrender charge and transfer
charge deducted.
DEATH BENEFIT
The Policy offers two death benefit options, Option A and Option B,
which you select on your Policy application.
If you select OPTION A, your death benefit will be the greater of (i)
your Policy's Specified Amount or (ii) the Minimum Amount Insured (which is a
specified percentage of your cash value based on the Insured's age). SEE
"Minimum Amount Insured."
23
<PAGE>
If you select OPTION B, your death benefit will be the greater of (i)
your Policy's Specified Amount PLUS your cash value or (ii) the Minimum Amount
Insured. SEE "Minimum Amount Insured."
Under either option, we will reduce the amount of death benefit we pay
by the amount of any outstanding Indebtedness and any due and unpaid Monthly
Deductions. SEE "Payment of Policy Benefits." Please note that partial
surrenders and related surrender charges also will reduce the amount of your
death benefit. SEE "Changing Your Policy's Specified Amount."
The death benefit payment will be increased by any applicable optional
insurance benefits provided by rider. SEE "Optional Insurance Benefits."
CHOOSING BETWEEN OPTION A AND OPTION B.
Both Option A and Option B provide insurance protection and the
opportunity to build your cash value. When choosing between Option A and
Option B, one way to differentiate the two may be to think of Option A as
emphasizing potential cash value growth and Option B as emphasizing potential
death benefit growth, as explained below.
Under Option A, any cash value you build will decrease the net amount at
risk to us relative to the amount of death benefit we must pay if the Insured
dies. As a result, all other things being equal, your cost of insurance
charges generally will be lower under Option A than under Option B for the
same Specified Amount. Lower monthly cost of insurance charges may enable you
to build cash value faster than if you were paying higher cost of insurance
charges under Option B. There is, however, no minimum guaranteed cash value,
which means you bear the entire investment risk that your cash value could
fall to zero. SEE "Cash Value."
Under Option B, unlike Option A, any cash value you build will increase
the amount of your death benefit. As a result, all other things being equal,
your death benefit under Option B generally will be greater than your death
benefit under Option A for the same Specified Amount.
ILLUSTRATIONS OF OPTION A AND OPTION B
To illustrate the differences between Option A and Option B, let's
assume that the Insured is less than 40 years old, that your Policy's
Specified Amount is $100,000, that you have no loan or outstanding Monthly
Deductions, and that your Policy cash value is $25,000.
Under Option A, your death benefit would be the greater of $100,000 and
the Minimum Amount Insured. Under Option B, your death benefit would be the
greater of $125,000 ($100,000 plus $25,000) and the Minimum Amount Insured.
Under both Options, the death benefit would be higher than the Minimum
Amount Insured, which would be $62,500, in this example. (The Minimum Amount
Insured is calculated by multiplying the cash value (ignoring the amount of
any outstanding Indebtedness) by a specific percentage which is based on the
Insured's age. In this example, the prescribed percentage would be 250%.
Different percentages apply at different ages, and generally decline as you
get older. SEE "Minimum Amount Insured.")
24
<PAGE>
Now let's assume that instead of $25,000 your cash value is $50,000. The
Minimum Insured Amount would be $125,000 (250% times $50,000). Under Option A,
your Minimum Insured Amount would be greater than the Specified Amount. As a
result, your death benefit would be $125,000. On the other hand, under Option
B, your death benefit ($150,000) would be higher than the Minimum Amount
Insured ($125,000).
CHANGING YOUR DEATH BENEFIT OPTION
After the death benefit option you selected on your application has been
in effect for one Policy Year, you may change it by sending Notice to Us. The
new death benefit option also must remain in effect for one Policy Year before
we will allow another change. There is no charge or fee for changing the death
benefit option. The change will become effective on the Monthly Anniversary on
or following the date we approve the change.
If you change your death benefit from Option A to Option B, your
Policy's new Specified Amount will be the old Specified Amount DECREASED by
your Policy's cash value (ignoring the amount of any outstanding Indebtedness)
as determined on the Date of Receipt of your Notice to Us. We will not allow
this change if it would result in a Specified Amount that is less than the
minimum Specified Amount of $50,000 ($25,000 for Insureds less than 18 years
of age). Changing from Option A to Option B will require proof of
insurability, if you wish your Policy's new Specified Amount under Option B to
be the same as the old Specified Amount under Option A.
If you change your death benefit option from Option B to Option A, your
Policy's new Specified Amount will be the old Specified Amount INCREASED by
your Policy's cash value (ignoring the amount of any outstanding Indebtedness)
next determined on the Date of Receipt of your Notice to Us. Changing from
Option B to Option A does not require proof of insurability, unless you make
changes in your Policy's Specified Amount or elect optional benefits available
by rider.
A change in death benefit option will affect your cost of insurance. SEE
"Calculating Your Cost of Insurance." We will recalculate the maximum premium
limitation following a change in death benefit option. SEE "Minimum Amount
Insured" under "Calculating Your Cost of Insurance."
CHANGING YOUR POLICY'S SPECIFIED AMOUNT
Within certain limits, you may increase or reduce your Policy's
Specified Amount. A change in Specified Amount may increase or decrease your
cost of insurance charges. SEE "Calculating Your Cost of Insurance." A change
in the Specified Amount also may have tax consequences. SEE "Tax Matters."
Changes in Specified Amount do not necessarily require changes in planned
periodic premiums. SEE "Planned Periodic Premium Payments." However, any
increase or decrease in Specified Amount will require us to declare a new
Annual Target Premium Payment for the new Specified Amount. SEE "Annual Target
Premium Payment." Whether the premium charge applies will be determined using
the new Annual Target Premium Payment. SEE "Premium Charge." We will
recalculate the maximum premium limitation following an increase or decrease
in Specified Amount. SEE "Premium Payments" and "Tax Matters."
25
<PAGE>
The minimum amount by which you can increase your Policy's Specified
Amount is $25,000, unless such increase is made in conjunction with a change
in death benefit Option or to satisfy Internal Revenue Code requirements. For
any increase, you must apply in writing and we will require satisfactory proof
of insurability. The increase will become effective on the Monthly Anniversary
on or following the date we approve the increase. Your rights to cancel your
Policy do not apply to increases in Specified Amount.
We will not allow a reduction in your Policy's Specified Amount (other
than that resulting from a partial surrender of cash value under Option A)
that results in a Specified Amount that is less than $50,000 ($25,000 if the
Insured is less than 18 years of age), nor will we allow a reduction that
would cause your Policy not to qualify as life insurance for federal tax law
purposes. Requests for reduction must be in writing. For purposes of
determining your cost of insurance charge, we will apply any decrease in
Specified Amount against the most recent increase in Specified Amount. The
decrease will become effective on the Monthly Anniversary on or following the
Date of Receipt of your Notice to Us.
Partial surrenders will reduce your Policy's death benefit on a dollar
for dollar basis unless the death benefit is the Minimum Amount Insured, in
which case your death benefit will be reduced by a multiple of the amount
surrendered. Under death benefit Option A, the Specified Amount and the cash
value will be reduced by the amount of the partial surrender. Under death
benefit Option B, only the cash value portion of the death benefit will be
reduced by the amount of the partial surrender.
OTHER POLICY BENEFITS
OPTIONAL INSURANCE BENEFITS
Subject to certain underwriting or issue requirements, you may add one
or more of the following optional insurance benefits to your Policy by rider.
Each rider's description in this Prospectus is subject to the specific terms
of the rider as each contains definitions, contractual limitations, and
conditions. We will deduct the cost of any optional insurance benefits as part
of the Monthly Deduction. SEE "Monthly Deductions."
ACCELERATED BENEFITS FOR TERMINAL ILLNESS RIDER. This rider provides for
an early benefit payment to you upon receipt of proof that the Insured is
terminally ill (as defined in the rider). The rider is not available in all
states. The maximum amount you may receive under the rider prior to the
Insured's death is 50% of the then current death benefit payable under the
Policy (excluding additional benefits payable under other riders) or, if less,
$250,000. We will deduct the amount of any Indebtedness from the amount of the
early payment. The early payment will be treated as a "lien" against Policy
values. The death benefit will be reduced by the amount of the lien and any
Policy loans, plus accrued interest. Monthly Deductions will continue to be
made after the early payment. The Owner's access to the cash value of the
Policy through Policy loans, partial surrenders, or full surrender is limited
to any excess of the cash value over the amount of the lien. Interest will be
charged on the amount of the early payment and any unpaid Monthly Deductions.
Premium payments required to be made for cost of insurance are still required
to be made after the early payment. If such payment is not paid when due, we
will pay the premium on behalf of the Owner and add that amount to the early
payment amount to be deducted from the death benefit. If the amount of the
early payment plus accrued interest and required unpaid cost of insurance
premiums ever exceed the amount of the death benefit, the Policy terminates
and no additional insurance benefits are payable.
26
<PAGE>
ACCIDENTAL DEATH BENEFIT RIDER. This rider provides an additional life
insurance benefit if the Insured's death results from accidental bodily injury
(as defined in the rider). The selected additional life insurance benefit can
be up to a maximum of $200,000, or the Specified Amount, whichever is less.
The premium for this rider is $.84 per $1,000 of coverage per year.
CHILDREN TERM LIFE INSURANCE RIDER. This rider provides level term life
insurance on the lives of the Insured's children (as defined in the rider).
The cost for this rider is $6 per $1,000 of coverage per year.
EXTENDED MATURITY DATE RIDER. This rider permits you to extend your
Policy's maturity date up to ten years beyond what it otherwise would be
(I.E., the Monthly Anniversary following the Insured's 100th birthday). The
death benefit during the extended maturity period will be your Policy's cash
value less any Indebtedness. Also during this period, the Policy's cash value
will continue to accrue in the same manner as described in the Policy, and any
Policy loans in effect will continue to accrue interest. We will not deduct
cost of insurance charges or accept additional premium payments during this
period. We will assess a maintenance charge during this period. Extension of
the maturity date is subject to all of the terms and conditions of the Policy,
except where they are inconsistent with the rider. Extending the maturity date
of your Policy beyond the Insured's age 100 may result in the current taxation
of any increases in your Policy's cash value that result from investment
experience in the Variable Fund Accounts. You should consult a qualified tax
adviser before making such an extension.
WAIVER OF MONTHLY DEDUCTION RIDER. This rider waives your Monthly
Deduction during periods of total and permanent disability of the Insured, but
only if the Insured has been totally and permanently disabled (as defined in
the rider) for at least six consecutive months. We will not deduct the amount
of any Monthly Deduction waived under this rider from the cash value proceeds
payable upon maturity of your Policy, or the death benefit proceeds payable if
the Insured dies before the Policy matures. If Option A is in effect when we
approve a claim under the rider, we will change your death benefit option from
Option A to Option B as of the Monthly Anniversary after the disability began.
While we are paying benefits under the rider, you may not increase your
Policy's Specified Amount. Please note that the rider does not apply to
interest under your Policy loans. As a result, it is possible that your Policy
could lapse for nonpayment of loan interest. The premium for this rider varies
based upon the age of the Insured.
If you would like further information about the optional insurance
benefits available under your Policy, please contact us at 1-800-531-8303.
Please note that adding or deleting riders, or increasing or decreasing
coverage under the riders, can have tax consequences. SEE "Tax Matters." You
should consult a qualified tax adviser.
BENEFITS AT MATURITY
If the Insured is living, we will pay the cash value of your Policy,
less any Indebtedness, when your Policy matures. All Policies will mature on
the Monthly Anniversary following the Insured's 100th birthday unless extended
by rider.
27
<PAGE>
PAYMENT OF POLICY BENEFITS
PAYMENT OF DEATH BENEFIT
As long as your Policy has not terminated due to lapse, maturity, or
full surrender, we will pay your Policy's death benefit to your beneficiary.
We will usually pay the death benefit within seven (7) days after we receive
due proof of death at our Home Office and all other requirements necessary to
make payment. We will determine the cash value portion of the death benefit as
of the Valuation Date immediately following the date of death. We will pay the
death benefit in cash or under one or more of the payment options you have
selected in advance. If you have not selected a payment option, your
beneficiary may select the payment option prior to (or after) the Insured's
death. We may postpone payment of the death benefit in certain circumstances.
SEE "Postponement of Payments."
We will reduce the death benefit by any Indebtedness and any due and
unpaid Monthly Deductions. These proceeds will be increased by any applicable
additional optional insurance death benefits provided by rider.
PAYMENT OF MATURITY BENEFIT
If your Policy matures before the Insured dies, we will normally pay you
the cash value of your Policy (reduced by any Indebtedness and any due and
unpaid Monthly Deductions) within seven (7) days after the Valuation Date on
which the Policy matures. We may postpone payments in certain circumstances.
SEE "Postponement of Payments."
DEATH BENEFIT PAYMENT OPTIONS
We will pay the death benefit in a lump sum or under one of the payment
options below. During the Insured's lifetime, you may select a payment option.
If the Insured dies and you have not chosen a payment option, your beneficiary
can choose a payment option. If you have selected a payment option before the
Insured's death, your beneficiary may not change that option after the
Insured's death. Proceeds applied under a payment option will no longer vary
by the investment experience of the Variable Fund Accounts.
The nature and timing of your choice of payment option can effect the
tax consequences to you or your beneficiary. You should consult your tax
adviser.
INTEREST ONLY OPTION. The Policy's principal amount may be left on
deposit with USAA Life for a mutually determined period, not to exceed 30
years. We will make interest payments at mutually determined regular
intervals. The principal amount will earn interest at a minimum rate of 3%
compounded annually. At the end of the fixed period, we will pay the principal
amount.
INSTALLMENTS FOR A FIXED PERIOD OPTION. Under this option, we will pay
the principal amount plus interest in equal or unequal installments for a
specified number of years (not more than 30), as mutually agreed upon. The
amount of the installments will not be less than that shown in the Table of
Guaranteed Payments contained in your Policy.
28
<PAGE>
INSTALLMENTS OF A FIXED AMOUNT OPTION. Under this option, we will pay
the principal amount plus interest in equal or unequal installments, as
mutually agreed upon, until the amount applied, together with interest on the
unpaid balance, is paid in full.
OTHER OPTIONS. We will apply the sum under any other option mutually
agreed upon.
Any arrangements involving more than one payment option, or involving a
Beneficiary that is not a natural person (E.G, a corporation) or who is a
fiduciary (E.G., a trustee) are subject to our approval. In addition, the
details of the arrangements are subject to our rules in effect at the time the
arrangements take effect.
The beneficiary may designate a successor payee as to any amount that we
would otherwise pay to the beneficiary's estate. Amounts applied under these
payment options will not be subject to the claims of creditors or to legal
process, to the extent permitted by law.
CASH VALUE
Your Policy's cash value will vary on a daily basis with the investment
experience of the Variable Fund Accounts to which you have allocated your Net
Premium Payments. Your Policy's cash value also will vary to reflect the
effect of various Policy transactions, such as additional premium payments,
partial surrenders, and Policy loans, and to reflect applicable charges and
deductions. YOUR POLICY DOES NOT PROVIDE A MINIMUM GUARANTEED CASH VALUE,
WHICH MEANS YOU BEAR THE ENTIRE INVESTMENT RISK THAT YOUR CASH VALUE COULD
FALL TO ZERO.
On your Policy's Effective Date, your cash value will equal your Net
Premium Payments, less the Monthly Deduction for the following Policy month.
Thereafter, your cash value on any Valuation Date will equal the sum of your
Policy's value in each Variable Fund Account plus, if applicable, any value
held in our general account to secure any Policy loan, plus any interest
earnings credited on the value held in the general account, less the amount of
any outstanding Indebtedness, and less any Monthly Deductions, transfer
charges, and partial surrender charges applied through that date. SEE "Loans."
On each Monthly Anniversary, the Monthly Deduction will reduce your
Policy's cash value.
CALCULATING YOUR VALUE
IN THE VARIABLE FUND ACCOUNTS
When you invest in a Variable Fund Account, you are purchasing units of
interest or "Accumulation Units" ("units") of that Account. You purchase units
at their price next determined on any given Valuation Date following the
receipt of your payment. Therefore, on any given Valuation Date, you can
calculate the value of your investment in a Variable Fund Account by
multiplying the number of units of each Variable Fund Account credited to your
Policy by the price of the units on that Date.
29
<PAGE>
We determine the number of units to credit to you by dividing (i) the
Net Premium Payment you allocate to a Variable Fund Account by (ii) that
Variable Fund Account's price per unit or "unit value" next computed on the
Date of Receipt of the premium payment. Certain transactions will affect the
number of units in a Variable Fund Account credited to you. Net Premium
Payments will increase the number of full or fractional units. Loans, partial
or full surrenders, partial surrender charges, transfer charges, and Monthly
Deductions involve redemption of full or fractional units and will decrease
the number of units. In addition, Transfer of Value among Variable Fund
Accounts will decrease the number of units in the Variable Fund Accounts from
which value is transferred and increase the number of units in the Variable
Fund Accounts to which value is transferred.
Each Variable Fund Account's units are valued separately. The unit value
of a Variable Fund Account on any Valuation Date is calculated by adjusting
the unit value from the previous Valuation Date for: (1) the investment
performance of the corresponding Fund, (2) any dividends or distributions paid
by that Fund, and (3) the Separate Account charges that we assess (SEE
"Separate Account Charges").
To find out daily what your cash value is, including the value and
number of units of each Variable Fund Account credited to your Policy, please
call us at 1-800-531-8303.
TRANSFER OF VALUE
Except during the first 30 days after your Policy becomes effective, you
may transfer all or part of the value in any Variable Fund Account to any
other Variable Fund Account of the Separate Account, up to six (6) times per
Policy Year, without charge. Each transfer thereafter is subject to a $25
charge.
The minimum amount you can transfer from any Variable Fund Account is
$250 (or the remaining Account value if less). A transfer will result in the
redemption or purchase (or both) of units of the Variable Fund Accounts
involved. You may request a transfer by telephone or by Notice to Us. A
request for transfer must clearly state the amount to be transferred, the
Variable Fund Account from which it is to be withdrawn, and the Variable Fund
Account to which it is to be credited. We will effect the transfer using the
Variable Fund Account unit values next computed on the Date of Receipt of your
request, unless a postponement of payments is in effect. SEE "Postponement of
Payments."
We reserve the right, at any time and without prior notice, to
terminate, suspend, or modify these transfer privileges.
LOANS
After your first Policy Year, you may borrow money from USAA Life by
using your Policy as the sole security for the loan. The amount that you may
borrow is the "loan value." The maximum loan value is 85% of your cash
surrender value.
You may request a loan by telephone or by Notice to Us, but you must
obtain the written consent of all assignees and irrevocable beneficiaries, if
any, before we can make the loan.
We will usually pay you the loan proceeds within seven (7) days after
the Date of Receipt of your loan request, unless a postponement of payments is
in effect. SEE "Postponement of Payments."
30
<PAGE>
LOAN COLLATERAL
When you take a loan, we will transfer an amount equal to the loan from
your value in the Variable Fund Accounts to our general account. We make this
transfer of "loan collateral" to secure your loan. You may specify the
Variable Fund Accounts from which you want us to withdraw the loan collateral.
If you do not so specify, we will withdraw the loan collateral from the
Variable Fund Accounts in the same proportion as each Account's value has to
the total Policy cash value. While a loan is outstanding, we will credit the
loan collateral on a daily basis with interest at an effective annual rate of
4%.
LOAN INTEREST
We will charge you interest on your loan at a maximum annual rate of 6%
payable in advance. We have the option of charging less. For Policies that
have been in effect more than 10 Policy Years and if the Insured is age 55 or
older, we charge interest at a maximum annual "preferred loan" rate of 4.5%
payable in advance. We have the option of charging less for a preferred loan.
The entire amount of interest on your loan balance for each Policy Year is
payable in advance at the commencement of the loan and at the beginning of
each Policy Year thereafter. We will automatically deduct the interest from
the Variable Fund Accounts in the same proportion as the loan amount was
withdrawn from the Accounts. If you have insufficient value in the Variable
Fund Accounts to pay the interest, we will add the amount of any unpaid
interest to your loan principal, and subject it to the same rate of interest
as the principal. Because interest is paid in advance, loan repayments during
a Policy Year may result in an overpayment of interest. We will credit any
overpayment of interest to you on the date of any loan repayment.
REPAYMENT OF INDEBTEDNESS
You may repay your Indebtedness (I.E., loans and any unpaid interest) in
full or in part at any time before the Insured's death and while the Policy is
in effect. If not repaid, we will deduct the Indebtedness from any death
benefit, maturity benefit, or full surrender proceeds. Loans and unpaid loan
interest in existence at the end of the grace period may not be repaid until
the Policy is reinstated.
You must designate any loan repayment as such. Otherwise, we will treat
it as a premium payment instead. You may direct how you want your loan
repayment to be allocated among the Variable Fund Accounts. If you do not
specify an allocation, we will allocate your loan repayment to the Variable
Fund Accounts in the same proportion as Net Premium Payments are being
allocated to the Accounts.
EFFECT OF POLICY LOANS
A loan will reduce the value of the Variable Fund Accounts from which it
is deducted. Thus, the amount loaned will not share in the investment
experience of the Variable Fund Accounts. Therefore, a loan, whether repaid or
not, will have a permanent effect on the cash value of the Policy.
Loan values will be determined as of the Date of Receipt of the loan
request. For situations where a Policy loan may be treated as a taxable
distribution, SEE "Tax Matters."
31
<PAGE>
SURRENDERS
You may fully or partially surrender your Policy for all or part of its
cash value to the extent described below. We will usually pay full or partial
surrenders of cash value within seven (7) days after we receive your written
request at our Home Office. We will determine the cash value of the
surrendered amount as of the Date of Receipt of your request for surrender.
There may be tax consequences in connection with a full or partial surrender.
SEE "Tax Matters." You must obtain the written consent of all assignees or
irrevocable beneficiaries, if any, before we will process any request for
surrender.
We will effect any surrenders using the Variable Fund Account unit
values next computed on the Date of Receipt of your Notice to Us or, in the
case of partial surrenders, your Notice to Us or telephone request. In certain
circumstances, we may postpone the payment of surrenders. SEE "Postponement of
Payments."
FULL SURRENDERS
At any time before the Insured's death and while the Policy is still in
effect, you may surrender your Policy for its entire cash surrender value by
sending Notice to Us. We may require the return of the Policy. We also may
assess a surrender charge. SEE "Surrender Charges." We sometimes refer to the
net amount you would receive as the Policy's "cash surrender value." Your
Policy and all insurance will terminate on the Date of Receipt of your Notice
to Us.
PARTIAL SURRENDERS
After your first Policy Year and while your Policy is still in effect,
but before the Insured's death, you may surrender a portion of your Policy for
cash. We will assess an administrative processing fee equal to the lesser of
$25 or 2% of the amount withdrawn. You may direct how you would like us to
withdraw a partial surrender and the administrative processing fee from your
current value in the Variable Fund Accounts. If you do not specify a
withdrawal allocation, we will withdraw the partial surrender and the
administrative processing fee from the Variable Fund Accounts in the same
proportion as each Account's value has to the total Policy cash value. SEE
"Surrender Charges" and "Deduction of Charges." You may request a partial
surrender by telephone or by Notice to Us.
Your Policy's remaining cash value after a partial surrender may not be
less than an amount equal to the then current surrender charge for a full
surrender.
Partial surrenders and related surrender charges will reduce your death
benefit. SEE "Changing Your Policy's Specified Amount" under "Death Benefit."
32
<PAGE>
TELEPHONE TRANSACTIONS
You may submit requests to change your premium payment allocation,
requests for partial surrenders, requests for loans, and requests for Transfer
of Value among Variable Fund Accounts by telephone. We will employ reasonable
procedures to confirm that instructions communicated by telephone are genuine,
and only if we do not, will we be liable for any losses because of
unauthorized or fraudulent instructions. We will obtain information prior to
any discussion regarding your Policy including, but not limited to: (i) your
USAA number or Policy number, (ii) your name, and (iii) your social security
number. In addition, we will record all telephone communications with you and
will send confirmations of all transactions to your address. Your Policy
automatically authorizes you to make telephone transactions, subject to our
right to modify, suspend, or discontinue this telephone transaction privilege
at any time without prior notice. You may decline the option of utilizing the
telephone transaction privilege when filling out your Policy application.
DOLLAR COST AVERAGING PROGRAM
The Dollar Cost Averaging Program enables you to make regular, equal
investments over time into one or more of the Variable Fund Accounts, by
transferring a fixed dollar amount at regular intervals from one or more
Variable Fund Accounts under the Policy.
To begin the Dollar Cost Averaging Program, you must have at least
$5,000 in the Variable Fund Account from which you intend to transfer value.
The minimum amount that you may transfer is $100, or the remaining value of
the Account, if less. The transfers must be scheduled to occur over a period
of at least 12 months at monthly, quarterly, or semi-annual intervals, as you
elect.
You may select this Program by submitting a written request to our Home
Office or by making a request by telephone. You may cancel your participation
in this Program in the same manner.
Transfers under the Dollar Cost Averaging Program will be processed
effective at the Accumulation Unit Values at the end of the Valuation Period
that includes the date of the transfer. No charges apply to transfers made
under the Dollar Cost Averaging Program.
We reserve the right to suspend, terminate, or modify the offering of
the Dollar Cost Averaging Program upon providing you written notice 30 days in
advance. Should we suspend or terminate the Program, the suspension or
cancellation will not affect any Policy for which the Dollar Cost Averaging
Program is already in effect.
FREE LOOK RIGHT
You may cancel your Policy within 10 days after receiving it, or such
longer period as state law may require, by returning the Policy to us along
with a written request for cancellation. Upon its return, we will refund the
greater of your premium payments or the value of the Variable Fund Accounts as
of the Date of Receipt of your written request to cancel, plus any premium
charge, Monthly Deduction, and mortality and expense charge that we deducted.
33
<PAGE>
POSTPONEMENT OF PAYMENTS
We may postpone payments of partial surrenders, full surrenders, Policy
loans, maturity benefits, death benefits, and Variable Fund Account transfers
beyond seven (7) days whenever:
1. the New York Stock Exchange is closed,
2. the SEC, by order, permits postponement for the protection of
Policy Owners, or
3. the SEC requires trading to be restricted or declares an
emergency.
We reserve the right to defer payment of any partial surrenders, full
surrenders, Policy loans or refunds that would be derived from a premium
payment made by a check until the check has cleared the banking system.
MORE POLICY INFORMATION
OWNERS AND BENEFICIARIES
OWNERS
If you are the Owner of the Policy, the rights and privileges of the
Policy during the lifetime of the Insured belong to you. Generally, the Owner
is also the Insured, unless a different Owner is designated in the application
or at a later date.
SUCCESSOR OWNER. As Owner, you may designate a successor Owner. If you
die without designating a successor Owner, ownership of the Policy will pass
to your estate.
CHANGE OF OWNERSHIP. As Owner, you may change ownership of your Policy,
at any time, during the Insured's lifetime, by submitting Notice to Us. The
change will take effect on the Date of Receipt of the request. A change of
ownership is subject to the rights of an assignee of record and those of any
irrevocable beneficiary. We are not responsible for any payments made or
actions taken before we receive your Notice to Us.
COLLATERAL ASSIGNMENT. As Owner, you may assign the Policy as collateral
security by submitting a Notice to Us. You will need to obtain the written
consent of any irrevocable beneficiaries and assignees of record before we
recognize any assignment; however, a collateral assignment takes precedence
over the interest of a revocable beneficiary. The assignment will take effect
as of the date we receive your Notice to Us. We are not responsible for the
validity or effect of any collateral assignment, nor are we responsible for
any payment or other action taken before we receive the Notice to Us. We are
not bound by an assignment until we receive it at our Home Office.
34
<PAGE>
We will pay any death benefit payable to an assignee in one lump sum. We
will pay any remaining proceeds to the designated beneficiary or
beneficiaries. A collateral assignee is not an Owner. A collateral assignment
is not a transfer of ownership, unless it is an absolute assignment. All
collateral assignees of record must consent to any full surrender, partial
surrender, loan or payment from a Policy under an Accelerated Benefits for
Terminal Illness Rider. 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. Therefore, you should consult a
qualified tax adviser prior to making an assignment.
BENEFICIARIES
You may name one or more beneficiaries in your Policy application. You
may classify beneficiaries as primary, contingent, revocable, or irrevocable.
If no primary beneficiary survives the Insured, we will pay the Policy
proceeds to the contingent beneficiaries. Beneficiaries in the same class will
receive equal payments unless you direct otherwise. A beneficiary must survive
the Insured in order to receive his or her share of the death benefit
proceeds. If a beneficiary dies before the Insured dies, his or her unpaid
share is divided among the remaining beneficiaries of the same class who
survive the Insured. If no beneficiary survives the Insured, we will pay the
proceeds to you, if you are alive, or, if not, to your estate.
CHANGE OF BENEFICIARY. You may change the beneficiary while the Insured
is living, by submitting a Notice to Us. You must obtain the written consent
of any irrevocable beneficiaries before we will accept any change in
beneficiary. A change in beneficiary will take effect on the Date of Receipt
of the request. We will not be responsible for any payment or other action
taken before receipt of your Notice to Us. If we make a payment of death
benefits in good faith before receiving the Notice to Us, we will receive
credit for the payment against our liability under the Policy. A change of
Beneficiary is subject to the rights of an assignee of record.
CALCULATING YOUR COST OF INSURANCE
For each Monthly Anniversary, we determine your monthly cost of
insurance by multiplying (i) the net amount at risk under your Policy by (ii)
your cost of insurance rate and (iii) dividing the resulting amount by 1000.
NET AMOUNT AT RISK
We determine the net amount at risk by subtracting your Policy's cash
value on any Monthly Anniversary from your Policy's current death benefit
(divided by a factor that discounts the death benefit to the beginning of the
month). Your Policy's death benefit may be the death benefit required to
qualify the Policy as life insurance. SEE "Minimum Amount Insured."
The net amount at risk may be greater if you have selected death benefit
Option B rather than death benefit Option A. SEE "Death Benefits." Since the
death benefit payable under Option B is the Specified Amount plus the cash
value, the difference between the death benefit and the cash value will be
greater under Option B than under Option A (unless the Minimum Amount Insured
applies). As the net amount at risk will be greater, so the cost of insurance
also will be greater. The net amount at risk also may be affected by changes
in your Policy's cash value or in the Specified Amount. SEE "Cash Value" and
"Death Benefits."
35
<PAGE>
The net amount at risk for each Policy continues to be determined
generally by subtracting the Policy's cash value from the Policy's death
benefit (divided by a factor that discounts the death benefit to the beginning
of the month), regardless of whether the death benefit is the Policy's current
Specified Amount or the Minimum Amount Insured. The cost of insurance rate
applied against the net amount at risk will continue to increase as the
Insured's age increases.
NET AMOUNT AT RISK - MORE THAN ONE RATE CLASS
If you increase the Specified Amount and the rate class applicable to
the increase is different from that of the initial Specified Amount, then, in
determining the cost of insurance charge, the net amount at risk will be
calculated separately for each rate class. The method of determining the net
amount at risk for each rate class will differ between Option A and Option B.
If Option A is in effect, the cash value will be apportioned among the initial
Specified Amount and any increases in Specified Amount. The cash value will
first be considered a part of the initial Specified Amount. If the cash value
is greater than the initial Specified Amount, the balance of the cash value
will then be considered a part of each increase in Specified Amount, beginning
with the first increase.
If Option B is in effect, the net amount at risk will be determined by
the proportional relationship of the initial Specified Amount and the
Specified Amount increases for each new rate class to the total Specified
Amount.
Because the method of calculating the net amount at risk is different
between Option A and Option B when more than one rate class is in effect, a
change in the death benefit option may result in a different net amount at
risk for each rate class than would have occurred had the death benefit option
not been changed. Thus, the total cost of insurance will be increased or
decreased.
COST OF INSURANCE RATES
Your cost of insurance rates are based on your Insured's age, sex, and
rate class. Generally, we set cost of insurance rates based on our
expectations as to future mortality experience. We apply any changes to cost
of insurance rates to all persons of the same age, sex, and rate class. We
will give you 30 days' notice before any increase in your current cost of
insurance rates becomes effective. We guarantee that your cost of insurance
rates will never be greater than the maximum cost of insurance rates shown in
your Policy. These guaranteed rates are based on the 1980 Commissioners
Standard Ordinary Mortality Table, and age on the Insured's last birthday.
The rate class of the Insured will affect your cost of insurance rate.
USAA Life currently places Insureds into one of three preferred rate classes
or into one of two standard rate classes involving higher mortality risks. In
an otherwise identical Policy, Insureds in the preferred rate class will have
a lower cost of insurance rate than those in a standard rate class. We make
all final determinations of an Insured's rate class.
36
<PAGE>
MINIMUM AMOUNT INSURED
The Minimum Amount Insured is the amount of insurance proceeds that the
Internal Revenue Code requires for your Policy to qualify as life insurance
and to exclude the death benefit from your beneficiary's taxable income. If
higher than the death benefit under Option A or Option B, we will pay you the
Minimum Amount Insured. You can determine the Minimum Amount Insured by
multiplying your Policy's cash value (ignoring the amount of any outstanding
loan and any unpaid loan interest) by a specified percentage based on the
Insured's age. The specified percentages, which generally decline as the
Insured gets older, are:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
MINIMUM INSURED AMOUNT AS A PERCENTAGE OF CASH VALUE
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INSURED'S 40 or 95 and older
AGE* Under 45 50 55 60 65 70 75 to 90
PERCENTAGE 250% 215% 185% 150% 130% 120% 115% 105% 100%
-----------------------------------------------------------------------------
</TABLE>
* Last birthday at the beginning of the Policy Year. A more complete table
appears in your Policy.
If, prior to the Insured's death, unexpected increases in your Policy's
cash value would cause your Policy not to satisfy Internal Revenue Code
requirements, we will increase the death benefit to the Minimum Amount Insured
so that the death benefit will be excluded from the beneficiary's taxable
income.
THE CONTRACT
The Policy is a legal contract between you and us. The consideration for
issuing the Policy is:
1. completion of the application, and
2. payment of the first full premium.
Your Policy, your Policy application, any supplemental applications,
riders, endorsements, and amendments form the entire contract. We will
consider statements in the application as representations and not warranties.
We will not use any representation to void your Policy or defend a claim under
your Policy unless it is contained in your written application or supplemental
application. Only the president or secretary of USAA Life has authority to
change or waive a provision of your Policy, and then only in writing.
All requests for changes to your Policy must be clear and in writing,
and must be received by our Home Office.
This Policy is subject to the laws of the state where it is issued. To
the extent that the Policy may not comply, it will be interpreted and applied
to comply.
37
<PAGE>
INCONTESTABILITY
We will not contest a Policy, or any increase in Specified Amount,
except for lapse or fraud, after the Policy or increase has been in effect
during the Insured's lifetime for two years. Any increase in the Specified
Amount will have its own two-year contestable period beginning with the
Effective Date of the increase. During any two-year contestable period, we
have the right to contest the validity of your Policy based on material
misstatements made in the application or any supplemental application. The
two-year contestable period begins on the Effective Date of your Policy, or,
in the case of an increase, on the date the increase is approved and made
effective.
If your Policy is reinstated after lapse, it will have a two-year
contestable period beginning with the date of reinstatement. If the Policy has
been in force for two years during the lifetime of the Insured, it will be
contestable only as to statements made in the reinstatement application. If
the Policy has been in force for less than two years, it will be contestable
as to statements made in any reinstatement applications as well as the initial
application.
The incontestability provisions do not apply to optional insurance
benefits added to your Policy by rider. Each rider contains its own
incontestability provision.
If we contest and rescind your Policy, you will receive your premiums
paid, less any Indebtedness and any previous partial surrenders.
MISSTATEMENT OF AGE OR SEX
Age means the Insured's age on his or her last birthday. If the
Insured's age or sex has been misstated on the application or any supplemental
application, we will adjust the cash value and death benefit to those based on
the correct Monthly Deductions since the Policy's Effective Date.
SUICIDE EXCLUSION
Your Policy does not cover suicide by the Insured, while sane or insane,
during the first two years after the Policy's Effective Date. If the Insured
commits suicide during this period, our sole liability will be to refund all
premiums paid, less any Indebtedness and previous partial surrenders. We will
not pay any death benefit in those circumstances.
If your Policy lapses and is later reinstated, we will measure the
two-year suicide exclusion period from the Effective Date of reinstatement. If
you increase your Policy's Specified Amount, we will measure the two-year
suicide exclusion period for the increase from the increase's Effective Date.
If the Insured dies as a result of suicide (whether sane or insane) during the
separate two-year suicide exclusion period, we will only pay the death benefit
attributable to the initial Specified Amount (on which the two-year suicide
exclusion period has expired). We will refund the premium payments less any
Indebtedness and any partial surrenders attributable to the increase in the
Specified Amount.
38
<PAGE>
NON-PARTICIPATING POLICY
Your Policy is "non-participating," which means you will not share in
any of our profits or surplus earnings. We will not pay dividends on your
Policy.
REPORTS AND RECORDS
We will maintain all records relating to the Policy and the Separate
Account. We will mail to you a Policy annual statement showing:
(1) the amount of death benefit;
(2) the cash value;
(3) any Indebtedness;
(4) any loan interest charge;
(5) any loan repayment since the last annual statement;
(6) any partial surrender since the last annual statement;
(7) all premium payments since the last annual statement;
(8) all deductions and charges since the last annual statement;
and,
(9) other pertinent information required by any applicable law
or regulation, or that we deem helpful to you.
We will mail the statement within 30 days after the Policy's
anniversary, or, at our discretion, within 30 days after the end of each
calendar year showing information as of a date not more than 60 days prior to
the mailing of the annual statement. We also will send you periodic reports
for the Funds that correspond to the Variable Fund Accounts, periodic reports
for the Separate Account, and any other information, as required by state and
federal law.
We will mail confirmation notices (or other appropriate notification)
promptly at the time of the following transactions:
(1) Policy issue;
(2) receipt of premium payments;
(3) transfers among Variable Fund Accounts;
(4) change of premium allocation;
(5) change of death benefit option;
(6) increases or decreases in Specified Amount;
(7) partial surrenders;
(8) receipt of loan repayments; and,
(9) reinstatement.
39
<PAGE>
PERFORMANCE INFORMATION
From time to time, we may quote performance information for the Variable
Fund Accounts of the Separate Account 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 Variable Fund Accounts 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 Variable Fund Account or the Fund in which it invests. The
performance information shown may reflect the deduction of only some of the
applicable charges to the Policy. We may, for example, exclude 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 Variable Fund Account'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 USAA Life's financial
strength or claims-paying ability as determined by firms that analyze and rate
insurance companies and by nationally recognized statistical rating
organizations.
Performance information for any Variable Fund Account reflects the
performance of a hypothetical Policy and are not illustrative of how actual
investment performance would affect the benefits under your Policy. Therefore,
you should not consider such performance information to be an estimate or
guarantee of future performance.
OTHER INFORMATION
USAA LIFE
USAA Life is a stock insurance company incorporated in the State of
Texas in June 1963. USAA Life is principally engaged in writing life insurance
policies, health insurance policies, and annuity contracts. USAA Life is
authorized to transact insurance business in all states of the United States
(except New York) and the District of Columbia. USAA Life on a consolidated
basis prepared in accordance with Generally Accepted Accounting Principles
("GAAP") had total assets of $7,174,411,000 on December 31, 1997. USAA Life is
a wholly-owned stock subsidiary of USAA. The commitments under the Policies
are USAA Life's, and USAA has no legal obligation to back those commitments.
USAA Life is the depositor administering the Separate Account. USAA
Life's obligations as depositor of the Separate Account may not be transferred
without notice to and consent of the Owners. USAA Life also issues variable
annuity contracts through another separate account, which is also a registered
investment company. In addition, USAA Life serves as transfer agent of the
USAA Life Investment Trust.
40
<PAGE>
DIRECTORS OF USAA LIFE. USAA Life is managed by its Board of Directors,
described below, all of whom are also officers of either USAA or USAA Life and
have the same principal business address as USAA Life, as shown on the front
cover page of this Prospectus.
NAME PRINCIPAL OCCUPATION (PAST FIVE YEARS)
Edwin L. Rosane Vice Chairman, Chief Executive Officer/President.
Robert G. Davis Chairman since June 1997; prior thereto, Director
since December 1996; Chief Executive Officer and
President of USAA CAPCO since December 1996; prior
thereto, Special Assistant to CEO, USAA, since
June 1996; prior thereto, Chief Executive Officer
and President of Bank One, Columbus, since 1991.
Bradford W. Rich Director; General Counsel & Secretary; Senior Vice
President, USAA, since January 1996; prior
thereto, Senior Vice President and Special
Assistant to CEO, USAA, since December 1995; prior
thereto, Executive Vice President and General
Counsel, ACE Limited.
Josue Robles, Jr. Director; Senior Vice President, Chief Financial
Officer/Treasurer, USAA, since August 1995; prior
thereto, Senior Vice President, Chief Financial
Officer/Controller, USAA, since September 1994;
prior thereto, Special Assistant to Chairman,
USAA, since July 1994; prior thereto, Active
Service with U.S. Army since 1966.
Michael J.C. Roth Director; Chief Executive Officer and President,
USAA IMCO, since October 1993 and January 1990,
respectively.
Janice E. Marshall Director; since June 1997; President, USAA Buying
Services, since March 1996; prior thereto, Senior
Vice President, Central Region & Regional
Services, USAA P&C, since November 1994; prior
thereto, Regional Vice President, USAA P&C, since
January 1993.
William B. Tracy Director since June 1997; Senior Vice President,
Human Resources, USAA, since June 1988.
Donald R. Walker Director since June 1997; Chief Information
Officer, USAA, and President & CEO, USAA ITCO,
since January 1996; prior thereto, Special
Assistant to Chairman, USAA, since November 1995;
prior thereto, Active Duty with U.S. Air Force
since 1966.
41
<PAGE>
OFFICERS (OTHER THAN DIRECTORS). The senior officers of USAA Life, other
than the Directors named above, and the officers responsible for variable life
operations are described below. The principal business address of each person
listed is same as the address of USAA Life, as shown on the cover page of this
Prospectus.
NAME PRINCIPAL OCCUPATION (PAST FIVE YEARS)
John W. Douglas Senior Vice President, Life & Health Operations,
since January 1997; prior thereto, Senior Vice
President, Life & Health Marketing, since January
1995; prior thereto, Senior Vice President, Life &
Health Marketing, since 1990.
Kenneth A. McClure Senior Vice President, Life & Health Marketing,
since January 1997; prior thereto, Senior Vice
President, Life & Health Operations, since January
1995; prior thereto, Senior Vice President, Life &
Health Operations, since August 1992.
James A. Robinson Treasurer/Senior Vice President, Finance, since
April 1992.
Edward R. Dinstel Vice President, Life & Health Underwriting/Issue,
since July 1991.
Larkin W. Fields Vice President, Life Marketing Services, since
November 1995; prior thereto, Vice President,
Corporate Actuary, since September 1994; prior
thereto, Vice President, Accounting, August 1993;
prior thereto, Assistant Vice President, Operating
Accounting, since May 1990.
Robert J. Flannery Vice President, Actuarial Valuation, since January
1998; Vice President, Actuary-Annuities & Life
Products, since March 1997; prior thereto, Vice
President, Actuary, since March 1994; prior
thereto, Assistant Vice President, Life Products
Actuary, since September 1988.
Richard T. Halinski, Jr. Assistant Secretary; Vice President and Managing
Attorney of Life & Health, USAA, since November
1994; prior thereto, Assistant Vice President and
Managing Attorney of Life & Health, USAA, since
November 1990.
Ronald W. Holtkamp Vice-President-Assistant Treasurer; Senior Vice
President-Senior Financial Officer, Financial
Service Center, USAA, since December 1997; prior
thereto Senior Vice President, Controller, USAA,
since June 1989.
King Mawhinney Vice President, Life Sales since May 1997; prior
thereto, Vice President, Health Insurance, since
September 1994; prior thereto, Assistant Vice
President, Health Insurance, since December 1992.
42
<PAGE>
Pattie S. McWilliams Vice President, Life/Annuity Service & Claims,
since September 1993; prior thereto, Assistant
Vice President, Policy Owner Services, since May
1988.
James M. Middleton Vice President, Systems Integration & Program
Control, since September 1997; prior thereto,
Assistant Vice President, Systems Integration &
Analysis, since March 1994; prior thereto,
Executive Director, Systems Integration & Program
Control, since 1992.
Stephen N. Patzman Vice President, Corporate Actuary since November
1995; prior thereto, Vice President, Operational
Accounting, since September 1994; prior thereto,
Assistance Vice President, Actuary, since July
1979.
Leldon W. (Jack) Ward Vice President, Health Insurance since May 1997;
prior thereto, Vice President, Life Sales, Life &
Health Marketing, since January 1996; prior
thereto, Assistant Vice President, USAA Life
General Agency, since December 1992.
Dwain A. Akins Assistant Secretary; Assistant Vice President and
Managing Attorney of Life & Health Insurance
Counsel, USAA, since November 1994; prior thereto,
Executive Director and Managing Attorney, Life &
Health Insurance Counsel, USAA, since February
1991.
Bruce W. Clements Assistant Vice President-Deputy General Counsel
and Assistant Secretary; Senior Vice President for
P&C Counsel, USAA, since September 1997; prior
thereto, Vice President-Deputy General Counsel,
USAA, since June 1991.
Allen R. Pierce Assistant Vice President, Actuary - reinsurance,
Specialty Markets and Life Insurance, since
January 1998; Assistant Vice President, Actuarial
Support & Management Accounting Products and other
related departments, since September 1994; prior
thereto, Executive Director, since 1992.
Michael A. Moczygemba Assistant Vice President, Market Planning, since
May 1998; prior thereto, Executive Director,
Market Planning, since June 1996; prior thereto,
Director, Market Planning & Analysis, Corporate
Plans, since October 1991.
Layne C. Roetzel Assistant Vice President, Plans & Administration,
since May 1998; prior thereto, Executive
Director/Controller, La Cantera Development
Company, since March 1997; prior thereto,
Director, Financial Statement Reporting, USAA
Life, since September 1995; prior thereto,
Co-Project Manager, CLAS/LIS Project, since
October 1995; prior thereto, Director, Management
Accounting, since December 1992.
You should also review the accompanying Fund prospectuses for a
description of the management of the Funds.
43
<PAGE>
SEPARATE ACCOUNT
The Separate Account was established by a resolution of the Board of
Directors of USAA Life as a separate account on January 20, 1998. The Separate
Account is organized as a unit investment trust and registered with the SEC
under the Investment Company Act of 1940. Registration does not involve
supervision of the management of the Separate Account by the SEC.
The assets of the Separate Account are the property of USAA Life and are
held for the benefit of the Owners and other persons entitled to payments
under Policies issued through the Separate Account. The assets of the Separate
Account equal to the reserves and other liabilities of the Separate Account
are not chargeable with liabilities that arise from any other business which
USAA Life may conduct.
The Separate Account is divided into Variable Fund Accounts, each
representing a different investment objective. Net Premium Payments are
allocated to the Variable Fund Accounts in accordance with your instructions.
SEE "Investment Options." Each Variable Fund Account invests exclusively in
the shares at the net asset value of a Fund. Income and gains and losses from
assets in each Variable Fund Account are credited to, or charged against, that
Variable Fund Account without regard to income, gains, or losses in the other
Variable Fund Accounts.
POLICY DISTRIBUTION
We intend to sell the Policy in all states in which we are licensed and
the District of Columbia. USAA IMCO, located at 10750 Robert F. McDermott
Freeway, San Antonio, Texas 78288, is the principal underwriter distributing
the Policy. USAA IMCO, a Texas corporation organized in May 1970, is
registered with the SEC under the Securities Exchange Act of 1934 as a
broker-dealer and is an active member of the National Association of
Securities Dealers, Inc.
The Policy will be sold by licensed life insurance sales representatives
who are also registered representatives of USAA IMCO. These licensed insurance
sales representatives are salaried employees and receive neither direct nor
indirect commissions nor any renewal commissions from the sale of the
policies.
USAA IMCO serves as principal underwriter for the Policies pursuant to
an amended and restated Distribution and Administration Agreement with USAA
Life dated March 30, 1998. Pursuant to this agreement, USAA Life bears the
cost of the salaries of the sales representatives who sell the policies and
substantially all other distribution expenses of the Policies. The agreement
terminates upon its assignment or upon at least ninety days' notice by either
party. USAA IMCO also serves as principal underwriter and investment adviser
for the following other registered investment companies: USAA Tax Exempt Fund,
Inc., USAA Investment Trust, USAA State Tax-Free Trust, USAA Mutual Fund,
Inc., USAA Life Investment Trust. In addition, USAA IMCO serves as principal
underwriter for the Separate Account of USAA Life, a registered investment
company.
44
<PAGE>
TAX MATTERS
The following is a discussion of certain federal income tax matters. We
do not intend this to be tax advice, nor does the following summary purport to
be complete or to cover all situations. You should consult your counsel and
other competent advisers for more complete information.
The individual situation of each Owner or beneficiary will determine how
ownership or receipt of Policy proceeds will be treated for purposes of the
federal estate tax, the state inheritance tax and other taxes.
TAXATION OF POLICY PROCEEDS
The following discussion is based on current federal income tax law and
interpretations. It assumes that the Owner is a natural person who is a U.S.
citizen and resident. The tax effects on non-U.S. residents or non-U.S.
citizens may be different. The discussion is general in nature, and should not
be considered tax advice, for which you should consult a qualified tax
adviser.
GENERAL. A 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 (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
* increases in your Policy's cash value as a result of investment
experience will not be subject to federal income tax unless and
until there is a distribution from your Policy, such as a
surrender or a partial surrender.
The federal income tax consequences of a distribution from your Policy
can be affected by whether your Policy is determined to be a "modified
endowment contract" (which is discussed below). In all cases, however, the
character of all income that is described below as taxable to the payee will
be ordinary income (as opposed to capital gain).
TESTING FOR MODIFIED ENDOWMENT CONTRACT STATUS. Your Policy will be a
"modified endowment contract" if, at any time during the first seven Policy
Years, you have paid a cumulative amount of premiums that exceeds the premiums
that would have been paid by that time under a similar fixed-benefit insurance
policy that was designed (based on certain assumptions mandated under the
Code) to provide for paid-up future benefits after the payment of seven level
annual premiums. This is called the "seven-pay" test.
45
<PAGE>
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, the selection of additional rider
benefits, 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's lifetime as a non-modified endowment contract, a Policy loan will be
treated as indebtedness, and no part of the loan proceeds will be subject to
current federal income tax. Interest on the loan generally will not be tax
deductible.
After the first 15 Policy Years, the proceeds from a partial surrender
will not be subject to federal income tax except to the extent such proceeds
exceed your "basis" in your Policy. (Your basis generally will equal the
premiums you have paid, less the amount of any previous distributions from
your Policy that were not taxable.) During the first 15 Policy Years, the
proceeds from a partial surrender or a reduction in insurance coverage could
be subject to federal income tax, under a complex formula, to the extent that
your cash value exceeds your basis in your Policy.
On the maturity date or upon full surrender, any excess in the amount of
proceeds we pay (including amounts we use to discharge any Policy loan) over
your basis in the Policy, will be subject to federal income tax. In addition,
if a Policy terminates 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.
46
<PAGE>
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's lifetime will be taxed on
an "income-first" basis. Distributions for this purpose include a loan
(including any increase in the loan amount to pay interest on an existing loan
or an assignment or a pledge to secure a loan) or partial surrender. Any such
distributions will be considered taxable income to you to the extent your cash
value exceeds your basis in the Policy. (For modified endowment contracts,
your basis is similar to the basis described above for other Policies, except
that it also would be increased by the amount of any prior loan under your
Policy that was considered taxable income to you.) For purposes of determining
the taxable portion of any distribution, all modified endowment contracts
issued by the same insurer (or its affiliate) to the same owner (excluding
certain qualified plans) during any calendar year are aggregated. The U.S.
Treasury Department has authority to prescribe additional rules to prevent
avoidance of "income-first" taxation on distributions from modified endowment
contracts.
A 10% penalty tax also will apply to the taxable portion of most
distributions from a Policy that is a modified endowment contract. The penalty
tax will not, however, apply to distributions (i) to taxpayers 59 1/2 years of
age or older, (ii) in the case of a disability (as defined in the Code) or
(iii) 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 terminates after a grace period while there is a Policy loan, the
cancellation of such loan will be treated as a distribution to the extent not
previously treated as such and could be subject to tax, including the 10%
penalty tax, as described above. In addition, on the maturity date and upon a
full surrender, any excess of the proceeds we pay (including any amounts we
use to discharge any loan) over your basis in the Policy, will be subject to
federal income tax and, unless an exception applies, the 10% penalty tax.
Distributions that occur during a Policy Year in which your Policy
becomes a modified endowment contract, and during any subsequent Policy Years,
will be taxed as described in the two preceding paragraphs. In addition,
distributions from a Policy within two years before it becomes a modified
endowment contract also will be subject to tax in this manner. This means that
a distribution made from a Policy that is not a modified endowment contract
could later become taxable as a distribution from a modified endowment
contract. The Treasury Department has been authorized to prescribe rules which
would treat similarly other distributions made in anticipation of a Policy
becoming a modified endowment contract.
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, if the payee has an insurable interest in the Insured's life because
the Insured is a director, officer or employee of the payee or by reason of
the Insured being financially interested in any trade or business carried on
by the payee.
47
<PAGE>
DIVERSIFICATION. Under Section 817(h) of the Code, the Treasury
Department has issued regulations that implement investment diversification
requirements. Failure by us 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.
Our Separate Account, through the Mutual Funds, intends to comply with these
requirements.
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 Owner, rather than the insurance company, to be
treated as the owner of the assets in the account. 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. USAA
Life reserves the right to amend the Policies in any way necessary to avoid
any such result. As of the date of this Prospectus, no such guidelines have
been issued, although the Treasury Department has informally indicated that
any such guidelines could limit the number of investment funds or the
frequency of transfers among such funds. These guidelines may apply only
prospectively, although retroactive application is possible if such standards
are considered not to embody a new position.
ESTATE AND GENERATION SKIPPING TAXES. If the Insured is the Policy
Owner, the death benefit under a Policy will generally be includable in the
Owner's estate for purposes of federal estate tax. If the Owner is not the
insured person, under certain conditions, only an amount approximately equal
to the cash surrender value of the Policy would be includable. Federal estate
tax is integrated with federal gift tax under a unified rate schedule. In
general, estates less than $625,000 (increasing annually, beginning in 1999,
to $1 million in 2006 and thereafter) will not incur a federal estate tax
liability. 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.
If the Owner of the Policy is not the Insured, and the Owner dies before
the Insured, the value of the Policy, as determined under Internal Revenue
Service regulations, is includable in the federal gross of the Owner for
federal estate tax purposes. Whether a federal estate tax is payable depends
on a variety of factors, including those listed in the preceding paragraph.
The particular situation of each Owner, Insured 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.
48
<PAGE>
PENSION AND PROFIT-SHARING PLANS. If 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.
If purchased as part of a pension or profit-sharing plan, the reasonable
net premium cost for such amount of insurance 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 cash value will not be subject to federal income tax. However, the
Policy's cash value will generally be taxable to the extent it exceeds the
participant's cost basis in the Policy. The participant's cost basis will
generally include the costs of insurance previously reported as income to the
participant. Special rules may apply if the participant had borrowed from the
Policy or was an owner-employee under the plan.
There are limits on the amounts of life insurance that may be purchased
on behalf of a participant in a pension or profit-sharing plan. Complex rules,
in addition to those discussed above, apply whenever life insurance is
purchased by a tax qualified plan. You should consult a qualified tax adviser.
OTHER EMPLOYEE BENEFIT PROGRAMS. Complex rules may also apply when a
Policy is held by an employer or a trust, or acquired by an employee, in
connection with the provision of other employee benefits. These Policy Owners
must consider whether the Policy was applied for by or issued to a person
having an insurable interest under applicable state law and with the insured
person's consent. The lack of an insurable interest or consent may, among
other things, affect the qualification of the Policy as life insurance for
federal income tax purposes and the right of the beneficiary to receive a
death benefit.
ERISA. Employers and employer-created trusts may be subject to
reporting, disclosure and fiduciary obligations under the Employee Retirement
Income Security Act of 1974. You should consult a qualified legal adviser.
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.
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, 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.
49
<PAGE>
TAXATION OF USAA LIFE
USAA Life is taxed as a life insurance company under federal income tax
laws. USAA Life does not initially expect to incur any income tax on the
earnings or the realized capital gains attributable to the Separate Account.
If, in the future, USAA Life determines that the Separate Account may incur
federal income taxes, then it may assess a charge against the Separate Account
Variable Fund Accounts for those taxes. Any charge will reduce the Policy's
cash value.
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, charges may be made for such taxes when they are attributable to our
Separate Account or allocable to the Policies.
Certain Mutual Funds in which your cash value is invested may elect to
pass through to USAA Life taxes withheld by foreign taxing jurisdictions on
foreign source income. Such an election will result in additional taxable
income and income tax to USAA Life. 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 USAA
Life.
STATE REGULATION OF USAA LIFE
USAA Life, a stock life insurance company organized under the laws of
Texas, is subject to regulation by the Texas Department of Insurance. An
annual statement is filed with the Texas Department of Insurance on or before
March 1st of each year covering the operations and reporting on the financial
condition of USAA Life as of December 31 of the preceding year. Periodically,
the Commissioner of Insurance examines the liabilities and reserves of USAA
Life and the Separate Account and certifies their adequacy.
In addition, USAA Life is subject to the insurance laws and regulations
of all other states and jurisdictions where it is licensed. Generally, the
Insurance Department of any other state applies the laws of the state of Texas
in determining USAA Life's permissible investments.
LEGAL MATTERS
Freedman, Levy, Kroll, and Simonds, Washington, D.C., has advised USAA
Life on certain federal securities law matters. All matters of Texas law
pertaining to the Policy, including the validity of the Policy and USAA Life's
right to issue the Policy under Texas insurance law, have been passed upon by
Dwain A. Akins, Assistant Vice President and Assistant Secretary of USAA Life.
We are not involved in any legal proceedings that may involve the assets
of the Separate Account nor are we involved in any legal proceedings of a
material nature involving our own assets.
50
<PAGE>
EXPERTS
The consolidated financial statements of USAA Life as of December 31,
1997 and 1996, and for each of the years in the three-year period ended
December 31, 1997, have been included in this Prospectus in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
included elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
REGISTRATION STATEMENT
USAA Life has filed a registration statement under the Securities Act of
1933 with the SEC relating to the offering described in this Prospectus. This
Prospectus does not contain all the information set forth in the registration
statement and amendments thereto and the exhibits filed as part thereof, to
all of which reference is hereby made for additional information concerning
the Separate Account, USAA Life and the Policies.
The exhibits to the registration statement include a form of
hypothetical illustration of the Policy that shows how cash value, cash
surrender value, and the death benefit could vary over an extended period of
time assuming hypothetical gross rates of return (I.E., investment income and
capital gains and losses, realized or unrealized) for the Funds equal to
annual rates of 0%, 6%, and 12%, Insureds in the rate class illustrated, and
based on current and guaranteed Policy charges.
The additional information contained in the registration statement may
be obtained at the SEC's main office in Washington, D.C., upon payment of the
prescribed fees.
FINANCIAL STATEMENTS
You should consider the consolidated financial statements of USAA Life
only as bearing on the ability of USAA Life to meet its contractual
obligations under the Policies. They do not bear on the investment performance
of the Separate Account. This Prospectus contains no financial statements for
the Separate Account, which commenced operations as of the date of this
Prospectus.
51
<PAGE>
USAA LIFE INSURANCE COMPANY
Consolidated Balance Sheets
December 31, 1997 and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
ASSETS 1997 1996
- ------ ---- ----
<S> <C> <C>
Investments:
Debt securities, at amortized cost $ 1,245,257 1,471,707
Debt securities, at fair value 4,869,912 4,119,664
Equity securities, at fair value 352,863 313,068
Mortgage loans 4,462 4,746
Policy loans 130,246 118,683
------------ ------------
Total investments 6,602,740 6,027,868
Cash and cash equivalents 39,642 9,444
Premium balances receivable 2,899 1,655
Accounts receivable - affiliates 50 20
Furniture and equipment 1,403 1,156
Accrued investment income 78,929 71,636
Deferred policy acquisition costs 207,090 189,298
Deferred tax 22,230 28,244
Other assets 34,631 20,712
Separate account assets 184,797 93,804
------------ ------------
Total assets $ 7,174,411 6,443,837
============ ============
LIABILITIES
Insurance reserves $ 992,983 811,413
Funds on deposit 5,097,272 4,763,093
Accounts payable and accrued expenses 87,315 34,295
Accounts payable - affiliates 12,072 13,441
Other liabilities 55,099 57,107
Separate account liabilities 184,797 93,804
------------ ------------
Total liabilities 6,429,538 5,773,153
------------ ------------
STOCKHOLDERS' EQUITY
Preferred capital stock, $100 par value;
1,200,000 shares authorized (600,000 in 1996);
600,000 shares issued and outstanding 60,000 60,000
Common capital stock, $100 par value;
30,000 shares authorized; 25,000 shares
issued and outstanding 2,500 2,500
Additional paid-in capital 51,408 51,408
Net unrealized gains on investments 33,403 22,300
Retained earnings 597,562 534,476
------------ ------------
Total stockholders' equity 744,873 670,684
------------ ------------
Total liabilities
and stockholders' equity $ 7,174,411 6,443,837
============ ============
</TABLE>
See accompanying notes to consolidated fnancial atatements.
52
<PAGE>
USAA LIFE INSURANCE COMPANY
Consolidated Statements of Income
Years ended December 31, 1997, 1996, and 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
REVENUES
Premiums $ 355,825 337,442 305,898
Investment income, net 452,104 428,161 406,922
Fees, sales and loan income 9,403 8,752 8,345
Net realized investment gains 43,524 13,773 1,748
Other revenues 31,315 13,335 14,587
------------ ------------ ------------
Total revenues 892,171 801,463 737,500
BENEFITS AND EXPENSES
Losses, benefits and settlement expenses 542,880 498,341 462,032
Deferred policy acquisition costs 11,898 6,071 3,915
Dividends to policyholders 53,082 53,691 45,588
Other operating expenses 117,354 122,474 124,318
------------ ------------ ------------
Total benefits and expenses 725,214 680,577 635,853
Income before income taxes 166,957 120,886 101,647
Federal income tax expense (benefit):
Current 57,799 37,090 38,447
Deferred (1,674) (1,494) (3,107)
------------ ------------ ------------
Total Federal income tax expense 56,125 35,596 35,340
------------ ------------ ------------
Net income $ 110,832 85,290 66,307
============ ============ ============
</TABLE>
See accompanying notes to consolidated fnancial atatements.
53
<PAGE>
USAA LIFE INSURANCE COMPANY
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996, and 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CAPITAL
Balance at beginning of year $ 113,908 93,908 93,908
Issuance of preferred stock - 20,000 -
------------ ------------ ------------
End of year 113,908 113,908 93,908
RETAINED EARNINGS
Beginning of year 534,476 465,016 418,310
Net income 110,832 85,290 66,307
Dividends to stockholders (47,746) (15,830) (19,601)
------------ ------------ ------------
End of year 597,562 534,476 465,016
NET UNREALIZED GAINS (LOSSES) ON INVESTMENTS
Beginning of year 22,300 16,446 (38,607)
Increase (decrease) in net unrealized
gains (losses) on investments 11,103 (398) 55,053
Transfer of unrealized capital gains on separate account - 6,252 -
------------ ------------ ------------
End of year 33,403 22,300 16,446
------------ ------------ ------------
NET UNREALIZED GAINS ON SEPARATE ACCOUNT
Beginning of year - 13,072 -
Increase (decrease) in net unrealized
gains on separate account - (6,820) 13,072
Transfer of unrealized capital gains on separate account - (6,252) -
End of year - - 13,072
------------ ------------ ------------
Total stockholders' equity $ 744,873 670,684 588,442
============ ============ ============
</TABLE>
See accompanying notes to consolidated fnancial atatements.
54
<PAGE>
USAA LIFE INSURANCE COMPANY
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996, and 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash from operating activities:
Net income $ 110,832 85,290 66,307
Adjustments to reconcile net income to net
cash provided by operating activities:
Net realized investment gains (43,524) (13,773) (1,748)
Non-cash investment income (13,148) (5,185) -
(Increase) in deferred policy acquisition costs (19,938) (17,728) (18,993)
Depreciation and amortization (7,951) (5,442) (5,298)
Deferred income tax benefit (1,974) (1,494) (3,107)
(Increase) in premium balances receivable (1,244) (44) (346)
(Increase) in accounts receivable-affiliate (30) (20) -
(Increase) in accrued investment income (7,292) (12,213) (7,171)
(Increase) Decrease in other assets (14,583) (8,495) 6,197
Increase in insurance reserves 102,790 78,926 65,721
Increase (Decrease) in accounts payable and
accrued expense 53,022 (20,126) 8,852
Increase (Decrease) in accounts payable-affiliates (1,370) 3,379 3,394
Increase (Decrease) in other liabilities 432 7,089 (4,712)
Other (3,016) 759 40
------------ ------------ ------------
Net cash provided by operating
activities 153,306 90,923 109,136
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sales and maturities of
available-for-sale securities 370,972 587,945 420,818
Proceeds from maturities of held-to-maturity
securities 117,667 106,504 184,729
Proceeds from principal collections on
investments 271,471 351,540 292,673
Other investments sold 948 1,123 934
Retirement of notes receivable - - 30,000
Securities purchased - available-for-sale (1,181,564) (1,460,349) (1,313,784)
Other investments purchased (165) (451) (1,382)
Investment in variable annuity separate account - 87,280 (81,000)
------------ ------------ ------------
Net cash used in investing activities (420,671) (326,408) (467,012)
------------ ------------ ------------
(Continued)
See accompanying notes to consolidated fnancial atatements.
55
<PAGE>
USAA LIFE INSURANCE COMPANY
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996, and 1995
(Dollars in Thousands)
Cash flows from financing activities:
Deposits and interest credited to funds
on deposit 742,374 571,941 655,626
Withdrawals from funds on deposit (419,611) (362,658) (344,774)
Proceeds from issuance of preferred stock - 20,000 -
Dividends to stockholders (25,200) (15,830) (19,601)
------------ ------------ ------------
Net cash provided by financing activities 297,563 213,453 291,251
------------ ------------ ------------
Net increase (decrease) in cash and cash
equivalents 30,198 (22,032) (66,625)
Cash and cash equivalents at beginning of year 9,444 31,476 98,101
Cash and cash equivalents at end of year $ 39,642 9,444 31,476
============ ============ ============
</TABLE>
Significant Non-Cash Financing Activities:
In 1997, the Company declared and paid a dividend to stockholders by
transferring equity securities with a fair value of $22,546, a cost of
$11,560, and recognized a gain of $10,986.
(Continued)
See accompanying notes to consolidated fnancial atatements.
56
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION
USAA LIFE INSURANCE COMPANY (the Company) is a wholly-owned
subsidiary of UNITED SERVICES AUTOMOBILE ASSOCIATION (USAA). The
Company markets individual life insurance policies, annuity
contracts, and individual and group accident and health policies
primarily to individuals eligible for membership in USAA. The
Company is licensed to do business in all states including the
District of Columbia but excluding New York. The Company has a
subsidiary company (USAA Life Insurance Company of New York)
licensed to sell Life and Annuity contracts in that state. The
Company's other business (USAA Life General Agency) offers
additional products of other insurance companies requested by USAA
membership, which are not sold by the Company. The consolidated
financial statements include the accounts of the Company and its
subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
(b) INVESTMENTS
Debt securities, including bonds, mortgage-backed securities
(MBS's), and redeemable preferred stocks, have been classified as
either held-to-maturity or available-for-sale. Debt securities
classified as held-to-maturity are carried at amortized cost.
Securities classified as available-for-sale are carried at fair
value with unrealized gains or losses (net of related deferred
income taxes, deferred policy acquisition costs, and future
policyholder benefits) reflected in stockholders' equity.
Bonds, at amortized cost of approximately $281,206, and $2,876
were on deposit with various state governmental agencies at
December 31, 1997, and 1996 respectively. When the New York
subsidiary was formed in 1997, the Company withdrew its license in
the State of New York. To be in compliance with the New York
Regulation 109, the 1997 deposits include $278,333 held for the
security of the New York policyholders.
Mortgage-backed securities held represent participating interests
in pools of long term first mortgage loans originated and serviced
by the issuers of the securities. Market interest rate
fluctuations can affect the prepayment speed of principal and the
yield on the securities.
All equity securities, which include common and nonredeemable
preferred stocks, have been classified as available-for-sale.
Equity securities are carried at fair value with unrealized gains
or losses (net of related deferred income taxes, deferred policy
acquisition costs, and future policyholder benefits) reflected in
stockholders' equity.
Real estate mortgages and policy loans are carried at their unpaid
principal balances with interest rates ranging from 4.80% to 10.0%
at December 31, 1997.
Short-term securities are carried at cost.
Interest is not accrued on debt securities or mortgage loans for
which principal or interest payments are determined to be
uncollectible.
(Continued)
57
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
Realized gains and losses are included in net income based upon
specific identification of the investment sold. When impairment of
the value of an investment is considered to be other than
temporary, a provision for the writedown to estimated net
realizable value is recorded.
(c) CASH AND CASH EQUIVALENTS
For purposes of the consolidated statement of cash flows, all
highly liquid marketable securities that have a maturity at
purchase of three months or less and money market mutual funds are
considered to be cash equivalents. At December 31, 1997 and 1996,
cash and cash equivalents include $268, and $362, respectively, of
separate account purchases awaiting reinvestment. These funds are
restricted from the Company's use.
(d) FEDERAL INCOME TAXES
The Company and its subsidiaries are included in the consolidated
Federal income tax return filed by USAA. Taxes are allocated to
the separate companies of USAA based on a tax allocation
agreement, whereby companies receive a current benefit to the
extent their losses are utilized by the consolidated group.
Separate company current taxes are the higher of taxes computed at
a 35% rate on regular taxable income or taxes computed at a 20%
rate on alternative minimum taxable income, adjusted for any
consolidated benefits allocated to the companies based on the use
of separate company losses within the group.
Deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets
and liabilities. The effect on deferred income taxes of a change
in tax rates is recognized in income in the period that includes
the enactment date.
(e) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value estimates of the Company's financial instruments
were made at a point in time, based on relevant market information
about the related financial instrument. These estimates do not
reflect any premium or discount that could result from offering
for sale at one time the Company's entire holding of a particular
financial instrument. In addition, the tax ramifications related
to the effect of fair market value estimates have not been
considered in the estimates.
(f) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(g) DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs, consisting primarily of certain
underwriting and selling expenses, are deferred and amortized.
Traditional individual life and health acquisition costs are
amortized in proportion to
(Continued)
58
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
anticipated premium income after allowing for lapses and
terminations (20 years; but not to exceed the life of the policy).
Acquisition costs for universal life and annuities are amortized
in relation to the present value of estimated gross profits from
surrender charges and investment, mortality and expense margins
(20 years).
Deferred policy acquisition costs are reviewed to determine that
the unamortized portion does not exceed expected future income or
gross profits.
(h) INSURANCE RESERVES
Included in reserves are traditional life and health products and
payout annuities with life contingencies. Payout annuities without
life contingencies, deferred annuities, and universal life
products are classified as funds on deposit. Traditional life and
individual health reserves are computed using a net level premium
method and are based on assumed or guaranteed investment yields
and assumed rates of mortality, morbidity, withdrawals, expenses
and anticipated future policyholder dividends. These assumptions
vary by such characteristics as plan, year of issue, policy
duration, date of receipt of funds, and may include provisions for
adverse deviation.
(i) INSURANCE REVENUES AND EXPENSES
Premiums on traditional life insurance products are recognized as
revenues as they become due. Benefits and expenses are matched
with premiums in arriving at profits by providing for policy
benefits over the lives of the policies and by amortizing
acquisition costs. For universal life and investment annuity
contracts, revenues consist of investment earnings and policy
charges for the cost of insurance, policy administration, and
surrender charges assessed during the period. Expenses for these
policies include interest credited to policy account balances,
benefit claims incurred in excess of policy account balances, and
administrative expenses. The related deferred policy acquisition
costs are amortized in relation to the present value of expected
gross profits from surrender charges and investment, mortality,
and expense margins.
(j) FUNDS ON DEPOSIT
Funds on deposit are liabilities for universal life and
investment-related products. These liabilities are determined
following the "retrospective deposit" method and consist
principally of policy account balances before applicable surrender
charges.
(k) PARTICIPATING BUSINESS
Certain life insurance policies contain dividend payment
provisions which enable the policyholder to participate in the
earnings of the life insurance operations. The participating
insurance in force accounted for 8% of the total life insurance in
force at December 31, 1997, and 9% of life insurance in force at
December 31, 1996. Participating policies accounted for 13% of the
premium income in 1997, and 15% of the premium income in 1996. The
provision for policyholders' dividends is based on current
dividend scales.
The Company guarantees to pay dividends in aggregate, on all
policies issued after December 31, 1983, in the total amount of
$15,092 in 1998.
(Continued)
59
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
Income attributable to participating policies in excess of
policyholder dividends is restricted by several states for
participating policyholders of those states, otherwise income in
excess of policyholder dividends is accounted for as belonging to
the stockholders.
(l) RECLASSIFICATIONS
Certain reclassifications of prior period amounts have been made
to conform with the current year's presentation.
(2) BASIS OF ACCOUNTING
The Company prepares separate statutory financial statements in
accordance with accounting practices prescribed or permitted by the
Insurance Department of Texas. Prescribed statutory accounting practices
include a variety of publications of the NAIC as well as state laws,
regulations, and general administrative rules. Permitted statutory
accounting practices encompass all accounting practices not so
prescribed. The NAIC is currently undergoing a codification project
whereby a comprehensive accounting and reporting basis may be adopted
which is intended to replace prescribed or permitted accounting
practices.
These consolidated financial statements have been prepared on the basis
of generally accepted accounting principles (GAAP), which differs from
the basis of accounting followed in reporting to insurance regulatory
authorities. Reconciliations of statutory net income and capital and
surplus, as determined using statutory accounting principles, to the
amounts included in the accompanying consolidated financial statements
are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory net income $ 97,588 62,998 55,213
Gain(loss) on sale of investments 980 (6,422) (1,719)
Deferred policy acquisition costs 19,938 17,728 18,993
Tax adjustment 7,253 8,386 397
Participating policyholder earnings 3,294 (787) (40)
Insurance reserves and other (18,221) 3,387 (6,537)
------------ ------------ ------------
GAAP net income $ 110,832 85,290 66,307
============ ============ ============
Statutory capital and surplus 540,053 470,263 396,676
Increases (decreases):
Deferred policy acquisition costs 207,090 189,298 164,831
Federal income taxes 22,354 28,236 19,974
Asset valuation reserve 99,651 103,482 96,742
Interest maintenance reserve - - 4,894
Participating policyholder liability (4,143) (6,583) (5,398)
Policyholder reserve and funds (91,468) (69,279) (75,052)
Investment unrealized gain (loss) adjustments:
Investment valuation difference 150,686 56,285 145,352
Policyholder accounts and other assets (175,607) (96,828) (155,588)
Other adjustments (3,743) (4,190) (3,989)
------------ ------------ ------------
GAAP capital and surplus $ 744,873 670,684 588,442
============ ============ ============
</TABLE>
(Continued)
60
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(3) INVESTMENTS
The amortized cost, estimated fair values and carrying values of
investments in debt and equity securities as of December 31, 1997 were
as follows:
<TABLE>
<CAPTION>
Held-to-Maturity
--------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
DEBT SECURITIES
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 11,060 1,912 - 12,972 11,060
Obligations of states and
political subdivisions 5,525 373 (2) 5,896 5,525
Debt securities issued by
foreign governments and
corporations 41,153 1,051 (13) 42,191 41,153
Mortgage backed securities 759,916 26,262 (1,546) 784,632 759,916
Corporate securities 427,603 16,220 (713) 443,110 427,603
------------ ------------ ------------ ------------ ------------
Total debt securities $ 1,245,257 45,818 (2,274) 1,288,801 1,245,257
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Available-for-Sale
--------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
DEBT SECURITIES
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 301,875 2,500 (994) 303,381 303,381
Obligations of states and
political subdivisions 66,443 2,933 - 69,376 69,376
Debt securities issued by
foreign governments and
corporations 128,144 4,866 (19) 132,991 132,991
Mortgage backed securities 1,230,196 54,906 (37) 1,285,065 1,285,065
Corporate securities 2,995,524 85,527 (1,952) 3,079,099 3,079,099
------------ ------------ ------------ ------------ ------------
Total debt securities $ 4,722,182 150,732 (3,002) 4,869,912 4,869,912
============ ============ ============ ============ ============
EQUITY SECURITIES
Common stock $ 216,508 82,854 (1,678) 297,684 297,684
Nonredeemable preferred stock 51,696 3,610 (127) 55,179 55,179
------------ ------------ ------------ ------------ ------------
Total equity securities $ 268,204 86,464 (1,805) 352,863 352,863
============ ============ ============ ============ ============
</TABLE>
(Continued)
61
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
The amortized cost, estimated fair values and carrying values of
investments in debt and equity securities as of December 31, 1996 were
as follows:
<TABLE>
<CAPTION>
Held-to-Maturity
--------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
DEBT SECURITIES
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 21,132 1,530 (4) 22,658 21,132
Obligations of states and
political subdivisions 42,844 807 - 43,651 42,844
Debt securities issued by
foreign governments and
corporations 53,333 280 (893) 52,720 53,333
Mortgage backed securities 870,583 24,443 (9,694) 885,332 870,583
Corporate securities 481,906 17,374 (3,517) 495,763 481,906
Redeemable preferred stock 1,909 - - 1,909 1,909
------------ ------------ ------------ ------------ ------------
Total debt securities $ 1,471,707 44,434 (14,108) 1,502,033 1,471,707
============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
Available-for-Sale
--------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair Carrying
Cost Gains Losses Value Value
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
DEBT SECURITIES
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 327,091 885 (4,372) 323,604 323,604
Obligations of states and
political subdivisions 7,848 723 (66) 8,505 8,505
Debt securities issued by
foreign governments and
corporations 127,213 3,619 (425) 130,407 130,407
Mortgage backed securities 1,232,769 38,654 (3,982) 1,267,441 1,267,441
Corporate securities 2,372,767 35,073 (18,133) 2,389,707 2,389,707
------------ ------------ ------------ ------------ ------------
Total debt securities $ 4,067,688 78,954 (26,978) 4,119,664 4,119,664
============ ============ ============ ============ ============
EQUITY SECURITIES
Common stock $ 202,313 70,095 (1,481) 270,927 270,927
Nonredeemable preferred stock 37,298 4,872 (29) 42,141 42,141
------------ ------------ ------------ ------------ ------------
Total equity securities $ 239,611 74,967 (1,510) 313,068 313,068
============ ============ ============ ============ ============
</TABLE>
(Continued)
62
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
The amortized cost and estimated fair values of debt securities classified as
held to maturity and available for sale at December 31, 1997, by contractual
maturity, are shown by category below. Expected maturities may differ from
contractual maturities because borrowers may have the right to prepay
obligations.
<TABLE>
<CAPTION>
Held-to-Maturity
----------------------------------
Estimated
Amortized fair
Cost Value
------------ ------------
<S> <C> <C>
Due in one year or less $ 108,753 109,699
Due after one year through five years 147,757 153,194
Due after five years through ten years 180,975 187,965
Due after ten years 47,856 53,311
------------ ------------
485,341 504,169
Mortgage-backed securities 759,916 784,632
------------ ------------
$ 1,245,257 1,288,801
============ ============
</TABLE>
<TABLE>
<CAPTION>
Available-for-Sale
----------------------------------
Estimated
Amortized fair
Cost Value
------------ ------------
<S> <C> <C>
Due in one year or less $ 58,514 58,809
Due after one year through five years 1,666,587 1,694,623
Due after five years through ten years 1,562,265 1,616,995
Due after ten years 204,620 214,420
------------ ------------
3,491,986 3,584,847
Mortgage-backed securities 1,230,196 1,285,065
------------ ------------
$ 4,722,182 4,869,912
============ ============
</TABLE>
Proceeds from sales of available-for-sale securities during 1997, 1996, and
1995 were $317,851, $495,039, and $416,071, respectively. Gross gains and
losses of $29,049 and $2,913 respectively for 1997, and $25,566 and $18,317
respectively for 1996, and $7,820 and $9,268 respectively for 1995, were
realized on those sales.
Gross investment income during 1997, 1996, and 1995 was $456,322, $431,893,
and $410,912, respectively and consists primarily of interest income on fixed
maturity securities. Investment expenses were $4,218, $3,732, and $3,990 for
1997, 1996, and 1995, respectively.
(Continued)
63
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(4) FEDERAL INCOME TAXES
The expected statutory Federal income tax amounts for the years ended
December 31, 1997, 1996, and 1995 differ from the effective tax amounts
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income before income taxes $ 166,957 120,886 101,647
============ ============ ============
Federal income tax expense at 35% statutory rate 58,435 42,310 35,577
Increase (decrease) in tax resulting from:
Dividends received deduction (604) (660) (536)
Tax credits - R&E (548) (6,188) -
Other, net (1,158) 134 299
------------ ------------ ------------
Federal income tax expense $ 56,125 35,596 35,340
============ ============ ============
</TABLE>
Deferred income tax benefit for the years ended December 31, 1997, 1996,
and 1995 was primarily attributable to differences between the valuation
of assets and insurance liabilities for financial reporting and tax
purposes.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31 are presented below:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets:
Insurance reserves $ 70,361 62,358
Accounts payable and accrued expenses 1,497 1,612
Policyholder dividends 6,778 6,738
Other, net 3,686 6,929
------------ ------------
Total gross deferred tax assets 82,322 77,637
------------ ------------
Deferred tax liabilities:
Investments 7,590 2,641
Depreciable assets 39 1
Deferred policy acquisition costs 34,517 37,025
Other, net 9 331
------------ ------------
Total gross deferred tax liabilities 42,155 39,998
------------ ------------
Deferred tax liability on net
unrealized gains on investments (17,937) (9,395)
------------ ------------
Net deferred tax asset $ 22,230 28,244
============ ============
</TABLE>
Management believes that the realization of the deferred tax asset is
more likely than not based on the expectation that such benefits will be
utilized in the future consolidated tax returns of the USAA group.
(Continued)
64
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
At December 31, 1997, and 1996, the Company had the following Federal
income tax payable/receivable amounts:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Current Net Federal income taxes payable (receivable) $ (1,552) 3,157
</TABLE>
Aggregate cash payments to (receipts from) USAA for income taxes were
$62,345, $38,064, and $44,965 for USAA Life Insurance Company and $163,
$(155), and $126 for its subsidiaries during the years ended December
31, 1997, 1996, and 1995, respectively.
(5) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following tables present the carrying amounts and estimated fair
values of the Company's financial instruments at December 31. Financial
Accounting Statement No. 107, "Disclosures about Fair Value of Financial
Instruments", defines the fair value of a financial instrument as the
amount at which the instrument could be exchanged in a current
transaction between willing parties.
<TABLE>
<CAPTION>
1997 1996
------------------------- ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 39,642 39,642 9,444 9,444
Debt securities 6,115,169 6,158,713 5,591,371 5,621,697
Equity securities 352,863 352,863 313,068 313,068
Mortgage loans 4,462 5,114 4,746 5,232
Other invested assets 2,352 2,736 2,373 2,828
Policy loans 130,246 130,246 118,683 118,683
Premium balances receivable 2,899 2,899 1,655 1,655
Accrued investment income 78,929 78,929 71,636 71,636
Separate Account 184,797 184,797 93,804 93,804
Financial liabilities:
Deferred annuities and annuities without
life contingencies 3,787,507 3,787,507 3,720,373 3,720,373
Policyholder dividend accumulations 28,593 28,593 23,191 23,191
Policy dividends declared but unpaid 31,081 31,081 29,415 29,415
Accounts payable and accrued expenses 87,315 87,315 34,295 34,295
Separate Account 184,797 184,797 93,804 93,804
</TABLE>
The carrying amounts of financial assets and liabilities shown in the
above table are included in the balance sheet under the indicated
captions with the following exceptions: other invested assets are
included in other assets, deferred annuities and annuities without life
contingencies are included in funds on deposit, policyholder dividend
accumulations are included in funds on deposit, and policy dividends
declared and unpaid are included in other liabilities.
(Continued)
65
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments:
Cash and cash equivalents: Cash and cash equivalents approximate fair
value because of the short maturity of these instruments.
Debt and equity securities: Fair market values for bonds and stocks are
determined using quoted market prices from Merrill Lynch Pricing
Services, Bloomberg Services or individual brokers.
Mortgage loans: The fair value of mortgage loans and the mortgage loan
component of other assets are estimated by discounting the future cash
flows using interest rates currently being offered for mortgage loans
with similar characteristics and maturities.
Policy loans: In the Company's opinion, the book value of the policy
loans approximates their fair value. Policy loans are shown on the
financial statements at face value, and carry interest rates ranging
from 4.8% to 7.4% in advance.
Premiums receivable: The recorded amount for premiums receivable
approximates fair value because only a slight percentage of total
policies issued by the Company lapse.
Accrued investment income: The accrued amount of investment income
approximates its fair value because of the quality of the Company's
investment portfolio combined with the short term nature of the
collection period.
Deferred annuities and annuities without life contingencies: The fair
value of the deferred annuities is estimated as the aggregate cash value
of the annuity, which approximates the carrying value. The fair value of
annuities without life contingencies is estimated as the commuted value
of the annuity.
Policyholder dividend accumulations: The fair value of policyholder
dividend accumulations is estimated using the book value less a
percentage of accrued interest anticipated to be forfeited as a result
of policy cancellations. Estimated annual interest to be forfeited is
not significant.
Policy dividends declared but unpaid: The carrying value of policy
dividends declared but unpaid approximates the fair value because the
carrying value reflects anticipated forfeitures as a result of policy
cancellations. Estimated annual interest to be forfeited is not
significant.
Accounts payable and accrued expenses: The fair value of accounts
payable and accrued expenses approximates its carrying value because of
the short term nature of the obligations.
Separate account assets and liabilities: The separate account assets
reflect the net asset value of the underlying mutual funds, therefore
carrying value is considered fair value. The separate account
liabilities are reflected at the underlying balances due to the contract
holders, excluding seed money, without consideration for applicable
surrender charges, if any.
(Continued)
66
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(6) BORROWINGS
The Company has no borrowing activity outside of the agreements
described in Note 7 "Transactions with affiliates."
(7) TRANSACTIONS WITH AFFILIATES
Certain services have been contracted from USAA and its affiliates, such
as rental of office space, utilities, mail processing, data processing,
printing, and employee benefits. The Company allocates these and other
expenses to affiliates for administrative services performed by the
Company. The contracted services and allocations are based upon various
formulas or agreements with the net amounts included in expenses. The
aggregate amount of such contracted services was $73,136, $70,713, and
$66,787 for 1997, 1996, and 1995, respectively. The aggregate amount of
the Company's allocations to affiliates was $4,376, $4,742, and $3,910
for 1997, 1996, and 1995, respectively.
The Company has an agreement with USAA Investment Management Company
regarding the reimbursement of costs for investment services provided.
The aggregate amount of the USAA Investment Management Company
contracted services was $3,037, $2,793, and $2,941 for 1997, 1996 and
1995, respectively.
The Company also received premium and annuity considerations from USAA
of $4,201, $4,093, and $6,145 in 1997, 1996, and 1995, respectively,
representing amounts received for structured settlements issued to
claimants of USAA and for group insurance on USAA employees.
The Company has intercompany funding agreements with USAA Capital
Corporation (CAPCO) and USAA Funding Company (FUNDCO) for unsecured
borrowings up to $150,000 in the aggregate, at an interest rate based
upon CAPCO's or FUNDCO's cost of funding. As of December 31, 1997, 1996,
and 1995 the Company had no liability for borrowed money. The Company
borrowed $3,598,125 during 1997, $2,566,042 during 1996, and $1,809,466
during 1995, through the use of these funding agreements. The interest
associated with these intercompany funding agreements was $855, $660,
and $898 in 1997, 1996, and 1995, respectively.
In 1996, the Company exercised a put option on a $20,000 medium term
note from CAPCO.
(8) REINSURANCE
The Company is party to several reinsurance agreements. The Company's
general policy is to reinsure that portion of any risk in excess of $600
with a $100 corridor on the life of any one individual. However in 1997
the Company entered into certain reinsurance treaties which are based on
a first dollar quota share pool. The Company retains 10% of the risk on
each life up to the normal $600 retention and the remaining 90% goes to
a coinsurance pool which is placed with a number of reinsurers on a
quota share basis.
Additionally, the Company's entry into the Bank Owned Life Insurance
(BOLI) business resulted in two reinsurance treaties, one Yearly
Renewable Term (YRT) and one Coinsurance treaty, both of which are with
one reinsurer on a first dollar basis, with the Company retaining 50% of
the business in the coinsurance arrangement.
(Continued)
67
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
Although the ceding of reinsurance does not discharge the Company from
its primary legal liability to a policyholder, the reinsuring company
assumes the related liability.
Life insurance in force in the amounts of $4,077,094, $3,595,801 and
$3,690,040 is ceded on a yearly renewable term basis; $4,684,726,
$939,290, and $716,596 is ceded on a coinsurance basis; and $957,267,
$952,599, and $1,000,581 is ceded in accordance with a stop loss
agreement at December 31, 1997, 1996, and 1995, respectively.
Reinsurance amounts related to insurance reserves, funds on deposit, and
paid losses totaled $204,607, and $13,023 at December 31, 1997 and 1996,
respectively. Premium revenues and interest credited to policyholders
were reduced by $204,109, $11,837, and $11,072 for reinsurance premiums
ceded during the years ended December 31, 1997, 1996, and 1995,
respectively. Benefits were reduced by $196,062, $7,838, and $7,435 for
reinsurance recoverables during the years ended December 31, 1997, 1996,
and 1995, respectively. One reinsurer accounts for 90% of the amount
recoverable from reinsurers at December 31, 1997.
Reinsurance amounts related to accident and health insurance reserves
and paid losses totaled $17,981 and $15,786 at December 31, 1997 and
1996, respectively. Premium revenues were reduced by $3,297, $3,117, and
$3,134 for reinsurance premiums ceded during the years ended December
31, 1997, 1996, and 1995, respectively. Benefits were reduced by $3,268,
$3,604, and $3,299 for reinsurance recoverables during the years ended
December 31, 1997, 1996, and 1995, respectively.
(9) DEFERRED POLICY ACQUISITION COSTS AND FUTURE POLICY BENEFITS
Deferred policy acquisitions costs and premiums are summarized below:
<TABLE>
<CAPTION>
Accident
Life Annuity and Health Total
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at
January 1, 1995 $ 122,138 28,115 11,608 161,861
---------- ---------- ---------- ----------
Additions 15,676 4,498 2,658 22,832
Amortization (4,375) 1,926 (1,466) (3,915)
FAS 115 DAC (2,051) (13,896) - (15,947)
---------- ---------- ---------- ----------
Net change 9,250 (7,472) 1,192 2,970
---------- ---------- ---------- ----------
Balance at
December 31, 1995 $ 131,388 20,643 12,800 164,831
---------- ---------- ---------- ----------
Additions 18,436 2,999 2,364 23,799
Amortization (5,006) 634 (1,699) (6,071)
FAS 115 DAC 141 6,598 - 6,739
---------- ---------- ---------- ----------
Net change 13,571 10,231 665 24,467
---------- ---------- ---------- ----------
Balance at
December 31, 1996 $ 144,959 30,874 13,465 189,298
---------- ---------- ---------- ----------
Additions 24,674 3,942 3,073 31,689
Amortization (7,764) (2,373) (1,761) (11,898)
FAS 115 DAC 1,201 (3,200) - (1,999)
---------- ---------- ---------- ----------
Net change 18,111 (1,631) 1,312 17,792
---------- ---------- ---------- ----------
</TABLE>
(Continued)
68
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
<TABLE>
<S> <C> <C> <C> <C>
Balance at
December 31, 1997 $ 163,070 29,243 14,777 207,090
========== ========== ========== ==========
1997 Premiums $ 277,631 8,143 70,051 355,825
========== ========== ========== ==========
1996 Premiums $ 264,382 7,792 65,268 337,442
========== ========== ========== ==========
1995 Premiums $ 240,234 4,630 61,034 305,898
========== ========== ========== ==========
</TABLE>
The liabilities for future policy benefits and related insurance in
force at December 31, 1997, and 1996 are summarized below:
<TABLE>
<CAPTION>
Future Policy
Benefits
-------------------------------
1997 1996
---- ----
<S> <C> <C>
Life and annuity:
Individual $ 948,565 775,659
Group 2,792 1,449
------------- -------------
Total life and annuity 951,357 777,108
============= =============
Accident and health $ 41,626 34,305
============= =============
Insurance in force
-------------------------------
1997 1996
---- ----
Life and annuity:
Individual $ 69,540,314 67,650,451
Group 1,870,085 1,659,106
------------- -------------
Total life and annuity $ 71,410,399 69,309,557
============= =============
</TABLE>
Life Insurance and Annuities:
Interest assumptions used in the calculation of future policy benefits
for Traditional Life policies are as follows:
Participating term 9.28%
Participating permanent 8.68% to 9.28%
Non - Participating term 6.00% to 8.91%
Future policy benefits for Universal Life and Deferred Annuities are
equal to the current account value without anticipation of any
applicable surrender charges.
Future policy benefits for Payout Annuities use the original pricing
interest rates.
(Continued)
69
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
Mortality and withdrawal assumptions are based on the Company's
experience.
Health Insurance:
Interest assumptions used for future policy benefits on health policies
are calculated using a level interest rate of 6%.
Morbidity for Income Replacement policies are based on the 1985 CIDA
table. Morbidity for In Hospital Cash policies are based on 1966-67
Intercompany Experience table.
Termination assumptions are based on the Company and industry
experience.
(10) CAPITAL STOCK
The Company has outstanding 600,000 shares of Annually Adjustable
Cumulative Perpetual Preferred Stock; 100,000 shares each of Series A,
Series B, Series C, Series D, Series E, and Series F. All preferred
stock is owned by FUNDCO. No other stock ranks Senior to the Series A-F
preferred stock. The dividend rate will be 65% of the cost of the funds
for CAPCO on Commercial paper having a 180-day maturity on the first
business day of each Dividend Period. The preferred stock has a par
value of $100 and a liquidation value of $100 per share. The preferred
stock shares are redeemable at the option of the Company for cash, in
whole or in part, on the 15th day of each December for Series A and
Series B and on the 15th day of each June for Series C, Series D, Series
E, and Series F at par value plus accrued and unpaid dividends.
Preferred stock dividends of $2,200, $1,830, and $1,601 were paid in
1997, 1996, and 1995 respectively, and $94 has accrued since the last
payment on December 15, 1997.
The Company has authorized 30,000 shares of common capital stock, $100
par value, of which 25,000 shares were issued and outstanding at
December 31, 1997, 1996, and 1995. Dividends of $45,546, $14,000, and
$18,000 were paid on the common stock during 1997, 1996, and 1995,
respectively. The 1997 dividend was paid in cash and equity securities.
The equity securities transferred had an original cost of $11,560, a
fair value of $22,546, and the Company recognized gain of $10,986.
(11) UNASSIGNED SURPLUS AND DIVIDEND RESTRICTIONS
Texas law limits the payment of dividends to shareholders. The maximum
dividend that may be paid without prior approval of the Insurance
Commissioner is limited to the greater of net gain from operations of
the preceding calendar year or 10% of capital and surplus as of the
prior December 31. As a result, dividend payments to shareholders were
limited to approximately $47,976 in 1997 and are limited to $66,872 in
1998. Dividends are paid as determined by the Board of Directors and at
its discretion.
The Texas Department of Insurance imposes minimum risk-based capital
requirements on insurance companies that were developed by the National
Association of Insurance Commissioners (NAIC). The formulas for
determining the amount of risk-based capital (RBC) specify various
weighting factors that are applied to statutory financial balances or
various levels of activity based on the perceived degree of risk.
Regulatory compliance is determined by a ratio of the Company's
regulatory total adjusted capital to its authorized control level RBC,
as defined by the NAIC. Companies below specific trigger points or
ratios are classified within certain levels, each of which requires
specified corrective action. The Company's current statutory capital and
surplus is significantly in excess of the threshold RBC requirements.
(Continued)
70
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(12) EMPLOYEE BENEFIT PLANS
(a) PENSION PLAN
Substantially all employees are covered under a pension plan
administered by USAA which is accounted for on a group basis. The
benefits are determined based on years of service and the
employee's salary at date of retirement. The total net pension
cost allocated to the Company on the basis of salary expense was
$3,746, $4,847, and $1,913 in 1997, 1996 and 1995, respectively.
At December 31, 1997 and 1996, a liability of $899 and $1,612,
respectively, has been recorded which represents the excess of net
periodic pension cost allocated to the Company over its allocated
funding requirements.
(b) POSTRETIREMENT BENEFIT PLAN
Substantially all employees may become eligible for certain
medical and life insurance benefits provided for retired employees
under a plan administered by USAA, if they meet minimum age and
service requirements and retire while working for USAA. The total
postretirement benefit cost allocated to the Company was
approximately $737, $682, and $843 in 1997, 1996, and 1995,
respectively. At December 31, 1997 and 1996, a liability of $974
and $186, respectively, was recorded which represents the excess
of the net periodic postretirement benefit cost allocated to the
Company over its allocated funding requirements.
(c) POSTEMPLOYMENT BENEFITS
All employees of the Company who suffer total disability as a
result of illness or injury are eligible for long-term disability
benefits under a plan administered by USAA.
The postemployment benefit cost allocated to the Company is not
significant.
(13) SEPARATE ACCOUNT
The Separate Account is a segregated asset account established under
Texas law through which USAA Life Insurance Company invests the premium
payments received from Contract Owners. The assets of the Separate
Account are the property of the Company. However, only the assets of the
Separate Account in excess of the reserves, and other Contract
liabilities with respect to the Separate Account, are chargeable with
liabilities arising out of any other business the Company may conduct.
Income, gains and losses, whether or not realized, are, in accordance
with the Contracts, credited to or charged against the Separate Account
without regard to other income, gains or losses of the Company. The
Company's obligations arising under the Contracts are general corporate
obligations.
The Separate Account currently is divided into nine Variable Annuity
Fund Accounts, each of which invests in a corresponding Fund. The Funds
that are available under this Contract include seven funds of USAA Life
Investment Trust, the Capital Growth Portfolio of the Scudder Variable
Life Investment Fund, and the Growth Portfolio of The Alger American
Fund. The Accumulated Unit Value of the Contract in a Variable Fund
Account will vary, primarily based on the investment experience of the
Fund in whose shares the Variable Fund Account invests. The value of the
Funds' securities are carried at market value, or, in the case of the
USAA Life Variable Annuity Money Market Fund, at amortized cost, which
approximates market value.
(Continued)
71
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
The Company incurs mortality and administrative expenses on behalf of
Separate Account contract holders. The Company collects fees for these
expenses from contract holders at set amounts. In addition, the Company
incurs various expenses related to conducting the business or operations
of the USAA Life Investment Trust (Trust) as outlined by an underwriting
and administrative services agreement. The Company, out of its general
account, has agreed to pay directly or reimburse the Trust for Trust
expenses exceeding established limits. Such reimbursements were not
significant in 1997 and 1996.
(14) COMMITMENTS AND CONTINGENCIES
The Company is required by law to participate in the guaranty
associations of the various states in which it does business. The state
guaranty associations ensure payment of guaranteed benefits, with
certain restrictions to policyholders of impaired or insolvent insurance
companies, by assessing all other companies involved in similar lines of
business.
There are currently several insurance companies which had substantial
amounts of annuity business, in the process of liquidation or
rehabilitation. The Company paid $1,953, $2,437 and $4,823 to various
state guaranty associations during the years ended December 31, 1997,
1996, and 1995, respectively. The Company accrues its best estimate for
known insolvencies. At December 31, 1997 and 1996 accounts payable and
accrued expenses include $8,931 and $9,292, respectively, related to
estimated assessments.
(15) SUBSEQUENT EVENT
In January 1998, the Company declared and paid a dividend to
stockholders of $33,928. The dividend was paid in equity securities with
an original cost of $21,951, resulting in a realized gain of $11,977.
72
<PAGE>
We have not authorized anyone to give any information or make any
representations other than those contained in this Prospectus (or any sales
literature we approve) in connection with the offer of the Policies described
herein. You may not rely on any such information or representations, if made.
This Prospectus does not constitute an offer in any jurisdiction to any person
to whom such offer would be unlawful. This Prospectus is valid only when
accompanied or preceded by the current prospectuses for the Funds described
herein.
73
<PAGE>
THIS PAGE INTENTIONALLY LEFT BLANK
<PAGE>
THIS PAGE INTENTIONALLY LEFT BLANK
<PAGE>
[USAA Logo Graphic]
USAA Life Insurance Company
9800 Fredericksburg Road
San Antonio, Texas 78288
Copyright, 1998, USAA. All rights reserved.
31836-0798
