LIFE INSURANCE SEPARATE ACCOUNT OF USAA LIFE INSURANCE CO
497, 1998-08-31
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[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>

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<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.


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<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>

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<PAGE>

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<PAGE>

                              [USAA Logo Graphic]

                          USAA Life Insurance Company
                           9800 Fredericksburg Road
                           San Antonio, Texas 78288


                  Copyright, 1998, USAA. All rights reserved.


                                                                    31836-0798



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