<PAGE>
Registration No. 333-45343
As filed with the Securities and Exchange Commission
on April 29, 1999
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 2 TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF
SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM N-8B-2
LIFE INSURANCE SEPARATE ACCOUNT OF
USAA LIFE INSURANCE COMPANY
(Exact Name of Trust)
USAA LIFE INSURANCE COMPANY
(Name of Depositor)
9800 Fredricksburg Road, C-3-W
San Antonio, Texas 78288
(Complete Address of Depositor's Principal Executive Offices)
DWAIN A. AKINS, ESQ.
Assistant Vice President and Assistant Secretary
USAA Life Insurance Company
9800 Fredricksburg Road, C-3-W
San Antonio, Texas 78288
(Name and Complete Address of Agent for Service)
Please send copies of all communications to:
GARY O. COHEN, ESQ.
Freedman, Levy, Kroll & Simonds
1050 Connecticut Avenue, N.W., Suite 825
Washington, D.C. 20036
(202) 457-5107
Title and Amount of Securities Being Registered:
An Indefinite Amount of Interests in
Life Insurance Separate Account of
USAA Life Insurance Company
Under Variable Universal Life Insurance Policies
EXHIBIT INDEX ON PAGE ___
Page 1 to ___
<PAGE>
Approximate Date of Proposed Public Offering: Continuous.
This filing is made pursuant to Rules 6c-3 and 6e-3(T) under the Investment
Company Act of 1940.
It is proposed that this filing will become effective (check the appropriate
box):
[_] Immediately upon filing pursuant to paragraph (b) of Rule 485
[X] On May 1, 1999 pursuant to paragraph (b) of Rule 485
[_] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[_] On (date) pursuant to paragraph (a)(1) of Rule 485
If appropriate, check the following:
[_] This post-effective amendment designates a new effective date
for previously filed post-effective amendment.
Title of Securities Being Registered: Units of Interest in the Life Insurance
Separate Account of USAA Life Insurance Company under the Variable Universal
Life Insurance Policy.
ii
<PAGE>
RECONCILIATION AND TIE BETWEEN ITEMS IN
FORM N-8B-2 AND THE PROSPECTUS
LIFE INSURANCE SEPARATE ACCOUNT OF
USAA LIFE INSURANCE COMPANY
ITEM NO. OF FORM N-8B-2 * CAPTION IN PROSPECTUS**
1 Cover Page
2 Cover Page
3 Not Applicable
4 Policy Distribution
5 Definitions
6 Separate Account
7 Not Required***
8 Not Required***
9 Legal Matters
10 Death Benefit; Other Policy Benefits; Payment of
Policy Benefits; Transfer of Cash Value; Loans;
Surrenders; Policy Lapse and Reinstatement;
Investment Options - Voting Privileges; Investment
Options - Additions or Changes to Investment
Options; The Contract
11 Investment Options
12 Investment Options
13 The Policy at a Glance - Policy Charges and
Deductions; The Policy at a Glance - Fund Fees and
Other Expenses; Charges and Deductions; USAA Life
14 Policy Issuance; Premium Payments
15 Premium Payments; Investment Options
16 Premium Payments - Allocation of Premiums;
Investment Options
iii
<PAGE>
17 Death Benefit; Other Policy Benefits; Payment of
Policy Benefits; Transfer of Cash Value; Loans;
Surrenders; Policy Lapse and Reinstatement
18 Tax Matters - Taxation of Policy Proceeds: Our
Taxes; Separate Account; Charges and Deductions -
Monthly Deductions: Mortality and Expense Risk
Charge; Financial Statements
19 USAA Life; Reports and Records
20 Not Applicable
21 Loans
22 Not Applicable
23 Not Applicable**
24 Charges and Deductions; Cash Value; Telephone
Transactions; Free Look Right; Postponement of
Payments; More Policy Information
25 USAA Life
26 Not Applicable
27 USAA Life
28 USAA Life - Directors of USAA Life; USAA Life -
Officers (other than Directors)
29 USAA Life
30 Not Applicable
31 Not Applicable
32 Not Applicable
33 Not Applicable
34 Not Applicable
35 Policy Distribution
36 Not Required***
iv
<PAGE>
37 Not Applicable
38 Policy Distribution
39 Policy Distribution
40 Not Applicable
41 Policy Distribution; Investment Options
42 Not Applicable
43 Not Applicable
44 Charges and Deductions - Other Charges; Investment
Options
45 Not Applicable
46 Charges and Deductions - Other Charges; Investment
Options
47 Not Applicable
48 Not Applicable
49 Not Applicable
50 Not Applicable
51 Not Applicable**
52 Investment Options - Additions or Changes to
Investment Options
53 Tax Matters - Taxation of USAA Life
54 Not Applicable
55 Not Applicable**
56 Not Required***
57 Not Required***
58 Not Required***
59 Not Required***
v
<PAGE>
* Registrant includes this Reconciliation and Tie Sheet in the amendment
to its Registration Statement in compliance with Instruction 4 as to the
Prospectus as set out in Form S-6. Registrant filed a Notification of
Registration as an investment company on Form N-8A and a Form N-8B-2
Registration Statement under the Investment Company Act of 1940 on January 30,
1998. Pursuant to Sections 8 and 30(b)(1) of the Investment Company Act of
1940, Rule 30a-1 under that Act, and Forms N-8B-2 and N-SAR under that Act,
Registrant will keep its Form N-8B-2 Registration Statement current through the
filing of periodic reports required by the Securities and Exchange Commission.
** Caption in Prospectus, to the extent relevant to this Form. Certain
items are not relevant pursuant to the administrative practice of the Commission
and its staff of adapting the disclosure requirements of the Commission's
registration statement forms in recognition of the differences between variable
life insurance policies and other periodic payment plan certificates issued by
investment companies and between separate accounts organized as management
companies and unit investment trusts.
*** Not required pursuant to Instruction 1(a) as to the Prospectus as set
out in Form S-6.
vi
<PAGE>
USAA LIFE INSURANCE COMPANY
VARIABLE UNIVERSAL LIFE
PROSPECTUS
May 1, 1999
[LOGO OF USAA APPEARS HERE]
<PAGE>
USAA Life Insurance Company
Variable Universal Life
TABLE OF CONTENTS
SECTION
A. Variable Universal Life Insurance Policy Prospectus 3A-84A
B. USAA Life Investment Trust Prospectus 1B-23B
C. Scudder Variable Life Investment Fund Prospectus
(Capital Growth Portfolio)
D. Alger American Fund Prospectus (American Growth Portfolio)
E. BT Insurance Funds Trust Prospectuses
(BT Equity 500 Index Fund)
(BT Small Cap Index Fund)
(BT EAFE(R) Equity Index Fund)
1
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This page left blank intentionally
<PAGE>
VARIABLE UNIVERSAL LIFE INSURANCE POLICY
Offered By
USAA LIFE INSURANCE COMPANY PROSPECTUS DATED:
9800 Fredericksburg Road, San Antonio, Texas 78288 May 1, 1999
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.
<TABLE>
<S> <C>
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.
IMPORTANT The Securities and Exchange Commission ("SEC") has not approved or
NOTICES 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, anyone 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.
</TABLE>
3A
<PAGE>
TABLE OF CONTENTS
Page
----
DEFINITIONS 6A
THE POLICY AT A GLANCE 9A
QUESTIONS AND ANSWERS 12A
POLICY INFORMATION 15A
Policy Issuance 15A
Who May Purchase a Policy 15A
How to Purchase a Policy 15A
Effective Date of Your Policy 16A
Premium Payments 16A
Methods of Payment 16A
Amount and Frequency of Payments 16A
Allocation of Premiums 16A
Planned Periodic Premium Payments 17A
Annual Target Premium Payment 17A
Investment Options 17A
Additions or Changes to Investment Options 19A
Voting Privileges 19A
Special Considerations 19A
Policy Lapse and Reinstatement 20A
Lapse 20A
Grace Period 20A
Guaranteed Death Benefit 20A
Reinstatement 21A
Charges and Deductions 21A
Premium Charge 21A
Monthly Deductions from Cash Value 21A
Separate Account Charges 22A
Transfer Charges 22A
Surrender Charges 22A
Other Charges 23A
Deduction of Charges 23A
Death Benefit 23A
Choosing Between Option A and Option B 24A
Illustrations of Option A and Option B 24A
Changing Your Death Benefit Option 24A
Changing Your Policy's Specified Amount 25A
Other Policy Benefits 25A
Optional Insurance Benefits 25A
Benefits at Maturity 27A
Payment of Policy Benefits 27A
Payment of Death Benefit 27A
Payment of Maturity Benefit 27A
Death Benefit Payment Options 27A
Cash Value 28A
Calculating Your Value in the Variable Fund Accounts 28A
4A
<PAGE>
Transfer of Value 29A
Loans 29A
Loan Collateral 29A
Loan Interest 30A
Repayment of Indebtedness 30A
Effect of Policy Loans 30A
Surrenders 30A
Full Surrenders 31A
Partial Surrenders 31A
Telephone Transactions 31A
Dollar Cost Averaging Program 31A
Free Look Right 32A
Postponement of Payments 32A
MORE POLICY INFORMATION 32A
Owners and Beneficiaries 32A
Owners 32A
Beneficiaries 33A
Calculating Your Cost of Insurance 33A
Net Amount at Risk 33A
Net Amount at Risk - More Than One Rate Class 34A
Cost of Insurance Rates 34A
Minimum Amount Insured 34A
The Contract 35A
Incontestability 35A
Misstatement of Age or Sex 36A
Suicide Exclusion 36A
Non-Participating Policy 36A
Reports and Records 36A
PERFORMANCE INFORMATION 37A
OTHER INFORMATION 37A
USAA Life 37A
Directors of USAA Life 38A
Officers (other than Directors) 39A
Separate Account 41A
Policy Distribution 41A
Year 2000 Disclosure 41A
Tax Matters 42A
Taxation of Policy Proceeds 42A
Taxation of USAA Life 46A
State Regulation of USAA Life 46A
Legal Matters 47A
Independent Auditors 47A
Registration Statement 47A
Financial Statements 47A
5A
<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. The Administrative Charge compensates
us for the start-up expenses we incur in issuing the Policy. The Administrative
Charge 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. It 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 that you invest in the Variable Fund Accounts;
. plus, if applicable, any value that you transfer from the Separate
Account to USAA Life's general account to secure any Policy loan;
. plus any interest earnings we credit 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 we apply through that date.
DATE OF RECEIPT means the date we actually receive the item at our Home Office,
subject to two exceptions:
. if we receive the item on a date other than a Valuation Date, the Date
of Receipt will be the following Valuation Date; and
. if we receive the item 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 we pay in accordance with the death benefit
option in effect on the Insured's death (1) reduced by any Indebtedness and any
due and unpaid Monthly Deductions; and (2) 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.
6A
<PAGE>
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.
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 (1) the premium payments you have paid, or (2) 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 if you pay a sufficient amount of premium,
we guarantee your Policy will not lapse during the first five Policy Years and
that we will pay a Death Benefit.
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 that we deduct from the Policy's cash
value. The Maintenance Charge compensates us for recurring administrative
expenses related to the maintenance of the Policy and the Separate Account. The
Maintenance Charge 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:
. the cost of insurance and any riders; plus
. the administrative charge that is applied during the first 12 months
that the Policy is in effect; plus
. 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.
MUTUAL FUND means an open-end investment company under federal securities law.
It may offer shares of several different Funds for investment.
7A
<PAGE>
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 Separate 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 we receive 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. We
credit or charge the income, gains, and losses, realized or unrealized, from the
assets of the Separate Account against the Separate Account without regard to
our other income, gains or losses. We registered the Separate Account 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. The specified
amount 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
. any day on which the value of the shares of a Fund is not computed, or
. 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.
VARIABLE FUND ACCOUNT means a subdivision of the Separate Account in which you
may invest Net Premium Payments. The Policy provides several Variable Fund
Accounts. Each Variable Fund Account corresponds to a particular Fund. Net
Premium Payments that you allocate to a Variable Fund Account are invested in a
particular Fund. We also refer to the Variable Fund Accounts as Accounts in
this Prospectus.
WE, OUR, US, OR USAA LIFE means USAA Life Insurance Company.
YOU, YOUR OR YOURS refers to the Owner of the Policy.
8A
<PAGE>
THIS 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>
<CAPTION>
PREMIUM PAYMENTS AND WITHDRAWALS
<S> <C>
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 CHARGE1 Issue Class Current Monthly Guaranteed Monthly2
(PER $1000 OF NET AMOUNT AT Cost of Insurance Cost of Insurance
RISK) ----------------- -------------------
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
</TABLE>
- - -------------------------------------
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.
9A
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<TABLE>
<S> <C>
ADMINISTRATIVE CHARGE $10 per month (applies only during first Policy Year)
MAINTENANCE CHARGE $5 per month
TERMINAL ILLNESS RIDER None
ACCIDENTAL DEATH BENEFIT RIDER $.07 per $1,000 coverage per month
CHILDREN TERM LIFE INSURANCE
Rider $.50 per $1,000 coverage
EXTENDED MATURITY DATE RIDER None
WAIVER OF MONTHLY DEDUCTION Depends on age of Insured. We apply the Waiver of Monthly Deduction rates
RIDER to the 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 Account3
FEDERAL INCOME TAX CHARGE Currently none4
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 0% after the 10th Policy Year)
Minimum and Maximum Surrender
Charges:
Minimum Surrender Charges Per
$1,000 of Insurance
Male, Standard Age 1 $2.45 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 $2.41 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
</TABLE>
- - ---------------------
3 We deduct the Mortality and Expense Charge on a daily basis at an annual rate
of 0.75% of the value of each Variable Fund Account.
4 We do not currently deduct a Federal Income Tax Charge 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.
10A
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<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
NAME OF FUND FEES REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT5
- - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
USAA LIFE
INVESTMENT TRUST
Money Market .20% .60% .15% .80% .35%
Income .20% .35% .15% .55% .35%
Growth and Income .20% .17% .15% .37% .35%
World Growth .20% .46% .45% .66% .65%
Diversified Assets .20% .25% .15% .45% .35%
Aggressive Growth .50% .34% .20% .84% .70%
International .65% .70% .45% 1.35% 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 .20% .99% .10% 1.19% .30%
- - -----------------------------------------------------------------------------------------------------------------
Small Cap Index .35% 1.23% .10% 1.58% .45%
- - -----------------------------------------------------------------------------------------------------------------
EAFE(R) Equity
Index .45% 1.21% .20% 1.66% .65%
- - -----------------------------------------------------------------------------------------------------------------
</TABLE>
- - ------------------------
5 We based the fee and expense figures shown with respect to each Fund 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 the Funds of the USAA Life Investment Trust exist pursuant
to an Underwriting and Administrative Services Agreement, under 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 of each
other Fund. This Agreement is terminable by any party thereto upon 120 days'
notice to the other parties. Pursuant 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. Bankers Trust may terminate such expense reimbursements at its
discretion.
11A
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TRANSFERS
NUMBER OF FREE 6 per Policy Year
TRANSFERS
MINIMUM AMOUNT OF $250 (or remaining value in Variable Fund Account,
TRANSFER if less)
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
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."
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."
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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."
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."
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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. Your Policy has 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 as 1/10th 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."
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."
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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, unless you have paid enough premiums to qualify
for the Guaranteed Death Benefit. 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, plus any charges that we have deducted.
See "Free Look Right."
POLICY INFORMATION
POLICY ISSUANCE
Who May Purchase a Policy
Any individual of legal age in a state where we may lawfully sell the Policies
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,
at 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.
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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.
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
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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
you specify 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 you specify 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.
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 as 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. USAA is not affiliated with Bankers Trust Company, Fred Alger
Management, Inc., or Scudder, Kemper Investments, Inc.
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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>
<CAPTION>
FUND INVESTMENT OBJECTIVE
--------------------------------------------------------------
<S> <C>
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
Class A shares consisting 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>
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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.
Special Considerations
The Funds managed by Scudder, Alger Management, and Bankers Trust offer shares
to separate accounts of unaffiliated life insurance companies to fund benefits
under variable annuity contracts and variable life insurance policies. The
Funds managed by USAA IMCO offer shares only to our separate accounts to fund
benefits under the Contracts and the variable life insurance policies that we
offer. The boards of directors or trustees of these Funds monitor for possible
conflicts among separate accounts buying shares of the Funds. Conflicts could
develop for a variety of reasons. For example, differences in treatment under
tax and other laws or the failure by a separate account to comply with such laws
could cause a conflict.
To eliminate a conflict, a Fund's board of directors or trustees may require a
separate account to withdraw its participation in a Fund. A Fund's net asset
value could decrease if it had to sell investment securities to pay redemption
proceeds to a separate account withdrawing because of a conflict.
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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." You should not consider any deduction for the cost
of insurance after lapse 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 of 61 days 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, a Policy lapse
will occur, terminating all insurance, including benefits provided by rider. 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.
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.
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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:
. a completed written application for reinstatement;
. proof of insurability satisfactory to USAA Life;
. 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
. 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.
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 we will not deduct the
first-year-only administrative charge again if it has already been paid. A
possible disadvantage of reinstatement is that you must pay or reinstate any
Policy Indebtedness.
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. See "Annual Target Premium Payment."
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."
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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."
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. We guarantee that this charge will not
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. We
also refer to this charge as an "administrative processing fee." See
"Partial Surrenders" and "Deduction of Charges."
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.
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<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:
. your Policy's Specified Amount, or
. the Minimum Amount Insured (which is a specified percentage of your cash
value based on the Insured's age). See "Minimum Amount Insured."
If you select OPTION B, your death benefit will be the greater of:
. your Policy's Specified Amount PLUS your cash value, or
. 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."
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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.")
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.
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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."
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. You must
make requests for reduction 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, we will reduce the Specified Amount and the cash
value by the amount of the partial surrender. Under death benefit Option B, we
will reduce only the cash value portion of the death benefit 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."
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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. We treat the early payment as a "lien" against
Policy values. We reduce the death benefit by the amount of the lien and any
Policy loans, plus accrued interest. We will continue to make Monthly
Deductions 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. We
charge interest on the amount of the early payment and any unpaid Monthly
Deductions. We require premium payments to be made for cost of insurance
that 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, we will terminate the Policy and no additional insurance
benefits will be payable.
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). You can select an additional life
insurance benefit 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.
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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.
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.
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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;
. 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;
. 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 (1) the number of
units of each Variable Fund Account credited to your Policy by (2) the price of
the units on that Date.
We determine the number of units to credit to you by dividing (1) the Net
Premium Payment you allocate to a Variable Fund Account by (2) 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.
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Each Variable Fund Account's units are valued separately. We calculate the unit
value of a Variable Fund Account on any Valuation Date by adjusting the unit
value from the previous Valuation Date for:
. the investment performance of the corresponding Fund;
. any dividends or distributions paid by that Fund; and
. 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."
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%.
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Loan Interest
You are charged interest on the 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 a preferred loan interest rate of 4.5%. 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 your Variable Fund Account(s) in the same proportion as each
Account's value has to the total Policy cash value on the date the loan starts.
Similarly, we will deduct interest from your Variable Fund Account(s) at the
beginning of each Policy Year in the same proportion as each Account's value has
to the total Policy cash value as of that date. If there is insufficient value
in your Variable Fund Account(s) to pay the interest in advance, your policy
will enter its grace period.
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. You may not repay loans and
unpaid loan interest in existence at the end of the grace period 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.
We will determine loan values 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."
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."
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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." We will
terminate your Policy and all insurance 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."
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:
. your USAA number or Policy number,
. your name, and
. 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.
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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.
We will process transfers under the Dollar Cost Averaging Program to be
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.
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:
. the New York Stock Exchange is closed,
. the SEC, by order, permits postponement for the protection of Policy
Owners, or
. 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.
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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.
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 (1) the net amount at risk under your Policy by (2) your cost of
insurance rate, and (3) dividing the resulting amount by 1000.
Net Amount at Risk
We determine the net amount at risk by (1) subtracting your Policy's cash value
on any Monthly Anniversary from (2) 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."
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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, we will calculate the net amount at
risk 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, we will apportion the cash value 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, we will determine the net amount at risk 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.
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:
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<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:
. completion of the application, and
. payment of the first full premium.
The entire contract consists of:
. your Policy,
. your Policy application, and
. any supplemental applications, riders, endorsements, and amendments.
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.
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. Each 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, a new two-year contestable period
begins on 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.
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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.
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:
. the amount of death benefit;
. the cash value;
. any Indebtedness;
. any loan interest charge;
. any loan repayment since the last annual statement;
. any partial surrender since the last annual statement;
. all premium payments since the last annual statement;
. all deductions and charges since the last annual statement; and
. 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.
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We will mail confirmation notices (or other appropriate notification) promptly
at the time of the following transactions:
. Policy issue;
. receipt of premium payments;
. transfers among Variable Fund Accounts;
. change of premium allocation;
. change of death benefit option;
. increases or decreases in Specified Amount;
. partial surrenders;
. receipt of loan repayments; and
. reinstatement.
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 24, 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 $8,500,568,000 on December 31, 1998. 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.
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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.
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 since November 1996; 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 since September 1994; 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.
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.
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.
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OFFICERS (OTHER THAN DIRECTORS). The officers of USAA Life, other than the above
named Directors, 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.
Edward R. Dinstel Vice President, Life & Health Underwriting/Issue.
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.
Robert J. Flannery Vice President, Actuarial Valuation, since January 1998;
prior thereto, 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.
James E. Goral Vice President, Medical Director since November 1998; prior
thereto, Physician, Diagnostic Clinic of San Antonio since
April 1995; prior thereto; Physician, Southwest Medical
Clinic since September 1979.
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 Insurance Counsel, 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.
Pattie S.
McWilliams Vice President, Life/Annuity Service & Claims, since
September 1993
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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.
Bobby L. Casey Assistant Vice President, Life Accounting and Analysis,
since December 1998; prior thereto, Director of
Management Accounting (1987 - 90, 1991 -1992, 1995 to
1998), Director of Cash Management and Control & Support
(1993- 1995), Director of Financial Statement Reporting
(1990-1991, 1992-1993).
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;
prior thereto, 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.
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You should also review the accompanying Fund prospectuses for a description of
the management of the Funds.
SEPARATE ACCOUNT
By a resolution of the Board of Directors of USAA Life, we established the
Separate Account 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 of USAA Life 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 serves as both principal underwriter and investment adviser
for the following 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.
YEAR 2000 DISCLOSURE
LIKE OTHER ORGANIZATIONS AROUND THE WORLD, USAA LIFE COULD BE ADVERSELY AFFECTED
BY THE SO-CALLED "YEAR 2000 PROBLEM." THE PROBLEM EXISTS BECAUSE MANY COMPUTER
PROGRAMS USE ONLY THE LAST TWO DIGITS TO REFER TO A YEAR AND MAY NOT PROPERLY
RECOGNIZE A YEAR THAT BEGINS WITH A "20" INSTEAD OF A "19." AS A RESULT, SUCH
PROGRAMS MIGHT NOT PROPERLY PROCESS AND CALCULATE INFORMATION THAT RELATES TO
DATES BEGINNING JANUARY 1, 2000 AND BEYOND.
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USAA LIFE HAS SPENT MUCH EFFORT AND MONEY TO CONFRONT THE YEAR 2000 PROBLEM AND
WE EXPECT TO HAVE OUR COMPUTER SYSTEMS READY FOR THE YEAR 2000 BY MID-1999. IN
ADDITION, WE ARE ASSESSING THE YEAR 2000 READINESS OF THE MUTUAL FUNDS IN WHICH
THE SEPARATE ACCOUNT INVESTS. ALTHOUGH WE CANNOT SAY THAT YOU WILL EXPERIENCE NO
EFFECT FROM THIS SITUATION, WE CAN TELL YOU THAT WE ARE MAKING A LARGE EFFORT TO
AVOID ANY ILL EFFECTS UPON OUR POLICY OWNERS.
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. The discussion is general in nature, and
should not be considered tax advice, for which you should consult a qualified
tax adviser.
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.
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.
Whenever there is a "material change" under a Policy, the Policy will generally
be (1) treated as a new contract for purposes of determining whether the Policy
is a modified endowment contract, and (2) 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.
42A
<PAGE>
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 predetermined 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.
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 (1) 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 (2) 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.
43A
<PAGE>
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 (1) to taxpayers 59 1/2 years of age or older,
(2) in the case of a disability (as defined in the Code), or (3) 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.
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.
44A
<PAGE>
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 $650,000 (increasing annually 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.
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.
45A
<PAGE>
ERISA. Employers and employer-created trusts may be subject to reporting,
disclosure and fiduciary obligations under the Employee Retirement Income
Security Act of 1974. 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.
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 we 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, we may make charges for such taxes when they are attributable to our
Separate Account or allocable to the Policies.
Certain Mutual Funds in which your 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.
46A
<PAGE>
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.
INDEPENDENT AUDITORS
The financial statements of the Separate Account as of and for the period ended
December 31, 1998, and the consolidated financial statements of USAA Life as of
December 31, 1998 and 1997, and for each of the years in the three-year period
ended December 31, 1998, have been included in this Prospectus in reliance upon
the accompanying reports thereon of KPMG 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. The financial statements of the Separate Account and USAA Life appear
on the pages that follow.
47A
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of USAA Life Insurance Company and Policyowners of the
Life Insurance Separate Account of USAA Life Insurance Company:
We have audited the accompanying statements of assets and liabilities as of
December 31, 1998, the related statements of operations, the statements of
changes in net assets, and the unit value information presented in note 6 for
the period August 31, 1998 (commencement of operations) through December 31,
1998, for the USAA Life Money Market Fund Account, USAA Life Income Fund
Account, USAA Life Growth and Income Fund Account, USAA Life World Growth Fund
Account, USAA Life Diversified Assets Fund Account, USAA Life Aggressive Growth
Fund Account, USAA Life International Fund Account, the Fund Account of the
Capital Growth Portfolio-Class A shares of the Scudder Variable Life Investment
Fund (Scudder VLIF Capital Growth Portfolio Fund Account), the Fund Account of
the American Growth Portfolio of the Alger American Fund (Alger American Growth
Portfolio Fund Account), and the Fund Accounts of the Equity 500 Index Fund,
Small Cap Index Fund and EAFE(R) Equity Index Fund, which are funds of the
Bankers Trust (BT) Insurance Funds Trust series (BT Equity 500 Index Fund
Account, BT Small Cap Index Fund Account, and BT EAFE Equity Index Fund
Account), available within the Life Insurance Separate Account of USAA Life
Insurance Company. These financial statements and unit value information are
the responsibility of the Life Insurance Separate Account's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and unit value
information are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. Investments owned at December 31, 1998, were verified by
examination of the underlying portfolios of the USAA Life Investment Trust or
through confirmation for the Scudder, Alger, and BT Insurance Funds Trust Funds'
portfolios. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and unit value information referred to
above present fairly, in all material respects, the financial position of the
aforementioned fund accounts of the Life Insurance Separate Account of USAA Life
Insurance Company as of December 31, 1998, and the results of their operations,
the changes in their net assets, and the unit value information for the period
August 31, 1998 (commencement of operations) through December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ KPMG LLP
-------------------------------
KPMG LLP
San Antonio, Texas
February 5, 1999
48A
<PAGE>
THE LIFE INSURANCE SEPARATE ACCOUNT OF USAA LIFE INSURANCE COMPANY
STATEMENTS OF ASSETS AND LIABILITIES
Variable Fund Accounts (In Thousands, Except Per Unit Data) DECEMBER 31, 1998
<TABLE>
<CAPTION>
Fund Investment at
Shares Cost Market Value
----------------------------------------------------
ASSETS
<S> <C> <C> <C>
Investments at market value:
USAA Life Money Market Fund 1 $ 1 $ 1
USAA Life Income Fund - - -
USAA Life Growth and Income Fund 1 3 3
USAA Life World Growth Fund - - -
USAA Life Diversified Assets Fund 3 39 38
USAA Life Aggressive Growth Fund - - -
USAA Life International Fund - - -
Scudder VLIF Capital Growth Portfolio-Class 1 2 3
A Shares
Alger American Growth Portfolio - - -
BT Equity 500 Index Fund 1 3 3
BT Small Cap Index Fund - - -
BT EAFE(R) Equity Index Fund 1 2 2
------ ---
Total investments $ 50 $50
Other assets:
Receivable from USAA Life Insurance Company -
---
Total assets 50
Liabilities
Payable to USAA Life Insurance Company -
---
Net assets $50
===
Fund Account Accumulation
Units Unit Value Reserves
----------------------------------------------------
NET ASSETS
USAA Life Money Market Fund Account 1 $ 1.178565 $ 1
USAA Life Income Fund Account - 14.089499 -
USAA Life Growth and Income Fund Account 1 20.468785 3
USAA Life World Growth Fund Account - 17.860722 -
USAA Life Diversified Assets Fund Account 2 17.974654 38
USAA Life Aggressive Growth Fund Account - 13.993064 -
USAA Life International Fund Account - 10.417977 -
Scudder VLIF Capital Growth Portfolio Fund 1 24.448446 3
Account
Alger American Growth Portfolio Fund Account - 26.806157 -
BT Equity 500 Index Fund Account 1 11.003536 3
BT Small Cap Index Fund Account - 8.825971 -
BT EAFE(R) Equity Index Fund Account 1 10.386978 2
---------
Net assets attributable to policyowners' $50
reserves
=========
</TABLE>
See accompanying Notes to Financial Statements.
49A
<PAGE>
THE LIFE INSURANCE SEPARATE ACCOUNT OF USAA LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
VARIABLE FUND ACCOUNTS (IN THOUSANDS) PERIOD ENDED DECEMBER 31, 1998*
<TABLE>
<CAPTION>
USAA LIFE USAA LIFE USAA LIFE USAA Life
MONEY USAA LIFE GROWTH WORLD DIVERSIFIED
MARKET Income AND INCOME GROWTH ASSETS
FUND ACCOUNT FUND ACCOUNT FUND ACCOUNT FUND ACCOUNT FUND ACCOUNT
------------ ------------ ------------ ------------ -----------------
NET INVESTMENT INCOME:
<S> <C> <C> <C> <C> <C> <C>
Income dividends and
capital gains
distributions $ - $ - $ - $ - $ 2
------ ---- ---- ----- ----
Expenses
Mortality and expense
risk charge - - - - -
------ ---- ---- ----- ----
Net investment income - - - - 2
------ ---- ---- ----- ----
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain - - - - -
Change in net unrealized
appreciation/depreciation - - - - (1)
------ ---- ---- ----- ----
Net realized and
unrealized gain (loss)
on investments - - - - (1)
------ ---- ---- ----- ----
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ - $ - $ - $ - $ 1
====== ==== ==== ===== ====
</TABLE>
*Variable fund accounts commenced operations August 31, 1998.
See accompanying Notes to Financial Statements.
50A
<PAGE>
THE LIFE INSURANCE SEPARATE ACCOUNT OF USAA LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS
VARIABLE FUND ACCOUNTS (IN THOUSANDS) PERIOD ENDED DECEMBER 31, 1998*
<TABLE>
<CAPTION>
USAA LIFE SCUDDER VLIF ALGER BT BT
AGGRESSIVE USAA LIFE CAPITAL AMERICAN EQUITY 500 SMALL CAP BT
GROWTH INTERNATIONAL GROWTH GROWTH INDEX INDEX EAFE(R)
FUND FUND PORTFOLIO PORTFOLIO FUND FUND EQUITY INDEX
ACCOUNT ACCOUNT FUND ACCOUNT FUND ACCOUNT ACCOUNT ACCOUNT FUND ACCOUNT
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET INVESTMENT INCOME:
Income dividends and
capital
gains distributions $ - $ - $ - $ - $ - $ - $ -
---- ---- ---- ---- ---- ---- -----
Expenses
Mortality and expense - - - - - - -
risk charge
Net investment - - - - - - -
income
---- ---- ---- ---- ---- ---- -----
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS:
Net realized gain - - - - - - -
Change in net unrealized
appreciation/depreciation - - 1 - - - -
---- ---- ---- ---- ---- ---- -----
Net realized and
unrealized gain (loss)
on investments - - 1 - - - -
---- ---- ---- ---- ---- ---- -----
INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ - $ - $ 1 $ - $ - $ - $ -
==== ==== ==== ==== ==== ==== =====
</TABLE>
*Variable fund accounts commenced operations August 31, 1998.
See accompanying Notes to Financial Statements.
51A
<PAGE>
THE LIFE INSURANCE SEPARATE ACCOUNT OF USAA LIFE INSURANCE COMPANY
STATEMENTS OF CHANGES IN NET ASSETS
VARIABLE FUND ACCOUNTS (IN THOUSANDS) PERIOD ENDED DECEMBER 31, 1998*
<TABLE>
<CAPTION>
USAA LIFE USAA LIFE
USAA LIFE MONEY INCOME GROWTH USAA LIFE
MARKET FUND FUND AND INCOME WORLD GROWTH FUND
ACCOUNT ACCOUNT FUND ACCOUNT ACCOUNT
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
From operations:
Net investment income $ - $ - $ - $ -
Net realized gain - - - -
on investments
Change in net unrealized
appreciation/depreciation - - - -
----- ----- ----- -----
Increase in net assets
resulting from operations - - - -
----- ----- ----- -----
FROM POLICY TRANSACTIONS:
Units issued 48 - 3 -
Units redeemed (47) - - -
Increase in net assets
from policy transactions 1 3 -
----- ----- ----- -----
Net increase in net assets 1 - 3 -
NET ASSETS:
Beginning of period - - - -
----- ----- ----- -----
End of period $ 1 $ - $ 3 $ -
===== ===== ===== =====
UNITS ISSUED AND REDEEMED
Beginning balance - - - -
Units issued 46 - 1 -
Units redeemed (45) - - -
----- ----- ----- -----
Ending balance 1 - 1 -
===== ===== ===== =====
</TABLE>
*Variable fund accounts commenced operations August 31, 1998.
See accompanying Notes to Financial Statements.
52A
<PAGE>
THE LIFE INSURANCE SEPARATE ACCOUNT OF USAA LIFE INSURANCE COMPANY
STATEMENTS OF CHANGES IN NET ASSETS
VARIABLE FUND ACCOUNTS (IN THOUSANDS) PERIOD ENDED DECEMBER 31, 1998*
<TABLE>
<CAPTION>
USAA LIFE USAA LIFE
DIVERSIFIED AGGRESSIVE GROWTH USAA LIFE
ASSETS FUND Fund INTERNATIONAL
ACCOUNT Account FUND ACCOUNT
<S> <C> <C> <C>
INCREASE IN NET ASSETS
From operations:
Net investment income $ 2 $ - $ -
Net realized gain - - -
on investments
Change in net unrealized
appreciation/depreciation (1) - -
---- ---- ----
Increase in net assets
resulting from operations 1 - -
---- ---- ----
FROM POLICY TRANSACTIONS:
Units issued 37 - -
Units redeemed - - -
Increase in net assets
from policy transactions 37 - -
---- ---- ----
Net increase in net assets 38 - -
NET ASSETS:
Beginning of period - - -
---- ---- ----
End of period $ 38 $ - $ -
==== ==== ====
UNITS ISSUED AND REDEEMED
Beginning balance - - -
Units issued 2 - -
Units redeemed - - -
---- ---- ----
Ending balance 2 - -
==== ==== ====
</TABLE>
*Variable fund accounts commenced operations August 31, 1998.
See accompanying Notes to Financial Statements.
53A
<PAGE>
THE LIFE INSURANCE SEPARATE ACCOUNT OF USAA LIFE INSURANCE COMPANY
STATEMENTS OF CHANGES IN NET ASSETS
VARIABLE FUND ACCOUNTS (IN THOUSANDS) PERIOD ENDED DECEMBER 31, 1998*
<TABLE>
<CAPTION>
SCUDDER VLIF
CAPITAL GROWTH ALGER AMERICAN BT EQUITY BT SMALL CAP
PORTFOLIO FUND GROWTH PORTFOLIO 500 INDEX INDEX FUND BT EAFE(R) EQUITY
ACCOUNT FUND ACCOUNT FUND ACCOUNT ACCOUNT INDEX FUND ACCOUNT
<S> <C> <C> <C> <C> <C>
INCREASE IN NET ASSETS
FROM OPERATIONS:
Net investment income $ - $ - $ - $ - $ -
---- ---- ---- ---- ----
Net realized gain
on investments - - - - -
Change in net unrealized
appreciation/depreciation 1 - - - -
---- ---- ---- ---- ----
Increase in net assets
resulting from operations 1 - - - -
---- ---- ---- ---- ----
FROM POLICY TRANSACTIONS:
Units issued 4 - 3 - 2
Units redeemed (2) - - - -
---- ---- ---- ---- ----
Increase in net assets
from policy transactions 2 - 3 - 2
---- ---- ---- ---- ----
Net increase in net assets 3 - 3 - 2
NET ASSETS:
Beginning of period - - - - -
---- ---- ---- ---- ----
End of period $ 3 $ - $ 3 $ - $ 2
==== ==== ==== ==== ====
UNITS ISSUED AND REDEEMED
Beginning balance - - - - -
Units issued 1 - 1 - 1
Units redeemed - - - - -
---- ---- ---- ---- ----
Ending balance 1 - 1 - 1
==== ==== ==== ==== ====
</TABLE>
*Variable fund accounts commenced operations August 31, 1998.
See accompanying Notes to Financial Statements.
54A
<PAGE>
THE LIFE INSURANCE SEPARATE ACCOUNT OF
USAA LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
(1) ORGANIZATION
The Life Insurance Separate Account of USAA Life Insurance Company is
registered under the Investment Company Act of 1940, as amended, as a
segregated unit investment account of USAA Life Insurance Company (USAA Life),
a wholly owned subsidiary of the United Services Automobile Association
(USAA). The Life Insurance Separate Account commenced operation August 31,
1998.
The Life Insurance Separate Account is divided into twelve variable fund
accounts, each of which invests in a corresponding fund. The funds'
objectives can be found on page A-8 in this report. Units of the Life
Insurance Separate Account are sold only in connection with the Variable
Universal Life Policy.
The fund accounts available within the Life Insurance Separate Account
include: the USAA Life Money Market Fund Account, USAA Life Income Fund
Account, USAA Life Growth and Income Fund Account, USAA Life World Growth Fund
Account, USAA Life Diversified Assets Fund Account, USAA Life Aggressive
Growth Fund Account, and USAA Life International Fund Account; the Fund
Account of the Capital Growth Portfolio-Class A shares of the Scudder Variable
Life Investment Fund (Scudder VLIF Capital Growth Portfolio Fund Account); the
Fund Account of the American Growth Portfolio of the Alger American Fund
(Alger American Growth Portfolio Fund Account); the Fund Accounts of the
Equity 500 Index Fund, Small Cap Index Fund and EAFE(R) Equity Index Fund,
which are funds of the Bankers Trust (BT) Insurance Funds Trust series (BT
Equity 500 Index Fund Account, BT Small Cap Index Fund Account, and BT EAFE
Equity Index Fund Account), available within the Life Insurance Separate
Account of USAA Life Insurance Company.
The assets of the Life Insurance Separate Account are the property of USAA
Life and are not chargeable with liabilities arising out of any other business
of USAA Life.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Security Valuation
Investments in mutual fund securities are carried in the Statements of Assets
and Liabilities at net asset value as reported by the fund. Gains or losses
on securities transactions are determined on the basis of the first-in first-
out (FIFO) cost method. Security transactions are recorded on the trade date.
Dividend income, if any, is recorded on ex-dividend date.
DISTRIBUTIONS
The net investment income (loss) and realized capital gains of the Life
Insurance Separate Account are not distributed, but instead are retained and
reinvested for the benefit of unit owners.
FEDERAL INCOME TAX
Operations of the Life Insurance Separate Account are included in the federal
income tax return of USAA Life, which is taxed as a "Life Insurance Company"
under the Internal Revenue Code. Under current federal income tax law, no
income taxes are payable with respect to operation of the Life Insurance
Separate Account.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that may affect the reported amounts in the financial statements.
55A
<PAGE>
(3) RELATED PARTY TRANSACTIONS
During the year ended December 31, 1998, advisory and administrative fees of
$1.1 million were paid or payable to USAA Investment Management Company (USAA
IMCO) by the funds of the USAA Life Investment Trust (the Trust). USAA IMCO
is indirectly wholly owned by USAA. The funds' advisory fees are computed on
an annualized rate of 0.20% of the monthly average net assets for each
calendar month of each fund of the Trust except for the USAA Life Aggressive
Growth Fund, which accrues at an annualized rate of 0.50%, and USAA Life
International Fund, which accrues at an annualized rate of 0.65%. The funds
are an investment option for both the Variable Universal Life Policy and the
Flexible Premium Deferred Combination Fixed and Variable Annuity Contract.
Administrative fees are based on estimated time incurred to provide such
services.
(4) EXPENSES
A mortality and expense risk charge is deducted by USAA Life from the Life
Insurance Separate Account on a daily basis which is equal, on an annual
basis, to 0.75% of the daily net asset value of each variable fund account.
The mortality risk assumed is that insureds may live for a shorter period of
time than estimated. Thus a greater amount of death benefits than expected
will be payable. The expense risk assumed by USAA Life is that the costs of
administering the policies and the Life Insurance Separate Account may exceed
the amount recovered from the policy maintenance and administration expense
charges. The mortality and expense risk charge is guaranteed by USAA Life and
cannot be increased.
The following expenses are charged to reimburse USAA Life for the expenses it
incurs in the establishment and maintenance of the Policies and each variable
fund account. On the policy's effective date, and each monthly anniversary
thereafter, certain monthly charges will be deducted by USAA Life through a
redemption of units from the cash value of the policy. The monthly deduction
will include cost of insurance charges, charges for any optional insurance
benefits provided by rider, an administrative charge of $10 during the first
twelve policy months, and a recurring maintenance charge of $5. For the
period ended December 31, 1998, monthly deduction charges totaled
approximately $1,000 and such charges have been classified as policy
redemptions.
A transfer charge of $25 will be deducted for each value transfer between
Variable Fund Accounts in excess of six per Policy Year. For each partial
surrender of cash value, a charge equal to the lesser of $25 or 2% of the
amount withdrawn will be deducted. This charge is also referred to as an
"administrative processing fee." For full surrenders, the amount of the
surrender charge will equal a percentage of the Annual Target Premium Payment
specified in the policy. The number of years the policy has been inforce at
the time of surrender determines the applicable percentage.
A 3% premium charge is deducted from the policyholder's premium to compensate
USAA Life for sales charges and taxes. The charge will be deducted from the
policyholder's premium payments until the policyholder's gross amount of
premium payments received exceeds the sum of the policyholder's Annual Target
Premium Payments payable over 10 years.
(5) YEAR 2000 (UNAUDITED)
Like other companies, the Life Insurance Separate Account could be adversely
affected if the computer systems used by its service providers are not able to
perform their intended functions effectively after 1999 because of the
inability of computer software to distinguish the year 2000 from the year
1900. USAA Life is taking steps to address this potential year 2000 problem
with respect to the computer systems that they use and to obtain satisfactory
assurances that comparable steps are being taken by the Life Insurance
Separate Account's service providers. At this time, however, there can be no
assurance that these steps will be sufficient to avoid any adverse impact on
the Life Insurance Separate Account from this problem.
56A
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(CONTINUED) DECEMBER 31, 1998
6) UNIT VALUES
A summary of unit values and units outstanding for variable universal life
policies and the expense ratios, including expenses of the underlying funds, for
the period is as follows:
<TABLE>
<CAPTION>
USAA LIFE USAA LIFE USAA LIFE USAA LIFE
MONEY USAA LIFE GROWTH AND WORLD DIVERSIFIED USAA LIFE
MARKET INCOME INCOME GROWTH ASSETS AGGRESSIVE
FUND FUND FUND FUND FUND GROWTH FUND
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998(a) 1998(a) 1998(a) 1998(a) 1998(a) 1998(a)
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
At end of period:
Accumulation units 1 - 1 - 2 -
(000)
Accumulation unit $1.178565 $14.089499 $20.468785 $17.860722 $17.974654 $13.993064
value
Net assets (000) $ 1 $ - $ 3 $ - $ 38 $ -
Ratio of expenses to 1.10% 1.10% 1.10% 1.40% 1.10% 1.45%
average net assets
(b) (c)
Ratio of expenses to
average net assets,
excluding 1.55% 1.30% 1.12 % 1.41% 1.20% 1.59%
reimbursements (c)
SCUDDER
VLIF ALGER
CAPITAL AMERICAN
USAA LIFE GROWTH GROWTH BT EQUITY BT EAFE(R)
INTERNATIONAL PORTFOLIO PORTFOLIO BT EQUITY 500 SMALL CAP EQUITY INDEX
FUND FUND FUND INDEX FUND INDEX FUND FUDN
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998(a) 1998(a) 1998(a) 1998(a) 1998(a) 1998(a)
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
At end of period:
Accumulation units - 1 - 1 - 1
(000)
Accumulation unit $10.417977 $24.448446 $26.806157 $11.003536 $ 8.825971 $10.386978
value
Net assets (000) $ - $ 3 $ - $ 3 $ - $ 2
Ratio of expenses to 1.85% 1.26% 1.54% 1.05% 1.20% 1.40%
average net assets
(b) (c)
Ratio of expenses to
average net assets,
excluding 2.10% N/A N/A 1.94% 2.33% 2.41%
reimbursements (c)
</TABLE>
(a) Variable fund accounts commenced operations August 31, 1998 with the
following initial unit values per unit:
USAA Life Money Market Fund Account $ 1.162018
USAA Life Income Fund Account $13.766435
USAA Life Growth and Income Fund Account $16.937712
USAA Life World Growth Fund Account $14.981795
USAA Life Diversified Assets Fund Account $16.007256
USAA Life Aggressive Growth Fund Account $ 9.446371
USAA Life International Fund Account $ 9.285958
Scudder VLIF Capital Growth Portfolio Fund Account $18.614844
Alger American Growth Portfolio Fund Account $19.521151
BT Equity 500 Index Fund Account $ 8.561922
BT Small Cap Index Fund Account $ 7.048653
BT EAFE(R) Equity Index Fund Account $ 8.920584
(b) The information is based on actual expenses to the policyowner for the
period, including the expenses of the underlying fund, after giving effect
to reimbursement of fund expenses by USAA Life.
(c) Annualized. The ratio is not necessarily indicative of 12 months of
operations.
57A
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
USAA LIFE INSURANCE COMPANY:
We have audited the accompanying consolidated balance sheets of USAA LIFE
INSURANCE COMPANY and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, comprehensive income, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of USAA LIFE INSURANCE
COMPANY and subsidiaries as of December 31, 1998, and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
---------------------------
KPMG LLP
San Antonio, Texas
March 11, 1999
58A
<PAGE>
USAA LIFE INSURANCE COMPANY
Consolidated Balance Sheets
December 31, 1998 and 1997
(Dollars in Thousands, Except Share Data)
<TABLE>
<CAPTION>
ASSETS 1998 1997
- - ------ --------------- -------------
<S> <C> <C>
Investments:
Debt securities, at amortized cost $ 884,926 1,245,257
Debt securities, at fair value 5,455,606 4,869,912
Equity securities, at fair value 251,815 352,863
Mortgage loans 3,903 4,462
Policy loans 131,520 130,246
--------- ---------
Total investments 6,727,770 6,602,740
Cash and cash equivalents 62,203 39,642
Premium balances receivable 2,969 2,899
Accounts receivable - affiliates 664 50
Furniture and equipment 3,955 1,403
Collateral for securities loaned at fair value 737,202 -
Accrued investment income 82,042 78,929
Deferred policy acquisition costs 226,986 207,090
Deferred tax 53,745 22,230
Reinsurance recoverable 308,262 204,626
Other assets 12,281 34,492
Separate account assets 282,489 184,797
--------- ---------
Total assets $ 8,500,568 7,378,898
========= =========
LIABILITIES
- - -----------
Insurance reserves $ 1,168,284 1,009,817
Funds on deposit 5,498,136 5,284,925
Accounts payable and accrued expenses 64,940 87,315
Accounts payable - affiliates 10,593 12,072
Payable upon return of securities loaned 737,202 -
Other liabilities 48,872 55,099
Separate account liabilities 282,489 184,797
--------- ---------
Total liabilities 7,810,516 6,634,025
--------- ---------
STOCKHOLDERS' EQUITY
Preferred capital stock, $100 par value; 1,200,000 shares
authorized; 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
Accumulated other comprehensive income 18,108 33,403
Retained earnings 558,036 597,562
--------- ---------
Total stockholders' equity 690,052 744,873
--------- ---------
Total liabilities and stockholders' equity $ 8,500,568 7,378,898
========= =========
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
59A
<PAGE>
USAA LIFE INSURANCE COMPANY
Consolidated Statements of Income
Years Ended December 31, 1998, 1997, and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -----------
Revenues
- - --------
<S> <C> <C> <C>
Premiums $ 364,012 355,825 337,442
Investment income, net 476,131 452,104 428,161
Fees, sales and loan income 10,946 9,403 8,752
Net realized investment gains 23,172 43,524 13,773
Other revenues 40,700 31,315 13,335
------- ------- -------
Total revenues 914,961 892,171 801,463
------- ------- -------
Benefits and expenses
- - ---------------------
Losses, benefits and settlement expenses 553,400 542,880 498,341
Deferred policy acquisition costs 13,170 11,898 6,071
Dividends to policyholders 59,704 53,082 53,691
Other operating expenses 139,193 117,354 122,474
------- ------- -------
Total benefits and expenses 765,467 725,214 680,577
------- ------- -------
Income before Federal income taxes 149,494 166,957 120,886
------- ------- -------
Federal income tax expense (benefit):
Current 71,293 57,799 37,090
Deferred (18,930) (1,674) (1,494)
------- ------- -------
Total Federal income tax expense 52,363 56,125 35,596
------- ------- -------
Net income $ 97,131 110,832 85,290
======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
60A
<PAGE>
USAA LIFE INSURANCE COMPANY
Consolidated Statements of Comprehensive Income
Years Ended December 31, 1998, 1997, and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Net Income $ 97,131 110,832 85,290
------- ------- -------
Other comprehensive income(loss), net of income taxes
Unrealized gains(losses) on securities:
Unrealized holding gains arising during year 50,222 37,714 20,067
Reclassification adjustment for realized gains
included in net income (65,517) (26,611) (27,285)
------- ------- -------
Other comprehensive income(loss), net of income taxes (15,295) 11,103 (7,218)
------- ------- -------
Total comprehensive income $ 81,836 121,935 78,072
======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
61A
<PAGE>
USAA LIFE INSURANCE COMPANY
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1998, 1997, and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Capital
- - -------
Preferred capital stock $ 60,000 60,000 60,000
Common capital stock 2,500 2,500 2,500
Additional paid-in capital 51,408 51,408 51,408
-------- ------- -------
End of year 113,908 113,908 113,908
-------- ------- -------
Accumulated other comprehensive income
- - --------------------------------------
Balance at beginning of year 33,403 22,300 29,518
Unrealized gains(losses) on securities during year, net of
Income taxes and reclassification adjustments (15,295) 11,103 (398)
Unrealized gains(losses) on separate account during year,
net of income taxes and reclassification adjustments - - (6,820)
-------- ------- -------
End of year 18,108 33,403 22,300
-------- ------- -------
Retained earnings
- - -----------------
Beginning of year 597,562 534,476 465,016
Net income 97,131 110,832 85,290
Dividends to stockholders (136,657) (47,746) (15,830)
-------- ------- -------
End of year 558,036 597,562 534,476
-------- ------- -------
Total stockholders' equity $ 690,052 744,873 670,684
======== ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
62A
<PAGE>
<TABLE>
<CAPTION>
USAA LIFE INSURANCE COMPANY
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997, and 1996
(Dollars in Thousands)
1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 97,131 110,832 85,290
Adjustments to reconcile net income to net
cash provided by operating activities:
Net realized investment gains (23,172) (43,524) (13,773)
Non-cash investment income (6,414) (13,148) (5,185)
(Increase) in deferred policy acquisition costs (21,068) (19,938) (17,728)
Depreciation and amortization (6,418) (7,951) (5,442)
Deferred income tax benefit (18,930) (1,974) (1,494)
(Increase) in premium balances receivable (70) (1,244) (44)
(Increase) in accounts receivable-affiliate (614) (30) (20)
(Increase) in accrued investment income (3,113) (7,292) (12,213)
(Increase) decrease in other assets (81,425) (14,583) (8,495)
Increase in insurance reserves 158,467 102,790 78,926
Increase (decrease) in accounts payable and
Accrued expense (22,375) 53,022 (20,126)
Increase (decrease) in accounts payable-affiliates 1,479 (1,370) 3,379
Increase (decrease) in other liabilities (6,227) 432 7,089
Other 2,220 (2,716) 759
---------- ---------- ----------
Net cash provided by operating activities 69,471 153,306 90,923
---------- ---------- ----------
Cash flows from investing activities:
Proceeds from sales and maturities of
Available-for-sale securities 582,584 370,972 587,945
Proceeds from maturities of held-to-maturity
Securities 170,271 117,667 106,504
Proceeds from principal collections on investments 494,809 271,471 351,540
Other investments sold 3,186 948 1,123
Securities purchased - available-for-sale (1,331,934) (1,181,564) (1,460,349)
Other investments purchased (72) (165) (451)
Investment in variable annuity separate account - - 87,280
---------- ---------- ----------
Net cash used in investing activities (81,156) (420,671) (326,408)
---------- ---------- ----------
Cash flows from financing activities:
Deposits and interest credited to funds on deposit 594,433 742,374 571,941
Withdrawals from funds on deposit (457,459) (419,611) (362,658)
Proceeds from issuance of preferred stock - - 20,000
Dividends to stockholders (102,729) (25,200) (15,830)
---------- ---------- ----------
Net cash provided by financing activities 34,245 297,563 213,453
---------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents 22,561 30,198 (22,032)
Cash and cash equivalents at beginning of year 39,642 9,444 31,476
---------- ---------- ----------
Cash and cash equivalents at end of year $ 62,203 39,642 9,444
========== ========== ==========
Significant Non-Cash Financing Activities:
The Company declared and paid a dividend to stockholders by transferring equity securities
with a fair value, cost, and recognized gain of $33,928, $21,951, and $11,977 respectively for 1998,
$22,546, $11,560, and $10,986 respectively for 1997, and none for 1996.
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
63A
<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
subsidiary 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) ACCOUNTING STANDARDS ADOPTED
The Company adopted Statement of Financial Accounting Standard No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", on January 1, 1997. SFAS No. 125
established criteria for determining whether transfers of financial assets
are sales or secured borrowings. The adoption of this statement resulted
in the recording of an asset and corresponding liability representing the
collateral received in connection with the Company's securities lending
program. The collateral held is recorded in "Collateral for securities
loaned at fair value" with the off setting liability being reflected in
"Payable upon return of securities loaned." This accounting treatment has
no effect on the Company's net earnings or stockholders' equity.
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" on
January 1, 1998. This statement establishes standards for reporting and
presentation of comprehensive income and its components in a full set of
financial statements. Comprehensive income consists of net income and net
unrealized gains (losses) on securities and is presented in the
consolidated statements of comprehensive income. SFAS No. 130 requires only
additional disclosures in the consolidated financial statements; it does
not affect the Company's financial position, results of operations, or
liquidity.
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" on January 1, 1998. This statement
provides standards for reporting information about operating segments in
financial statements using the "management approach."
The Company adopted the provisions of the AICPA Statement of Position (SOP)
98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use" on January 1, 1998. This SOP requires that certain costs
of computer software developed or obtained for internal use be capitalized
and amortized over the estimated useful life of the software. Adoption of
this SOP did not have a material impact on the Company's financial
position, results of operations, or liquidity.
64A
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(C) 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 insurance reserves) reflected in stockholders' equity.
Bonds, at amortized cost of approximately $289,788, and $281,206 were on
deposit with various state governmental agencies at December 31, 1998, and
1997, 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 1998 and 1997 deposits include
$286,825 and $278,333, respectively, 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 non-redeemable 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 insurance
reserves) reflected in stockholders' equity.
Mortgage and policy loans are carried at their unpaid principal balances
with interest rates ranging from 4.80% to 10.0% at December 31, 1998.
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.
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. Net realized
capital gains of $56,720, $0, and $0 for 1998, 1997, and 1996 respectively,
allocable to future policyholder dividends and interest, were deducted from
net realized capital gains and an offsetting amount was reflected in
insurance reserves.
(D) 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, 1998 and 1997, cash and cash equivalents include $760 and
$268, respectively, of separate account purchases awaiting reinvestment.
These funds are restricted from the Company's use.
65A
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(E) 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.
(F) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value estimates of the Company's financial instruments are 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.
(G) 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.
(H) 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 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.
66A
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(I) INSURANCE RESERVES
Included in insurance 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.
(J) 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.
(K) 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.
(L) 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
7% of the total life insurance in force at December 31, 1998, and 8% of
life insurance in force at December 31, 1997. Participating policies
accounted for 16% of the premium income in 1998, and 13% of the premium
income in 1997. The provision for policyholders' dividends is based on
current dividend scales.
The Company guarantees to pay dividends in aggregate, on all participating
policies issued after December 31, 1983, in the total amount of $16,897 in
1999.
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.
(M) RECLASSIFICATIONS
Certain reclassifications of prior period amounts have been made to conform
with the current year's presentation.
67A
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(2) BASIS OF ACCOUNTING
-------------------
The Company prepares separate statutory financial statements in accordance
with accounting practices prescribed or permitted by the Texas Department of
Insurance. 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 has adopted codification
for standard accounting practices, which will be implemented in 2001. It is
currently unknown which states will adopt codification.
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>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Statutory net income $ 97,323 97,588 62,998
Gain (loss) on sale of investments (50,372) 980 (6,422)
Deferred policy acquisition costs 21,104 19,938 17,728
Tax adjustment 17,862 7,253 8,386
Participating policyholder earnings 778 3,294 (787)
Insurance reserves and other 10,436 (18,221) 3,387
--------- -------- -------
GAAP net income $ 97,131 110,832 85,290
========= ======== =======
Statutory capital and surplus 488,224 540,053 470,263
Increases (decreases):
Deferred policy acquisition costs 226,986 207,090 189,298
Federal income taxes 53,734 22,354 28,236
Asset valuation reserve 78,940 99,651 103,482
Participating policyholder liability (2,914) (4,143) (6,583)
Policyholder reserve and funds (65,710) (8,819) 7,437
Deferred and uncollected premiums (86,809) (82,649) (76,716)
Investment unrealized gain (loss) adjustments:
Investment valuation difference 185,432 150,686 56,285
Policyholder accounts and other assets (189,847) (175,607) (96,828)
Other adjustments 2,016 (3,743) (4,190)
--------- -------- -------
GAAP capital and surplus $ 690,052 744,873 670,684
========= ======== =======
</TABLE>
68A
<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, 1998 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 $ 11,040 1,933 - 12,973 11,040
Obligations of states and political subdivisions 4,175 151 - 4,326 4,175
Debt securities issued by foreign
governments and corporations 41,858 650 - 42,508 41,858
Mortgage-backed securities 536,040 16,969 (130) 552,879 536,040
Corporate securities 291,813 14,865 - 306,678 291,813
--------- ------- ------- --------- ---------
Total debt securities $ 884,926 34,568 (130) 919,364 884,926
========= ======= ======= ========= =========
Available-for-Sale
-----------------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair Carrying
cost gains losses Value value
------------- -------------- -------------- -------------- -----------
Debt securities
- - ---------------
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies $ 287,283 4,795 - 292,078 292,078
Obligations of states and political subdivisions 57,874 2,039 - 59,913 59,913
Debt securities issued by foreign
governments and corporations 388,524 14,039 (1,630) 400,933 400,933
Mortgage-backed securities 1,012,224 45,178 (491) 1,056,911 1,056,911
Corporate securities 3,527,910 128,938 (11,077) 3,645,771 3,645,771
--------- ------- ------- --------- ---------
Total debt securities $ 5,273,815 194,989 (13,198) 5,455,606 5,455,606
========= ======= ======= ========= =========
Equity securities
- - -----------------
Common stock $ 158,498 34,174 - 192,672 192,672
Non-redeemable preferred stock 55,500 3,744 (101) 59,143 59,143
--------- ------- ------- --------- ---------
Total equity securities $ 213,998 37,918 (101) 251,815 251,815
========= ======= ======= ========= =========
</TABLE>
69A
<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, 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 5,525 373 (2) 5,896 5,525
subdivisions
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
========= ======= ====== ========= =========
Available-for-Sale
--------------------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized Unrealized fair Carrying
cost gains Losses value value
--------------- -------------- --------------- -------------- -------------
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 66,443 2,933 - 69,376 69,376
subdivisions
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
Non-redeemable 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>
70A
<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, 1998, 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 $ 23,987 24,391
Due after one year through five years 234,168 241,377
Due after five years through ten years 52,673 56,425
Due after ten years 38,058 44,292
---------- ---------
348,886 366,485
Mortgage-backed securities 536,040 552,879
---------- ---------
$ 884,926 919,364
========== =========
Available-for-Sale
--------------------------------
Estimated
Amortized fair
cost value
-------------- --------------
Due in one year or less $ 60,652 61,270
Due after one year through five years 2,356,186 2,412,515
Due after five years through ten years 1,518,780 1,586,626
Due after ten years 325,973 338,284
---------- ---------
4,261,591 4,398,695
Mortgage-backed securities 1,012,224 1,056,911
---------- ---------
$5,273,815 5,455,606
========== =========
</TABLE>
Proceeds from sales of available-for-sale securities during 1998, 1997, and
1996 were $399,619, $317,851, and $495,039, respectively. Gross gains and
losses of $65,670 and $2,794 respectively for 1998, and $29,049 and $2,913
respectively for 1997, and $25,566 and $18,317 respectively for 1996, were
realized on those sales.
Gross investment income during 1998, 1997, and 1996 was $480,350, $456,322,
and $431,893, respectively, and consists primarily of interest income on fixed
maturity securities. Investment expenses were $4,219, $4,218, and $3,732 for
1998, 1997, and 1996, respectively.
The Company engages in securities lending whereby certain securities from its
portfolio are loaned to other institutions for short periods of time. Initial
collateral, primarily cash, is required at a rate of 102% of the market value
of a loaned security. The collateral is deposited by the borrower with a
lending agent, and retained and invested by the lending agent according to the
Company's guidelines to generate additional income. The market value of the
loaned securities is monitored on a daily basis with additional collateral
obtained or refunded as the market value of the loaned securities fluctuates.
71A
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
At December 31, 1998 and 1997, net unrealized gains of $189,847 and $175,607
were allocated to insurance reserves for participating life insurance policies
and interest sensitive contracts. In addition, net unrealized gains of $6,865
and $5,683 were allocated against deferred policy acquisition costs in 1998
and 1997 respectively.
(4) FEDERAL INCOME TAXES
---------------------
The expected statutory Federal income tax amounts for the years ended December
31, 1998, 1997, and 1996 differ from the effective tax amounts as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- ---------- ----------
<S> <C> <C> <C>
Income before income taxes $149,494 166,957 120,886
======== ======= =======
Federal income tax expense at 35% statutory rate 52,323 58,435 42,310
Increase (decrease) in tax resulting from:
Dividends received deduction (499) (604) (660)
Tax credits - R&E 32 (548) (6,188)
Other, net 507 (1,158) 134
-------- ------- -------
Federal income tax expense $ 52,363 56,125 35,596
======== ======= =======
</TABLE>
Deferred income tax benefit for the years ended December 31, 1998, 1997, and
1996 was primarily attributable to differences between the valuation of assets
and insurance liabilities for financial reporting and tax purposes.
72A
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
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>
1998 1997
--------- ---------
Deferred tax assets:
<S> <C> <C>
Insurance reserves $ 88,118 70,361
Accounts payable and accrued expenses 1,667 1,497
Policyholder dividends 7,544 6,778
Other, net 6,741 3,686
-------- -------
Total gross deferred tax assets 104,070 82,322
-------- -------
Deferred tax liabilities:
Investments 5,532 7,590
Depreciable assets 266 39
Deferred policy acquisition costs 36,478 34,517
Other, net 2,708 9
-------- -------
Total gross deferred tax liabilities 44,984 42,155
-------- -------
Deferred tax liability on net unrealized gains on investments (5,341) (17,937)
-------- -------
Net deferred tax asset $ 53,745 22,230
======== =======
</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.
At December 31, 1998, and 1997, the Company had the following Federal income
tax payable/receivable amounts:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Current net Federal income taxes payable (receivable) $ 2,382 (1,552)
</TABLE>
Aggregate cash payments to (receipts from) USAA for income taxes were $66,643,
$62,345, and $38,064 for USAA Life Insurance Company and $(1,250), $163, and
$(155) for its subsidiaries during the years ended December 31, 1998, 1997,
and 1996, respectively.
73A
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
Detailed tax amounts for items of comprehensive income are as follows:
<TABLE>
<CAPTION>
Tax
Before-tax (expense) Net-of-tax
amount or benefit amount
------------- ------------- -------------
<S> <C> <C> <C>
FOR THE YEAR ENDING DECEMBER 31, 1996
- - -------------------------------------
Unrealized gains on securities:
Unrealized holding gains(losses) arising during year $ 30,872 (10,805) 20,067
Less: reclassification adjustment for gains realized in income (41,977) 14,692 (27,285)
-------- ------- -------
Net unrealized gains(losses) from securities (11,105) 3,887 (7,218)
-------- ------- -------
Other comprehensive income (11,105) 3,887 (7,218)
======== ======= =======
For the year ending December 31, 1997
Unrealized gains on securities:
Unrealized holding gains arising during year $ 58,022 (20,308) 37,714
Less: reclassification adjustment for gains realized in income (40,940) 14,329 (26,611)
-------- ------- -------
Net unrealized gains from securities 17,082 (5,979) 11,103
-------- ======= -------
Other comprehensive income 17,082 (5,979) 11,103
======== ======= =======
For the year ending December 31, 1998
Unrealized gains(losses) on securities:
Unrealized holding gains arising during year $ 77,265 (27,043) 50,222
Less: reclassification adjustment for gains realized in income (100,796) 35,279 (65,517)
-------- ------- -------
Net unrealized gains(losses) from securities (23,531) 8,236 (15,295)
-------- ------- -------
Other comprehensive income (23,531) 8,236 (15,295)
======== ======= =======
</TABLE>
74A
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(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. SFAS 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>
1998 1997
------------------------------ ------------------------------
Carrying Fair Carrying Fair
amount value amount value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 62,203 62,203 39,642 39,642
Debt securities 6,340,532 6,374,970 6,115,169 6,158,713
Equity securities 251,815 251,815 352,863 352,863
Mortgage loans 3,903 4,707 4,462 5,114
Policy loans 131,520 131,520 130,246 130,246
Premium balances receivable 2,969 2,969 2,899 2,899
Accrued investment income 82,042 82,042 78,929 78,929
Separate account 282,489 282,489 184,797 184,797
Financial liabilities:
Deferred annuities and annuities
without life contingencies 3,773,742 3,773,742 3,787,507 3,787,507
Policyholder dividend accumulations 30,016 30,016 28,593 28,593
Policy dividends declared but unpaid 35,965 35,965 31,081 31,081
Accounts payable and accrued expenses 64,940 64,940 87,315 87,315
Separate account 282,489 282,489 184,797 184,797
</TABLE>
All carrying amounts are included in the balance sheet under the indicated
captions, except for deferred annuities and annuities without life
contingencies, and policyholder dividend accumulations both of which are
included in funds on deposit, and policy dividends declared but unpaid which
are included in other liabilities.
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 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.
75A
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
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.
(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 $127,604, $73,136, and $70,713 for 1998,
1997, and 1996, respectively. The aggregate amount of the Company's
allocations to affiliates was $6,553, $4,376, and $4,742 for 1998, 1997, and
1996, 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 $3,600, $3,039, and $2,793 for 1998, 1997 and 1996,
respectively.
76A
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
The Company also received premium and annuity considerations from USAA of
$4,319, $4,201, and $4,093 in 1998, 1997, and 1996, 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, 1998, 1997, and 1996
the Company had no liability for borrowed money. The Company borrowed
$271,553, $3,598,125, and $2,566,042 during 1998, 1997 and 1996
respectively, through the use of these funding agreements. The interest
associated with these intercompany-funding agreements was $76, $855, and
$660 in 1998, 1997, and 1996, respectively.
(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% is ceded to a coinsurance
pool which is placed with a number of reinsurers on a quota share basis.
The Company assumes Bank Owned Life Insurance (BOLI) business through 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 under the coinsurance arrangement.
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 $4,500,994, $4,087,549, and
$3,595,801 is ceded on a yearly renewable term basis; $10,982,455,
$4,687,456, and $939,290 is ceded on a coinsurance basis; and $1,562,383,
$957,925, and $952,599 is ceded in accordance with a stop loss agreement at
December 31, 1998, 1997, and 1996, respectively. Reinsurance amounts related
to insurance reserves, funds on deposit, and paid losses totaled $308,262
and $204,626 at December 31, 1998 and 1997, respectively. Premium revenues
and interest credited to policyholders were reduced by $104,262, $204,123,
and $11,837 for reinsurance premiums ceded during the years ended December
31, 1998, 1997, and 1996, respectively. Benefits were reduced by $114,351,
$196,080, and $7,838 for reinsurance recoverables during the years ended
December 31, 1998, 1997, and 1996, respectively.
In accordance with accident and health reinsurance contracts, aggregate
reserves for policies and contracts and policy and contract claims are
reduced by $23,868 and $17,981 at December 31, 1998 and 1997, respectively.
Premium revenues were reduced by $3,266, $3,297, and $3,117 for reinsurance
premiums ceded during the years ended December 31, 1998, 1997, and 1996,
respectively. Benefits were reduced by $6,082, $3,268, and $3,604 for
reinsurance recoverables during the years ended December 31, 1998, 1997, and
1996, respectively.
77A
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(9) DEFERRED POLICY ACQUISITION COSTS AND FUTURE POLICY BENEFITS
------------------------------------------------------------
Deferred policy acquisitions costs and premiums are summarized below:
<TABLE>
<CAPTION>
Accident
and
Life Annuity Health Total
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Balance at
January 1, 1996 $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)
Fair Value Adjustment 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)
Fair Value Adjustment 1,201 (3,200) - (1,999)
-------- ------ ------ -------
Net change 18,111 (1,631) 1,312 17,792
-------- ------ ------ -------
Balance at
December 31, 1997 $163,070 29,243 14,777 207,090
-------- ------ ------ -------
Additions 20,220 8,486 5,532 34,238
Amortization (9,809) (1,608) (1,753) (13,170)
Fair Value Adjustment (256) (916) - (1,172)
-------- ------ ------ -------
Net change 10,155 5,962 3,779 19,896
-------- ------ ------ -------
Balance at
December 31, 1998 $173,225 35,205 18,556 226,986
======== ====== ====== =======
1998 Premiums $281,655 6,755 75,602 364,012
======== ====== ====== =======
1997 Premiums $277,631 8,143 70,051 355,825
======== ====== ====== =======
1996 Premiums $264,382 7,792 65,268 337,442
======== ====== ====== =======
</TABLE>
78A
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
The liabilities for future policy benefits and related insurance in-force at
December 31, 1998 and 1997 are summarized below:
<TABLE>
<CAPTION>
Future Policy
Benefits
1998 1997
------------- ----------
<S> <C> <C>
Life and annuity:
Individual $ 1,115,627 965,399
Group 2,881 2,792
------------- ----------
Total life and annuity 1,118,508 968,191
============= ==========
Accident and health $ 49,776 41,626
============= ==========
Insurance in Force
--------------------------
1998 1997
------------- ----------
Life and annuity:
Individual $ 69,858,089 69,540,314
Group 2,215,752 1,870,085
------------- ----------
Total life and annuity $ 72,073,841 71,410,399
============= ==========
</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.
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.
79A
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(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 $2,229, $2,200, and $1,830 were paid in 1998, 1997, and
1996 respectively, and $81 and $94 were accrued for each year after the last
payments on December 15, 1998 and 1997, respectively.
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,
1998, 1997, and 1996. Dividends of $134,428, $45,546, and $14,000 were paid on
the common stock during 1998, 1997, and 1996, respectively. The equity
securities transferred had an original cost of $21,951, $11,560, $0, a fair
value of $33,928, $22,546 and $0, and a realized gain of $11,977, $10,986, and
$0 in 1998, 1997 and 1996, respectively.
(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
$66,910 in 1998 and are limited to $56,811 in 1999. Dividends are paid as
determined by the Board of Directors and at its discretion. Extraordinary
dividends approved by the Texas Department of Insurance, totaling $69,785, $0
and $0 were paid in 1998, 1997 and 1996, respectively.
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.
(12) BUSINESS SEGMENTS
-----------------
The significant business segments of the Company are life insurance, annuity
products, and health insurance which are marketed primarily to individuals
eligible for membership in USAA. The life insurance segment offers universal
life, whole life, term, and other individual coverages. The annuity segment
offers both fixed and variable annuity products. The health segment offers
individual and group accident and health policies.
80A
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
The following table shows total revenues, income before income taxes, and total
assets for these segments as of and for the years ended December 31, 1996, 1997,
and 1998:
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ ------------
<S> <C> <C> <C>
Revenues:
- - ---------
Premiums:
Life $ 281,655 277,631 264,382
Annuity 6,755 8,143 7,792
Health 75,602 70,051 65,268
--------- --------- ---------
$ 364,012 355,825 337,442
Investment income, net:
Life $ 168,938 138,001 124,133
Annuity 303,796 310,069 299,485
Health 3,397 4,034 4,543
--------- --------- ---------
$ 476,131 452,104 428,161
Realized capital gains, net:
Life $ (489) 35,148 18,075
Annuity 23,661 8,376 (4,302)
Health 0 0 0
--------- --------- ---------
$ 23,172 43,524 13,773
Other revenues:
Life $ 24,464 15,928 3,680
Annuity 15,061 14,316 8,613
Health 12,121 10,474 9,794
--------- --------- ---------
$ 51,646 40,718 22,087
Total revenues: $ 914,961 892,171 801,463
========= ========= =========
Income before income taxes:
- - ---------------------------
Life $ 80,766 110,476 58,914
Annuity 72,449 55,053 44,029
Health (3,721) 1,428 17,943
--------- --------- ---------
$ 149,494 166,957 120,886
========= ========= =========
Income tax (expense) or benefit:
- - --------------------------------
Life $ (28,290) (37,138) (17,348)
Annuity (25,376) (18,507) (12,965)
Health 1,303 (480) (5,283)
--------- --------- ---------
$ (52,363) (56,125) (35,596)
========= ========= =========
Total assets:
- - -------------
Life $ 3,143,667 2,462,903 1,971,134
Annuity 5,251,162 4,823,421 4,389,271
Health 105,739 92,574 83,432
--------- --------- ---------
$ 8,500,568 7,378,898 6,443,837
========= ========= =========
</TABLE>
81A
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(13) 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 $4,422, $3,746, and $4,847 in 1998, 1997 and
1996, respectively. At December 31, 1998 and 1997, a liability of $0 and
$899, 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 of the Company 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 postretirement benefit
cost allocated to the Company based on the number of employees was $1,084,
$737 and $682 in 1998, 1997 and 1996, respectively. At December 31, 1998
and 1997, a liability of $2,097 and $974, respectively, has been recorded
which represents the under-funding of the Company's allocated funding
requirements under the net periodic postretirement benefit cost allocated
to the Company.
(C) CONTRIBUTORY RETIREMENT PLAN
Substantially all employees of the Company and its subsidiaries are
eligible to participate in USAA's contributory retirement plan. The
Company matches participant contributions dollar for dollar to a maximum
of 6% of a participant's compensation. The Company's contributions vest on
a graduated basis up to 100% after five years of credited service. In 1998
and 1997, the Company's contributions to the Plan totaled $2,415 and
$2,122, respectively.
(14) SEPARATE ACCOUNT
----------------
The Separate Account and the Life Insurance Separate Account are segregated
asset accounts established under Texas law through which USAA Life Insurance
Company invests the premium payments received from Contract Owners and Policy
Owners, respectively. The assets of the Separate Accounts are the property of
the Company. However, only the assets of the Separate Accounts in excess of
the reserves, and other Contract liabilities with respect to the Separate
Accounts, 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 and Policies, credited to or charged
against the Separate Accounts without regard to other income, gains or losses
of the Company. The Company's obligations arising under the Contracts are
general corporate obligations.
82A
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
The Separate Account currently is divided into twelve 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, and three funds of
the Bankers Trust Insurance Funds Trust series. 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 Money Market Fund, at amortized cost,
which approximates market value.
The Company incurs mortality expenses on behalf of Separate Accounts contract
holders and policy owners. The Company also incurs administrative expenses on
behalf of contract owners. The Company collects fees for these expenses from
contract holders and policy owners, respectively 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 1998 and 1997.
(15) YEAR 2000
---------
The Company has entered into contracts under which information technology
support is provided by its affiliate, USAA Information Technology Company
("ITCO"), which is also an indirect, wholly-owned subsidiary of USAA. USAA
established a Change of Century Program Management Office in 1994, and has
since developed an extensive Change of Century Project Management Plan which
is followed by ITCO personnel in the assessment, evaluation, testing, and
certification of all systems utilized by the USAA companies, including the
USAA Life Insurance Company.
The Company, with assistance from ITCO and USAA, has also identified and
contacted critical vendors and business partners whose computerized systems
interface with the Company's systems, regarding their plans and progress in
addressing their Year 2000 issues.
(16) 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 $1,898, $1,953 and $2,437 to various state guaranty associations
during the years ended December 31, 1998, 1997, and 1996, respectively. The
Company accrues its best estimate for known insolvencies. At December 31,
1998 and 1997 accounts payable and accrued expenses include $6,052 and $8,931,
respectively, related to estimated assessments.
The Company is party to various lawsuits and claims generally incidental to
its business. The ultimate disposition of these matters is not expected to
have a significant adverse effect on the Company's financial position or
results of operations.
83A
<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.
84A
<PAGE>
[LOGO OF USAA LIFE INSURANCE COMPANY APPEARS HERE]
USAA Life Insurance Company
9800 Fredericksburg Road
San Antonio, Texas 78288
(C) Copyright, 1999, USAA. All rights reserved.
<PAGE>
PART II
INFORMATION NOT REQUIRED TO BE FILED IN A PROSPECTUS
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the Securities
Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with
the Securities and Exchange Commission such supplementary and periodic
information, documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly adopted pursuant to
authority conferred in that section.
UNDERTAKING PURSUANT TO RULE 484(b)(1)
UNDER THE SECURITIES ACT OF 1933
Rule 484(b)(1) under the Securities Act of 1933 requires a description of
"[a]ny provision or arrangement . . . whereby the registrant may indemnify a
director, officer or controlling person of the registrant against liabilities
arising under the [Securities] Act." Registrant, the Life Insurance Separate
Account of USAA Life Insurance Company, does not, as a technical matter, have
any directors or officers. Nevertheless, Registrant, pursuant to Section 13 of
the Amended and Restated Distribution and Administration Agreement, may
indemnify, albeit indirectly, directors and/or officers of its depositor, USAA
Life Insurance Company ("USAA Life"), as follows. Section 13 of such Agreement
provides that Registrant shall indemnify the employees of USAA Investment
Management Company ("IMCO"), Registrant's principal underwriter. To whatever
extent any director or officer of USAA Life may be deemed to be an "employee" of
IMCO, Registrant may be deemed to be permitted to indemnify such person pursuant
to such Agreement, which is filed as Exhibit 1.(3)(a) to this Registration
Statement and is herein incorporated by reference.
Additionally, there are certain other provisions or arrangements whereby
USAA Life, and/or certain of its affiliated persons, may be indemnified by
parties or entities other than Registrant. Such provisions or arrangements are
incorporated herein by reference, as follows: to Article IX of the By-Laws of
USAA Life, filed as Exhibit 1.6(b) to this Registration Statement; to Section 9
of the Amended and Restated Underwriting and Administrative Services Agreement,
filed as Exhibit 1.(8)(a) to this Registration Statement; to Section 12 of the
Transfer Agent Agreement, as amended, filed as Exhibit 1.(8)(c) to this
Registration Statement; to Section 6(b) of the Reimbursement Agreement, filed as
Exhibit 1.8(d)(iii) to this Registration Statement; to Section 12.2 of the
Amended Participation Agreement, filed as Exhibit 1.8(e)(i) to this Registration
Statement; to Section 7 of the Participation Agreement, filed as Exhibit
1.8(f)(i) to this Registration Statement; and to the Expense Allocation
Agreement, filed as Exhibit 1.8(f)(ii) to this Registration Statement.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of
Registrant pursuant to the foregoing provisions, or otherwise, Registrant has
been advised that in the opinion of the Securities and
<PAGE>
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by Registrant
of expenses incurred or paid by a director, officer or controlling person of
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
REPRESENTATION REGARDING THE REASONABLENESS OF AGGREGATE FEES AND CHARGES
DEDUCTED UNDER THE POLICIES PURSUANT TO SECTION 26(e)(2)(A) OF THE INVESTMENT
COMPANY ACT OF 1940
USAA Life Insurance Company ("USAA Life") represents that the fees and
charges deducted under the Policies, in the aggregate, are reasonable in
relation to the services rendered, the expenses expected to be incurred, and the
risks assumed by the Company under the Policies. USAA Life bases its
representation on its assessment of all of the facts and circumstances,
including such relevant factors as: the nature and extent of such services,
expenses and risks; the need for USAA Life to earn a profit; the degree to which
the Policies include innovative features; and the regulatory standards for
exemptive relief under the Investment Company Act of 1940 used prior to October
1996, including the range of industry practice. This representation applies to
all Policies sold pursuant to this Registration Statement, including those sold
on the terms specifically described in the prospectus contained herein, or any
variations therein, based on supplements, endorsements, or riders to any
Policies or prospectus, or otherwise.
S-2
<PAGE>
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement contains the following papers and documents:
The facing sheet.
Reconciliation and tie between items in Form N-8B-2 and the Prospectus.
Prospectus consisting of 84 pages.
Undertaking, pursuant to Section 15(d) of the Securities Exchange Act of 1934 to
file reports.
Undertaking pursuant to Rule 484(b)(1) under the Securities Act of 1933,
regarding indemnification.
Representation regarding the reasonableness of aggregate fees and charges.
The signatures.
Written consents of the following persons:
Dwain A. Akins, Esq., Assistant Vice President and Assistant Secretary,
USAA Life Insurance Company (filed as Exhibit 2)./4/
KMPG LLP, Independent Auditors (see Exhibit 6). (Filed herewith.)
James C. Hackard, ASA, MAAA, Associate Actuary, USAA Life Insurance Company
(filed as Exhibit 9)./4/
The following exhibits:
1. Exhibits required by Article IX, paragraph A, of Form N-8B-2:
(1) Resolution of Board of Directors of USAA Life Insurance Company
establishing Life Insurance Separate Account of USAA Life
Insurance Company. (The resolution is filed in lieu of a trust
or indenture creating a unit investment trust.)/1/
(2) Not applicable.
(3)(a) Amended and Restated Distribution and Administration Agreement by
and between USAA Life Insurance Company and USAA Investment
Management Company, dated December 16, 1994 and amended and
restated, to encompass variable universal life insurance, March
30, 1998./4/
(3)(b) Not applicable.
S-3
<PAGE>
(3)(c) Not applicable.
(4) Not applicable.
(5) Revised Form of Variable Universal Life Insurance Policy
(Policy Form No. VUL 31891TX), including riders./4/
(6)(a) Articles of Incorporation of USAA Life Insurance Company, as
amended./4/
(6)(b) Bylaws of USAA Life Insurance Company./4/
(7) Not applicable.
(8)(a) Amended and Restated Underwriting and Administrative
Services Agreement by and between USAA Life Insurance
Company, USAA Life Investment Trust and USAA Investment
Management Company, dated December 16, 1994, amended
February 7, 1997, amended and restated, to encompass
variable universal life insurance, February 26, 1998, and
amended and restated, November 18, 1998./2,5/
(8)(b)(i) Investment Advisory Agreement by and between USAA Life
Investment Trust and USAA Investment Management Company,
dated December 16, 1994./2/
(8)(b)(ii) Amendment to Investment Advisory Agreement by and between
USAA Life Investment Trust and USAA Investment Management
Company, with respect to Funds added to Trust, dated
February 7, 1997./3/
(8)(b)(iii) Second Amendment to Investment Advisory Agreement by and
between USAA Life Investment Trust and USAA Investment
Management Company, to encompass variable life insurance,
dated February 18, 1998./2/
(8)(c)(i) Transfer Agent Agreement by and between USAA Life Investment
Trust and USAA Life Insurance Company, dated December 15,
1994./2/
(8)(c)(ii) Letter Agreement by and between USAA Life Investment Trust
and USAA Life Insurance Company, appointing USAA Life as the
Transfer Agent and Dividend Disbursing Agent for Funds added
to Trust, dated February 7, 1997./2/
(8)(c)(iii) Amendment to Transfer Agent Agreement by and between USAA
Life Investment Trust and USAA Life Insurance Company, to
encompass variable universal life insurance, dated February
18, 1998./2/
S-4
<PAGE>
(8)(d)(i) Amended Participation Agreement by and between Scudder
Variable Life Investment Fund and USAA Life Insurance
Company, dated February 3, 1995, as amended May 21, 1998./6/
(8)(d)(ii) Amended Participating Contract and Policy Agreement by and
between Scudder Investor Services, Inc. and USAA Investment
Management Company, dated February 3, 1995, as amended April
29, 1998./6/
(8)(d)(iii) Amended Reimbursement Agreement by and between Scudder
Kemper Investments, Inc. and USAA life Insurance Company,
dated February 3, 1995, as amended May 21, 1998./6/
(8)(d)(iv) Amended Letter Agreement by and between Scudder Kemper
Investments, Inc., Scudder Investor Services, Inc., Scudder
Variable Life Investment Fund, USAA Life Insurance Company
and USAA Investment Management Company, dated February 3,
1995, as amended March 16, 1998./6/
(8)(e)(i) Amended Participation Agreement by and between The Alger
American Fund, Fred Alger Management, Inc., Fred Alger &
Company, Incorporated, and USAA Life Insurance Company,
dated December 16, 1994, as amended March 16, 1998./4/
(8)(e)(ii) Amended Expense Allocation Agreement by and between Fred
Alger Management, Inc., Fred Alger & Company, Incorporated,
and USAA Life Insurance Company, dated December 16, 1994 as
amended March 16, 1998./4/
(8)(f)(i) Participation Agreement by and between BT Insurance Funds
Trust, Bankers Trust Company and USAA Life Insurance
Company, dated April 30, 1998./4/
(8)(f)(ii) Expense Allocation Agreement by and between Bankers Trust
Company and USAA Life Insurance Company, dated April 30,
1998./4/
(10)(a)(i) Revised Form of Application for the Variable Universal Life
Insurance Policy filed as Exhibit 1.(5). /4/
(10)(a)(ii) Form of Application for Variable Universal Life Insurance
Policy Change./4/
(10)(b) Proposed Section 1035 Exchange Form./4/
S-5
<PAGE>
Other Exhibits
2. Opinion and Consent of Dwain A. Akins, Esq. Assistant Vice
President and Assistant Secretary, USAA Life Insurance Company,
as to the legality of the Policy interests being registered./4/
3. Not applicable.
4. Not applicable.
5. Financial Data Schedule. (See Exhibit 27 below.)
6. Consent of KPMG LLP, Independent Auditors. (Filed herewith.)
7. Powers of Attorney for: Edwin L. Rosane, Robert G. Davis,
Bradford W. Rich, Josue Robles, Jr., Michael J.C. Roth, Janice E.
Marshall, William B. Tracy, Donald R. Walker, and James A.
Robinson./1/
8. Revised form of illustration showing cash values, cash surrender
values, and death benefits, based on annualized rates of return
of 0%, 6%, and 12%, and based on current and guaranteed Policy
charges. (Filed herewith.)
9. Opinion and Consent of James C. Hackard, ASA, MAAA, Associate
Actuary, USAA Life Insurance Company, as to the methodology for
computing cash values, cash surrender values, and death benefits
as described in the form of illustration filed as Exhibit 8./4/
27. Financial Data Schedule. (Inapplicable, because, notwithstanding
Instruction 5 as to Exhibits, the Commission staff has advised
that no such Schedule is required.)
/1/ Previously filed on January 30, 1998, with the initial filing of this
Registration Statement.
/2/ Incorporated herein by reference to Post-Effective Amendment No. 6,
filed on March 2, 1998, to the Form N-1A Registration Statement (File No. 33-
82270) of USAA Life Investment Trust.
/3/ Incorporated herein by reference to Post-Effective Amendment No. 3,
filed on February 14, 1997, to Form N-1A Registration Statement (File No. 33-
82270) of USAA Life Investment Trust.
/4/ Previously filed on May 15, 1998, with the Pre-Effective Amendment to
Registrant's Form S-6 Registration Statement.
/5/ Incorporated herein by reference to Post-Effective Amendment No. 7,
filed on February 26, 1999, to the Form N-1A Registration Statement (File No.
33-82270) of USAA Life Investment Trust.
/6/ Previously filed on February 26, 1999, with the Post-Effective
Amendment No. 1 to Registrant's Form S-6 Registration Statement.
S-6
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, the
Registrant, Life Insurance Separate Account of USAA Life Insurance Company, has
duly caused this amended Registration Statement to be signed on its behalf by
the undersigned thereunto duly authorized, and its seal to be hereunto fixed and
attested, all in the City of San Antonio, and State of Texas, on this 27th day
of April, 1999.
Signature: Life Insurance Separate Account of
USAA Life Insurance Company
(Registrant)
By: USAA Life Insurance Company
(On behalf of Registrant and itself)
By: /s/ EDWIN L. ROSANE
-----------------------------------
EDWIN L. ROSANE
Vice Chairman, Chief Executive Officer
and President
Attest: /s/ DWAIN A. AKINS
------------------------
DWAIN A. AKINS
Assistant Vice President
and Assistant Secretary
S-7
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, this amended
Registration Statement has been signed below by the following person in the
capacity and on the date indicated.
Signature Title Date
*/s/ROBERT G. DAVIS Chairman April 27, 1999
- - -------------------
Robert G. Davis
*Signed by Dwain A. Akins, as Attorney-in-fact.
S-8
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, this amended
Registration Statement has been signed below by the following person in the
capacity and on the date indicated.
Signature Title Date
/s/EDWIN L. ROSANE Director April 22, 1999
- - ------------------
Edwin L. Rosane
S-9
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, this amended
Registration Statement has been signed below by the following person in the
capacity and on the date indicated.
Signature Title Date
/s/ BRADFORD W. RICH Director April 23, 1999
- - --------------------
Bradford W. Rich
S-10
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, this amended
Registration Statement has been signed below by the following person in the
capacity and on the date indicated.
Signature Title Date
/s/ JOSUE ROBLES, JR. Director April 22, 1999
- - ---------------------
Josue Robles, Jr.
S-11
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, this amended
Registration Statement has been signed below by the following person in the
capacity and on the date indicated.
Signature Title Date
/s/MICHAEL J.C. ROTH Director April 26, 1999
- - --------------------
Michael J.C. Roth
S-12
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, this amended
Registration Statement has been signed below by the following person in the
capacity and on the date indicated.
Signature Title Date
/s/ JANICE E. MARSHALL Director April 22, 1999
- - ----------------------
Janice E. Marshall
S-13
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, this amended
Registration Statement has been signed below by the following person in the
capacity and on the date indicated.
Signature Title Date
*/s/DONALD B. WALKER Director April 27, 1999
- - --------------------
Donald B. Walker
*Signed by Dwain A. Akins, as Attorney-in-fact.
S-14
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Act of 1933, this amended
Registration Statement has been signed below by the following person in the
capacity and on the date indicated.
Signature Title Date
/s/ JAMES A. ROBINSON Senior Vice President and April 25, 1999
- - --------------------- Treasurer (Principal Financial
James A. Robinson and Accounting Officer)
S-15
<PAGE>
EXHIBIT INDEX
6. Consent of KPMG LLP, Independent Auditors. (Filed herewith.)
8. Revised form of illustration showing cash values, cash surrender values,
and death benefits based on an annualized rates of return of 0%, 6%, and
12%, and based on current and guaranteed Policy charges. (Filed herewith.)
S-16
<PAGE>
EXHIBIT 6
CONSENT OF INDEPENDENT AUDITORS
<PAGE>
[LETTERHEAD OF KPMG APPEARS HERE]
EXHIBIT 6
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors of USAA Life Insurance Company
and Policyowners of the Life Insurance Separate Account of
USAA Life Insurance Company:
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Independent Auditors" in the Registration Statement and
related prospectus.
/s/ KPMG LLP
KPMG LLP
San Antonio, Texas
April 27, 1999
<PAGE>
EXHIBIT 8
ILLUSTRATION
<PAGE>
USAA LIFE INSURANCE COMPANY
VARIABLE UNIVERSAL LIFE PROVIDED VIA DIRECT MAIL BY:
INSURANCE Chris Croninger, CLU, ChFC
ILLUSTRATION 9800 Fredericksburg Road, San Antonio, TX 78288
1-800-531-8303
INITIAL DEATH BENEFIT: PREPARED ON: 04/28/99
$100,000 REQUESTED BY: INSURED:
OPTION: A John Doe John Doe
USAA #987654 USAA #987654
The purpose of this illustration is to show how the performance of the
underlying investment accounts could affect the policy cash values and death
benefit. The illustration is hypothetical and is not intended to be used to
project or predict investment results.
VARIABLE UNIVERSAL LIFE INSURANCE
Variable Universal Life insurance is a life insurance plan designed to provide
lifetime protection along with the opportunity to invest your premium dollars in
tax-deferred, investment choices. With this product, you can make transfers
among accounts with no immediate tax liability. This policy gives you control
of the investment/cash value portion of your policy. At the same time, you
assume the associated investment risk.
PRODUCT FEATURES: Important features include flexible benefits, flexible
premiums, permanent death benefit, cash value accumulation, and investment
options. You can borrow or withdraw cash value from your Variable Universal
Life insurance policy without surrendering your policy. Both loans and
withdrawals can adversely affect future cash value accumulations, premium
payments, and death benefits.
OPTIONAL BENEFIT RIDERS: Depending on your needs, you may purchase optional
riders: Waiver of Monthly Deduction, Child Rider, and Accidental Death Benefit.
Riders provide additional benefits and might contain conditions and exclusions
that are different from those in your policy. You also receive riders that are
included at no additional cost: Extended Maturity Rider and Accelerated Benefit
for Terminal Illness Rider. Availability of optional benefit riders are subject
to state approval.
More complete information about USAA Life's Variable Universal Life, including
charges and expenses, can be found in the prospectus which preceded or
accompanied this information. Another copy can be obtained from USAA Life at
the above address. Please read the prospectus carefully before sending money.
USAA Life's Variable Universal Life is distributed by USAA Investment Management
Company, a registered broker dealer and NASD member.
IMPORTANT TERMS IN THIS ILLUSTRATION
GUARANTEED EXPENSES: Your policy's values based on the maximum cost of
insurance and expenses and the assumed hypothetical return on your cash value.
The maximum cost of insurance and expenses are guaranteed; however, the
hypothetical values are not guaranteed as they assume a rate
of return that may or may not be achieved.
NON-GUARANTEED EXPENSES: Your policy's values based on the current cost of
insurance and expenses and the assumed hypothetical return on your cash value.
The current cost of insurance and expenses are not guaranteed, as the cost of
insurance and expenses could increase and the hypothetical return might not be
achieved.
HYPOTHETICAL GROSS RATE OF RETURN: The assumed annual rate of return shown to
illustrate how your policy would perform if it achieved the assumed hypothetical
rate. This rate is before any expenses. This policy does not guarantee any
rate of return. You assume all investment risk for this policy.
NET RATE OF RETURN: The Hypothetical Gross Rate of Return illustrated less .55%
which represents an average of the management fee and other expenses for each of
the 12 Funds corresponding to the 12 variable fund accounts under the policy and
.75% which represents the mortality and expense charge under the policy.
Certain expense limits lowered average Fund expenses for 1998. These expense
limits may not continue through 1999. (See prospectus for details.)
TOTAL ANNUAL PREMIUM: The annualized amount of money you contribute plus any
lump-sum premium payments.
CASH VALUE: The total value of your variable fund accounts including the
affects of any outstanding loan.
CASH SURRENDER VALUE: The maximum amount you would receive if you surrendered
your policy. This is also the amount you may borrow against or withdraw from
your policy. It reflects the deduction of the Surrender Charge and any
outstanding loans.
CUMULATIVE PREMIUM: The total of premium paid into the policy through the
number of policy year ends shown.
GUARANTEED DEATH BENEFIT: The guarantee that the policy will not lapse during
the first five years and that the death benefit
<PAGE>
will be paid if a sufficient amount of target premium has been paid. (See the
prospectus for details.)
SURRENDER CHARGE: The charge based on the Annual Target Premium. The Surrender
Charge declines each policy year until it is eliminated after policy year 10.
PAYMENTS AND EXPENSES
Payments include the dollar amounts you pay into your policy. Expenses are the
fees you pay to administer and maintain your policy. (See the prospectus for
details.)
ANNUAL TARGET PREMIUM: An annual amount of premium payment that we establish
when the policy is issued and that is shown on the Policy Information Page. It
is used 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.
TAX GUIDELINE PAYMENTS: The maximum amounts you may pay into your policy to
comply with Internal Revenue Service limitations. These payments include
Guideline Single, Guideline Annual, and Modified Endowment Contract ("MEC")
Guideline payments.
EXPENSES: The fees charged against your policy, including:
Premium Charge: A premium charge of 3% is deducted from all premium payments
until the total amount of premium paid exceeds the Annual Target Premium amount
multiplied by ten. For example: if your Annual Target Premium was $1,000, you
are charged a 3% premium charge until you have paid $10,000 in total premiums.
You would not be charged any premium charge for subsequent payments, assuming
you made no changes in coverage.
Maintenance Charge: A $5 monthly charge deducted from the policy's cash value
to cover recurring administrative expenses related to maintaining the policy.
This charge applies for the life of the policy.
Administrative Charge: A $10 charge deducted each month in the first year of
the contract to cover start-up expenses incurred in issuing this policy. This
charge stops after the first 12 months of the policy.
Cost of Insurance: The monthly charges for life insurance protection including
any EXTRA RISK CHARGES for rated policies and any additional cost for optional
benefit riders. Two cost of insurance rates are used in this illustration:
guaranteed cost and projected cost. Whenever Guaranteed Expenses are shown, the
guaranteed cost of insurance is assumed to determine policy values. Whenever
Non-Guaranteed Expenses are shown, the current cost of insurance is assumed to
determine policy values. The guaranteed cost of insurance is the guaranteed
maximum expense that can be deducted from the policy to cover insurance
protection. The current cost of insurance is the cost currently deducted to
cover insurance protection. The current cost of insurance could increase or
decrease based on the company's experience, but it will never be more than the
guaranteed cost of insurance.
RATE CLASSES
Rate classes are groupings of insured individuals who present a substantially
similar insurance risk and are grouped as such for the purpose of setting
premium rates. There are five rate classes offered in this product: Standard,
Standard Plus, Preferred, Preferred Plus, and Preferred Ultra.
ACCESSING YOUR CASH VALUE
You can borrow or withdraw the cash value from your Variable Universal Life
insurance policy without surrendering your policy. Both loans and withdrawals
will affect future cash value accumulations, premium payments, and death
benefits. (See the prospectus for details.)
POLICY LOANS: You may borrow part of your policy's cash value at a 6% interest
rate, paid in advance. Any loan remaining when the insured dies will be
deducted from the death benefit before the beneficiary is paid. The amount of
cash value you borrow will accumulate interest at the guaranteed rate of 4% and
will not participate in the performance of your selected variable fund accounts.
Your policy also offers Preferred Loans; see the prospectus for details.
POLICY WITHDRAWALS: You have the option to withdraw from the cash value.
Withdrawals will reduce your cash value and reduce your death benefit. A
partial surrender charge equal to the amount of $25 or 2% of the amount
withdrawn is assessed for each withdrawal. Any gain included in a withdrawal is
taxable. If the total of all withdrawals is more than the total premiums paid
to date, USAA Life must report the amount that exceeds your premiums paid as
gross income to the IRS, making the amount subject to federal (and possibly
state and local) tax. Withdrawals or reductions in coverage made in the first
15 years of policy issue are subject to special tax rules. (See the prospectus
for more information and consult your tax advisor.)
Policy Loans and/or withdrawals may adversely affect your policy and subject it
to premature termination. This is especially true if insufficient premium has
been paid.
IMPORTANT NOTICES
UNDERWRITING CRITERIA: USAA Life, at its discretion, may require a medical
examination and answers to medical, avocational, financial, and other questions
to evaluate insurability and rate classification.
SUICIDE CLAUSE: If death is caused by suicide within the first two years of the
contract, the total death benefit is equal to the premium paid, less any
indebtedness or any prior partial surrenders. This clause also applies to
optional death benefit riders.
INCOME TAX: Tax consequences may result from the limits and conditions of the
Internal Revenue Code and IRS regulations. USAA Life does not offer tax advice.
Please consult your tax advisor.
CONTRACTS ADVERTISED: This illustration and other enclosed forms are valid only
for the state of [Name], where the assumed Policyowner resides. Form numbers
for the Variable Universal Life insurance contract and any optional riders are :
VUL 31747 ST 2-98, VUL 31837 ST 2-98, VUL 31838 ST 2-98, VUL 31839 ST 2-98, VUL
31851 ST 2-98, VUL 31852 ST 2-98.
<PAGE>
<TABLE>
<S> <C> <C>
VARIABLE UNIVERSAL LIFE ILLUSTRATION
INSURED: POLICY INFORMATION: BENEFIT RIDERS SELECTED:
John Doe Option: A None
USAA #987654I Initial Death Benefit: $100,000
Contract ID #0000125UI Monthly Premium Payment: $100
Male, Age 35
Quote Effective Date: 04/28/99
Prepared On: 04/28/99
</TABLE>
THIS NOTICE APPLIES TO ALL HYPOTHETICAL VALUES FOR EACH HYPOTHETICAL GROSS RATE
OF RETURN SHOWN IN THIS ILLUSTRATION. THE POLICY YEAR-END VALUES SHOWN ASSUME
THAT PLANNED PREMIUM PAYMENTS ARE MADE ON THE FIRST DAY OF EACH PAYMENT PERIOD.
THE VALUES FOR THE COLUMNS ARE HYPOTHETICAL AND ARE NOT GUARANTEED. THE
PERFORMANCE OF YOUR SELECTED VARIABLE FUND ACCOUNTS MAY PRODUCE ACTUAL VALUES
OTHER THAN THOSE SHOWN IN THIS ILLUSTRATION. ACTUAL RESULTS MAY BE MORE OR LESS
FAVORABLE THAN THOSE SHOWN. REFER TO THE INTRODUCTORY INFORMATION ON THIS
ILLUSTRATION FOR AN EXPLANATION OF TERMS USED THROUGHOUT. THE HYPOTHETICAL
VALUES ILLUSTRATED ARE BASED ON THE NET RATE OF RETURN AND REFLECT THE DEDUCTION
OF THE COST OF INSURANCE, ADMINISTRATIVE, MAINTENANCE AND PREMIUM CHARGES. SEE
THE PROSPECTUS FOR FURTHER DETAILS.
<TABLE>
<CAPTION>
GUARANTEED EXPENSES NON-GUARANTEED EXPENSES
6% HYPOTHETICAL GROSS RATE OF RETURN 6% HYPOTHETICAL GROSS RATE OF RETURN
--------------------------------------------------------------------------------
(XX.XXXX% NET RATE OF RETURN) (XX.XXXX% NET RATE OF RETURN)
- - ------------------------------------------------------------------------------------------------------------
TOTAL CASH CASH
ANNUAL CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AGE PREMIUM $ VALUE $ VALUE $ BENEFIT $ VALUE $ VALUE $ BENEFIT $
- - ------ --- --------- ----------- ----------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 *999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
THIS ILLUSTRATION CONTINUES THIS ILLUSTRATION CONTINUES
TO POLICY YEAR 100. TO POLICY YEAR 100.
TAX GUIDELINE PAYMENTS $ EXPENSES $ (INCLUDED IN ALL FIGURES) RATE CLASS: Preferred
Guideline Single: 999,000,000 First-Year Admin.: 10/month
Guideline Annual: 99,000,000 Maintenance: 5/month each year
MEC Guideline: 99,000,000 Premium Charge: 3% of all premiums up to 10 annual target premiums
Commissions: None
ANNUAL TARGET PREMIUM $ 999,000,000
</TABLE>
* If sufficient accumulated target premiums have been paid in accordance with
the Guaranteed Death Benefit provision of the contract, then the actual death
benefit will be the specified amount.
<PAGE>
<TABLE>
<S> <C> <C>
VARIABLE UNIVERSAL LIFE ILLUSTRATION
INSURED: POLICY INFORMATION: BENEFIT RIDERS SELECTED:
John Doe Option: A None
USAA #987654 Initial Death Benefit: $100,000
Contract ID #0000125UI Monthly Premium Payment: $100
Male, Age 35
Quote Effective Date: 04/28/99
Prepared On: 04/28/99
GUARANTEED EXPENSES NON-GUARANTEED EXPENSES
12% HYPOTHETICAL GROSS RATE OF RETURN 12% HYPOTHETICAL GROSS RATE OF RETURN
------------------------------------- ---------------------------------------
(XX.XXXX% NET RATE OF RETURN) (XX.XXXX% NET RATE OF RETURN)
- - -------------------------------------------------------------------------------------------------------------
TOTAL CASH CASH
ANNUAL CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AGE PREMIUM $ VALUE $ VALUE $ BENEFIT $ VALUE $ VALUE $ BENEFIT $
- - ------ --- ---------- ----------- ----------- ----------- ----------- ----------- -----------
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
THIS ILLUSTRATION CONTINUES TO THIS ILLUSTRATION CONTINUES TO
POLICY YEAR 100. POLICY YEAR 100.
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
VARIABLE UNIVERSAL LIFE ILLUSTRATION
INSURED: POLICY INFORMATION: BENEFIT RIDERS SELECTED:
John Doe Option: A None
USAA #987654 Initial Death Benefit: $100,000
Contract ID #0000125UI Monthly Premium Payment: $100
Male, Age 25
Quote Effective Date: 04/28/99
Prepared On: 04/28/99
GUARANTEED EXPENSES NON-GUARANTEED EXPENSES
0% HYPOTHETICAL GROSS RATE OF RETURN 0% HYPOTHETICAL GROSS RATE OF RETURN
------------------------------------ -------------------------------------
(XX.XXXX% NET RATE OF RETURN) (XX.XXXX% NET RATE OF RETURN)
- - ----------------------------------------------------------------------------------------------------------
TOTAL CASH CASH
ANNUAL CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AGE PREMIUM $ VALUE $ VALUE $ BENEFIT $ VALUE $ VALUE $ BENEFIT $
- - ------ --- ---------- ----------- ----------- ----------- ----------- ----------- -----------
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
THIS ILLUSTRATION CONTINUES THIS ILLUSTRATION CONTINUES
TO POLICY YEAR 100. TO POLICY YEAR 100.
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
VARIABLE UNIVERSAL LIFE ILLUSTRATION
INSURED: POLICY INFORMATION: BENEFIT RIDERS SELECTED:
John Doe Option: A None
USAA #987654 Initial Death Benefit: $100,000
Contract ID #0000125UI Monthly Premium Payment: $100
Male, Age 35
Quote Effective Date: 04/28/99
Prepared On: 04/28/99
</TABLE>
Summary Page
This summary gives the cumulative premium projected through the ages requested
and compares three hypothetical gross rates of return for guaranteed (maximum)
and non-guaranteed (current) expenses. The values shown with a 0% hypothetical
gross rate of return are based on guaranteed expenses. The values for a 6% and
12% hypothetical gross rate of return are based on current expenses only.
<TABLE>
<CAPTION>
GUARANTEED EXPENSES NON-GUARANTEED EXPENSES
0% HYPOTHETICAL GROSS RATE OF RETURN 6% HYPOTHETICAL GROSS RATE OF RETURN
------------------------------------ --------------------------------------
(XX.XXXX% NET RATE OF RETURN ) (XX.XXXX% NET RATE OF RETURN)
- - -------------------------------------------------------------------------------------------------------------
CASH CASH
CUMULATIVE CASH SURRENDER DEATH CASH SURRENDER DEATH
YEAR AGE PREMIUM $ VALUE $ VALUE $ BENEFIT $ VALUE $ VALUE $ BENEFIT $
- - ------ --- ---------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
100 100 99,999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 99,999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 99,999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 99,999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
100 100 99,999,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000 999,000,000
NON-GUARANTEED EXPENSES
12% HYPOTHETICAL GROSS RATE OF RETURN
-------------------------------------------------------
(XX.XXXX% NET RATE OF RETURN)
CASH
CUMULATIVE CASH SURRENDER DEATH
YEAR AGE PREMIUM $ VALUE $ VALUE $ BENEFIT $
- - ------ ------- -------------------- --------------- --------------- -------------------
100 100 99,999,000 999,000,000 999,000,000 999,000,000
100 100 99,999,000 999,000,000 999,000,000 999,000,000
100 100 99,999,000 999,000,000 999,000,000 999,000,000
100 100 99,999,000 999,000,000 999,000,000 999,000,000
100 100 99,999,000 999,000,000 999,000,000 999,000,000
</TABLE>
<PAGE>
SIGNATURE PAGE
CUSTOMER: I have received a copy of this illustration and I understand that any
non-guaranteed elements illustrated are subject to change and can be higher or
lower than the values illustrated. My Account Representative has informed me of
the changing nature of these values.
SIGNED: DATE:
----------------------------------------- ----------------------
USAA Life Insurance Company certifies that this illustration has been presented
to the applicant and that the applicant has been informed that any non-
guaranteed elements illustrated are subject to change. No statements that are
inconsistent with the illustration have been made by the authorized
representative of USAA Life Insurance Company.
This illustration is based on the options you requested. Because the policy you
purchase may differ from that which has been illustrated, you will be provided
with an illustration that conforms to your policy at the time it is issued. You
will be asked to sign and return the conforming illustration to acknowledge
that, when applying for insurance, you were told and understood that any non-
guaranteed elements illustrated are subject to change and actual results may be
more or less favorable.
- - --------------------------------------- -------------------------------
KING MAWHINNEY, CLU, CHFC, FLMI, REBC DATE
VICE PRESIDENT, LIFE SALES
<PAGE>
<TABLE>
<S> <C> <C>
Variable Universal Life Illustration
INSURED: POLICY INFORMATION: BENEFIT RIDERS SELECTED:
John Doe Option: A None
USAA #987654 Initial Death Benefit: $100,000.00
Contract ID #0000125UI Monthly Premium Payment: $100.00
Male, Age 35
Quote Effective Date: 04/28/99
Prepared On: 04/28/99
</TABLE>
Variable Universal Life Guaranteed Annual Costs
(With 6% Hypothetical Gross Rate of Return)
(XX.XXXX% Net Rate of Return)
This table illustrates the guaranteed cost for the base policy and any optional
riders selected based on the mid-point hypothetical gross rate of return
identified above. The cash value and death benefits illustrated on the previous
pages assume that the cost for the options selected have been subtracted from
your total cash value.
<TABLE>
<CAPTION>
OPTIONAL BENEFITS
----------------------------------------------------------
GUARANTEED MAINT. & EXTRA WAIVER $200,000 TOTAL
COST PREMIUM ADMIN.* RISK MONTHLY $25,000 CHILD ACCIDENTAL GUARANTEED
YEAR AGE OF INS. $ CHARGE $ CHARGE $ CHARGE $ DEDUCT. $ RIDER DEATH BENEFIT COSTS $
- - -------- --- ---------- -------- ------------- ---------- ----------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
100 100 99,999,900 999,900 180 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 999,900 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 999,900 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 999,900 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 999,900 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 999,900 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 999,900 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 999,900 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 999,900 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 999,900 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 0 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 0 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 0 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 0 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 0 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 0 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 0 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 0 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 0 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 0 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 0 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 0 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 0 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 0 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 0 60 99,999,900 9,900 9,900 9,900 99,999,900
</TABLE>
* THIS INCLUDES A FIRST-YEAR ADMINISTRATIVE CHARGE OF $10 PER MONTH ($120),
FIRST YEAR ONLY.
<PAGE>
<TABLE>
<S> <C> <C>
Variable Universal Life Illustration
INSURED: POLICY INFORMATION: BENEFIT RIDERS SELECTED:
John Doe Option: A None
USAA #987654 Initial Death Benefit: $100,000
Contract ID #0000125UI Monthly Premium Payment: $100
Male, Age 35
Quote Effective Date: 04/28/99
Prepared On: 04/28/99
</TABLE>
Variable Universal Life Current Annual Costs
(With 6% Hypothetical Gross Rate of Return)
(XX.XXXX% Net Rate of Return)
This table illustrates the current cost for the amount of insurance and any
optional riders selected based on the mid-point hypothetical gross rate of
return identified above. The cash value and death benefits illustrated on the
previous pages assume that the cost for the options selected have been
subtracted from your total cash value.
<TABLE>
<CAPTION>
OPTIONAL BENEFITS
-----------------------------------------------------------
$200,000
CURRENT MAINT. & EXTRA WAIVER $25,000 ACCIDENTAL TOTAL
COST PREMIUM ADMIN.* RISK MONTHLY CHILD DEATH CURRENT
YEAR AGE OF INS. $ CHARGE $ CHARGE $ CHARGE $ DEDUCT. $ RIDER BENEFIT COSTS $
- - --------- --- ---------- -------- ------------- ---------- ----------- ------------ --------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
100 100 99,999,900 999,900 180 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 999,900 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 999,900 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 999,900 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 999,900 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 999,900 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 999,900 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 999,900 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 999,900 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 999,900 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 0 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 0 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 0 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 0 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 0 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 0 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 0 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 0 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 0 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 0 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 0 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 0 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 0 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 0 60 99,999,900 9,900 9,900 9,900 99,999,900
100 100 99,999,900 0 60 99,999,900 9,900 9,900 9,900 99,999,900
</TABLE>
* THIS INCLUDES A FIRST-YEAR ADMINISTRATIVE CHARGE OF $10 PER MONTH ($120),
FIRST YEAR ONLY.
