<PAGE>
USAA LIFE
INSURANCE COMPANY
VARIABLE UNIVERSAL LIFE
==========================================
Semiannual Report
June 30, 1999
[USAA LOGO APPEARS HERE]
<PAGE>
TABLE of CONTENTS
- -----------------------------------------------------------------------------
PRESIDENT'S MESSAGE.................................................... iii
USAA LIFE VARIABLE UNIVERSAL LIFE INSURANCE
SEPARATE ACCOUNT
CAPITAL GROWTH PORTFOLIO
Overview of the Variable Universal Life Fund Accounts.................. A-3
Statements of Assets and Liabilities................................... A-4
Statements of Operations............................................... A-5
Statements of Changes in Net Assets.................................... A-6
Notes to Financial Statements.......................................... A-8
USAA LIFE INVESTMENT TRUST
USAA Life Fund Overviews............................................... B-3
Portfolios of Investments.............................................. B-22
Notes to Portfolios of Investments..................................... B-40
Statements of Assets and Liabilities................................... B-42
Statements of Operations............................................... B-43
Statements of Changes in Net Assets.................................... B-44
Notes to Financial Statements.......................................... B-46
SCUDDER VARIABLE LIFE INVESTMENT FUND (VLIF)
CAPITAL GROWTH PORTFOLIO
Letter from the Fund's President....................................... C-3
Capital Growth Portfolio Management Discussion......................... C-4
Capital Growth Performance Update...................................... C-5
Capital Growth Portfolio Summary....................................... C-6
Investment Portfolios, Financial Statements, and Financial Highlights
Capital Growth Portfolio............................................... C-7
Notes to Financial Statements.......................................... C-16
THE ALGER AMERICAN FUND
ALGER AMERICAN GROWTH PORTFOLIO
Schedule of Investments................................................ D-4
Financial Highlights................................................... D-6
Statement of Assets and Liabilities.................................... D-7
Statement of Operations................................................ D-8
Statement of Changes in Net Assets..................................... D-9
Notes to Financial Statements.......................................... D-10
<PAGE>
TABLE OF CONTENTS, continued
- -----------------------------------------------------------------------------
BT INSURANCE FUNDS TRUST
Equity 500 Index Fund
Letter to Shareholders................................................. E-5
Schedule of Investments................................................ E-7
Statement of Assets and Liabilities.................................... E-12
Statement of Operations................................................ E-13
Statements of Changes in Net Assets.................................... E-14
Financial Highlights................................................... E-15
Notes to Financial Statements.......................................... E-16
Small Cap Index Fund
Letter to Shareholders................................................. E-21
Schedule of Investments................................................ E-23
Statement of Assets and Liabilities.................................... E-40
Statement of Operations................................................ E-41
Statements of Changes in Net Assets.................................... E-42
Financial Highlights................................................... E-43
Notes to Financial Statements.......................................... E-44
EAFE (Registered Trademark) Equity Index Fund
Letter to Shareholders................................................. E-49
Schedule of Investments................................................ E-52
Statement of Assets and Liabilities.................................... E-59
Statement of Operations................................................ E-60
Statements of Changes in Net Assets.................................... E-61
Financial Highlights................................................... E-62
Notes to Financial Statements.......................................... E-63
This report is for the information of USAA Life Variable Universal Life
policyowners and others who have received a copy of the currently effective
Variable Universal Life prospectus. It may be used as sales literature only when
preceded or accompanied by a current prospectus which includes complete
information. The USAA Life Variable Universal Life policy is distributed by USAA
Investment Management Company, a registered broker dealer.
<PAGE>
USAA LIFE VARIABLE UNIVERSAL LIFE INSURANCE SEMIANNUAL REPORT
PRESIDENT'S MESSAGE
FROM THE DESK OF ED ROSANE
On the next pages you'll find some valuable information about planning and
managing your long-term financial strategy, about funding your policy, and about
services available with your Variable Universal Life* policy. Also included
is an overview of policy performance and accumulation unit values that
introduces the Life Insurance Separate Account financial information and
subsequent USAA Life Investment Trust reports.
We continue to look for ways to improve our Variable Universal Life policy to
ensure we are providing you with the value and service you expect from USAA. I
encourage you to review this report and call one of my associates at
1-800-531-8303 to discuss any questions you may have.
Sincerely,
/s/ Edwin Rosane
- ------------------------
Edwin Rosane, CLU, FLMI
President
USAA Life Insurance Company
* Known in some states as Flexible Premium Variable Life.
1999 Semiannual Report iii
<PAGE>
USAA LIFE VARIABLE UNIVERSAL LIFE INSURANCE SEMIANNUAL REPORT
ABOUT YOUR POLICY
Owning a Variable Universal Life insurance policy is the result of innovative
thinking. You need life insurance protection, and you want to benefit from its
tax advantages. The policy's flexibility and its self-directed investments are
features that make your policy a unique choice for your long-term financial
plan. The basics are simple...
Your Variable Universal Life insurance policy gives you coverage for a lifetime
(to age 100). As long as you maintain enough cash value to keep your policy in
force, you don't need to requalify, unless you wish to increase your coverage.
Money you contribute to your policy is placed in investments that you choose.
The potential growth of your policy depends on how those investments perform.
You may, within limits, adjust your premium payments and death benefit according
to your needs.
Tax-Wise Funding of Your Policy
To make the most of your life insurance policy's tax advantages, it is important
to pay enough premiums into your policy in the early years to have cash value to
help pay the higher cost of insurance in later years.
Point to remember: Many tax advantages disappear if your policy funding exceeds
Internal Revenue Service premium payment or withdrawal restrictions.
Maintaining Sufficient Cash Value
For convenience, you determine the amount and frequency of your premium
payments, but you must maintain sufficient cash value to keep your policy in
effect.
Be sure your personal payment strategy includes paying premiums sufficient to
cover the cost of insurance and the monthly maintenance and mortality and
expense risk charges. Otherwise, the policy may lapse. And remember to
contribute enough in the early years to allow the cash value to help pay for the
higher cost of insurance as you age.
Reducing Investment Risk
Even during times of market speculation, keeping the investment portion of your
policy on track may be simpler than you think, if you apply the time-honored
strategies of diversification and dollar-cost-averaging.
Diversification
By their very nature, variable fund accounts are diversified. The 12 fund
accounts invest in an underlying mix of stocks and/or bonds. They may be
domestic, international, or a combination of the two. You can further diversify
by allocating dollars to fund accounts with different objectives to achieve a
balance of growth, income, and risk.
Dollar-Cost-Averaging
Another financial planning strategy is to make regular contributions with a
program called dollar-cost-averaging. By allocating a fixed amount or percentage
every month, you're able to buy more units when prices are low, and fewer units
when prices are high. Over time, this strategy may be more effective than
attempting to selectively time the market with occasional purchases. Keep in
mind there is no guarantee that dollar-cost-averaging will result in a profit or
protect against a loss. Systematic investing involves continuous investment in
securities regardless of fluctuations in the price of these securities, and you
should consider your ability to continue through periods of both low and high
price levels.
24-Hour Access to Policy Values
You can access current daily fund account values, 24 hours a day, 7 days a week,
through USAA TouchLine (Registered Trademark) at 1-800-531-5433. To access this
information, you need your USAA number and a unique TouchLine (Registered
Trademark) personal identification number (PIN). To establish a PIN, use the
last four digits of your Social Security number to get started, then decide on a
new four-digit number.
Pursuing a Consistent Strategy
You can pursue a consistent financial strategy with USAA Life. If you would like
to discuss your personal financial goals, or learn more about payment
strategies, diversification, or dollar-cost-averaging, please call an Account
Representative at 1-800-531-8303 any time.
USAA Life's Variable Universal Life is distributed by USAA Investment Management
Company, a registered broker dealer. The Variable Universal Life insurance
policy is subject to surrender charges and possible tax consequences. The
surrender charge can be as much as 50% of the annual target premium in the first
year. The charge declines each policy year and is eliminated after 10 policy
years. A 10% federal penalty tax may apply to withdrawals made before age
59 1/2. This material should be preceded by a USAA Life Variable Universal
Life prospectus.
iv Semiannual Report 1999
<PAGE>
USAA LIFE VARIABLE UNIVERSAL LIFE
INSURANCE SEPARATE ACCOUNT
=======================================
SEMIANNUAL REPORT
June 30, 1999
[LOGO OF USAA
APPEARS HERE]
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<PAGE>
VARIABLE UNIVERSAL LIFE INSURANCE SEPARATE ACCOUNT OF USAA LIFE INSURANCE
COMPANY
- --------------------------------------------------------------------------------
AN OVERVIEW
- --------------------------------------------------------------------------------
Fund Accounts June 30, 1999 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATION
UNIT VALUE AUV TOTAL RETURN
FUND ACCOUNT OBJECTIVE (AUV) SINCE INCEPTION
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
USAA LIFE Seeks the highest level of current income consistent with
MONEY MARKET preservation of capital and maintenance of liquidity $ 1.20 1.99%
(7-day yield is 2.47%)
- -----------------------------------------------------------------------------------------------------------------------
USAA LIFE INCOME Seeks maximum current income without
undue risk to principal $13.55 -2.87%
- -----------------------------------------------------------------------------------------------------------------------
USAA LIFE GROWTH Seeks capital growth and current income
AND INCOME $23.79 38.83%
- -----------------------------------------------------------------------------------------------------------------------
USAA LIFE Seeks long-term capital appreciation
WORLD GROWTH* $19.66 29.68%
- -----------------------------------------------------------------------------------------------------------------------
USAA LIFE Seeks long-term capital growth, consistent with
DIVERSIFIED ASSETS preservation of capital and balanced by current income $19.80 22.17%
- -----------------------------------------------------------------------------------------------------------------------
USAA LIFE Seeks appreciation of capital
AGGRESSIVE GROWTH $17.64 84.98%
- -----------------------------------------------------------------------------------------------------------------------
USAA LIFE Seeks capital appreciation with current income
INTERNATIONAL* as a secondary objective $11.01 17.12%
- -----------------------------------------------------------------------------------------------------------------------
SCUDDER VLIF CAPITAL Seeks to maximize long-term capital growth
GROWTH PORTFOLIO $27.05 43.72%
- -----------------------------------------------------------------------------------------------------------------------
ALGER AMERICAN Seeks long-term capital appreciation
GROWTH PORTFOLIO $30.98 57.05%
- -----------------------------------------------------------------------------------------------------------------------
BT EQUITY 500 INDEX Seeks to match as closely as possible the performance of the
S&P 500 (Registered Trademark) Index before the deduction of
Fund expenses $12.27 41.76%
- -----------------------------------------------------------------------------------------------------------------------
BT SMALL CAP INDEX Seeks to match as closely as possible the performance of the
Russell 2000 (Registered Trademark) Small Stock Index before
the deduction of Fund expenses $ 9.48 33.00%
- -----------------------------------------------------------------------------------------------------------------------
BT EAFE(Registered Seeks to match as closely as possible the performance of the
Trademark) Morgan Stanley Capital International Europe Australia Far East $10.77 19.31%
EQUITY INDEX* (EAFE) Index before the deduction of Fund expenses
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
The 7-day yield quotation more closely reflects the current earnings of the fund
than the total return quotation. An investment in the USAA Life Money Market
Fund is not insured or guaranteed by the FDIC or any other Government agency.
Although the fund seeks to preserve a stable value, it is possible to lose money
by investing in the fund. The 7-day yield reflects the 7-day period ending June
30, 1999.
* Foreign investing is subject to additional risks, such as currency
fluctuations, market illiquidity, and political instability, which are
discussed in the Variable Universal Life prospectus.
The performance data quoted represent past performance and do not represent the
actual experience of amounts invested by a particular owner. Past performance
is not a guarantee of future results. The variable insurance products are
subject to market risk, including potential fluctuations in investment return
and the potential loss of principal. Total returns for periods of less than
one year are not annualized. These returns are cumulative. Inception date for
all variable fund accounts for Variable Universal Life is 8/31/98 when sale of
USAA Life's Variable Universal Life insurance policy began. Since inception
performance numbers reflect experience since USAA Life began selling the
product. All other data reflects the actual performance of the underlying funds
in which the Life Insurance Separate Account invests, adjusted to reflect a
deduction of the M&E risk charge and a $5 monthly maintenance charge. M&E
charges total 0.75% on an annual basis. The performance figures above do not
reflect the cost of insurance protection and other insurance policy fees and, if
they did, the performance quoted above would be significantly lower. Investors
should ask for a personal illustration that shows the effect on performance of
the cost of insurance, other charges, and other variables. Because
accumulation units are part of an insurance policy, actual performance should
always be considered in conjunction with the policy's fees, cash value, and
death benefit. This product is not yet available in all states. This product
is known in some states as Flexible Premium Variable Life.
1999 Semiannual Report A-3
<PAGE>
VARIABLE UNIVERSAL LIFE INSURANCE SEPARATE ACCOUNT OF USAA LIFE INSURANCE
COMPANY
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------
VARIABLE FUND ACCOUNTS (In Thousands, Except Per Unit Data) June 30, 1999
(Unaudited)
- --------------------------------------------------------------------------------
Investment at
Fund Shares Cost Market Value
----------- ------ --------------
Assets
Investments at market value:
USAA Life Money Market Fund 117 $ 117 $ 117
USAA Life Income Fund 2 24 24
USAA Life Growth and Income Fund 8 155 164
USAA Life World Growth Fund 1 22 24
USAA Life Diversified Assets Fund 5 70 70
USAA Life Aggressive Growth Fund 6 90 104
USAA Life International Fund 1 5 5
Scudder VLIF Capital Growth Portfolio
- Class A Shares 4 105 104
Alger American Growth Portfolio 2 98 99
BT Equity 500 Index Fund 16 216 225
BT Small Cap Index Fund 1 9 9
BT EAFE (Registered Trademark) Equity
Index Fund 1 3 3
---- ----
Total investments $914 $948
====
Fund Account Accumulation
Units Unit Value Reserves
------------ ------------ --------
Net assets
USAA Life Money Market Fund Account 98 $ 1.201222 $117
USAA Life Income Fund Account 2 13.553955 24
USAA Life Growth and Income Fund Account 7 23.785966 164
USAA Life World Growth Fund Account 1 19.659120 24
USAA Life Diversified Assets Fund Account 4 19.797394 70
USAA Life Aggressive Growth Fund Account 6 17.644394 104
USAA Life International Fund Account 1 11.012953 5
Scudder VLIF Capital Growth Portfolio
Fund Account 4 27.048748 104
Alger American Growth Portfolio Fund Account 3 30.980503 99
BT Equity 500 Index Fund Account 19 12.271729 225
BT Small Cap Index Fund Account 1 9.483757 9
BT EAFE (Registered Trademark) Equity Index
Fund Account 1 10.774232 3
----
Net assets attributable to
policyowners' reserves $948
====
See accompanying Notes to Financial Statements on page A-8.
A-4 Semiannual Report 1999
<PAGE>
VARIABLE UNIVERSAL LIFE INSURANCE SEPARATE ACCOUNT OF USAA LIFE INSURANCE
COMPANY
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Variable Fund Accounts (In Thousands) Six-month period ended June 30, 1999
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
USAA Life USAA Life USAA Life
USAA Life USAA Life Growth USAA Life Diversified Aggressive USAA Life
Money Market Income and Income World Growth Assets Growth International
Fund Account Fund Account Fund Account Fund Account Fund Account Fund Account Fund Account
------------ ------------ ------------ ------------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net investment income:
Income Dividends $ 1 $ - $ - $ - $ - $ - $ -
Expenses
Mortality and expense
risk charge - - 1 - - - -
-------- ---------- ---------- ---------- ---------- ---------- ----------
Net investment
income (loss) 1 - (1) - - - -
-------- ---------- ---------- ---------- ---------- ---------- ----------
Net realized and
unrealized gain (loss)
on investments:
Realized gain - - 3 - - - -
Capital gains
distributions - - - - 4 1 -
-------- ---------- ---------- ---------- ---------- ---------- ----------
Net realized gain - - 3 - 4 1 -
Change in net unrealized
appreciation/depreciation - - 9 2 1 14 -
-------- ---------- ---------- ---------- ---------- ---------- ----------
Net realized and
unrealized gain on
investments - - 12 2 5 15 -
-------- ---------- ---------- ---------- ---------- ---------- ----------
Increase in net assets
resulting from operations $ 1 $ - $ 11 $ 2 $ 5 $ 15 $ -
======== ========== ========== ========== ========== ========== ==========
<CAPTION>
BT EAFE
Scudder Alger (Registered
VLIF Capital American BT Equity BT Small Trademark)
Growth Portfolio Growth Portfolio 500 Index Cap Index Equity Index
Fund Account Fund Account Fund Account Fund Account Fund Account
---------------- ---------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net investment income: $ - $ - $ - $ - $ -
Income Dividends
Expenses
Mortality and expense risk
charge - - - - -
------------ ----------- ---------- --------- ---------
Net investment income (loss) - - - - -
------------ ----------- ---------- --------- ---------
Net realized and unrealized
gain (loss) on investments:
Realized gain - - 4 - -
Capital gains distributions 9 6 - - -
------------ ----------- ---------- --------- ---------
Net realized gain 9 6 4 - -
Change in net unrealized
appreciation/depreciation (2) 1 9 - -
------------ ----------- ---------- --------- ---------
Net realized and unrealized
gain on investments 7 7 13 - -
------------ ----------- ---------- --------- ---------
Increase in net assets
resulting from operations $ 7 $ 7 $ 13 $ - $ -
============ =========== ========== ========= =========
</TABLE>
See accompanying Notes to Financial Statements on page A-8.
1999 Semiannual Report A-5
<PAGE>
VARIABLE UNIVERSAL LIFE INSURANCE SEPARATE ACCOUNT OF USAA LIFE INSURANCE
COMPANY
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
Variable Fund Accounts (In Thousands) Six-month period ended June 30, 1999
and Period ended December 31, 1998*
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
USAA Life USAA Life USAA Life Growth USAA Life
Money Market Fund Account Income Fund Account and Income Fund Account World Growth Fund Account
------------------------- ------------------- ----------------------- -------------------------
6/30/99 12/31/98 6/30/99 12/31/98 6/30/99 12/31/98 6/30/99 12/31/98
------------ ------------ --------- --------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase in net assets
From operations:
Net investment income (loss) $ 1 $ - $ - $ - $ (1) $ - $ - $ -
Net realized gain - - - - 3 - - -
Change in net unrealized
appreciation/depreciation - - - - 9 - 2 -
--------- ----------- --------- ------- -------- --------- -------- ----------
Increase in net assets
resulting from operations 1 - - - 11 - 2 -
--------- ----------- --------- ------- -------- --------- -------- ----------
From policy transactions:
Purchases 790 48 24 - 180 3 23 -
Monthly deduction charges (3) (1) - - (1) - - -
Other redemptions (672) (46) - - (29) - (1) -
--------- ----------- --------- ------- -------- --------- -------- ----------
Increase in net assets
from policy transactions 115 1 24 - 150 3 22 -
--------- ----------- --------- ------- -------- --------- -------- ----------
Net increase in net assets 116 1 24 - 161 3 24 -
Net assets:
Beginning of period 1 - - - 3 - - -
--------- ----------- --------- ------- -------- --------- -------- ----------
End of period $ 117 $ 1 $ 24 $ - $ 164 $ 3 $ 24 $ -
========= =========== ========= ======= ======== ========= ======== ==========
Units issued and redeemed:
Beginning balance 1 - - - 1 - - -
Units issued 905 46 2 - 8 1 1 -
Units redeemed (808) (45) - - (2) - - -
--------- ----------- --------- ------- -------- --------- -------- ----------
Ending balance 98 1 2 - 7 1 1 -
========= =========== ========= ======= ======== ========= ======== ==========
<CAPTION>
Scudder VLIF Capital Alger American Growth BT Equity 500 Index BT Small Cap Index
Growth Portfolio Fund Account Portfolio Fund Account Fund Account Fund Account
----------------------------- ---------------------- -------------------- ------------------
6/30/99 12/31/98 6/30/99 12/31/98 6/30/99 12/31/98 6/30/99 12/31/98
------------ ------------ ---------- --------- --------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase in net assets
From operations:
Net investment income (loss) $ - $ - $ - $ - $ - $ - $ - $ -
Net realized gain 9 - 6 - 4 - - -
Change in net unrealized
appreciation/depreciation (2) 1 1 - 9 - - -
-------- ----------- --------- ------- -------- --------- -------- ------
Increase in net assets
resulting from operations 7 1 7 - 13 - - -
-------- ----------- --------- ------- -------- --------- -------- ------
From policy transactions:
Purchases 98 4 94 - 245 3 9 -
Monthly deduction charges (1) - (1) - (3) - - -
Other redemptions (3) (2) (1) - (33) - - -
-------- ----------- --------- ------- -------- --------- -------- ------
Increase in net assets
from policy transactions 94 2 92 - 209 3 9 -
-------- ----------- --------- ------- -------- --------- -------- ------
Net increase in net assets 101 3 99 - 222 3 9 -
Net assets:
Beginning of period 3 - - - 3 - - -
-------- ----------- --------- ------- -------- --------- -------- ------
End of period $ 104 $ 3 $ 99 $ - $ 225 $ 3 $ 9 $ -
======== =========== ========= ======= ======== ========= ======== ======
Units issued and redeemed:
Beginning balance 1 - - - 1 - - -
Units issued 4 1 3 - 23 1 1 -
Units redeemed (1) - - - (5) - - -
-------- ----------- --------- ------- -------- --------- -------- ------
Ending balance 4 1 3 - 19 1 1 -
======== =========== ========= ======= ======== ========= ======== ======
</TABLE>
A-6 Semiannual Report 1999
<PAGE>
VARIABLE UNIVERSAL LIFE INSURANCE SEPARATE ACCOUNT OF USAA LIFE INSURANCE
COMPANY
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
Variable Fund Accounts (In Thousands) Six-month period ended June 30, 1999
and Period ended December 31, 1998*
(Unaudited)
- --------------------------------------------------------------------------------
USAA Life Diversified USAA Life Aggressive USAA Life International
Assets Fund Account Growth Fund Account Fund Account
- --------------------- -------------------- -----------------------
6/30/99 12/31/98 6/30/99 12/31/98 6/30/99 12/31/98
- ---------- ---------- --------- ---------- --------- ----------
$ - $ 1 $ - $ - $ - $ -
4 1 1 - - -
1 (1) 14 - - -
-------- -------- ------- -------- ------- --------
5 1 15 - - -
-------- -------- ------- -------- ------- --------
28 37 95 - 5 -
(1) - (1) - - -
- - (5) - - -
-------- -------- ------- -------- ------- --------
27 37 89 - 5 -
-------- -------- ------- -------- ------- --------
32 38 104 - 5 -
38 - - - - -
-------- -------- ------- -------- ------- --------
$ 70 $ 38 $ 104 $ - $ 5 $ -
======== ======== ======= ======== ======= ========
2 - - - - -
2 2 6 - 1 -
- - - - - -
-------- -------- ------- -------- ------- --------
4 2 6 - 1 -
======== ======== ======= ======== ======= ========
BT EAFE (Registered
Trademark) Equity Index
Fund Account
- -----------------------
6/30/99 12/31/98
- ---------- -----------
$ - $ -
- -
- -
-------- --------
- -
-------- --------
1 2
- -
- -
-------- --------
1 2
-------- --------
1 2
2 -
-------- --------
$ 3 $ 2
======== ========
1 -
- 1
- -
-------- --------
1 1
======== ========
* Variable fund accounts commenced operations August 31, 1998.
See accompanying Notes to Financial Statements on page A-8.
1999 Semiannual Report A-7
<PAGE>
VARIABLE UNIVERSAL LIFE INSURANCE SEPARATE ACCOUNT OF USAA LIFE INSURANCE
COMPANY
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
June 30, 1999
(Unaudited)
- --------------------------------------------------------------------------------
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-2 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 (Registered Trademark) 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 (Registered Trademark)
Equity Index Fund Account).
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.
3) RELATED PARTY TRANSACTIONS
During the six-month period ended June 30, 1999, advisory and administrative
fees of $479 thousand 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.
A-8 Semiannual Report 1999
<PAGE>
VARIABLE UNIVERSAL LIFE INSURANCE SEPARATE ACCOUNT OF USAA LIFE INSURANCE
COMPANY
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(Continued) June 30, 1999
(Unaudited)
- --------------------------------------------------------------------------------
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 assets 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.
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
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.
1999 Semiannual Report A-9
<PAGE>
VARIABLE UNIVERSAL LIFE INSURANCE SEPARATE ACCOUNT OF USAA LIFE INSURANCE
COMPANY
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(Continued) June 30, 1999
(Unaudited)
- --------------------------------------------------------------------------------
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 Growth
Money Market Fund Account Income Fund Account and Income Fund Account
----------------------------- ----------------------------- ---------------------------
Six-month Period Ended Six-month Period Ended Six-month Period Ended
Period Ended December 31, Period Ended December 31, Period Ended December 31,
June 30, 1999 1998(a) June 30, 1999 1998(a) June 30, 1999 1998(a)
-------------- ------------ -------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
At end of period:
Accumulation units (000) 98 1 2 - 7 1
Accumulation unit value $ 1.201222 $ 1.178565 $ 13.553955 $ 14.089499 $ 23.785966 $ 20.468785
Net assets (000) $ 117 $ 1 $ 24 $ - $ 164 $ 3
Ratio of expenses to
average net assets (b)(c) 1.10% 1.10% 1.10% 1.10% 1.10% 1.10%
Ratio of expenses to
average net assets,
excluding reimbursements (c) 1.33% 1.55% 1.37% 1.30% 1.11% 1.12%
<CAPTION>
Scudder VLIF Capital Growth Alger American Growth BT Equity 500 Index
Portfolio Fund Account Portfolio Fund Account Fund Account
----------------------------- ----------------------------- ---------------------------
Six-month Period Ended Six-month Period Ended Six-month Period Ended
Period Ended December 31, Period Ended December 31, Period Ended December 31,
June 30, 1999 1998(a) June 30, 1999 1998(a) June 30, 1999 1998(a)
-------------- ------------ -------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
At end of period:
Accumulation units (000) 4 1 3 - 19 1
Accumulation unit value $ 27.048748 $ 24.448446 $ 30.980503 $ 26.806157 $ 12.271729 $ 11.003536
Net assets (000) $ 104 $ 3 $ 99 $ - $ 225 $ 3
Ratio of expenses to
average net assets (b)(c) 1.25% 1.26% 1.54% 1.54% 1.05% 1.05%
Ratio of expenses to average
net assets, excluding
reimbursements (c) N/A N/A N/A N/A 1.26% 1.94%
</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 (Registered Trademark) 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.
A-10 Semiannual Report 1999
<PAGE>
VARIABLE UNIVERSAL LIFE INSURANCE SEPARATE ACCOUNT OF
USAA LIFE INSURANCE COMPANY
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
(Continued) June 30, 1999 (Unaudited)
- --------------------------------------------------------------------------------
USAA Life USAA Life Diversified
World Growth Fund Account Assets Fund Account
- ---------------------------- ----------------------------
Six-month Period Ended Six-month Period Ended
Period Ended December 31, Period Ended December 31,
June 30, 1999 1998(a) June 30, 1999 1998(a)
- ---------------------------- ----------------------------
1 - 4 2
$19.659120 $17.860722 $19.797394 $17.974654
$ 24 $ - $ 70 $ 38
1.40% 1.40% 1.10% 1.10%
1.49% 1.41% 1.25% 1.20%
USAA Life Aggressive USAA Life International
Growth Fund Account Fund Account
- ---------------------------- ----------------------------
Six-month Period Ended Six-month Period Ended
Period Ended December 31, Period Ended December 31,
June 30, 1999 1998(a) June 30, 1999 1998(a)
- ---------------------------- ----------------------------
6 - 1 -
$17.644394 $13.993064 $11.012953 $10.417977
$ 104 $ - $ 5 $ -
1.45% 1.45% 1.85% 1.85%
1.75% 1.59% 2.07% 2.10%
BT EAFE (Registered
BT Small Cap Index Trademark) Equity Index
Fund Account Fund Account
- ---------------------------- ----------------------------
Six-month Period Ended Six-month Period Ended
Period Ended December 31, Period Ended December 31,
June 30, 1999 1998(a) June 30, 1999 1998(a)
- ---------------------------- ----------------------------
1 - 1 1
$ 9.483757 $ 8.825971 $10.774232 $10.386978
$ 9 $ - $ 3 $ 2
1.20% 1.20% 1.40% 1.40%
1.89% 2.33% 1.90% 2.41%
1999 Semiannual Report A-11
