<PAGE>
As filed with the Securities and Exchange Commission on April 29, 1997.
Registration Nos.: 33-82268 and 811-8670
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 3 X
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
Amendment No. 4 X
SEPARATE ACCOUNT OF USAA LIFE INSURANCE COMPANY
(Exact Name of Registrant)
USAA LIFE INSURANCE COMPANY
(Name of Depositor)
9800 Fredericksburg Road
San Antonio, Texas 78288
(Address of Depositor's Principal Executive Offices)
Depositor's Telephone Number, including Area Code: 210-498-8000
RICHARD T. HALINSKI, JR., ESQ.
DWAIN A. AKINS, ESQ.
Life & Health Insurance Counsel
USAA LIFE INSURANCE COMPANY
9800 Fredericksburg Road, C-3-W
San Antonio, Texas 78288
(Name and Address of Agents for Service)
Copies to:
GARY O. COHEN, ESQ.
Freedman, Levy, Kroll & Simonds
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036
<PAGE>
Approximate Date of Proposed Public Offering: Continuous
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, 1997, 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.
The Registrant has registered an indefinite number or amount of its securities
under the Securities Act of 1933 pursuant to Rule 24f-2 under the Investment
Company Act of 1940. The securities being registered are units of interest under
variable annuity contracts. The Registrant filed a Rule 24f-2 Notice on February
27, 1997.
<PAGE>
CROSS REFERENCE SHEET
Pursuant to Rule 495 under the Securities Act of 1933 indicating the location in
the Prospectus of the information called for by the Items of Parts A and B of
Form N-4.
<TABLE>
<CAPTION>
Item No. Caption Location
- -------- --------- ----------
<S> <C> <C>
Part A
1. Cover Page Cover Page
2. Definitions Definitions of Special Terms
3. Synopsis Summary; Expense Table
4. Condensed Financial Selected Accumulation Unit Data;
Information Financial Data Performance Information
5. General Description of USAA Life; The Separate Account; The
Registrant, Depositor, and Funds; Fixed Fund Account
Portfolio Companies
6. Deductions Charges and Deductions
7. General Description of Contract Issuance and Premium Payments;
Variable Annuity Contracts Accumulation Phase; Transfer and
Withdrawals; Other Aspects of the
Contract; Owner Inquiries
8. Annuity Period Distribution Phase; Other Aspects of the
Contract
9. Death Benefit Death Benefits
10. Purchases and Contract Contract Issuance and Premium Payments;
Value Accumulation Phase
11. Redemptions Transfers and Withdrawals
12. Taxes Tax Matters
13. Legal Proceedings Not applicable
14. Table of Contents of the Contents of Statement of Additional
Statement of Additional Information
Information
Part B
15. Cover Page Cover Page
16. Table of Contents Table of Contents
17. General Information and General Information; Regulation and
History Reserves
18. Services Services
19. Purchase of Securities Not applicable
Being Offered
20. Underwriters Distributor
21. Calculation of Performance Calculation of Performance Information
Data
22. Annuity Payments Annuity Payments
23. Financial Statements Financial Statements
</TABLE>
<PAGE>
Part C
Information required to be included in Part C is set forth under the appropriate
Item so numbered in Part C to this Registration Statement.
<PAGE>
USAA LIFE INSURANCE COMPANY
VARIABLE ANNUITY
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
SECTION
A FLEXIBLE PREMIUM DEFERRED COMBINATION
FIXED AND VARIABLE ANNUITY CONTRACT PROSPECTUS.............. 3A - 30A
B USAA LIFE INVESTMENT TRUST PROSPECTUS ...................... 31B - 50B
C SCUDDER VARIABLE LIFE INVESTMENT FUND PROSPECTUS
(Capital Growth Portfolio).............................. 51C - 66C
D ALGER AMERICAN FUND PROSPECTUS
(American Growth Portfolio)............................. 67D - 76D
1
<PAGE>
This page left blank intentionally.
2
<PAGE>
VARIABLE ANNUITY
FLEXIBLE PREMIUM DEFERRED COMBINATION
FIXED AND VARIABLE ANNUITY CONTRACT
OFFERED BY
USAA Life Insurance Company
9800 Fredericksburg Road, San Antonio, Texas 78288
Telephone: (1-800-531-4440)
Prospectus dated: May 1, 1997
- --------------------------------------------------------------------------------
This Prospectus describes a Flexible Premium Deferred Combination Fixed
and Variable Annuity Contract ("Contract") that USAA Life Insurance Company
("USAA Life" or the "Company") is offering to individual members and families
of 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 Contract is designed to assist individuals in planning for
retirement and other long-term purposes. The Contract is available in
connection with retirement plans that may or may not qualify for special
federal tax treatment under the Internal Revenue Code (the "Code"), i.e.
Qualified and Nonqualified Plans. (See "Tax Matters - Qualified Plans"
below.)
The Contract enables Contract owners ("Contract Owners" or "Owners") to
earn a fixed rate of interest declared by USAA Life from time to time by
allocating their premium payments under the Contract to the Fixed Fund
Account of USAA Life. The Fixed Fund Account may not be available in all
States. (See "Fixed Fund Account" below.) Contract Owners also may seek a
variable investment return by allocating their premium payments to the
Separate Account of USAA Life (the "Separate Account"). The Separate Account
is a segregated investment account of USAA Life, and currently is divided
into nine Variable Fund Accounts (referred to herein as "Variable Annuity
Fund Accounts"), each of which invests in a corresponding Fund. The
Accumulated 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 Funds that are available under this Contract include: seven Funds
of USAA Life Investment Trust (the "Trust"), namely the USAA Life Variable
Annuity Money Market Fund ("VA Money Market Fund"), USAA Life Variable
Annuity Income Fund ("VA Income Fund"), USAA Life Variable Annuity Growth and
Income Fund ("VA Growth and Income Fund"), USAA Life Variable Annuity World
Growth Fund ("VA World Growth Fund"), USAA Life Variable Annuity Diversified
Assets Fund ("VA Diversified Assets Fund"), USAA Life Variable Annuity
Aggressive Growth Fund ("VA Aggressive Growth Fund"), and USAA Life Variable
Annuity International Fund ("VA International Fund"); the Capital Growth
Portfolio-Class A shares of the Scudder Variable Life Investment Fund (the
"Scudder VLIF Capital Growth Portfolio"); and the Growth Portfolio of The
Alger American Fund (the "Alger American Growth Portfolio"). The VA
Aggressive Growth Fund and the VA International Fund are not available to
California residents as of the date of this Prospectus, but are expected to
be available in the near future.
ACCUMULATION UNITS AND ANNUITY UNITS OF THE VARIABLE ANNUITY 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, AND ARE SUBJECT TO MARKET
RISKS.
This Prospectus sets forth information about the Separate Account that
a potential investor ought to know before investing. Please read it carefully
and retain it for future reference. The Company has filed a Statement of
Additional Information, dated May 1, 1997 ("SAI"), about the Separate Account
with the Securities and Exchange Commission ("SEC" or the "Commission"). The
SAI, dated May 1, 1997, is incorporated by reference into this Prospectus and
will be provided on request and without charge. For a copy of the SAI or an
Annual Report, call 1-800-531-4440 or write the Company at the address above.
A Table of Contents for the SAI appears on page 30A of this Prospectus.
- -------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND THE RELATED STATEMENT OF ADDITIONAL INFORMATION
(OR ANY SALES LITERATURE APPROVED BY USAA LIFE) IN CONNECTION WITH
THE OFFER CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED. THE CONTRACTS ARE NOT AVAILABLE IN ALL STATES AND
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY JURISDICTION TO ANY
PERSON TO WHOM SUCH OFFER WOULD BE UNLAWFUL THEREIN. THIS PROSPECTUS
IS VALID ONLY WHEN ACCOMPANIED OR PRECEDED BY THE CURRENT PROSPECTUS
OF USAA LIFE INVESTMENT TRUST, THE SCUDDER VLIF CAPITAL GROWTH
PORTFOLIO AND THE ALGER AMERICAN GROWTH PORTFOLIO. EACH PROSPECTUS
SHOULD BE READ CAREFULLY BEFORE INVESTING AND THEN
RETAINED FOR FUTURE REFERENCE.
3A
<PAGE>
TABLE OF CONTENTS:
DEFINITIONS OF SPECIAL TERMS.................................. 5A
SUMMARY ...................................................... 7A
EXPENSE TABLE................................................. 8A
SELECTED ACCUMULATION UNIT DATA............................... 10A
FINANCIAL STATEMENTS.......................................... 10A
USAA LIFE..................................................... 10A
THE SEPARATE ACCOUNT.......................................... 10A
THE FUNDS..................................................... 11A
Investment objectives of the Funds.................... 11A
Management of the Funds............................... 11A
Substitution of Funds................................. 11A
Dividends and Capital Gain Distributions.............. 12A
Voting Privileges..................................... 12A
FIXED FUND ACCOUNT............................................ 12A
Fixed Fund Account Withdrawal Charge.................. 12A
CONTRACT ISSUANCE AND PREMIUM PAYMENTS........................ 13A
Who May Purchase a Contract........................... 13A
How to Purchase a Contract............................ 13A
Minimum Premium Payments.............................. 14A
Initial Premium Payments.............................. 14A
Subsequent Premium Payments........................... 14A
Distributor........................................... 14A
Return Privilege...................................... 14A
Minimum Contract Value................................ 14A
ACCUMULATION PHASE............................................ 14A
Fixed Fund Account Value.............................. 14A
Variable Annuity Fund Account Value................... 15A
Net Investment Factor................................. 15A
TRANSFERS AND WITHDRAWALS..................................... 15A
Transfers............................................. 15A
Full and Partial Withdrawals ......................... 16A
CHARGES AND DEDUCTIONS........................................ 16A
Premium Taxes......................................... 16A
Contract Maintenance Charge........................... 16A
Administrative Expense Charge......................... 16A
Mortality and Expense Risk Charge..................... 16A
Income Taxes.......................................... 17A
Expenses of the Funds................................. 17A
Transfer Fee.......................................... 17A
Fixed Fund Account Withdrawal Charge.................. 17A
SPECIAL SERVICES.............................................. 17A
Dollar Cost Averaging Program......................... 17A
Systematic Withdrawal Program......................... 17A
Automatic Payment Plan................................ 18A
DISTRIBUTION PHASE............................................ 18A
Annuity Date.......................................... 18A
Application of Contract Value......................... 18A
Fixed and Variable Annuity Payments................... 18A
Number of Annuity Units............................... 18A
Annuity Unit Value.................................... 18A
Distribution Options.................................. 19A
Transfers of Annuity Units............................ 20A
Minimum Contract Value................................ 20A
POSTPONEMENT OF PAYMENTS...................................... 20A
DEATH BENEFITS................................................ 20A
Death Benefits Prior to the Annuity Date.............. 20A
Death Benefits On or After the Annuity Date........... 21A
OTHER ASPECTS OF THE CONTRACT................................. 21A
Contract Agreement.................................... 21A
Contract Owner........................................ 21A
Change of Ownership and Assignment.................... 21A
Annuitant ............................................ 21A
Beneficiary........................................... 21A
Change of Beneficiary................................. 22A
TAX MATTERS................................................... 22A
Tax Considerations Relating to Your Annuity........... 22A
Natural Persons....................................... 22A
Non-Natural Persons................................... 22A
Distributions During the Accumulation Phase
from Nonqualified Plans.............................. 22A
Distributions During the Distribution Phase
from Nonqualified Plans.............................. 22A
Distributions from Qualified Plans.................... 22A
Penalty on Distributions.............................. 23A
Multiple Contracts.................................... 23A
Federal Income Tax Withholding........................ 23A
Assignments........................................... 23A
Tax-Free Exchanges.................................... 23A
Transfers Between Investment Options.................. 23A
4A
<PAGE>
TABLE OF CONTENTS, CONTINUED
Generation-Skipping Transfers......................... 23A
Diversification....................................... 24A
Contract Owner Control................................ 24A
Qualified Plans....................................... 24A
TYPES OF QUALIFIED RETIREMENT PLANS........................... 24A
Individual Retirement Annuity ("IRA")................. 24A
Simplified Employee Pension-Individual
Retirement Annuity ("SEP-IRA")....................... 24A
Salary Reduction Simplified Employee Pension-
Individual Retirement Annuity ("SARSEP-IRA")......... 25A
Simple Retirement Accounts............................ 25A
Tax Sheltered Annuity ("TSA")......................... 25A
Texas Optional Retirement Program ("ORP")............. 25A
LEGAL PROCEEDINGS............................................. 26A
ANNUAL STATEMENTS AND REPORTS................................. 26A
ADMINISTRATION OF THE CONTRACTS............................... 26A
Telephone Transactions................................ 26A
OWNER INQUIRIES............................................... 26A
PERFORMANCE INFORMATION....................................... 26A
Yield and Total Return................................ 26A
Performance Comparisons............................... 27A
Variable Annuity Fund Account Performance............. 27A
Effect of Tax-Deferred Accumulations................... 27A
CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION............... 30A
DEFINITIONS OF SPECIAL TERMS:
ACCOUNT - The Fixed Fund Account or a Variable Annuity Fund Account.
ACCUMULATION PHASE - The period during the lifetime of the Contract Owner
between the Effective Date of the Contract and the Annuity Date.
ACCUMULATION UNIT - An accounting unit of measure used to calculate values in
each Variable Annuity Fund Account under the Contract before the Company
starts making income payments from the Variable Annuity Fund Accounts.
ANNUITANT - The person named on the Contract Information Page of the Contract
who is to receive income payments, and on whose life annuity payments may be
based.
ANNUITY - A contract designed to provide an Annuitant with income payments.
ANNUITY DATE - The date when the Company is to begin making income payments
to the Annuitant.
ANNUITY UNIT - An accounting unit of measure used to calculate the amount of
Variable Annuity Payments.
AUTHORIZED SALES REPRESENTATIVE - A salaried employee of the Company who is
licensed by state insurance department officials to sell the Contracts and
who is also a registered representative or principal of USAA Investment
Management Company.
BENEFICIARY - The person(s) designated by the Contract Owner to receive a
death benefit or any remaining income payments upon the Owner's or the
Annuitant's death.
CODE - Internal Revenue Code of 1986, as amended.
COMPANY, WE, OUR, OR US - USAA Life Insurance Company.
CONTRACT INFORMATION PAGE - The Contract Information Page of the Contract,
which identifies certain information and specifies certain terms of the
Contract.
CONTRACT VALUE - The monetary value of a Contract. It equals the sum of the
Fixed Fund Account Value and the Variable Annuity Fund Account Values under
the Contract.
CONTRACT YEAR - A period of 12 calendar months starting with the Effective
Date of the Contract, and each 12-month period thereafter. For example, if
your Contract was issued on July 1, your first Contract Year would end on the
following June 30. Each subsequent Contract Year would start on July 1 and
end on June 30.
DATE OF RECEIPT - The date a premium payment, a Written Request, or other
document is actually received at our Service Office subject to two
exceptions: (1) if received on a date other than a Valuation Date, the Date
of Receipt will be the following Valuation Date; and (2) if received on a
Valuation Date after close of trading of the New York Stock Exchange, the
Date of Receipt will be the following Valuation Date.
DISTRIBUTION OPTION - One of several ways in which the Contract Value can be
paid to the Annuitant.
DISTRIBUTION PHASE - The period starting on the Annuity Date during which the
Company makes annuity payments to the Annuitant.
EFFECTIVE DATE - The date that we approve the application and issue the
Contract. The Effective Date is shown on the Contract Information Page.
FIXED ANNUITY - A Distribution Option under which payments do not vary as to
dollar amount.
5A
<PAGE>
DEFINITIONS OF SPECIAL TERMS, CONTINUED FIXED
FIXED ANNUITY PAYMENTS - Annuity payments that are guaranteed by the Company
and are fixed in amount.
FIXED FUND ACCOUNT - The name of the investment alternative under this
Contract in which premium payments may be invested through the General
Account at interest rates declared from time to time by USAA Life. The
minimum effective annual interest rate is 3% (or a higher rate, if required
by state law).
FIXED FUND ACCOUNT VALUE - The amount of your Contract Value which is in the
Fixed Fund Account.
FREE LOOK PERIOD - The 10 day period following the date you first receive the
Contract, or such longer period as may be required by state law.
FUND - An individual class, series or portfolio of a Mutual Fund that is
available for investment under the Contract.
GENERAL ACCOUNT - The assets of the Company other than those in the Separate
Account or any other legally-segregated separate account established by USAA
Life.
MUTUAL FUND - A diversified open-end management investment company under
federal securities law. Currently, the Mutual Funds available under the
Contract include USAA Life Investment Trust, Scudder Variable Life Investment
Fund ("Scudder Fund") and The Alger American Fund ("Alger Fund"). In some
cases, only certain Funds of the latter two Mutual Funds are available.
NET ASSET VALUE - The current value of each Fund's total assets, less all
liabilities, divided by the total number of the Fund's shares outstanding.
NONQUALIFIED PLAN - A retirement plan that is not eligible for favorable tax
treatment under the Code.
OWNER - The person to whom we owe the rights and privileges of the Contract.
PROOF OF DEATH - A certificate of death, a certified copy of a statement of
death from the attending physician, a certified copy of a decree of a court
of competent jurisdiction as to the finding of death, or any other proof
satisfactory to us.
QUALIFIED PLAN - A retirement plan that is eligible for favorable tax
treatment under the Code. Contract Owners may contribute pre-tax dollars to a
Qualified Plan, thereby deferring the federal income tax on the money paid
into the Plan as well as on the interest or other income earned.
SEPARATE ACCOUNT - A segregated asset account established under Texas law
through which USAA Life invests the premium payments received from Contract
Owners. The Separate Account currently is divided into nine Variable Annuity
Fund Accounts, through which the Company invests in the nine available
Funds.
SERVICE OFFICE - The department of USAA Life responsible for administration
and servicing of the Contracts. The address and toll-free telephone number of
the Service Office are shown on the Contract Information Page in the
Contract. The same information is located in this Prospectus under the
heading "Owner Inquiries."
TELEPHONE REQUEST - A telephone request received by our Service Office that
is in proper form. Requests submitted to our Service Office by facsimile,
telegraph or other electronic transmission device will be treated as
Telephone Requests.
VALUATION DATE - Any business day, Monday through Friday, on which the New
York Stock Exchange is open for regular trading, except: (1) any day on which
the value of the shares of a Fund is not computed; and (2) any day during
which no order for the purchase, redemption, surrender or transfer of
Accumulation Units or Annuity Units is received.
VALUATION PERIOD - The period of time from the end of one Valuation Date to
the end of the next Valuation Date.
VARIABLE ANNUITY - A Distribution Option under which payments vary in amount
depending on the investment experience of the Funds that correspond to the
Variable Annuity Fund Accounts under this Contract.
VARIABLE ANNUITY PAYMENTS - Annuity payments that vary in amount depending on
the investment experience of one or more of the Variable Annuity Fund
Accounts of the Separate Account.
VARIABLE ANNUITY FUND ACCOUNT - Any of the several investment alternatives
under this Contract that correspond to a particular Fund. Premium payments
allocated to a Variable Annuity Fund Account are invested by the Company
through its Separate Account in the corresponding Fund. Please note that the
Contract refers to "Variable Annuity Fund Account" as "Variable Fund
Account."
VARIABLE ANNUITY FUND ACCOUNT VALUE - The amount of your Contract Value that
is in a Variable Annuity Fund Account.
WRITTEN REQUEST - A written request in proper form signed by the person
making the request and received by our Service Office in good order.
YOU, YOUR, YOURS - The Contract Owner.
6A
<PAGE>
SUMMARY
Set out below, in question and answer format, is a summary of the
Contract. Please read the remainder of this Prospectus for a more detailed
description. Variations due to requirements of particular states, if any, are
described in supplements which are attached to this Prospectus, or in
endorsements to the Contract, as appropriate.
WHAT TYPE OF CONTRACT AM I BUYING?
You are buying a Contract that provides you with the ability to make
flexible premium payments that accumulate on a fixed or variable basis, and
that you can use to purchase either a Fixed and/or Variable Annuity. This
Prospectus is intended to provide disclosure primarily about the variable
portion of the Contract. (See "The Contracts," below.)
HOW MUCH MUST I PAY, AND HOW OFTEN?
Subject to the minimum initial and subsequent premium requirements of
$1,000 and $100, respectively, the amount and frequency of premium payments
is completely flexible. Lower minimums apply in the case of Qualified Plans
and for USAA Life employees. (See "Contract Issuance and Premium Payments,"
below.) Except in the case of Qualified Plans, if your Contract Value falls
below $1,000 and we have received no premium payments for two years, we may
cancel your Contract and return to you its remaining value (less any
applicable charges).
WHAT IS THE SEPARATE ACCOUNT?
The Separate Account is a segregated asset account of USAA Life
established under Texas insurance law and registered with the SEC as a unit
investment trust. The Separate Account is divided into nine Variable Annuity
Fund Accounts, each of which invests in a corresponding Fund of one of the
available Mutual Funds. (See "The Separate Account," below.)
WHAT ARE MY INVESTMENT CHOICES?
You may invest your premiums in the Fixed Fund Account and/or up to
nine Variable Annuity Fund Accounts, each of which invests in a corresponding
Fund of a Mutual Fund. The nine Funds that are available through the
Variable Annuity Fund Accounts include the following:
USAA Life Investment Trust
USAA Life Variable Annuity Money Market Fund
USAA Life Variable Annuity Income Fund
USAA Life Variable Annuity Growth and Income Fund
USAA Life Variable Annuity World Growth Fund
USAA Life Variable Annuity Diversified Assets Fund
USAA Life Variable Annuity Aggressive Growth Fund
USAA LIfe Variable Annuity International Fund
Scudder Variable Life Investment Fund
Scudder Capital Growth Portfolio - Class A shares
The Alger American Fund
Alger American Growth Portfolio
For more information, see "The Funds" below.
WHO MANAGES MY INVESTMENT?
The investment advisers for the Trust, the Scudder VLIF Capital Growth
Portfolio, and the Alger American Growth Portfolio, are USAA Investment
Management Company ("USAA IMCO"), Scudder, Stevens & Clark, Inc. ("Scudder"),
and Fred Alger Management, Inc. ("Alger Management"), respectively
(collectively, the "Advisers"). Each Adviser is registered as an investment
adviser with the SEC. (See "The Funds - Management of the Funds," below.)
HOW DOES THE CONTRACT WORK?
Once your payment is received and your application is approved by the
Company, we will issue you a Contract. During the Accumulation Phase, you may
earn either a fixed rate of interest that we declare periodically (but not
less than 3%) by allocating your premium payments to the Fixed Fund Account,
or you may seek a variable investment return by allocating your premium
payments to one or more of the Variable Annuity Fund Accounts. (See "Contract
Issuance and Premium Payments," "Accumulation Phase," and "Distribution
Phase," below.) During the Distribution Phase, you may elect to receive Fixed
and/or Variable Annuity Payments, commencing on the Annuity Date. Fixed
Annuity Payments are periodic payments from USAA Life, the amount of which is
fixed and guaranteed by USAA Life. The amount of these payments will depend
on the Distribution Option you select, the age, and, generally, the sex of
the Annuitant, and the amount of Contract Value you elect to apply to the
Fixed Annuity Distribution Option. Variable Annuity Payments are periodic
payments from USAA Life, which vary depending on the net investment return of
the Variable Annuity Fund Accounts you select in connection with the Variable
Annuity Distribution Option. The net investment return of the Variable
Annuity Fund Accounts will, in turn, depend primarily on the investment
experience of the corresponding Funds. (See "Distribution Phase -
Distribution Options," below.)
WHAT CHARGES ARE ASSOCIATED WITH THE CONTRACT?
Beginning one year from the Effective Date of your Contract, we will
deduct a Contract Maintenance Charge of $30 per year from your Contract Value
for general administrative expenses. Should you decide to fully or partially
withdraw or transfer amounts from the Fixed Fund Account that have not been
on deposit there for at least seven years, you may incur a charge of anywhere
from 1% to 7%, depending upon how many years those payments have been
invested in the Fixed Fund Account. In addition, USAA Life assesses a charge
at an annual rate of 1.05% against the assets of the Separate Account for the
mortality and expense risks we assume under the Contract. We also assess an
Administrative Charge at an annual rate of 0.10% against the assets of the
Separate Account. (See "Charges and Deductions," below.)
7A
<PAGE>
Each Fund pays a fee to its Adviser, based upon Fund assets under
management. In addition, there are other expenses associated with the daily
operation of the Funds. These are more fully described in the Prospectus for
each Fund.
If your state assesses a premium tax with respect to your Contract,
USAA Life will deduct those amounts from the Contract Value in accordance
with applicable law. (See "Charges and Deductions," below.)
WHAT HAPPENS IF I DIE BEFORE THE ANNUITY DATE?
If you are the Annuitant, then the Beneficiary whom you designate will
receive either the sum of all premium payments (minus any prior partial
withdrawal) or the present Contract Value, whichever is greater, less any
applicable premium tax charge. Your Beneficiary will have certain options for
how the money is to be paid out. If you are an Owner who is not also an
Annuitant, certain special rules apply. (See "Death Benefits - Death Benefit
Prior to Annuity Date," below.)
MAY I TRANSFER CONTRACT VALUE AMONG VARIABLE ANNUITY FUND ACCOUNTS?
Yes. However, there are limits on how often you may do so. (See
"Transfers and Withdrawals" and "Distribution Phase - Transfers of Annuity
Units," below.)
MAY I TRANSFER CONTRACT VALUE FROM THE FIXED FUND ACCOUNT TO THE VARIABLE
ANNUITY FUND ACCOUNTS, AND VICE-VERSA?
Yes, subject once again to specific restrictions in the Contract and
the Prospectus. You may incur a charge for transfers from the Fixed Fund
Account. (See "Transfers and Withdrawals," and "Charges and Deductions -
Fixed Fund Account Withdrawal Charge," below.)
MAY I FULLY WITHDRAW FROM THE CONTRACT OR MAKE A PARTIAL WITHDRAWAL?
Yes, subject to any Contract requirements and to any restrictions
imposed under certain retirement plans. (For example, Owners under a public
school system or tax-exempt institution plan qualifying under Section 403(b)
of the Code are subject to special restrictions upon withdrawal.) If you
make a full or partial withdrawal from the Contract, certain charges may be
assessed. (See "Charges and Deductions," below.) In addition, the Internal
Revenue Service ("IRS") may assess a 10% premature withdrawal penalty tax if
you are under 59 1/2 years of age. (See "Transfers and Withdrawals" and "Tax
Matters," below.)
ARE LOANS AVAILABLE UNDER THE CONTRACT?
No. However, the Company may in the future permit loans in connection
with tax-sheltered annuity Contracts. See "TSA Loans" in the SAI.
DO I GET A "FREE LOOK" AT THIS CONTRACT?
Yes. If you return your Contract to the Company within the Free Look
Period, it will be cancelled. (See "Return Privilege," below.) During the
Free Look Period plus five calender days, your initial premium payment will
be allocated to the USAA Life Variable Annuity Money Market Fund Account
(See "Initial Premium Payments," below.)
EXPENSE TABLE
The purpose of the Expense Table and the Example is to assist the Owner
in understanding the various costs and expenses that an Owner will bear
directly or indirectly when investing in the Contract. The expenses of the
Separate Account as well as those of the Funds are reflected in the Table and
the Example, but premium taxes that are applicable in some states are not
reflected. For a more complete description of the expenses of the Separate
Account, see "Charges and Deductions," below. For more complete information
regarding expenses paid out of the assets of the Fund, see the Prospectuses
for the Funds.
8A
<PAGE>
CONTRACT OWNER TRANSACTION EXPENSES
Sales Load Imposed on Premium Payments...................... None
Deferred Sales Load......................................... None
Surrender Fee for Variable Annuity Fund Account............. None/(1)/
Transfer Fee ............................................... None/(1)/
Contract Maintenance Charge/(2)/............................ $30.00
SEPARATE ACCOUNT ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE DAILY NET ASSET VALUE)
Mortality and Expense Risk Charge/(3)/...................... 1.05%
Administrative Expense/(3)/................................. 10%
Total Separate Account Annual Expenses/(3)/................. 1.15%
ANNUAL EXPENSES OF THE FUNDS (AS A PERCENTAGE OF AVERAGE NET ASSETS)/(4)/
<TABLE>
<CAPTION>
MANAGEMENT OTHER EXPENSES AFTER TOTAL FUND ANNUAL
NAME OF FUND FEES EXPENSE REIMBURSEMENT /(5)/ EXPENSES/(5)/
<S> <C> <C> <C>
USAA Life Variable Annuity Money Market Fund .20% .15% .35%
USAA Life Variable Annuity Income Fund .20 .15 .35
USAA Life Variable Annuity Growth and Income Fund .20 .15 .35
USAA Life Variable Annuity World Growth Fund .20 .45 .65
USAA Life Variable Annuity Diversified Assets Fund .20 .15 .35
USAA Life Variable Annuity Aggressive Growth Fund .50 .20 .70
USAA Life Variable Annuity International Fund .65 .45 1.10
Scudder VLIF Capital Growth Portfolio .475 .055 .53
Alger American Growth Portfolio .75 .04 .79
</TABLE>
/(1)/ A charge of up to 7% of amounts allocated to the Fixed Fund Account will
be deducted upon certain transfers or withdrawals from that Account. (See
"Charges and Deductions - Fixed Fund Account Withdrawal Charge," below.)
/(2)/ Annual deduction of $30 applies only during the Accumulation Phase and
will be waived to the extent it would cause the amount of interest earned
on the Fixed Fund Account from the last Contract anniversary to be less
than a 3% annual effective rate, or a higher rate if required by state
law. (See "Charges and Deductions - Contract Maintenance Charge," below.)
/(3)/ Applies to all nine Variable Annuity Fund Accounts but not to the Fixed
Fund Account.
/(4)/ The Fund expenses shown above are assessed at the underlying Fund level
and are not direct charges against the Separate Account assets or
reductions from Contract Values and are not relevant to the Fixed Fund
Account. These Fund expenses are taken into consideration in computing
each Fund's Net Asset Value, which is the share price used to calculate
the Variable Annuity Fund Account Values.
/(5)/ Pursuant to an Underwriting and Administrative Service Agreement
("Underwriting Agreement") with the Trust, USAA Life, out of its General
Account, has agreed to assume Trust Fund expenses to the extent that such
expenses exceed, on an annual basis, .65% of the monthly average net
assets of the VA World Growth Fund, .70% of the monthly average net assets
of the VA Aggressive Growth Fund, 1.10% of the monthly average net assets
of the VA International Fund, and .35% of the monthly average net assets
of each other Fund. In the absence of expense reimbursement arrangements,
the expenses of the Trust's Funds for the 1996 fiscal year would have been
1.24%, .65%, .53%, .82% and .61% for the VA Money Market, VA Income, VA
Growth and Income, VA World Growth and VA Diversified Assets,
respectively, and for the current year, are estimated to be .79% and 1.19%
for the VA Aggressive Growth and VA International Funds, respectively. The
Underwriting Agreement is terminable by any party thereto upon 60 days
notice to the other parties.
EXAMPLE:
The following chart depicts the dollar amount of expenses that would be
incurred under this Contract assuming a $1,000 investment and 5% annual
return, assuming you invest solely in one of the Variable Annuity Fund
Account options. These dollar figures are illustrative only and should not be
considered a representation of past or future expenses. Actual expenses may
be greater or lesser than those shown below and would differ for amounts
allocated to the Fixed Fund Account. The expense amounts presented are
derived from a formula which expresses the $30 Contract Maintenance Charge as
a percentage of an estimated $26,680 average Contract account size.
If you surrender your Contract or annuitize at the end of the applicable
time period, you would pay the following expenses on a $1,000 investment,
assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
NAME OF FUND ACCOUNT 1 YR. 3 YRS. 5 YRS. 10 YRS.
<S> <C> <C> <C> <C>
USAA Life Variable Annuity Money
Market Fund Account $ 16 $ 52 $ 91 $208
USAA Life Variable Annuity Income
Fund Account 16 52 91 208
USAA Life Variable Annuity Growth
and Income Fund Account 16 52 91 208
USAA Life Variable Annuity
World Growth Fund Account 20 62 108 246
USAA Life Variable Annuity Diversified
Assets Fund Account 16 52 91 208
USAA Life Variable Annuity Aggressive
Growth Fund Account 20 63 111 253
USAA Life Variable Annuity
International Fund Account 24 76 134 304
Scudder VLIF Capital Growth Portfolio 18 58 101 231
Alger American Growth Portfolio 21 66 116 264
</TABLE>
9A
<PAGE>
SELECTED ACCUMULATION UNIT DATA
The table below reflects the historical performance of an accumulation
unit outstanding throughout the period shown under a representative Contract
invested in each Variable Annuity Fund Account. When reading the table,
please bear in mind that the unit value of each Variable Annuity Fund Account
will not be the same on any given day as the net asset value per share of the
corresponding Fund in which that Subaccount invests. One reason for this
divergence is that each unit value consists of the corresponding Fund's net
asset value minus charges to the Variable Annuity Fund Account. In addition,
dividends declared by each corresponding Fund are reinvested by the Variable
Annuity Fund Account in additional shares of that Fund. These distributions
have the effect of reducing the value of each share of the Fund and
increasing the number of Fund shares outstanding. However, the total cash
value in the Variable Annuity Fund Account does not change as a result of
such distribution. The information in the table below is derived from the
Separate Account's financial statements, which have been audited by KPMG Peat
Marwick LLP, the Separate Account's certified independent public accountants,
and should be read in conjunction with the Separate Account's financial
statements.
<TABLE>
<CAPTION>
USAA LIFE USAA LIFE USAA LIFE USAA LIFE USAA LIFE SCUDDER ALGER
VA MONEY VA INCOME VA GROWTH AND VA WORLD VA DIVERSIFIED VLIF CAPITAL AMERICAN
MARKET FUND FUND INCOME FUND GROWTH FUND ASSETS FUND GROWTH GROWTH
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT PORTFOLIO PORTFOLIO
FUND FUND
ACCOUNT ACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1996
Accumulation Unit Value $1.082816 $11.785992 $15.432048 $14.314911 $13.844197 $14.894774 $14.672583
Number of Accumulation Units
(000) 10,383 430 1,515 692 696 689 1,639
December 31, 1995
Accumulation Unit Value $1.040729 $11.848795 $12.579981 $11.947438 $12.243941 $12.543192 $13.095503
Number of Accumulation Units
(000) 5,478 89 205 161 86 93 630
February 6, 1995
Accumulation Unit Value* $1.00 $10.00 $10.00 $10.00 $10.00 $10.00 $10.00
*Accumulation Unit Value at date of inception.
</TABLE>
FINANCIAL STATEMENTS
The financial statements for the Separate Account are located in its
Annual Report, and the financial statements for the Company are located in
the SAI. See the cover page of this Prospectus for information on how to
obtain a copy of the Annual Report or SAI. These financial statements have
been included in reliance on the reports thereon of KPMG Peat Marwick, LLP,
and the firm's authority as experts in accounting and auditing. The financial
statements of the Company should be considered only as bearing on the ability
of the Company to meet its contractual obligations under the Contracts; they
do not bear on the investment performance of the Separate Account.
USAA LIFE
USAA Life is a stock insurance company incorporated in the State of
Texas in 1963. The Company is principally engaged in writing life insurance
policies, annuity contracts and health insurance policies. The Company is
authorized to transact insurance business in all 50 states of the United
States and the District of Columbia. The Company on a consolidated statutory
basis had total assets of $6,237,884,113 on December 31, 1996. The Company is
a wholly-owned stock subsidiary of USAA, the parent company of the USAA Group
of Companies. USAA is a diversified financial services concern providing
members and their families with a wide array of products and services to
maintain and enhance their financial lifestyle. The Home Office of USAA Life
is 9800 Fredericksburg Road, San Antonio, Texas 78288.
As of the date of this Prospectus, USAA and USAA Life both held the
highest ratings from A.M. Best Company (A++ Superior) and Standard & Poor's
Corporation (AAA Superior). USAA and USAA Life also held the highest and
second highest ratings (Aaa Exceptional and AA1 Excellent), respectively,
from Moody's Investors Service, as of that date. The ratings published by
these independent financial rating agencies serve as measurements of an
insurer's financial condition. The ratings are based on a qualitative as well
as quantitative evaluation of many factors, including an insurer's
profitability, asset quality, adequacy of reserves, capitalization and
management practices. These ratings are not a rating of investment
performance that purchasers of insurance products have experienced or are
likely to experience in the future.
THE SEPARATE ACCOUNT
The Separate Account was established under Texas law pursuant to a
resolution of the Board of Directors on February 8, 1994. The Separate Account
is registered with the
10A
<PAGE>
SEC as a unit investment trust under the Investment Company Act of 1940, as
amended (th e "1940 Act"). The assets of the Separate Account are the property
of the Company. However, the assets of the Separate Account not in excess of the
reserves, and other Contract liabilities with respect to the Separate Account,
are not chargeable with liabilities arising out of any other business the
Company may conduct. Income, gains and losses, whether or not realized, are, in
accordance with the Contracts, credited to or charged against the Separate
Account without regard to other income, gains or losses of the Company. The
Company's obligations arising under the Contracts are general corporate
obligations. The Separate Account is divided into nine Variable Annuity Fund
Accounts, each of which invests in a corresponding Fund or Portfolio, described
below.
THE FUNDS
THE VARIABLE ANNUITY FUND ACCOUNTS
Each of the nine Variable Annuity Fund Accounts of the Separate Account
invests solely in a corresponding Fund. Seven of the Variable Annuity Fund
Accounts invest in Funds of the Trust, while the other two Variable Annuity
Fund Accounts invest in Funds of the Scudder Fund and the Alger Fund,
respectively. The Trust, the Scudder Fund and the Alger Fund are all Mutual
Funds registered under the 1940 Act. A brief description of the Funds is set
out below. More comprehensive information, including a discussion of
potential risks, is found in each Fund Prospectus.
Please read each Fund Prospectus carefully.
INVESTMENT OBJECTIVES OF THE FUNDS
USAA LIFE VARIABLE ANNUITY MONEY MARKET FUND - The Fund's investment
objective is to seek the highest level of income consistent with
preservation of capital and maintenance of liquidity.
USAA LIFE VARIABLE ANNUITY INCOME FUND - The Fund's investment objective is
to seek maximum current income without undue risk to principal.
USAA LIFE VARIABLE ANNUITY GROWTH AND INCOME FUND - The Fund's investment
objective is to seek capital growth and current income.
USAA LIFE VARIABLE ANNUITY WORLD GROWTH FUND - The Fund's investment
objective is to seek long-term capital appreciation.
USAA LIFE VARIABLE ANNUITY DIVERSIFIED ASSETS FUND - The Fund's investment
objective is to seek long-term capital growth, consistent with
preservation of capital and balanced by current income.
USAA LIFE VARIABLE ANNUITY AGGRESSIVE GROWTH FUND - The Fund's investment
objective is appreciation of capital.
USAA LIFE VARIABLE ANNUITY INTERNATIONAL FUND - The Fund's investment
objective is capital appreciation with current income as a secondary
objective.
SCUDDER VLIF CAPITAL GROWTH PORTFOLIO - The Fund's investment objective is
to seek to maximize long-term capital growth.
ALGER AMERICAN GROWTH PORTFOLIO - The Fund's investment objective is to
seek long-term capital appreciation.
MANAGEMENT OF THE FUNDS
USAA Investment Management Company serves as the Trust's Adviser. The
Adviser's mailing address is 9800 Fredericksburg Road, San Antonio, Texas
78288. The Adviser is a wholly-owned indirect subsidiary of USAA. Scudder,
Stevens & Clark, Inc., Two International Place, Boston, Massachusetts 02110,
serves as the Adviser to the Scudder VLIF Capital Growth Portfolio. Fred
Alger Management, Inc., 75 Maiden Lane, New York, New York 10038, serves as
the investment manager of the Alger American Growth Portfolio. Neither
Scudder, Stevens & Clark, Inc., nor Fred Alger Management, Inc., is
affiliated with USAA.
SUBSTITUTION OF FUNDS
If the shares of any Fund should no longer be available for investment
by the Separate Account, or if in the judgment of the Company further
investment in such shares would be undesirable in view of the purposes of the
Contracts, the Company may eliminate such Fund and substitute shares of
another eligible investment Fund. In most cases, a substitution of shares of
any Fund would require prior approval of the SEC and be subject to such
requirements as it may impose. In addition, the Company may add new Variable
Annuity Fund Accounts to permit investment in additional mutual funds.
Shares of the Trust, the Scudder Fund and the Alger Fund are or may be
issued in connection with variable annuity contracts issued through the
Separate Account of the Company, as well as variable annuity contracts and
variable life insurance policies issued through separate accounts of
unaffiliated life insurance companies, and may be issued to certain
retirement and pension plans qualified under the Internal Revenue Code
("Plans"). We do not see any conflict among Contract Owners and owners of
variable annuity contracts or variable life insurance policies issued by
insurance companies not affiliated with USAA Life and Plan participants.
Nevertheless, differences in treatment under tax and other laws, as well as
other considerations, could cause material irreconcilable conflicts to arise.
For example, violation of the federal tax laws by one separate account
investing in a Fund could cause the variable annuity contracts funded through
another separate account to lose their tax-deferred status, unless remedial
action were taken. At the same time, USAA Life as well as the Boards of
11A
<PAGE>
Trustees of the Trust, the Scudder Fund and the Alger Fund, will monitor to
identify any material irreconcilable conflicts that may develop and determine
what, if any, action should be taken in response. If it becomes necessary for
any separate account to replace shares of any Fund with another investment,
the Fund may have to liquidate securities on a disadvantageous basis.
DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS
Any dividends or capital gain distributions paid on Fund shares are
automatically reinvested in shares of the Fund from which they are received
at the Fund's net asset value on the date payable. Such dividends and
distributions will have the effect of reducing the net asset value of each
share of the corresponding Fund, other than the Variable Annuity Money Market
Fund, and increasing, by an equivalent value, the number of shares
outstanding of the Fund. However, the value of your interest in the correspond
ing Variable Annuity Fund Account will not change as a result of any such
dividends and distributions.
VOTING PRIVILEGES
Based upon its present view of applicable law, the Company will vote
the shares of the Trust, the Scudder VLIF Capital Growth Portfolio and the
Alger American Growth Portfolio held directly by it or through the Separate
Account in the Variable Annuity Fund Accounts at annual or special meetings,
if any, of the shareholders of such Funds in accordance with instructions
received from persons having the voting interest in the corresponding
Variable Annuity Fund Accounts. The person having the voting interest in a
Variable Annuity Fund Account will be the Contract Owner. The persons
entitled to give voting instructions and the number of shares which a person
has a right to vote will be determined based on Variable Annuity Fund Account
Values as of the record date of the meeting.
The Company will vote shares attributable to Contracts for which it has
not received instructions, as well as shares attributable to it, in the same
proportion as it votes shares for which it has received instructions, unless
it determines that it may vote such shares in its own discretion. The Trust,
the Scudder Fund and the Alger Fund do not hold regular shareholder
meetings.
FIXED FUND ACCOUNT
THE FIXED FUND ACCOUNT IS NOT AVAILABLE IN ALL STATES. IF YOU ARE A
RESIDENT OF MD, WA, OR, PA OR MA THE FIXED FUND ACCOUNT IS NOT PART OF THE
CONTRACT. AMOUNTS ALLOCATED TO THE FIXED FUND ACCOUNT OF THIS CONTRACT, AND
AMOUNTS SUPPORTING FIXED ANNUITY PAYMENTS, BECOME PART OF THE COMPANY'S
GENERAL ACCOUNT. BECAUSE OF EXEMPTIVE AND EXCLUSIONARY PROVISIONS, INTERESTS
IN THE GENERAL ACCOUNT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, NOR IS THE GENERAL ACCOUNT REGISTERED AS AN INVESTMENT COMPANY UNDER
THE 1940 ACT. WE HAVE BEEN ADVISED THAT THE STAFF OF THE SECURITIES AND
EXCHANGE COMMISSION HAS NOT REVIEWED THE DISCLOSURES IN THIS PROSPECTUS THAT
RELATE TO THE FIXED FUND ACCOUNT OR FIXED ANNUITY PAYMENTS. DISCLOSURES
REGARDING THESE MATTERS, HOWEVER, MAY BE SUBJECT TO CERTAIN
GENERALLY-APPLICABLE PROVISIONS OF THE FEDERAL SECURITIES LAWS RELATING TO
THE ACCURACY AND COMPLETENESS OF STATEMENTS IN PROSPECTUSES.
Our obligations with respect to the Fixed Fund Account are legal
obligations of USAA Life and are supported by the assets of the General
Account, which also support obligations incurred by us under other insurance
contracts. Investments purchased with amounts allocated to the Fixed Fund
Account are the property of USAA Life, and Contract Owners have no legal
rights in such investments.
Premium payments that you allocate, as well as amounts that you
transfer, to the Fixed Fund Account during any month ("New Money") will earn
interest at the New Money Interest Rate, which is the rate of interest that
USAA Life declares at the beginning of each month for all New Money received
that month. The New Money Interest Rate is credited through the end of the
current calendar year in which the New Money is allocated to the Fixed Fund
Account.
The Contract Value in your Fixed Fund Account that is not attributable
to New Money will earn interest at the Portfolio Interest Rate, which is the
rate of interest that USAA Life declares at the beginning of each calendar
year for that year. USAA Life also may declare, before the beginning of each
month, additional interest on all amounts in the Fixed Fund Account other
than New Money.
Both the New Money Interest Rate and the Portfolio Interest Rate are
guaranteed ("Guaranteed Interest Rates"). The Guaranteed Interest Rates under
the Contract will never fall below a minimum effective annual rate of 3% (or
higher rate, if required by state law).
The New Money Interest Rate may be higher or lower than the Portfolio
Interest Rate. As a result, there may be occasions when an Owner could earn a
higher rate of interest by transferring amounts that are no longer subject to
a withdrawal charge out of the Fixed Fund Account to a Variable Annuity Fund
Account, and then transferring the amount back into the Fixed Fund Account.
By so doing, the amount transferred would be considered New Money and would
earn interest at the New Money Interest Rate, which could be higher than the
Portfolio Interest Rate previously applicable, for the remainder of the year
in which the transfer occurred. You should be aware, however, that because
any amounts transferred in the foregoing manner would be considered New
Money, they would again become subject to the Fixed Fund Account Withdrawal
Charge. (See "The Fixed Fund Account - Fixed Fund Account Withdrawal Charge,"
below.)
FIXED FUND ACCOUNT WITHDRAWAL CHARGE
We will deduct a charge from certain premium payments or other payments
withdrawn or transferred from the Fixed Fund Account. In declaring interest
rates for the Fixed Fund
12A
<PAGE>
Account, USAA Life takes numerous factors into account, including the length of
time that it expects Owners to leave funds in the Fixed Fund Account. Generally
speaking, a high degree of such Owner "persistence" in the Fixed Fund Account
tends to enable us to declare higher rates of interest than we otherwise could.
The Fixed Fund Account Withdrawal Charge is intended to promote such persistence
and to compensate us for costs we may incur if persistence is less than we
estimate.
The Fixed Fund Account Withdrawal Charge is calculated as a percentage
of the net amount of any premium payment or transfer into the Fixed Fund
Account (collectively, "Payments") that is subsequently withdrawn or
transferred. The applicable percentage will depend on how many years have
elapsed since the Payment being withdrawn or transferred was originally
credited to the Fixed Fund Account, according to the following schedule:
FIXED FUND ACCOUNT WITHDRAWAL CHARGE
NUMBER OF YEARS BETWEEN CHARGE AS A PERCENT OF
WITHDRAWAL OF TRANSFER AND PAYMENTS WITHDRAWN OR TRANSFERRED
DATE OF PAYMENT INTO THE IN EXCESS OF A 15% FREE
FIXED FUND ACCOUNT WITHDRAWAL AMOUNT
LESS THAN 1 7%
1 6
2 5
3 4
4 3
5 2
6 1
7 OR MORE 0
THE FIXED FUND ACCOUNT WITHDRAWAL CHARGE DOES NOT APPLY TO THE VARIABLE ANNUITY
FUND ACCOUNTS.
For purposes of determining the applicable charge, a year is considered to
be a period of 365 days unless a leap year is involved. In addition, Payments
will be considered to be withdrawn or transferred on a first in-first out
("FIFO") basis, that is, the earliest Payments will be considered withdrawn
first and before any earnings are deemed to be withdrawn. The Fixed Fund Account
Withdrawal Charge is calculated separately for Payments that have been made into
the Fixed Fund Account. The calculation of the Fixed Fund Account Withdrawal
Charge will be made in accordance with applicable state law and may vary. Please
refer to your annuity contract for more information.
The following transactions are not considered to be withdrawals for
purposes of assessing the Fixed Fund Account Withdrawal Charge: death of the
Annuitant or Owner prior to the Annuity Date, payment of a lump sum in lieu
of a Distribution Option and termination due to insufficient Contract Value.
In addition, the commencement of a Distribution Option currently is not
subject to the Fixed Fund Account Withdrawal Charge.
THE FIXED FUND ACCOUNT WITHDRAWAL CHARGE WILL NOT APPLY:
. To any Payment received by the Company at least seven years prior to the
requested date of withdrawal or transfer and that has not been previously
withdrawn or transferred;
. To the amount of any interest earned on the amount of your Payments into
the Fixed Fund Account;
. To withdrawals or transfers during any Contract Year of up to 15 % of the
value of the Payments that have been made to the Fixed Fund Account during
the seven years preceding the requested date of a withdrawal or transfer
("15% Free Withdrawal Amount"). Unused portions of this 15% Free Withdrawal
Amount are not carried forward to further Contract Years.
CONTRACT ISSUANCE AND PREMIUM PAYMENTS
WHO MAY PURCHASE A CONTRACT
Any individual of legal age in the states where the Contracts may be
lawfully sold, who is eligible to participate in any of the Qualified or
Nonqualified Plans for which the Contracts are designed, may apply to
purchase a Contract. The Contract is not available to persons who have
attained the age of 85.
HOW TO PURCHASE A CONTRACT
To purchase a Contract, you must complete an application
("Application") and submit it, along with your initial premium payment, to
our Service Office. If we accept the Application, we will prepare and issue a
Contract to you. The Effective Date of the Contract will appear on the
Contract Information Page.
If a premium payment accompanies your Application and the Application
is complete, we will either accept the Application and credit your premium
payment, or reject the Application and return the premium payment, within two
Valuation Dates after the Date of Receipt of the Application at our Service
Office.
If your Application is not complete, or is incorrectly completed, we
will request that you provide additional documents or information within five
Valuation Dates after the Date of Receipt of the Application at our Service
Office. If we do not receive a correctly-completed Application within this
five day period, we will immediately return your premium payment to you,
unless you specifically consent to our retaining the premium payment until
the Application is made complete, in which case we will credit your initial
premium payment within two Valuation Dates after we receive the last
information required to process the Application.
13A
<PAGE>
MINIMUM PREMIUM PAYMENTS
The current minimum initial and subsequent premium payments under the
Contracts are set out below.
MINIMUM MINIMUM
INITIAL PREMIUM SUBSEQUENT PREMIUM
TYPE OF PLAN
Nonqualified Annuity $1,000* $100*
IRA and SEP-IRA $ 100 $ 50*
SAR-SEP IRA $ 25 $ 25
TSA or ORP $ 50 $ 50
*EMPLOYEES OF ANY OF THE USAA GROUP OF COMPANIES WHO PURCHASE THE CONTRACT
MAY MAKE AN INITIAL PREMIUM PAYMENT OF $500 FOR NONQUALIFIED ANNUITIES, AND
MINIMUM SUBSEQUENT PREMIUM PAYMENTS BY PAYROLL DEDUCTION IN AN AMOUNT NOT
LESS THAN $25 FOR NONQUALIFIED ANNUITIES, IRA'S AND SEP-IRA'S.
ALLOCATION OF INITIAL AND SUBSEQUENT PREMIUM PAYMENTS
You may allocate your premium payments among the Fixed and Variable
Annuity Fund Accounts under this Contract in amounts no smaller than one
tenth of a percent, provided that the total amount equals an aggregate of 100
percent.
INITIAL PREMIUM PAYMENTS
If you allocate any part of the initial premium payment to the Fixed
Fund Account, we will allocate it to that Account on the Effective Date. If
you allocate any part of the initial premium payment to any of the Variable
Annuity Fund Accounts, we will allocate it to the USAA Life Variable Annuity
Money Market Fund Account on the Effective Date. That premium will remain in
the USAA Life Variable Annuity Money Market Fund Account for the Free Look
Period plus five calendar days. On the Valuation Date immediately following
the end of that period, the initial premium payment, together with any
subsequent premium payments that have been made, plus the earnings thereon
will be allocated among the Variable Annuity Fund Accounts as directed on the
Application.
SUBSEQUENT PREMIUM PAYMENTS
So long as your Contract Value does not fall below $1,000 (other than
for Contracts issued in connection with Qualified Plans), you need make no
further premium payments. You may, however, make subsequent premium payments
at any time before the Annuity Date. We will allocate subsequent premium
payments among the various Fixed and Variable Annuity Fund Accounts in the
same manner as the allocation of the initial premium payment. We will credit
all subsequent premium payments on the Date of Receipt, using, in the case of
Variable Annuity Fund Accounts, the Accumulation Unit Value next computed on
the Date of Receipt. You may change the allocation of subsequent premium
payments at any time by sending a Written or Telephone Request to our Service
Office. A request to change subsequent premium payment allocations will be
effective with the first premium payment received on or after the Date of
Receipt of the request.
DISTRIBUTOR
USAA IMCO, an affiliate of USAA Life, serves as the principal
underwriter ("Distributor") of the Contracts pursuant to a Distribution and
Administration Agreement, dated December 16, 1994 ("Agreement"). Under the
Agreement, USAA IMCO will offer the Contracts for sale and distribution
through its registered representatives, who are also qualified life insurance
agents employed by USAA Life. USAA IMCO also will provide certain
administrative services to USAA Life.
RETURN PRIVILEGE
You may return your Contract to the Company within the Free Look
Period. If you return your Contract within the Free Look Period, we will
refund any premium payment allocated to the Fixed Fund Account, plus the
greater of (1) premium payments allocated to the Variable Annuity Fund
Accounts or (2) the Variable Annuity Fund Account Value as of the Date of
Receipt of the cancellation request plus any mortality and expense risk
charge, administrative expense charge and any premium taxes that have been
deducted. The Contract will be deemed void as if no Contract had been issued.
MINIMUM CONTRACT VALUE
If during the Accumulation Phase your Contract Value is less than
$1,000 and we have received no premium payments for a period of two years, we
may at our option cancel your Contract. This minimum does not apply in the
case of Contracts issued in connection with Qualified Plans. We will give the
Contract Owner 30 days written notice of, and an opportunity to satisfy, this
requirement before we cancel the Contract. In the event of a cancellation, we
will pay the Owner the Contract Value in a lump sum and be released of any
further obligations under the Contract.
ACCUMULATION PHASE
The Accumulation Phase of a Contract is the period prior to the Annuity
Date during which you may invest your premium payments in the Fixed and/or
Variable Annuity Fund Accounts under the Contract. All premium payments
credited to the Fixed Fund Account or Variable Annuity Fund Accounts are net
of any applicable premium tax. Your premium payments will help build Contract
Value.
Your Contract Value during the Accumulation Phase will equal the sum of
your Variable Annuity Fund Account Value and your Fixed Fund Account Value,
as discussed below.
FIXED FUND ACCOUNT VALUE
The value of your Contract in the Fixed Fund Account ("Fixed Fund
Account Value") on any given Valuation Date will be equal to the sum of
premium payments allocated to the Fixed Fund Account: (1) less any applicable
premium tax; (2) plus accumulated interest; (3) plus any amounts
14A
<PAGE>
transferred from the Variable Annuity Fund Accounts to the Fixed Fund Account;
(4) less the Fixed Fund Account portion of any Contract Maintenance Charges; and
(5) less any withdrawals or transfers of value.
VARIABLE ANNUITY FUND ACCOUNT VALUE
The value of your Contract in each Variable Annuity Fund Account
("Variable Annuity Fund Account Value") on any given Valuation Date will
equal the product of the number of Accumulation Units credited to that
Account as of that Valuation Date multiplied by the value of the Account's
Accumulation Unit ("Accumulation Unit Value") as of that date. A Variable
Annuity Fund Account's Accumulation Unit Value will fluctuate and vary with
the investment experience of the corresponding Fund.
Accumulation Units are credited to a Variable Annuity Fund Account when
you allocate premium payments or transfer amounts from other Variable Annuity
Fund Accounts or the Fixed Fund Account to that particular Variable Annuity
Fund Account. The number of Accumulation Units credited to a Variable Annuity
Fund Account is determined by dividing the premium or other amount being
credited to the Account by the Accumulation Unit Value for the Valuation Date
as of which the premium or other amount is to be credited. In similar
fashion, Accumulation Units are cancelled and your value in a Variable
Annuity Fund Account is reduced by any amounts you have withdrawn or
transferred from that Account, and by the portion of the Contract Maintenance
Charge that is allocable to the Account.
You may call our Service Office to receive a quotation of the daily
Accumulation Unit Values credited to your Contract. The Accumulation Unit
Value of each Variable Annuity Fund Account will be determined once each
Valuation Date at the close of trading of the New York Stock Exchange,
currently 4:00 p.m. New York time.
Each Variable Annuity Fund Account's Accumulation Units are valued
separately. Initially, the Accumulation Unit Value of each Variable Annuity
Fund Account was set at $10, except for the Money Market Variable Annuity
Fund Account, which was set at $1. Thereafter, the Accumulation Unit Value of
a Variable Annuity Fund Account as of the end of any Valuation Period is
calculated as one (1) multiplied by two (2) where:
(1) is the Accumulation Unit Value for the Account as of the end of the
immediately preceding Valuation Period and
(2) is the net investment factor for the Valuation Period then ended.
NET INVESTMENT FACTOR
The net investment factor ("NIF") is used to determine how the
investment experience of a Fund affects the Accumulation Unit Value of the
corresponding Variable Annuity Fund Account from one Valuation Period to the
next Valuation Period. The NIF for each Variable Annuity Fund Account as of
the end of any Valuation Period is determined by dividing (1) by (2) and
subtracting (3) from the result where:
(1) Is the net result of:
(A) the net asset value per share of the corresponding Fund as of the end
of the current Valuation Period;
(B) plus the per share amount of any dividend or capital gain
distributions made on the Fund shares held in the corresponding
Variable Annuity Fund Accounts during the current Valuation Period;
(C) plus or minus a per share credit or charge for that current Valuation
Period for any decrease or increase, respectively, in any income
taxes reserved that we determine has resulted from the investment
operations of the particular Variable Annuity Fund Account or any
other taxes that are applicable to this Contract;
(2) Is the net asset value per share of the corresponding Fund at the
beginning of the current Valuation Period; and
(3) Is a factor representing the mortality and expense risk and
administrative expense charge. The annual charge is 1.15% (1.05% for the
mortality and expense risk charge and 0.10% for the administrative
expense charge).
TRANSFERS AND WITHDRAWALS
TRANSFERS
Subject to the restrictions below, you may transfer your Contract Value
among the Fixed and Variable Annuity Fund Accounts. There is no charge for a
transfer from a Variable Annuity Fund Account; however, transfers from the
Fixed Fund Account may be subject to a substantial withdrawal charge. (See
"The Fixed Fund Account Withdrawal Charge," above.) The following
restrictions apply to all transfers.
(1) Only six transfers may be made each Contract Year.
(2) The minimum amount of value that may be transferred from one Account to
another Account is $100, or, if less, the total remaining Account
balance.
(3) A Written or Telephone Request for a transfer must clearly state the
amount to be transferred, the Fixed or Variable Annuity Fund Account
from which it is to be withdrawn, and the Account to which it is to be
credited.
(4) A transfer will result in either the redemption or purchase of
Accumulation Units, or both; the transfer will be processed effective at
the Accumulation Unit Value next computed on the Date of Receipt of the
transfer request.
15A
<PAGE>
(5) We reserve the right at any time and without prior notice to terminate,
suspend, or modify these transfer privileges. Full and Partial
Withdrawals
FULL AND PARTIAL WITHDRAWALS
You may, at any time during the Accumulation Phase while the Annuitant is
still living, make a full or partial withdrawal from your Contract. A full or
partial withdrawal from a Variable Annuity Fund Account is not subject to any
charge, except that the full $30 Contract Maintenance Charge will be deducted
upon a full withdrawal of the Contract during a Contract Year. A full or partial
withdrawal from the Fixed Fund Account, however, may be subject to a substantial
withdrawal charge. (See "The Fixed Fund Account - Fixed Fund Account Withdrawal
Charge," above.) To make full or partial withdrawal from your Contract, you must
submit a Written or Telephone Request to our Service Office. In the case of a
partial withdrawal, you should specify the Fixed and/or Variable Annuity Fund
Accounts from which you wish the partial withdrawal to be made. If you do not
specify the Variable Annuity Fund Accounts, the withdrawal will be taken pro
rata from your Contract Value in each Variable Annuity Fund Account. In connec
tion with a partial withdrawal, the minimum amount that you may request for
withdrawal from the Fixed Fund Account or a Variable Annuity Fund Account is
$500, or, if less, the remaining balance in the Account.
Except as provided under "Postponement of Payments," below, within
seven calendar days of the Date of Receipt of your Written or Telephone
Request for full or partial withdrawal, we will pay you all or part of your
Contract Value, as appropriate, as of the Date of Receipt, less any
applicable charges. We reserve the right to defer the payment of a withdrawal
from the Fixed Fund Account for up to six months from the Date of Receipt of
the Written or Telephone Request at our Service Office.
Certain premature withdrawals may be subject to federal income tax and
penalties. For a discussion of this and other tax implications, see "Tax
Matters," below. The Owner should seek the advice of a tax adviser prior to
making a withdrawal.
CHARGES AND DEDUCTIONS
Various charges and deductions are made from the Contract Values, the
Separate Account, and the Funds, as described below.
PREMIUM TAXES
Premium taxes or other similar assessments imposed by states,
municipalities or other governmental entities will be charged against the
Contracts. Premium taxes currently imposed by certain states range from 0% to
3.5%. The Company will deduct such charges from the Owner's Contract Value
either when the premium payment is received or from the amount applied to
effect an annuity at the time annuity payments commence, in accordance with
applicable state law. The amount of any premium tax charge will depend on
your state of residence. No amount charged for premium taxes is deductible by
you for federal income tax purposes.
CONTRACT MAINTENANCE CHARGE
Beginning on the first anniversary of the Effective Date, and each
Contract anniversary thereafter, we will deduct a charge of $30 from the
Contract Value for Contract maintenance. This charge will apply only while
the Contract is in the Accumulation Phase. We will pro-rate the charge among
the Fixed and Variable Annuity Fund Accounts under the Contract. If the
Contract is surrendered for the total Contract Value on a date other than a
Contract anniversary date, the entire Contract Maintenance Charge for that
year will be deducted. This charge will not be deducted from death benefit
proceeds on the death of an Owner or Annuitant, from a lump sum payment in
lieu of annuitization, or upon termination due to insufficient Contract
Value.
ADMINISTRATIVE EXPENSE CHARGE
The Company assesses each Variable Annuity Fund Account a daily charge
at an annualized rate of 0.10% of the average daily net assets of each
Variable Annuity Fund Account. This charge, together with the Contract
Maintenance Charge, is to reimburse the Company for the expenses it incurs in
the establishment and maintenance of the Contracts and each Variable Annuity
Fund Account. These expenses include, but are not limited to: preparation of
the Contracts, confirmations, annual reports and statements, maintenance of
the Owner's records, maintenance of the Separate Account records,
administrative personnel costs, mailing costs, data processing costs, legal
fees, accounting fees, filing fees, the costs of other services necessary for
Owner servicing, and all accounting, valuation, regulatory and reporting
requirements. The Company does not intend to profit from this charge, on
average, over the period that the contracts are in force. This charge will be
reduced to the extent that the amount of this charge is in excess of that
necessary to reimburse the Company for its administrative expenses. Should
this charge prove to be insufficient, the Company will not increase this
charge (or the Contract Maintenance Charge) and will bear the loss.
MORTALITY AND EXPENSE RISK CHARGE
To compensate it for assuming mortality and expense risks under the
Contracts, the Company assesses each Variable Annuity Fund Account a daily
charge at the annualized rate of 1.05% of the average daily net assets of
each Variable Annuity Fund Account attributable to the Contracts. This charge
consists of approximately 0.70% for mortality risks and 0.35% for expense
risks. The mortality risks assumed by the Company arise from its contractual
obligation to make annuity payments after the Annuity Date for the life of
the Annuitant in accordance with annuity rates guaranteed in the Contracts
under
16A
<PAGE>
distribution options that involve life contingencies. USAA Life will
also assume a mortality risk by its contractual obligation to pay a death
benefit upon the death of an Annuitant or Contract Owner prior to the
Distribution Phase. The expense risk assumed by the Company is that all
actual expenses involved in administering the Contracts, including Contract
maintenance costs, administrative costs, mailing costs, data processing
costs, legal fees, accounting fees, filing fees and the costs of other
services may exceed the amount recovered from the Contract Maintenance Charge
and the Administrative Expense Charge. The Mortality and Expense Risk Charge
is guaranteed by the Company and cannot be increased.
If the Mortality and Expense Risk Charge is insufficient to cover the
actual costs associated with the Contracts, the loss will be borne by the
Company. Conversely, if the amount deducted proves more than sufficient, the
excess will be a profit to the Company. The Company expects to profit from this
charge.
INCOME TAXES
The Company reserves the right to charge for federal income taxes that
may be incurred by the Separate Account. This charge applies only to the
Variable Annuity Fund Accounts under this Contract.
EXPENSES OF THE FUNDS
The fees and expenses paid out of the assets of the Funds are described
in detail in the accompanying prospectuses for the Funds.
TRANSFER FEE
The Company does not charge a transfer fee for transfers among the
Variable Annuity Fund Accounts, or for transfers from a Variable Annuity Fund
Account to the Fixed Fund Account. Transfers from the Fixed Account to a
Variable Annuity Fund Account, however, may be subject to a withdrawal
charge. (See "Fixed Fund Account Withdrawal Charge," above.)
FIXED FUND ACCOUNT WITHDRAWAL CHARGE
This charge is described under "Fixed Fund Account - Fixed Fund Account
Withdrawal Charge." THIS CHARGE DOES NOT APPLY TO THE VARIABLE ANNUITY FUND
ACCOUNTS.
SPECIAL SERVICES
DOLLAR COST AVERAGING PROGRAM
During the Accumulation Phase, you may take advantage of our dollar
cost averaging program ("Dollar Cost Averaging Program"). The Dollar Cost
Averaging Program enables you to make regular, approximately equal
investments over time in the Fixed Fund Account and/or one or more of the
Variable Annuity Fund Accounts, by transferring a fixed dollar amount or a
specified percentage at regular intervals from one or more Variable Annuity
Fund Accounts under the Contract. Transfers from the Fixed Fund Account are
not permitted in connection with the Dollar Cost Averaging Program.
To begin the Dollar Cost Averaging Program, you must have at least
$5,000 in the Variable Annuity Fund Account from which you intend to transfer
Contract Value. The minimum amount that may be transferred is $100, or, if
less, the remaining value of the Account. The transfers must be scheduled to
occur over a period of at least 12 months at monthly, quarterly, or
semi-annual intervals, as you elect.
You may select this Program by submitting a Written Request to our
Service Office or by Telephone Request. You may cancel your participation in
this Program in the same manner.
Transfers under the Dollar Cost Averaging Program will be processed
effective at the Accumulation Unit Value at the end of the Valuation Period
that includes the date of transfer. The transfers made under the Dollar Cost
Averaging Program do not count toward your limit of six transfers per
Contract Year.
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 Contract as to which the Dollar Cost
Averaging Program is already in effect.
SYSTEMATIC WITHDRAWAL PROGRAM
You may participate in a systematic withdrawal program ("Systematic
Withdrawal Program"), under which you may elect to withdraw pre-set amounts
on an annual, semi-annual, quarterly, or monthly basis from the Fixed and/or
Variable Annuity Fund Accounts under your Contract.
The minimum amount of Contract Value you must have to begin a
Systematic Withdrawal Program is $20,000. The minimum amount that can be
withdrawn from the Fixed or a Variable Annuity Fund Account under this
Program is $250, or, if less, the remainder of the Account. You may change
the amount or frequency of the systematic withdrawal once in each Contract
Year by submitting a Written or Telephone Request to our Service Office.
Withdrawals will be processed effective at the Accumulation Unit Value
at the end of the Valuation Period that includes the date of withdrawal.
Withdrawals may be made pro rata from all Accounts under the Contract or the
Owner may specify the Accounts from which the withdrawal will be made.
You may select this Program by submitting a Written or Telephone
Request to our Service Office. You may cancel your participation in this
Program in the same manner.
Systematic withdrawals from the Fixed Fund Account are subject to any
Fixed Fund Account Withdrawal Charge that would apply to any other Fixed Fund
Account withdrawal. (See "The Fixed Fund Account - Fixed Fund Account
Withdrawal Charge.") We reserve the right to suspend, terminate
17A
<PAGE>
or modify the offering of this Program during the Accumulation Phase of the
Contract upon providing you written notice 30 days in advance. Should we suspend
or terminate this Program, the suspension or cancellation will not affect any
Contract as to which the Systematic Withdrawal Program is already in effect.
Systematic withdrawals may be subject to federal income tax and
penalties. (See "Tax Matters.") The Owner should seek the advice of a tax
adviser prior to selecting a Systematic Withdrawal Program.
Currently, there is no charge for systematic withdrawals, but the
Company reserves the right to charge for this Program during the Accumulation
Phase of the Contract. The Company does not intend to profit from any such
charge.
AUTOMATIC PAYMENT PLAN
You may establish an automatic payment plan ("Automatic Payment Plan")
by completing the appropriate form. Call our Service Office to obtain the
form and instructions. The Automatic Payment Plan is a program under which
you may elect to pay a pre-set premium amount periodically from a checking or
savings account. Under this Plan you authorize us to withdraw the pre-set
premium amount automatically on a pre-determined periodic basis to invest in
the Fixed Fund Account and/or one or more of the Variable Annuity Fund
Accounts.
DISTRIBUTION PHASE
The Distribution Phase describes the period under the Contract during
which the Annuitant or other payee will receive annuity payments, based on
amounts accumulated under the Contract during the Accumulation Phase. The
Company will make annuity payments pursuant to the distribution option
("Distribution Option") selected by the Contract Owner, beginning on the
Annuity Date, described below, and will continue to make such payments for
the period specified in the Distribution Option selected.
ANNUITY DATE
The Annuity Date is the date that the Contract Owner selected on the
Application. If this Contract is used as a Qualified Plan, the Annuity Date
must not be later than the date required by federal income tax law. (See
"Tax Matters.") If this Contract is used as a Nonqualified Plan, the Annuity
Date may not be later than the Annuitant's 95th birthday. The Annuity Date
also must be at least six months after the Effective Date, unless we choose
to waive this requirement. The Contract Owner may change the Annuity Date
selected by submitting a Written Request to our Service Office, which must be
received at least 30 days prior to the Annuity Date.
APPLICATION OF CONTRACT VALUE
We will apply your Contract Value as of the end of the Valuation Period
immediately preceding the tenth day before the Annuity Date to the
Distribution Option that you have selected. You may apply your Contract Value
to provide: (a) Fixed Annuity Payments, (b) Variable Annuity Payments, (c) a
combination of Fixed and Variable Annuity Payments, or (d) systematic
withdrawals.
FIXED AND VARIABLE ANNUITY PAYMENTS
A Fixed Annuity provides monthly payments in an amount guaranteed by
the Company for a specified period of time. A Variable Annuity is similar to
a Fixed Annuity, except that the amount of each payment is not guaranteed and
will vary in accordance with the net investment experience of the Variable
Annuity Fund Account to which all or part of the Contract Value has been
applied.
Examples of the minimum amount of the first monthly Fixed or Variable
Annuity Payment for each $1,000 of Contract Value applied to a Fixed or
Variable Distribution Option is shown for various ages in the appropriate
Annuity Payment Table in the Contract.
The amount of each subsequent monthly Fixed Annuity Payment is fixed
and specified by the terms of the Distribution Option selected. The amount of
each subsequent Variable Annuity Payment will be equal to the product of (1)
the number of Annuity Units of the Variable Annuity Fund Accounts funding the
Variable Annuity Payment multiplied by (2) the values of those Annuity Units
("Annuity Unit Values"). The payments from each Variable Annuity Fund Account
are then added to determine the total Variable Annuity Payment to be made to
the Annuitant.
NUMBER OF ANNUITY UNITS - The number of Annuity Units of each Variable
Annuity Fund Account under your Contract will depend on the amount of
Contract Value that you have allocated to each Variable Annuity Fund Account.
The Contract Value allocated to each Variable Annuity Fund Account that is
applied to provide Variable Annuity Payments is converted to a number of
Annuity Units for each Variable Annuity Fund Account by dividing the amount
of the first Variable Annuity Payment by the Annuity Unit Value of the
relevant Variable Fund Account as of the Valuation Period ending immediately
prior to the tenth day before the Annuity Date. This results in a number of
Annuity Units for each Variable Annuity Fund Account which thereafter remains
constant.
ANNUITY UNIT VALUE - The Annuity Unit Value for each Variable Annuity Fund
Account was established initially at $10 ($1 in the case of Money Market
Variable Annuity Fund Account). Thereafter, the Annuity Unit Value of a
Variable Annuity Fund Account as of the end of any Valuation Period is
calculated by multiplying (1) by (2) and multiplying the result by (3) where:
(1) is the Annuity Unit Value for the Variable Annuity Fund Account as of the
end of the immediately preceding Valuation Period;
(2) is the Net Investment Factor for the Valuation Period then ended (see
"Accumulation Phase - Net Investment Factor); and
18A
<PAGE>
(3) is a factor used to adjust for the assumed interest rate of 3% per year
used in the annuity payment tables used in the Contracts (but which is not
applicable because the actual amount earned on the Variable Annuity Fund
Account is credited instead).
As a result of the foregoing computations, if the net investment return
for a Variable Annuity Fund Account for any month is at an annual rate of
more than 3%, any Variable Annuity Payment based on that Variable Annuity
Fund Account will be greater than the Variable Annuity Payment based on that
Account for the previous month. Conversely, if the net investment return for
a Variable Annuity Fund Account for any month is at an annual rate of less
than 3%, any Variable Annuity Payment based on that Variable Annuity Fund
Account will be less than the Variable Annuity Payment based on that Account
for the previous month.
DISTRIBUTION OPTIONS
You may elect to receive annuity payments under any one or more of the
Distribution Options listed below or any other option including a lump sum
which you and the Company mutually agree upon in writing. The Company may, at
its discretion, offer more favorable distribution option values based upon
future interest rate and mortality assumptions.
At least 30 days prior to the Annuity Date, you must inform us in
writing which one of the Distribution Options you want to use to begin
annuity payments, and whether you want your Contract Value to fund a Fixed
Annuity, a Variable Annuity, a combination Fixed and Variable Annuity, or
systematic withdrawals. Your Contract Value will then be applied to determine
the amount of the annuity payment. Variable Annuity Payments can be provided
from a maximum of four Variable Annuity Fund Accounts.
Payments on a Fixed Annuity basis are available under Options 1
through 5. Payments on a Variable Annuity basis are available only under
Options 1, 2 and 3. Option 6 provides for systematic withdrawals. You should
be aware that, although Options 1, 2 and 3 are designed to provide annuity
payments for life, electing these Options on a Variable Annuity basis
involves investment risks. If the investment performance of the Funds you
select is poor, the amount of future Annuity Payments could be reduced
substantially or possibly altogether.
No full or partial withdrawals are permitted under Options 1 through 5
subsequent to the Annuity Date.
If you have not elected a Distribution Option at least 30 days prior to
the Annuity Date, we will apply the Contract Value, less any applicable
premium tax charge, under Distribution Option 2, with monthly payments
guaranteed for 10 years. Fixed Fund Account Value will be applied to effect a
Fixed Annuity. Variable Annuity Fund Account Value will be applied to effect
a Variable Annuity with payments funded from each Variable Annuity Fund
Account in the same proportion as each Account's value has to the total value
of all Variable Annuity Fund Accounts under your Contract. We will apply your
Contract Value as of the end of the Valuation Period immediately preceding
the tenth day before the Annuity Date.
If the Contract has been assigned, the amount due the assignee must be
paid in a lump sum before any annuity payments can be determined and
commence.
OPTION 1. INCOME PAYMENTS FOR LIFE - Under this option, the Company
guarantees periodic payments as long as the Annuitant is alive. It is
possible under this option for the Annuitant or other payee to receive only
one annuity payment if the Annuitant died prior to the second annuity payment,
since no minimum number of payments is guaranteed.
OPTION 2. INCOME PAYMENTS FOR LIFE WITH A CERTAIN PERIOD GUARANTEED - Under
this option, the Company guarantees that payments will be made for a certain
period of time even if the Annuitant dies before that period of time has
expired.
OPTION 3. JOINT AND SURVIVOR LIFE INCOME - Under this option, the Company
guarantees periodic payments as long as the Annuitant or the Joint Annuitant
is alive. It is possible under this option for an Annuitant or other payee to
receive only one annuity payment if both Annuitants die prior to the second
annuity payment, since no minimum number of payments is guaranteed. If one of
these persons dies before the Annuity Date, the election of this option is
revoked, and the survivor becomes the sole Annuitant. The surviving Annuitant
may elect to receive any one or more of the other Distribution Options
available under the Contracts.
OPTION 4. INCOME FOR SPECIFIED PERIOD - If this option is selected, the
Company will make periodic payments which are guaranteed for a specified
period of time. This period of time is agreed upon before payments begin.
This period of time cannot be longer than 30 years. The amount of each payment
is the same and is established pursuant to an annuity payment table
contained in the Contract.
OPTION 5. INCOME OF FIXED AMOUNT - If this option is selected, a sum of
monetary value is transferred to the Company. In exchange, the Company
agrees, pursuant to an annuity payment table contained in the Contract, to
pay the specified amount of interest on the principal and to make periodic
payments of a fixed dollar amount that is chosen as long as the principal and
interest earnings last.
OPTION 6. SYSTEMATIC WITHDRAWALS - You may elect a series of substantially
equal periodic payments made either
19A
<PAGE>
monthly, quarterly, semi-annually or annually. These payments may be made over
the life expectancy of the Annuitant or over a shorter period of time. You may
change the amount or frequency of the systematic withdrawal once in each
Contract Year. The minimum amount of Contract Value you must have to elect
systematic withdrawal is $20,000 or $5,000 if the Contract funds a Qualified
Plan. The minimum amount that can be withdrawn from an Account under this
Contract is $250, or, if less, the remaining balance of the Account. To the
extent that this Option 6 is selected, the systematic withdrawals are subject to
the terms and conditions set forth under "Special Services - Systematic
Withdrawal Program," above.
If this Contract is used to fund a Qualified Plan and if distributions
are required under federal income tax law, we offer a service to determine
the minimum amount of distribution that must be taken each year. You may
arrange with us to have this amount distributed by systematic withdrawal.
Once annuity payments have begun, a distribution option may be commuted
only if agreed to by the Company.
TRANSFERS OF ANNUITY UNITS
After the Annuity Date, the Annuitant or other payee may transfer
Annuity Units among the Variable Annuity Fund Accounts (up to a maximum of
four Variable Annuity Fund Accounts), or from a Variable Annuity Fund
Account to a Fixed Annuity under the same Distribution Option previously in
effect. There is no charge for such transfers. Transfers may not be made from
a Fixed Annuity to a Variable Annuity or to a new Distribution Option. The
minimum amount that may be transferred from a Variable Annuity Fund Account
is $100.
Transfers from a Variable Annuity Fund Account to another Variable
Annuity Fund Account or to a Fixed Annuity are subject to a limit of three
per Contract Year during the Distribution Phase. There is no charge for such
transfers. Once you have transferred Annuity Unit Value to the Fixed Fund
Account, it is locked in and cannot be transferred out.
We will process transfer requests using the Annuity Unit Value next
computed on the Date of Receipt of the transfer request, which may be by
Written or Telephone Request.
MINIMUM CONTRACT VALUE
If at the time your Contract becomes payable, the Contract Value is
less than $2,000 or would provide a monthly distribution payment of less than
$20 per month, we may at our option cancel this Contract. In this event, we
will pay the Annuitant the Contract Value in a lump sum and be released of
any further obligations under the Contract.
POSTPONEMENT OF PAYMENTS
We will normally pay amounts withdrawn from a Contract within seven
calendar days after our Date of Receipt of the Written or Telephone Request
for withdrawal using the Fixed or Variable Annuity Fund Account Value as of
that Date of Receipt. In addition, we will normally effect transfers of
Contract Value among the Fixed and Variable Annuity Fund Accounts using the
Fixed or Variable Annuity Fund Account Values as of the Date of Receipt of
the Written or Telephone Request for transfer.
However, we may not be able to determine the value of assets of the
Variable Annuity Fund Accounts if: (1) the New York Stock Exchange is closed
for other than customary weekends and holidays; (2) trading on the New York
Stock Exchange is restricted; or (3) an emergency exists as a result of which
it is not reasonably practicable to dispose of securities held in the
Separate Account or determine their value. In such cases, we may postpone the
payment of withdrawal proceeds or defer acting upon a transfer request or any
other transaction pertaining to the Separate Account. We may also postpone
payments or defer such other transactions where the SEC, by order, permits us
to do so for the protection of Contract Owners. In addition, requests for
full or partial withdrawals that would be derived from a premium payment made
to us by a check that has not cleared the banking system will be deferred, to
the extent permitted by applicable law at the time, until payment of the
check has been honored.
DEATH BENEFITS
DEATH BENEFITS PRIOR TO THE ANNUITY DATE
If the Annuitant is the Owner and dies before the Annuity Date, we will
pay the death benefit to the Beneficiary. If the Owner is not the Annuitant
and the Owner dies before the Annuity Date, we will pay a death benefit to
the Annuitant, or the Beneficiary if the Annuitant does not survive the
Owner. We must receive Proof of Death and a Written Request specifying the
manner of payment before the death benefit will be paid.
The death benefit is the greater of: (1) the Contract Value on the Date
of Receipt of Proof of Death and any necessary instructions as to any
Distribution Option chosen; or (2) the sum of the premium payments credited
to the Contract, less the amount of any withdrawals and less any applicable
premium tax.
In lieu of receiving the death benefit in a lump sum, the Beneficiary
or the Annuitant, if entitled, may choose a Distribution Option.
In accordance with current federal income tax law, if the Owner dies
before the Annuity Date, distribution of the Contract Value is required to be
as follows.
(1) If the Owner and Annuitant are the same person and no Beneficiary was
designated or survived the Owner, full distribution to the Owner's
estate must occur within five years after the Owner's death.
20A
<PAGE>
(2) If the Owner and the Annuitant are the same person and the Beneficiary is
the Owner's spouse, or if the Annuitant is the Owner's spouse, the spouse
may: (a) assume ownership as the Annuitant and defer distribution until
the Annuity Date, or (b) receive d istributions over a period of time not
exceeding the surviving spouse's life or life expectancy, in which case
payments must begin within one year after the Owner's death.
(3) If the Owner and the Annuitant are the same person and the Beneficiary is
not the Owner's spouse, then distribution must begin within one year after
the Owner's death and must be made over a period of time not exceeding the
life or life expectancy of the Beneficiary, or, in the alternative, full
distribution must occur within five years after the Owner's death.
(4) If the Owner and the Annuitant are not the same person and the Annuitant
is not the Owner's spouse, then distribution must begin within one year
after the Owner's death and must be made over a period of time not
exceeding the life or life expectancy of the Annuitant, or Beneficiary if
the Annuitant does not survive the Owner, or, in the alternative, full
distribution must occur within five years after the Owner's death.
Federal income tax law imposes similar requirements for distributions
following the death of an Owner of a Contract used as part of a Qualified
Plan.
DEATH BENEFITS ON OR AFTER THE ANNUITY DATE
In accordance with current federal income tax law, if the Owner is the
Annuitant and dies on or after the Annuity Date, any payment that remains
under the terms of the Contract must continue at least as rapidly as before
the Annuitant's death. To the extent that the Distribution Option then in
effect provides for any benefits following the Annuitant's death, the
Beneficiary may:
(1) Continue to receive the same payments as the Annuitant; or
(2) If permitted under the Distribution Option in effect, receive higher
payments, but over a shorter period of time, than the Annuitant was
receiving; or
(3) If permitted under the Distribution Option in effect, take full
distribution of the remaining value at the Annuitant's death.
OTHER ASPECTS OF THE CONTRACT
CONTRACT AGREEMENT
The Contract and the Application form the entire agreement between you
and the Company. We will consider statements in the Application to be
representations and not warranties. Only an officer of the Company has
authority to: (1) waive a provision of the Contract or (2) agree with the
Owner to changes in the Contract; and then only in writing.
We reserve the right to change the Contract in order to comply with all
federal and state laws that apply to variable annuity contracts. This right
shall include, but not be limited to, the right to conform the terms of the
Contract to reflect any changes in the federal tax laws so that the Contract
will continue to qualify as an annuity contract thereunder.
CONTRACT OWNER
The rights and privileges of the Contract belong to the Owner during
the Annuitant's lifetime. The Owner is the Annuitant unless the Application
designates a different Owner and we have approved. If the Owner and the
Annuitant are different persons and the Owner dies either before or after the
Annuity Date, then the rights and privileges of ownership will vest in the
Annuitant, or the Beneficiary if the Annuitant does not survive the Owner. If
the Annuitant is the Owner and dies, then the rights and privileges of
ownership will vest in the Beneficiary.
CHANGE OF OWNERSHIP AND ASSIGNMENT
You may transfer or assign ownership of the Contract, subject to legal
restrictions. A request to transfer or assign ownership must be made in
writing and be sent to our Service Office. An assignment is not effective
until it is received by our Service Office. We are not responsible for
determining the validity of an assignment.
ANNUITANT
The Annuitant must be a natural person. The maximum age of the
Annuitant on the Annuity Date is age 95. The Owner, by Written Request, may
change the Annuitant at any time so long as such request is received by our
Service Office at least 15 days prior to the Annuity Date. The change will be
effective as of the Date of Receipt of the Written Request. If an Annuitant
who is not the Owner predeceases the Owner prior to the Annuity Date, then
the Beneficiary becomes the Annuitant, unless the Owner by Written Request
designates another Annuitant. A Non-Owner Annuitant has no rights or
privileges prior to the Annuity Date. When a Distribution Option involving
life contingencies is elected, the amount payable as of the Annuity Date is
based on the age and sex (where permissible) of the Annuitant, as well as the
Distribution Option selected and the Contract Value.
BENEFICIARY
The Beneficiary is the person or persons named in the Application who
may be entitled to receive any Contract benefits that are provided upon the
Owner's or the Annuitant's death. A contingent beneficiary may be named to
receive the Contract benefits in the event the Beneficiary does not sur-
21A
<PAGE>
vive the Annuitant. If the Beneficiary dies while receiving annuity payments,
any remaining payments due will be paid to the Beneficiary's estate.
Unless otherwise provided, benefits will be paid as follows:
(1) If two or more Beneficiaries have been named, all benefits will be paid in
equal shares to those living at the time of the Annuitant's death; and
(2) If no Beneficiary survives the Annuitant, payment will be made to the
Annuitant's estate.
CHANGE OF BENEFICIARY
The Owner, during the Annuitant's life, may change the Beneficiary. To
make a change, written notice must be received by our Service Office. The
change will take effect as of the date the Owner signs the request. If we
make any payments before receiving the request to change the Beneficiary, we
will receive credit against our obligations under the Contract.
TAX MATTERS
The following is a brief summary of the federal income tax consequences
of the Contract. State and local income tax considerations, as well as estate
tax, gift tax, and inheritance tax considerations may also be material. No
one can be certain that the law or regulations will remain unchanged or that
the IRS or courts will always agree as to how the tax laws or regulations are
to be interpreted. This discussion is not intended as tax advice. We
recommend that you consult with a professional adviser for your particular
tax situation.
TAX CONSIDERATIONS RELATING TO YOUR ANNUITY
Section 72 of the Internal Revenue Code of 1986, as amended ("Code")
governs the federal income taxation of annuities in general. Taxation of an
annuity is largely dependent upon: (a) whether it is used in a retirement
program eligible for special tax treatment under the Code, referred to as
Qualified Plans; and (b) the status of the beneficial owner as either a
natural or non-natural person when the annuity is used in connection with a
Nonqualified Plan.
NATURAL PERSONS
Natural persons are individuals. Increases in the Contract Value of an
annuity when the Owner is a natural person generally are not taxed until a
distribution occurs. Full or partial withdrawals and death benefit payments
are examples of distributions during the Accumulation Phase, and annuity
payments and lump sum distributions are examples of distributions during the
Distribution Phase. Certain other transactions may also be deemed to be a
distribution, e.g., loans and assignments. The provisions of Section 72 of
the Code concerning these distributions are summarized briefly below.
NON-NATURAL PERSONS
Non-natural persons include corporations, trusts and partnerships. Any
increase during a tax year in the Contract Value of an annuity which is not
used in a Qualified Plan eligible for special treatment under the Code is
currently includible in the gross income of a non-natural person that is the
Owner. There are exceptions to this rule if an annuity is held by: (a) a
structured settlement company; (b) an employer with respect to a terminated
pension plan; (c) the estate of a decedent by reason of the death of the
decedent; or (d) certain entities other than employers, such as a trust
holding an annuity as an agent for a natural person.
DISTRIBUTIONS DURING THE ACCUMULATION PHASE FROM NONQUALIFIED PLANS
Distributions received during the Accumulation Phase are treated as
being derived first from "income on the Contract" and includible in gross
income. The amounts of the distribution exceeding income on the Contract are
referred to as "investment in the Contract" and are not included in gross
income. Income on the Contract for an annuity would be income earned on
previous premium payments. Investment in the Contract is an amount equal to
total premium payments paid for any annuity contract, less any previous
distributions from such annuity Contract that were not included in gross
income.
DISTRIBUTIONS DURING THE DISTRIBUTION PHASE FROM NONQUALIFIED PLANS
The non-taxable portion of each annuity payment is determined by
multiplying each annuity payment by the ratio that the investment in the
Contract bears to (1) in the case of Fixed Annuity Payments, the total value
of expected payments under the Contract, and (2) in the case of Variable
Annuity Payments, the total number of annuity payments expected to be made
for the term of the Distribution Phase. The balance of each payment is the
taxable portion. The taxable portion, which is the income on the Contract, is
taxed at ordinary income rates. Owners, Annuitants, and Beneficiaries under
the Contracts should seek competent financial advice about the tax
consequences of any distribution.
DISTRIBUTIONS FROM QUALIFIED PLANS
Generally, if the employee does not have any cost basis for his or her
interest in the Qualified Plan, each payment, regardless of the amount, is
fully taxable as ordinary income, from both a fixed and variable annuity. An
employee's cost basis in a Qualified Plan consists of any non-deductible
contributions he or she has made to the Qualified Plan and any employer's
contributions that have been taxed to him or her. When the employee has a
cost basis for his or her interest in the Qualified Plan and the variable
annuity starting date is after June 30, 1986, the payments are taxed under
the annuity rules as they are expressly applied to variable payments. Thus,
the amount
22A
<PAGE>
excludable from the employee's gross income each year is determined by dividing
his or her cost basis (adjusted for any refund or period-certain guaranteed) by
the number of years in the payment period. If the annuity is payable for a life
or lives, the payment period is determined by the use of IRS annuity tables. The
computation for determining the amount excludable from the employee's gross
income is very complex and the advice of competent tax counsel is highly
recommended.
PENALTY ON DISTRIBUTIONS
Subject to certain exceptions, any distributions either during the
Accumulation or Distribution Phase from Nonqualified Plans are subject to a
penalty equal to 10% of the amount includible in gross income. This penalty
is not applied to certain distributions, including: (a) distributions made
on or after the taxpayer's age 59 1/2; (b) distributions made on or after the
death of the owner of the contract, or where the owner of the contract is not
a natural person, the death of the annuitant; (c) distributions attributable
to the taxpayer's becoming disabled; (d) distributions which are part of a
scheduled series of substantially equal periodic payments made at least
annually for the life (or life expectancy) of the taxpayer or the joint lives
(or life expectancies) of the taxpayer and the taxpayer's beneficiary; (e)
distributions of amounts that are allocable to investments in the contract
made prior to August 14, 1982, and (f) payments under an immediate annuity as
defined under Section 72(u)(4) of the Code. Distributions from Qualified
Plans are subject to a similar 10% penalty with similar exceptions. These
exceptions include distributions not in excess of deductible medical expenses
and, after December 31, 1996, distributions to eligible unemployed persons
not in excess of deductible health insurance premiums.
Any modification, other than by reason of death or disability, of
distributions that is part of a scheduled series of substantially equal
periodic payments as noted in (d) above, that occurred before the taxpayer's
age 59 1/2 or within 5 years of the first of such scheduled payments, will
result in requirements to pay the penalties that would have been due had (d)
above not applied, plus interest for the deferral period. It is our
understanding that the IRS does not consider a scheduled series of
distributions to qualify under (d) above, if (as in the case of our
Systematic Withdrawal Program) the owner of the annuity retains the right to
modify such distributions at will, even if such right is not exercised.
MULTIPLE CONTRACTS
Multiple contracts ("MCs") mean Nonqualified Plan annuity contracts
that are issued within the same calendar year to the same owner by one
company or its affiliates. MCs are treated as a single annuity contract for
purposes of determining the tax consequences of any distribution during the
Accumulation Phase. Such treatment may result in adverse tax consequences,
including more rapid taxation of the distributable amounts from the MCs.
FEDERAL INCOME TAX WITHHOLDING
Section 3405 of the Code provides for federal income tax withholding on
the portion of a distribution which is includible in the gross income of the
recipient. Amounts to be withheld depend upon the nature of the distribution.
However, a recipient may elect not to have income taxes withheld or have
income taxes withheld at a different rate by filing a completed election form
with the Company.
Effective January 1, 1993, certain distributions from Qualified Plans
under Section 401 or Section 403(b) of the Code, which are not directly
rolled over or transferred to another eligible Qualified Plan, are subject to
a mandatory 20% withholding for federal income tax. The 20% withholding
requirement does not apply to: (a) distributions for the life or life
expectancy of the participant, or joint and last survivor expectancy of the
participant and a designated beneficiary; (b) distributions for a specified
period of ten years or more; or (c) distributions which are required as
minimum distributions.
ASSIGNMENTS
Any Assignment of all or any portion of the Contract Value before the
Annuity Date is treated as a distribution subject to taxation under the
distribution rules set forth above. Any gain in the Contract Value subsequent
to the assignment while such assignment remains in effect is treated as
income on the Contract in the year in which it is earned.
TAX-FREE EXCHANGES
Section 1035 of the Code provides that no gain or loss will be
recognized on the exchange of an annuity contract for an annuity contract.
This Section applies only if the annuity contracts exchanged relate to the
same owner. A variable annuity contract is included within the meaning of an
annuity contract under this section of the Code. An owner who makes a fully
tax-free exchange of annuity contracts has the same basis in the new annuity
contract as in the old annuity contract.
TRANSFERS BETWEEN INVESTMENT OPTIONS
Currently, transfers between investment options are not subject to
federal income taxation.
GENERATION-SKIPPING TRANSFERS
Under Section 2601 of the Code, certain taxes may be due when all or
part of an annuity is transferred to, or a death benefit is paid to, an
individual two or more generations younger than the owner. These taxes tend
to apply to transfers of significantly large dollar amounts. We may be
required to determine whether a transaction must be treated as a "direct
skip" as defined in the Code and the amount of the resulting tax. If
required, we will deduct from your Contract, or from any applicable payment
to be treated as a
23A
<PAGE>
direct skip, any amount we are required to pay as a result of the transaction.
DIVERSIFICATION
Section 817(h) of the Code imposes certain diversification standards on
the underlying assets of the Contracts. The Code provides that a Nonqualified
Plan variable annuity contract will not be treated as an annuity contract for
any period (and any subsequent period) for which the investments are not
adequately diversified in accordance with regulations prescribed by the
United States Treasury Department ("Treasury Department"). Disqualification
of the Contract as an annuity contract would result in imposition of federal
income tax to the Owner with respect to the income on the Contract prior to
the receipt of payments under the Contract. The Code contains a safe harbor
provision which provides that annuity contracts meet the diversification
requirements if, as of the end of each quarter, the underlying assets meet
diversification standards for a regulated investment company and no more than
55% of the total assets consist of cash, cash items, U.S. government
securities and securities of other regulated investment companies.
Treasury Regulation 1.817-5, which established diversification
requirements for the investment funds underlying variable contracts,
amplifies the diversification requirements for variable contracts set forth
in the Code and provides an alternative to the safe harbor provision
described above. Under the regulation, an investment fund will be deemed
adequately diversified if: (a) no more than 55% of the value of the total
assets of the fund is represented by any one investment; (b) no more than 70%
of the value of the total assets of the Fund is represented by any two
investments; (c) no more than 80% of the value of the total assets of the
Fund is represented by any three investments; and (d) no more than 90% of the
value of the total assets of the Fund is represented by any four investments.
This test must be met on the last day of each calendar quarter or within 30
days thereafter.
The Code provides that, for purposes of determining whether or not
diversification standards imposed on the underlying funds of variable
contracts by Section 817(h) of the Code have been met, each United States
government agency or instrumentality shall be treated as a separate issuer.
The Company intends that all Funds of the Trust underlying the
Contracts will be managed by their Adviser in such a manner as to comply with
these diversification requirements. The Advisers to the Scudder Fund and the
Alger Fund have advised us that they intend that those Funds also be so
managed.
CONTRACT OWNER CONTROL
The Treasury Department has indicated that it may issue guidelines
under which a variable annuity contract will not be treated as an annuity
contract for tax purposes if the owner of the Contract has excessive control
over the investment funds underlying the contract. 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.
The issuance of such guidelines may require the Company to impose limitations
on the Owner's right to control the investment. It is not known whether any
such guidelines would have a retroactive effect.
QUALIFIED PLANS
There are various types of Qualified Plans for which the Contract may
be suitable. Owners, Annuitants and Beneficiaries are cautioned that benefits
under a Qualified Plan may be subject to the terms and conditions of the
Qualified Plan, or of provisions of law applicable to Qualified Plans,
regardless of the terms and conditions of the Contracts issued pursuant to
the Qualified Plan. Set out below is a general description of the types of
Qualified Plans with which the Contracts may be used. Such descriptions are
not exhaustive and are for general informational purposes only. The tax rules
regarding Qualified Plans are very complex and will have different
applications, depending on individual facts and circumstances. Before
purchasing a Contract for use in funding a Qualified Plan, you should obtain
competent tax advice, both as to the tax treatment and suitability of such an
investment. Optional annuity benefits provided under an employer's Qualified
Plan may not, under Title VII of the Civil Rights Act of 1964, vary between
men and women. The Contracts sold by the Company in connection with employer
sponsored Qualified Plans will utilize annuity tables which do not
differentiate on the basis of sex.
TYPES OF QUALIFIED RETIREMENT PLANS
INDIVIDUAL RETIREMENT ANNUITY ("IRA")
Individuals who are eligible may maintain an IRA. Subject to
limitations, contribution of certain amounts up to $2,000 for an employed
individual may be deductible from gross income. Purchasers of IRAs are to
receive a special disclosure document, which describes in detail the
limitations on eligibility, contributions, transferability and distributions.
It also describes the conditions under which distributions from IRAs and
other Qualified Plans may be rolled over or transferred into an IRA on a
tax-deferred basis.
SIMPLIFIED EMPLOYEE PENSION-INDIVIDUAL RETIREMENT ANNUITY ("SEP-IRA")
A SEP-IRA is a type of tax-deductible retirement plan, available to
both incorporated and unincorporated businesses. Ease of administration, a
characteristic not normally associated with qualified retirement plans, sets
the SEP-IRA apart. The SEP-IRA also offers most of the same tax incentives
available through a traditional pension or profit-sharing plan. With a
SEP-IRA, each plan participant establishes an IRA. The
24A
<PAGE>
employer puts the plan into effect by completing IRS Form 5305-SEP and makes
tax-deductible payments to each participant's IRA. Currently, the maximum
SEP-IRA payment on behalf of any one employee in a calendar year is 15% of the
employee's compensation, or $22,500, whichever is less. The SEP-IRA is suited
for a small business because it is a simple, economical plan for both the
employer and employees.
SALARY REDUCTION SIMPLIFIED EMPLOYEE PENSION-INDIVIDUAL RETIREMENT ANNUITY
("SARSEP-IRA")
A SARSEP-IRA is a tax-deductible retirement plan designed to encourage
small companies and their employees to begin planning for their retirement.
It offers the same tax incentives available through a regular SEP-IRA plan,
pension and profit sharing plans. While SEP-IRA plans allow only employer
contributions, SARSEP-IRA plans also allow voluntary contributions by
employees through a salary reduction plan.
Beginning 1997, employers may no longer establish a new SARSEP-IRA.
However, under pre-1997 rules, employers may continue to make contributions
to SARSEP-IRAs established before 1997, and SARSEP-IRAs may continue to
invest their funds with USAA Life, including the transfer of existing
SARSEP-IRA funds to USAA Life. In addition, employees hired after December
31, 1996 may participate in SARSEP-IRAs established by their employers before
1997, if otherwise eligible under existing SARSEP-IRA rules.
SIMPLE RETIREMENT ACCOUNTS
Employees and employers may establish an IRA plan known as a simple
retirement account ("SRA"), if certain requirements are met. Under an SRA,
the employer contributes elective employee compensation deferrals up to a
maximum of $6,000 a year. The employer must, in general, make a fully vested
matching contribution for employee deferrals up to 3% of compensation.
TAX-SHELTERED ANNUITY ("TSA")
Section 403(b) of the Code permits the purchase of TSAs by employees of
public schools and certain charitable, educational and scientific
organizations described in Section 501(c)(3) of the Code. These qualifying
employers may make contributions to the Contracts for the benefit of their
employees. Such contributions are not includible in the gross income of the
employee until the employee receives distributions from the Contract. The
amount of contributions to the TSA is limited to certain maximums imposed by
the Code. Furthermore, the Code sets forth additional restrictions governing
such items as transferability, distributions, non-discrimination and
withdrawals. (Information about taking a loan against a TSA Contract is
described in detail in the SAI.)
Distributions of amounts contributed to a TSA contract are restricted.
The restrictions apply to amounts accumulated after December 31, 1988
(including voluntary contributions after that date and earnings on prior and
current voluntary contributions). These restrictions require that no
distributions will be permitted prior to one of the following events: (1)
attainment of age 59 1/2, (2) separation from service, (3) death, (4)
disability, or (5) hardship (hardship distributions will be limited to the
amount of salary reduction contributions exclusive of earnings thereon).
TEXAS OPTIONAL RETIREMENT PROGRAM ("ORP")
The ORP is a deferred contribution plan available to certain employees
of Texas institutions of higher education. An ORP is an individualized plan
in which each participant selects investments through various companies
offering a variety of investment products such as annuity contracts and
mutual fund investments. Since participants manage their own personal
investment accounts, ORP entails more individual risks and responsibility
than other Qualified Plans. Benefits are a direct result of the amounts
contributed and the return on investments made by each participant. Upon
termination from Texas public higher education employment, ORP participants who
have more than one year of participation in the ORP retain control over all
investments, both employee and employer contributions. In the case of
participants with one year or less of participation in the ORP, employer
contributions must be returned to the institution. THEREFORE, DURING YOUR FIRST
YEAR OF PARTICIPATION IN THE ORP, YOUR EMPLOYER'S CONTRIBUTIONS WILL BE INVESTED
IN THE FIXED FUND ACCOUNT. AFTER THE FIRST YEAR, EMPLOYER CONTRIBUTIONS CAN BE
MAINTAINED IN THE FIXED FUND ACCOUNT OR TRANSFERRED TO ANY OF THE VARIABLE
ANNUITY FUND ACCOUNTS, SUBJECT TO OUR GENERALLY APPLICABLE RULES FOR TRANSFERS.
Certain redemption restrictions apply to Contracts issued under the
ORP. With respect to Contracts issued under the ORP, state law provides that
withdrawal benefits are available only if the participant obtains the age of
70 1/2 years or terminates participation in the ORP because of death,
retirement, including disability retirement, or terminating employment in all
public institutions of higher learning in Texas. Under Texas law a
participant may not transfer ownership of an ORP plan unless under a
qualified domestic relations order issued by a court having appropriate
jurisdiction. The value of such Contracts may, however, be transferred to
other Contracts or other carriers during participation in these retirement
programs, subject to any charges that would apply in the case of any other
surrender of the Contract. Appropriate disclosure regarding the restrictions
on redemption imposed by the ORP will also be found in sales materials
accompanying this Prospectus. On the Application, there will be a statement
you will be required to sign acknowledging that you have read the
restrictions on redemption imposed by the ORP.
ALL QUALIFIED PLANS REFERENCED IN THIS PROSPECTUS INCLUDE SPECIAL
PROVISIONS CHANGING OR RESTRICTING CERTAIN RIGHTS AND BENEFITS OTHERWISE
AVAILABLE TO NONQUALIFIED PLANS FUNDED BY THE CONTRACT. YOU SHOULD CAREFULLY
READ YOUR CONTRACT, RIDERS AND ENDORSEMENTS TO REVIEW ANY
25A
<PAGE>
SUCH CHANGES OR LIMITATIONS. ADDITIONAL CHANGES AND LIMITATIONS MAY APPEAR IN
ANY OTHER QUALIFIED PLAN DOCUMENTS OR IN LAWS OR REGULATIONS APPLICABLE TO
QUALIFIED PLANS. THE CHANGES AND LIMITATIONS MAY INCLUDE: RESTRICTIONS ON
OWNERSHIP, TRANSFERABILITY, ASSIGNABILITY, CONTRIBUTIONS, DISTRIBUTIONS, AS WELL
AS REDUCTIONS TO THE MINIMUM ALLOWABLE PREMIUM PAYMENT FOR AN ANNUITY CONTRACT
AND ANY SUBSEQUENT ANNUITY YOU MAY PURCHASE FOR USE AS A QUALIFIED PLAN.
ADDITIONALLY, VARIOUS PENALTY AND EXCISE TAXES MAY APPLY TO CONTRIBUTIONS OR
DISTRIBUTIONS MADE IN VIOLATION OF APPLICABLE LIMITATIONS.
LEGAL PROCEEDINGS
As of the date of this Prospectus, there are no legal proceedings to
which the Company, the Separate Account or the Distributor is a party except
for routine litigation which the Company does not believe is relevant to the
Contracts offered by this Prospectus.
ANNUAL STATEMENTS AND REPORTS
At least once each Contract Year, we will send you a statement for the
Contract, which will provide you with information concerning your Contract
Value. It will include information concerning the number of Accumulation
Units credited to your Contract for each Variable Annuity Fund Account and
the dollar value of the Accumulation Units, as of a date not more than two
months prior to the date of mailing of the statement. We may, at our
discretion, send you a statement more frequently. As required by federal and
state law, we will also send you semi-annual reports for the Funds that
correspond to the Variable Annuity Fund Accounts, semi-annual reports for the
Separate Account, and any other information.
ADMINISTRATION OF THE CONTRACTS
While the Company has overall responsibility for administration of the
Contracts, it has retained the services of Alliance - One Services, L.P.,
formerly known as Continuum Administrative Services Corporation (referred to
throughout this Prospectus as our "Service Office"), pursuant to a Third Party
Administration Agreement (the "TPA Agreement"). Such administrative services
include issuance of the Contracts and maintenance of the required Owner's
records. The Company pays all fees or charges incurred by the Service Office.
The Service Office serves as a Third Party Administrator to various insurance
companies offering both variable and fixed annuities and insurance contracts.
The Company's ability to administer the Contracts could be affected temporarily
should the Service Office elect to terminate the TPA Agreement.
TELEPHONE TRANSACTIONS
Requests to change premium payment allocation, requests for
withdrawals, and requests for transfers between Accounts may be made by
Telephone Request. 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. Information will be obtained prior to any discussion regarding
the Contract including: (1) USAA number or Contract number, (2) the name of
the Owner, and (3) social security number of the Owner. If you are sending a
Telephone Request by facsimile, telegraph, or other electronic transmission
device, please include such identification information on such request. In
addition, all telephone communications with an Owner which concern purchases,
redemptions or transfers are recorded, and confirmations of all transactions
are sent to the Owner's address. We may modify, suspend or discontinue this
telephone transaction privilege at any time without prior notice. The number
for telephone transactions is 1-800-531-4265. In times of heavy usage you may
have difficulty making a Telephone Request. You may assure your transaction
by submitting a Written Request. All Written Requests will be processed on the
Date of Receipt.
OWNER INQUIRIES
Inquiries concerning your Contract should be addressed to USAA Life at
our Service Office, 301 W. 11th Street, Kansas City, Missouri 64105, or made
by calling 1-800-531-4265.
PERFORMANCE INFORMATION
YIELD AND TOTAL RETURN
From time to time, the Separate Account may advertise the yields and
total returns of its Variable Annuity Fund Accounts. These figures will be
based on historical results and are not intended to indicate future
performance. The "yield" of a Variable Annuity Fund Account refers to the
income generated by an investment in the Variable Annuity Fund Account over
the period specified in the advertisement, excluding realized and unrealized
capital gains and losses in the corresponding Fund's investments. This income
is then "annualized" and shown as a percentage of the investment. The
Separate Account also may advertise the "effective yield" of the USAA Life
Variable Annuity Money Market Fund Account, which is calculated similarly
but, when annualized, the income earned by an investment in the Variable
Annuity Fund Account is assumed to be reinvested. The "effective yield" will
be slightly higher than the "yield" because of the compounding effect of this
assumed reinvestment.
The "total return" of a Variable Annuity Fund Account is the total change
in value of an investment in the Variable Annuity Fund Account over a period of
time specified in the advertisement. "Average annual total return" is the rate
of return that would produce that change in value over the specified period, if
compounded annually. "Cumulative
26A
<PAGE>
total return" is the total return over the entire specified period, expressed as
a percentage.
Neither yield nor total return figures reflect deductions for premium
taxes, since most states do not impose such taxes.
PERFORMANCE COMPARISONS
The Separate Account's performance reported from time to time in
advertisements and sales literature may be compared to generally accepted
indices or analysis such as those provided by Lipper Analytical Services,
Inc., Standard & Poor's Corporation and Dow Jones. Performance ratings
reported periodically in financial publications such as Money Magazine,
Forbes, Business Week, Fortune, Financial Planning and The Wall Street
Journal may also be used. For more information, see the Statement of
Additional Information.
VARIABLE ANNUITY FUND ACCOUNT PERFORMANCE
The investment performance information for each Variable Annuity Fund
Account will generally reflect the investment performance of the
corresponding Fund. Table I below shows the average annual total return of
each Variable Annuity Fund Account (other than the USAA Life VA Aggressive
Growth and VA International Fund Accounts) for the fiscal year ended December
31, 1996 and for the period from February 6, 1995 (commencement of
operations) through December 31, 1995. The average annual total return
figures are computed in accordance with a formula prescribed by the SEC.
Table II shows the cumulative total returns of each Variable Annuity Fund
Account for the periods indicated.
Tables III and IV below show hypothetical performance information for
the Scudder VLIF Capital Growth Variable Annuity Fund Account and the Alger
American Growth Variable Annuity Fund Account that is based on the actual
historical performance of the corresponding Fund in which each Variable
Annuity Fund Account invests. This information reflects all actual charges
and deductions of these Funds and all Separate Account charges and deductions
that hypothetically would have been made had the Separate Account been
invested in these Funds for all of the periods indicated. Comparable
hypothetical performance information for the USAALife Variable Annuity Fund
Accounts, is not shown because the corresponding Funds in which they invest
did not commence operations until 1995.
Performance information for the USAA Life Variable Annuity Aggressive
Growth and International Fund Accounts (the "new Accounts"), which commenced
operations on May 1, 1997, is not available. The corresponding Trust Funds in
which the new Accounts invest (the "new Funds") also commenced operations on
that date and have no performance history. However, you may wish to refer to
the Trust's Prospectus, which contains, for illustrative purposes,
performance information for mutual funds that the new Fund's Adviser manages
in a substantially similar manner.
EFFECT OF TAX-DEFERRED ACCUMULATIONS
Unlike taxable investments, contributions to tax-favored Qualified
Plans and Nonqualified Plan Contracts provide tax-deferred treatment on
earnings. In addition, contributions to tax-favored Qualified Plans
ordinarily are not subject to income tax until withdrawn. As shown in the chart
below, investing in a tax-favored program increases the accumulation power of
savings over time. The more taxes saved and reinvested in the program, the more
the accumulation power effectively grows over the years. The light green lines
in the charts below represent the lump-sum withdrawal remaining after payment of
federal income taxes.
To further illustrate the advantages of tax-deferred savings using a
28% federal tax bracket, an annual fixed yield (before the deduction of any
fees or charges) of 10% under a tax-favored Qualified Plan in which tax
savings were reinvested has an equivalent annual fixed yield of 13.9% under a
conventional savings program. The 10% yield on the tax-favored Qualified
Plans would be reduced by the assumed impact of income taxes upon withdrawal.
The amount of this reduction in yield will vary depending upon the timing
of withdrawals. The first chart below shows the actual after-tax amounts
that would be received upon full withdrawal at the end of the periods shown.
As indicated above, contributions to tax-favored Qualified Plans are
not subject to federal income tax unless and until withdrawn. Accumulation
under tax-favored Qualified Plans are generally not required to be withdrawn
until age 70 1/2. There may be restrictions on withdrawals of certain types of
contributions until age 59 1/2, separation from service, death, disability or
hardship. Withdrawals before age 59 1/2 generally are subject to a 10% penalty
tax in addition to regular income tax, but withdrawals may be eligible for
total or partial rollover to an IRA or another retirement program.
By taking into account the current deferral of taxes, these
contributions to tax-favored Qualified Plans increase the amount available
for savings by decreasing the relative current out-of-pocket cost of the
investment.
27A
<PAGE>
<TABLE>
<CAPTION>
VARIABLE ANNUITY FUND ACCOUNT PERFORMANCE TABLE I
AVERAGE ANNUAL TOTAL RETURN (THROUGH DECEMBER 31, 1996)
YEAR ENDED
NAME OF VARIABLE ANNUITY FUND ACCOUNT SINCE INCEPTION* DECEMBER 31, 1996
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
USAA Life Variable Annuity Money Market Fund Account 4.17% 3.85%
USAA Life Variable Annuity Income Fund Account 8.91% -0.70%
USAA Life Variable Annuity Growth and Income Fund Account 25.40% 22.50%
USAA Life Variable Annuity World Growth Fund Account 20.57% 19.64%
USAA Life Variable Annuity Diversified Assets Fund Account 18.49% 12.90%
Scudder VLIF Capital Growth Portfolio Fund Account 23.10% 18.58%
Alger American Growth Portfolio Fund Account 22.14% 11.89%
TABLE II
CUMULATIVE TOTAL RETURN (THROUGH DECEMBER 31, 1996)
YEAR ENDED
NAME OF VARIABLE ANNUITY FUND ACCOUNT SINCE INCEPTION* DECEMBER 31, 1996
- --------------------------------------------------------------------------------------------------------------------
USAA Life Variable Annuity Money Market Fund Account 8.08% 3.85%
USAA Life Variable Annuity Income Fund Account 17.66% -0.70%
USAA Life Variable Annuity Growth and Income Fund Account 54.10% 22.50%
USAA Life Variable Annuity World Growth Fund Account 42.93% 19.64%
USAA Life Variable Annuity Diversified Assets Fund Account 38.23% 12.90%
Scudder VLIF Capital Growth Portfolio Fund Account 48.74% 18.58%
Alger American Growth Portfolio Fund Account 46.52% 11.89%
</TABLE>
* Sales of the Variable Annuity commenced February 6, 1995.
HYPOTHETICAL PERFORMANCE
Based on Historical Fund Performance
The performance information shown below is based on the actual performance of
the Scudder VLIF Capital Growth Portfolio Class A Shares and the Alger
American Growth Portfolio, which were in existence prior to the date the
Separate Account commenced operations.
<TABLE>
<CAPTION>
TABLE III
AVERAGE ANNUAL TOTAL RETURN (THROUGH DECEMBER 31, 1996)
SINCE 10 YEARS ENDED 5 YEARS ENDED 1 YEAR ENDED
NAME OF VARIABLE ANNUITY FUND ACCOUNT INCEPTION* 12/31/96 12/31/96 12/31/96
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Scudder VLIF Capital Growth Portfolio Fund Account 12.98% 11.79% 11.16% 18.87%
Alger American Growth Portfolio Fund Account 17.39% _ 15.37% 12.09%
TABLE IV
CUMULATIVE TOTAL RETURN (THROUGH DECEMBER 31, 1996)
SINCE 10 YEARS ENDED 5 YEARS ENDED 1 YEAR ENDED
NAME OF VARIABLE ANNUITY FUND ACCOUNT INCEPTION* 12/31/96 12/31/96 12/31/96
- ------------------------------------------------------------------------------------------------------------------------------
Scudder VLIF Capital Growth Portfolio Fund Account 304.90% 204.31% 69.72% 18.87%
Alger American Growth Portfolio Fund Account 259.20% _ 104.39% 12.09%
</TABLE>
* The inception dates of the corresponding Funds used for purposes of this
illustration were as follows:
Scudder VLIF Capital Growth Portfolio July 16, 1985
Alger American Growth Portfolio January 9, 1989
28A
<PAGE>
EFFECT OF TAX-DEFERRED ACCUMULATIONS
The charts below compare accumulations attributable to premium payments to (1)
Contracts purchased with pre-tax dollars under a tax-favored Qualified Plan and
(2) Nonqualified Contracts purchased with after-tax dollars to Taxable
investments. Variable Annuity values shown in both tables reflect the deduction
of all Contract charges (mortality and expense risk, administrative expense and
annual maintenance). The taxable investment values do not reflect the deduction
of any charges, which, if applied, would lower the values shown. These examples
assume that no money was allocated to the Fixed Fund Account, and, therefore, do
not reflect any Fixed Fund Account withdrawal charges that may apply.
QUALIFIED VARIABLE ANNUITY
[GRAPH APPEARS HERE]
This hypothetical chart compares the results of investing an initial pre-tax
premium of $2,000 and additional pre-tax contributions of $2,000 each year
thereafter during the Accumulation Period. It also assumes a 28% tax rate and
a 10% rate of return and reflects the deduction of fees and charges under
Qualified Plan Contracts. However, because premium payments to a taxable
investment are first taxed at a rate of 28%, each $2,000 premium payment is
reduced to $1,440. An additional 10% tax penalty may apply to withdrawals
before age 59 1/2.
NONQUALIFIED VARIABLE ANNUITY
[GRAPH APPEARS HERE]
This hypothetical chart compares the results of investing an initial
after-tax premium of $5,000 and additional after-tax contributions of $400
made at the beginning of each month during the Accumulation Period. It also
assumes a 28% tax rate and a 10% rate of return and reflects the deduction of
fees and charges under Nonqualified Plan Contracts. An additional 10% tax
penalty may apply to withdrawals before age 59 1/2.
29A
<PAGE>
CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
A Statement of Additional Information (the "SAI"), dated May 1, 1997, is
incorporated by reference into this Prospectus and will be provided on request
and without charge.
FOR A COPY CALL 1-800-531-4440 OR WRITE THE COMPANY AT:
USAA Life Insurance Company
9800 Fredericksburg Road
San Antonio, Texas 78288
THE FOLLOWING ARE THE CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION:
GENERAL INFORMATION
DISTRIBUTOR
SAFEKEEPING OF THE ASSETS OF THE SEPARATE ACCOUNT
REGULATION AND RESERVES
SERVICES
TAX-SHELTERED ANNUITY LOANS
INDEPENDENT AUDITORS
LEGAL MATTERS
CALCULATION OF PERFORMANCE INFORMATION
Money Market Variable Fund Account
Other Variable Fund Accounts
ANNUITY PAYMENTS
Gender of Annuitant
Misstatement of Age or Sex and Other Errors
Annuity Unit Value
FINANCIAL STATEMENTS
30A
<PAGE>
VARIABLE ANNUITY
FLEXIBLE PREMIUM DEFERRED COMBINATION
FIXED AND VARIABLE ANNUITY CONTRACT
OFFERED BY: STATEMENT OF ADDITIONAL
INFORMATION
USAA LIFE INSURANCE COMPANY
9800 FREDERICKSBURG ROAD Dated May 1, 1997
SAN ANTONIO, TEXAS 78288
This Statement of Additional Information ("SAI") is not a prospectus, but
should be read in conjunction with the Prospectus, dated May 1, 1997 for the
Separate Account of USAA Life Insurance Company ("USAA Life"). Capitalized terms
used in this SAI that are not otherwise defined herein have the same meanings
given to them in the Prospectus. A copy of the Prospectus may be obtained by
writing USAA Life at the address above, or by calling 1-800-531-4440.
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
GENERAL INFORMATION...................................... 3
DISTRIBUTOR.............................................. 3
SAFEKEEPING OF THE ASSETS OF THE SEPARATE ACCOUNT........ 3
REGULATION AND RESERVES.................................. 3
SERVICES................................................. 4
TAX SHELTERED ANNUITY LOANS.............................. 4
INDEPENDENT AUDITORS..................................... 6
LEGAL MATTERS............................................ 6
CALCULATION OF PERFORMANCE INFORMATION................... 6
USAA Life Variable Annuity Money Market Fund Account.. 6
Other Variable Annuity Fund Accounts.................. 7
ANNUITY PAYMENTS......................................... 8
Gender of Annuitant................................... 8
Misstatement of Age or Sex and Other Errors........... 8
Annuity Unit Value.................................... 8
FINANCIAL STATEMENTS..................................... 10
</TABLE>
2
<PAGE>
GENERAL INFORMATION
USAA Life is a stock insurance company incorporated in the State of Texas in
1963. USAA Life is principally engaged in writing life insurance policies,
fixed annuity contracts and health insurance policies. USAA Life is authorized
to transact insurance business in all 50 states of the United States and the
District of Columbia. USAA Life is a wholly-owned stock subsidiary of the
United Services Automobile Association ("USAA"), the parent company of the USAA
Group of Companies.
DISTRIBUTOR
The Contracts are primarily sold in a continuous offering by direct response
through salaried sales account representatives employed by USAA Life. These
individuals are appropriately licensed at the state level to sell variable
annuity contracts and are registered with the National Association of Securities
Dealers, Inc. (the "NASD") as registered representatives or principals with USAA
Investment Management Company ("USAA IMCO"). USAA IMCO, an affiliate of USAA
Life, is registered as a broker-dealer with the SEC and the NASD.
SAFEKEEPING OF THE ASSETS OF THE SEPARATE ACCOUNT
All assets of the Separate Account are held in the custody and safekeeping of
USAA Life. The assets are kept physically segregated and held separate and
apart from the assets of USAA Life's General Account. USAA Life maintains
records of all purchases and redemptions of shares of the Funds by each of the
Variable Annuity Fund Accounts.
REGULATION AND RESERVES
USAA Life is subject to regulation by the Texas Department of Insurance and by
insurance departments of other states and jurisdictions in which it is licensed
to do business. This regulation covers a variety of areas, including benefit
reserve requirements, adequacy of insurance company capital and surplus, various
operational standards, and accounting and financial reporting procedures. USAA
Life's operations and accounts are subject to periodic examination by insurance
regulatory authorities. The Contracts described in the Prospectus are filed
with and (where required) approved by insurance officials in each state and
jurisdiction in which Contracts are sold.
Although the federal government generally has not directly regulated the
business of insurance, federal initiatives often have an impact on the insurance
business in a variety of ways. Federal measures that may adversely affect the
insurance business include employee benefit regulation, tax law changes
affecting the taxation of insurance companies or of insurance products, changes
in the relative desirability of various personal investment vehicles, and
removal of impediments on the entry of banking institutions into the insurance
business. Also, both the executive and legislative branches of the federal
government periodically have under consideration various insurance regulatory
matters, that could ultimately result in direct federal regulation of some
aspects of the insurance business. It is not possible to predict whether this
will occur or, if so, what the effect on USAA Life would be.
3
<PAGE>
Pursuant to state insurance laws and regulations, USAA Life is obligated to
carry on its books, as liabilities, reserves to meet its obligations under
outstanding insurance contracts. These reserves are based on assumptions about,
among other things, future claims experience and investment returns. Neither
the reserve requirements nor the other aspects of state insurance regulation
provide absolute protection to holders of insurance contracts, including the
Contracts, if USAA Life were to incur claims or expenses at rates significantly
higher than expected, or significant unexpected losses on its investments.
SERVICES
USAA Life has entered into a Third Party Administrator Agreement with
Alliance-One Services, L.P. ("ALLIANCE"), formerly known as Continuum
Administrative Services Corporation, pursuant to which ALLIANCE will provide
certain services in connection with the Separate Account including, among other
things, application and premium processing, issuance of the Contracts, and
recordkeeping. ALLIANCE has developed a computerized recordkeeping system for
annuity accounting and has the necessary data processing equipment and personnel
to provide and support remote terminal access to its system for the maintenance
of annuity records, processing information, and the generation of output with
respect to the records and information. USAA Life paid ALLIANCE $1,761,832 for
services rendered for the period from February 6, 1995 (commencement of
Separate Account operations) through December 31, 1996, of which $1,153,791 was
attributable to developmental costs. USAA Life has entered into a Service
Agreement with USAA Transfer Agency Company d/b/a USAA Shareholder Account
Services ("USAA SAS"), pursuant to which USAA SAS will receive and forward to
USAA Life applications and premium payments for certain Tax Sheltered Annuity
Contracts.
TAX SHELTERED ANNUITY LOANS
Loans are not currently available under the Contract. USAA Life may in the
future, at its discretion, permit loans in connection with Contracts that fund
section 403(b) Tax Sheltered Annuities ("TSAs"). Any such loans must conform to
the requirements mandated by Section 72(p) of the Internal Revenue Code. If you
borrow against the Fixed Fund Account and/or Variable Annuity Fund Account(s),
the portion equal to the loan amount will be transferred from the particular
Account(s) to a "Loan Collateral Account." The "Loan Collateral Account" is part
of the Company's general assets and liabilities.
Loans are not available on TSA Contracts where the TSA plan is subject to the
Title I of the Employee Retirement Income Security Act (ERISA). Also, loans are
not permitted when the Systematic Withdrawal Program has been elected or when
the Contract has been annuitized. If you have taken a loan in the past which is
still outstanding, limits for any subsequent loans will be reduced by the amount
of the outstanding loan plus accrued interest. Any renegotiation of an existing
loan becomes a new loan for tax purposes.
The amount of the loan you may obtain depends upon your Contract Value as
shown below. The maximum loan amount may not exceed an aggregate of $50,000 on
all TSA accounts. The minimum loan amount is $2,500.
CONTRACT VALUE MAXIMUM LOAN AMOUNT
-------------- -------------------
$0 - $99,999 50% of Account Balance*
$100,000 or more $50,000*
- -----------
/*/ Internal Revenue Code requirements may be subject to change.
4
<PAGE>
Only one TSA loan may be requested in any twelve month period. A TSA loan
must be repaid within a maximum of five years. Because the amount of the loan
may be removed from both the Fixed Fund Account and/or Variable Annuity Fund
Account(s), a loan will have a permanent effect on the Contract Value. The
longer the loan is outstanding the greater the effect is likely to be.
The loan must be repaid on a monthly schedule amortized over the term of the
loan. The loan may be prepaid in full or in part at any time. Loan payments
will be due as agreed upon at the time of the loan approval. An amount equal to
the amount of loan repayment will be transferred from the Loan Collateral
Account to the Fixed Fund Account and the Variable Annuity Fund Account(s) in
the same proportion as purchase payments are currently allocated, unless the
Owner requests otherwise.
The entire loan balance must be repaid before a withdrawal from the Contract
or before annuitization begins. If the loan is repaid in full before the end of
the loan term, loan interest due will be prorated and an appropriate credit will
be provided. Upon the death of the Owner, the death benefit will be reduced by
the outstanding loan balance and loan interest.
A TSA loan is not a taxable distribution if the loan does not exceed the
maximum limitations and repayment does not become overdue. If a default in loan
repayment occurs, USAA Life Insurance Company may declare the entire outstanding
loan balance, plus interest plus any Fixed Fund Account Withdrawal Charge stated
in the Contract also immediately due and payable. Please note that a default as
to any installment payment under your loan amortization schedule may have
adverse tax consequences possibly subjecting you to tax on the defaulted payment
or possibly the entire value of the amount of the loan, plus payment of the 10%
distribution penalty if prior to age 591/2. Such a distribution will include any
applicable federal income tax withholding and state taxes, if any. We recommend
that you consult with a professional advisor regarding your particular tax
situation.
Before a loan can be made under a TSA Contract, a properly completed Written
Request and Loan Agreement must be signed. A Loan Agreement can be obtained by
calling our toll free number 1-800-531-4265 and requesting a copy from a
representative at our Service Office.
5
<PAGE>
INDEPENDENT AUDITORS
The audited financial statements of the Separate Account included in its
Annual Report and the audited consolidated financial statements and schedules of
USAA Life Insurance Company and its subsidiary as of December 31, 1996 and 1995
and for each of the years in the three-year period ended December 31, 1996 have
been included in the registration statement in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, through their
offices located at 112 East Pecan, Suite 2400, San Antonio, Texas 78205, and
upon the authority of said firm as experts in accounting and auditing.
LEGAL MATTERS
The legal validity of the Contracts has been passed upon by Richard T.
Halinski, Jr., Esq., of the legal department of USAA Life. Freedman, Levy,
Kroll & Simonds, Washington D.C., has advised USAA Life on certain federal
securities law matters.
CALCULATION OF PERFORMANCE INFORMATION
From time to time, the Separate Account may include in advertisements, sales
literature, and reports to contract owners or prospective investors information
relating to the performance of its Variable Annuity Fund Accounts. The
performance information that may be presented is not an estimate or guarantee of
future investment performance and does not represent the actual experience of
amounts invested by a particular Owner. Set out below is a description of the
standardized and non-standardized methods used in calculating the performance
information for the Variable Annuity Fund Accounts. All standardized performance
quotations will reflect the deduction of the Mortality and Expense Risk Charge,
the Administrative Expense Charge and the Contract Maintenance Charge, based on
an estimated average Contract size of $26,680 and Fund operating expenses (net
of reimbursements), but will not reflect charges for any state premium taxes.
The Contracts are not subject to a charge for withdrawals from any Variable
Annuity Fund Account.
USAA LIFE VARIABLE ANNUITY MONEY MARKET FUND ACCOUNT
YIELD and EFFECTIVE YIELD quotations for the USAA Life Variable Annuity Money
Market Fund Account are computed in accordance with standard methods prescribed
by the SEC. Under these methods, the USAA Life Variable Annuity Money Market
Fund Account's yield is calculated based on a hypothetical Contract having a
beginning balance of one Accumulation Unit in the USAA Life Variable Annuity
Money Market Fund Account for a specified seven-day period. Yield is determined
by dividing the net change in the Accumulation Unit Value during the seven-day
period, reduced by the estimated daily equivalent of the Contract Maintenance
Charge, by its beginning value to obtain the base period return, then
multiplying the base period return by the fraction 365/7. The net change in
Accumulation Unit Value will reflect the value of additional shares purchased
with the dividends paid by the Trust, but will not reflect any realized capital
gains or losses or unrealized appreciation or depreciation in the assets of the
Variable Annuity Fund Account.
The effective yield of the USAA Life Variable Annuity Money Market Fund
Account reflects the effects of compounding, and is computed according to the
following formula prescribed by the SEC:
365/7
Effective Yield = [(Base Period Return + 1)-----] - 1
For the seven day period ended December 31, 1996, the current yield of the
USAA Life Variable Annuity Money Market Fund Account WAS 3.98%.
6
<PAGE>
OTHER VARIABLE ANNUITY FUND ACCOUNTS
Each Variable Annuity Fund Account may state its TOTAL RETURN or YIELD in
sales literature and advertisements. Any statements of total return, yield, or
other performance data of a Variable Annuity Fund Account, other than yield
quotations of the USAA Life Money Market Variable Annuity Fund Account, will be
accompanied by information on that Variable Annuity Fund Account's standardized
average annual total return for the most recent 1, 5, or 10 year periods or, if
less, the period from the Variable Annuity Fund Account's inception of
operation.
AVERAGE ANNUAL TOTAL RETURN. Standardized average annual total return is
computed according to the following formula prescribed by the SEC, based on a
hypothetical $1,000 Contract Value:
n
P (1 + T) = ERV
Where:
P = A hypothetical initial premium payment of $1,000.
T = Average annual total return.
n = Number of years.
ERV = Ending redeemable value of a hypothetical $1,000 Contract Value at the
end of the period.
Non-standardized average annual total return is computed in a similar manner,
except that different time periods and hypothetical initial payments may be
used, and certain charges may not be reflected.
CUMULATIVE TOTAL RETURN. Cumulative total return is calculated in a manner
similar to standardized average annual total return, except that the results are
not annualized. The SEC has not prescribed a standard formula for calculating
cumulative total return. Cumulative total return is calculated by finding the
cumulative rates of return of a hypothetical initial investment of $1,000 over
various periods, according to the following formula, and then expressing that as
a percentage:
C = (ERV/P) - 1
Where:
P = A hypothetical initial payment of $1,000.
C = Cumulative total return.
ERV= Ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the applicable period.
The standardized average annual and cumulative total returns for each Variable
Annuity Fund Account for periods ended December 31, 1996 were as follows:
<TABLE>
<CAPTION>
STANDARDIZED AVERAGE ANNUAL TOTAL RETURN CUMULATIVE TOTAL RETURN
---------------------------------------- --------------------------
VARIABLE ANNUITY FUND ACCOUNT SINCE INCEPTION* ONE YEAR SINCE INCEPTION* ONE YEAR
- ---------------------------- ----------------- --------- ----------------- --------
<S> <C> <C> <C> <C>
USAA Life VA Money Market Fund Account 4.17% 3.85% 8.08% 3.85%
USAA Life VA Income Fund Account 8.91% -0.70% 17.66% -.70%
USAA Life VA Growth and Income Fund Account 25.40% 22.50% 54.10% 22.50%
USAA Life VA World Growth Fund Account 20.57% 19.64% 42.93% 19.64%
USAA Life VA Diversified Assets Fund Account 18.49% 12.90% 38.23% 12.90%
Scudder VLIF Capital Growth Portfolio 23.10% 18.58% 48.74% 18.58%
Alger American Fund Growth Portfolio 22.14% 11.89% 46.52% 11.89%
</TABLE>
* Separate account commenced operations February 6, 1995.
7
<PAGE>
30-DAY YIELD. Each Variable Annuity Fund Account, other than the USAA Life
Variable Annuity Money Market Fund Account, may also advertise its yield based
on a specified 30-day period. Yield is determined by dividing the net
investment income per Accumulation Unit earned during the 30-day period by the
Accumulation Unit Value on the last day of the period and annualizing the
resulting figure, according to the following formula prescribed by the SEC,
which assumes a semi-annual reinvestment of income:
6
[(a-b ) ]
YIELD = 2 [(--- +1) -1]
[(cd ) ]
Where:
a = Net investment income earned during the period by the Fund whose shares
are owned by the Variable Annuity Fund Account.
b = Expenses accrued for the period.
c = The average daily number of Accumulation Units outstanding during the
period.
d = The maximum offering price per Accumulation Unit on the last day of the
period.
ANNUITY PAYMENTS
GENDER OF ANNUITANT
When annuity payments are based on life expectancy, the amount of each annuity
payment ordinarily will be higher if the Annuitant or other measuring life is a
male, as compared with a female under an otherwise identical Contract, because,
statistically, females tend to have longer life expectancies than males.
However, there will be no differences between males and females in any
jurisdiction, including Montana, where such differences are not permitted. We
may also make available Contracts with no such differences in connection with
certain employer-sponsored benefit plans. Employers should be aware that under
most such plans, Contracts that make distinctions based on gender are prohibited
by law.
MISSTATEMENT OF AGE OR SEX AND OTHER ERRORS
If the age or sex of an Annuitant has been misstated to us, any amount payable
will be that which the premium payments paid would have purchased at the correct
age and sex. If we made any overpayments because of incorrect information about
age or sex, or any error or miscalculation, we will deduct the overpayment from
the next payment or payments due. We will add any underpayments to the next
payment. The amount of any adjustment will be credited or charged with interest
at the effective annual rate of 3% per year.
ANNUITY UNIT VALUE
Annuity Unit Value is calculated at the same time that Accumulation Unit Value
is calculated and is based on the same values for shares of the Funds. The
following illustrations show, by use of hypothetical examples, the methods of
determining the Annuity Unit Value and the amount of Variable Annuity Payments.
8
<PAGE>
Illustration of Calculation of Annuity Unit Value
<TABLE>
<CAPTION>
Annuity at age 65: Life with 120 payments certain:
<S> <C>........................................................................ <C>
1. Annuity Unit Value, beginning of period.................................... $ .980000
2. Assume Net Investment Factor for period equal to........................... 1.001046
3. Daily adjustment for 3.0% Assumed Investment Rate.......................... .999919
4. (2) x (3).................................................................. 1.000965
5. Annuity Unit Value, end of period.......................................... $ .980946
(1) x (4)
Illustration of Annuity Payments
Annuity at age 65: Life with 120 payments certain:
1. Number of Accumulation Units at Annuity Date.............................. 10,000.00
2. Assume Accumulation Unit Value (as of the end of the Valuation Period
immediately prior to the tenth day before the first monthly payment)
equal to.................................................................. 1.800000
3. Contract Value (1) x (2).................................................. $18,000.00
4. First monthly annuity payment per $1,000 of Contract Value................ $ 5.48
5. First monthly annuity payment (3) x (4) /$ 1,000.......................... $ 98.64
6. Annuity Unit Value (as of the end of the Valuation Period immediately
prior to the tenth day before the first month payment).................... $ .980000
7. Number of Annuity Units (5) / (6)......................................... 100.653
8. Assume Annuity Unit Value for second month equal to....................... $ .997000
9. Second monthly annuity payment (7) x (8).................................. $ 100.35
10. Assume annuity unit value for third month equal to........................ $ .953000
11. Third monthly annuity payment (7) x (10).................................. $ 95.92
</TABLE>
9
<PAGE>
FINANCIAL STATEMENTS
The financial statements for the Company as of December 31, 1996 and 1995, and
for each of the years in the three year period ended December 31, 1996, and the
accompanying Report of Independent Auditors are set out below. The financial
statements for the Company included herein should be considered only as bearing
upon the ability of the Company to meet its obligations under the Contracts,
which include death benefits and its assumption of mortality and expense risks.
The most recent audited financial statements for the Separate Account and the
accompanying Report of Independent Auditors are incorporated into this SAI by
reference to the Separate Account's Annual Report, dated December 31, 1996 which
accompanies this SAI.
10
<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 subsidiary as of December 31, 1996, and 1995, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1996. 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 subsidiary as of December 31, 1996, and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
March 28, 1997
KPMG PEAT MARWICK LLP
<PAGE>
USAA LIFE INSURANCE COMPANY
Consolidated Balance Sheet
December 31, 1996 and 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
Assets 1996 1995
- ------ ----------- ---------
<S> <C> <C>
Investments:
Debt securities, at amortized cost $1,471,707 1,710,849
Debt securities, at fair value 4,119,664 3,608,235
Equity securities, at fair value 313,068 211,073
Mortgage loans 4,746 5,775
Policy loans 118,683 106,609
Short-term securities - 1,008
---------- ---------
Total investments 6,027,868 5,643,549
Cash and cash equivalents 9,444 31,476
Premium balances receivable 1,655 1,611
Accounts receivable - affiliates 20 -
Furniture and equipment 1,156 1,162
Accrued investment income 71,636 59,423
Deferred policy acquisition costs 189,298 164,831
Deferred tax 28,244 19,878
Other assets 20,712 12,257
Separate account assets 93,804 122,819
------- -------
Total assets $ 6,443,837 6,057,006
=========== =========
Liabilities
Insurance reserves $ 811,413 791,247
Funds on deposit 4,763,093 4,542,292
Accounts payable and accrued expenses 34,295 54,421
Accounts payable - affiliates 13,441 10,062
Other liabilities 57,107 48,833
Separate account liabilities 93,804 21,709
----------- ---------
Total liabilities 5,773,153 5,468,564
----------- ---------
Stockholders Equity
Preferred capital stock, $100 par value;
600,000 shares authorized; 600,000
shares issued and outstanding
(400,000 in 1995) 60,000 40,000
Common capital stock, $100 par value;
30,000 shares authorized; 25,000 shares
issued and outstanding 2,500 2,500
Additional paid-in capital 51,408 51,408
Net unrealized gains on investments 22,300 16,446
Retained earnings 534,476 465,016
Net unrealized gains on separate account - 13,072
----------- ---------
Total stockholders' equity 670,684 588,442
----------- ---------
Total liabilities
and stockholders' equity $ 6,443,837 6,057,006
=========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
USAA LIFE INSURANCE COMPANY
Consolidated Statements of Income
Years ended December 31, 1996, 1995, and 1994
(Dollars in Thousands)
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Revenues
Premiums $337,442 305,898 279,766
Investment income, net 428,161 406,922 372,354
Fees, sales and loan income 8,752 8,345 7,637
Realized investment gains(losses) 13,773 1,748 (321)
Other revenues 13,335 14,587 8,559
-------- ------- -------
Total revenues 801,463 737,500 667,995
-------- ------- -------
Benefits and expenses
Losses, benefits and settlement expenses 498,341 462,032 400,136
Deferred policy acquisition costs 6,071 3,915 6,315
Dividends to policyholders 53,691 45,588 44,188
Other operating expenses 122,474 124,318 111,442
-------- ------- -------
Total benefits and expenses 680,577 635,853 562,081
-------- ------- -------
Income before income taxes 120,886 101,647 105,914
-------- ------- -------
Federal income tax expense (benefit):
Current 37,090 38,447 44,530
Deferred (1,494) (3,107) (7,684)
-------- ------- -------
Total Federal income tax expense 35,596 35,340 36,846
-------- ------- -------
Net income $ 85,290 66,307 69,068
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
USAA LIFE INSURANCE COMPANY
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1996, 1995, and 1994
(Dollars in Thousands)
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Capital
Balance at beginning of year $ 93,908 93,908 73,083
Issuance of preferred stock 20,000 - 20,000
Contribution of equipment - - 825
-------- -------- -------
End of year 113,908 93,908 93,908
-------- -------- -------
Retained Earnings
Beginning of year 465,016 418,310 359,841
Net income 85,290 66,307 69,068
Dividends to stockholders (15,830) (19,601 (10,599)
-------- -------- -------
End of year 534,476 465,016 418,310
-------- -------- -------
Net unrealized gains(losses) on investments
Beginning of year 16,446 (38,607) 31,281
Increase (decrease) in net unrealized
gains (losses) on investments (398) 55,053 (69,888)
Transfer of unrealized capital gains on separate account 6,252 - -
-------- -------- -------
End of year 22,300 16,446 (38,607)
-------- -------- -------
Net unrealized gains on separate account
Beginning of year 13,072 - -
Increase (decrease) in net unrealized
gains on separate account (6,820) 13,072 -
Transfer of unrealized capital gains on separate account (6,252) - -
-------- -------- -------
End of year - 13,072 -
-------- -------- -------
Total stockholders' equity $670,684 588,442 473,611
======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
USAA LIFE INSURANCE COMPANY
Consolidated Statements of Cash Flows
Years ended December 31, 1996, 1995, and 1994
(Dollars in Thousands)
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Cash from operating activities:
Net income $ 85,290 66,307 69,068
Adjustments to reconcile net income to net
cash provided by (used in) oper. activities:
Realized investment (gains) losses (13,773) (1,748) 321
Increase in deferred policy acquisition costs (17,728) (18,993) (13,162)
Depreciation and amortization (5,442) (5,298) (2,451)
Deferred income tax benefit (1,494) (3,107) (7,684)
Increase in premium balances receivable (44) (346) (191)
(Increase) Decrease in accounts receivable-affiliates (20) - 81
Increase in accrued investment income (12,213) (7,171) (4,369)
(Increase) Decrease in other assets (8,495) 6,197 (5,149)
Increase in insurance reserves 78,926 65,721 48,934
Increase in accounts payable and accrued exp. (20,126) 8,852 14,109
Increase in accounts payable-affiliates 3,379 3,394 2,745
Increase (Decrease) in other liabilities 7,089 (4,712) 4,207
Other 759 40 2,706
---------- ----------- -----------
Net cash provided by operating
activities 96,108 109,136 109,165
---------- ----------- -----------
Cash flows from investing activities:
Proceeds from sales and maturities of
available-for-sale securities 587,945 420,818 294,734
Proceeds from maturities of held-to-maturity
securities 106,504 184,729 61,397
Proceeds from principal collections on
investments 351,540 292,673 565,649
Other investments sold 1,123 934 1,404
Retirement of notes receivable - 30,000 -
Securities purchased - available-for-sale (1,465,534) (1,313,784) (610,097)
Securities purchased - held-to-maturity - - (719,097)
Other investments purchased (451) (1,382) (1,826)
Issuance of notes receivable - - (30,000)
Investment in variable annuity separate account 87,280 (81,000) -
---------- ----------- -----------
Net cash used in investing activities (331,593) (467,012) (437,836)
---------- ----------- -----------
Cash flows from financing activities:
Deposits and interest credited to funds
on deposit 571,941 655,626 671,938
Withdrawals from funds on deposit (362,658) (344,774) (261,958)
Proceeds from issuance of preferred stock 20,000 - 20,000
Dividends to parent and affiliate (15,830) (19,601) (10,599)
---------- ----------- -----------
Net cash provided by financing activities 213,453 291,251 419,381
---------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents (22,032) (66,625) 90,710
Cash and cash equivalents at beginning of year 31,476 98,101 7,391
---------- ----------- -----------
Cash and cash equivalents at end of year $ 9,444 31,476 98,101
========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
December 31, 1996 and 1995
(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
50 states and the District of Columbia. The Company's 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 subsidiary. All significant intercompany
balances and transactions have been eliminated in consolidation.
(b) Investments
Debt securities, including bonds, mortgage-backed securities (MBS's),
and redeemable preferred stocks, have been classified as either held-to-
maturity or available-for-sale. Debt securities classified as held-to-
maturity are carried at amortized cost. Securities classified as
available-for-sale are carried at fair value with unrealized gains or
losses (net of related deferred income taxes, deferred acquisition cost,
and future policyholder benefits) reflected in stockholders' equity.
Bonds, at amortized cost of approximately $2,876, and $1,582 were on
deposit with various state governmental agencies at December 31, 1996,
and 1995 respectively.
Mortgage-backed securities held represent participating interests in
pools of long term first mortgage loans originated and serviced by the
issuers of the securities. Market interest rate fluctuations can affect
the prepayment speed of principal and the yield on the securities.
All equity securities, which include common and nonredeemable preferred
stocks, have been classified as available-for-sale. Equity securities
are carried at fair value with unrealized gains or losses (net of
related deferred income taxes, deferred acquisition cost, and future
policyholder benefits) reflected in stockholders' equity.
Real estate mortgages and policy loans are carried at their unpaid
principal balances with interest rates ranging from 4.8% to 10.0% at
December 31, 1996.
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.
(c) Cash and cash equivalents
For purposes of the consolidated statement of cash flows, all highly
liquid marketable securities that have a maturity at purchase of three
months or less and money market mutual funds are considered to be cash
equivalents. At December 31, 1996 and 1995, cash and cash equivalents
include $362, and $259, respectively, of separate account purchases
awaiting reinvestment. These funds are restricted from the Company's
use.
5
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(d) Federal income taxes
The Company and its subsidiary are included in the consolidated Federal
income tax return filed by USAA. Taxes are allocated to the separate
companies of USAA based on a tax allocation agreement, whereby companies
receive a current benefit to the extent their losses are utilized by the
consolidated group. Separate company current taxes are the higher of
taxes computed at a 35% rate on regular taxable income or taxes computed
at a 20% rate on alternative minimum taxable income, adjusted for any
consolidated benefits allocated to the companies based on the use of
separate company losses within the group.
Deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and
liabilities. The effect on deferred income taxes of a change in tax
rates is recognized in income in the period that includes the enactment
date.
(e) Fair value of financial instruments
The fair value estimates of the Company's financial instruments were
made at a point in time, based on relevant market information about the
related financial instrument. These estimates do not reflect any
premium or discount that could result from offering for sale at one time
the Company's entire holding of a particular financial instrument. In
addition, the tax ramifications related to the effect of fair market
value estimates have not been considered in the estimates.
(f) Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(g) Deferred policy acquisition costs
Policy acquisition costs, consisting primarily of certain underwriting
and selling expenses, are deferred and amortized. Traditional
individual life and health acquisition costs are amortized in proportion
to anticipated premium income after allowing for lapses and terminations
(20 years; but not to exceed the life of the policy). Acquisition costs
for universal life and annuities are amortized in relation to the
present value of estimated gross profits from surrender charges and
investment, mortality and expense margins (20 years).
Deferred policy acquisition costs are reviewed to determine that the
unamortized portion does not exceed expected future income or gross
profits.
(h) Insurance reserves
Included in reserves are traditional life and health products and payout
annuities with life contingencies. Payout annuities without life
contingencies, deferred annuities, and universal life products are
classified as funds on deposit. Traditional life and individual health
reserves are computed using a net level premium method and are based on
assumed or guaranteed investment yields and assumed rates of mortality,
morbidity, withdrawals, expenses and anticipated future policyholder
dividends. These assumptions vary by such characteristics as plan, year
of issue, policy duration, date of receipt of funds, and may include
provisions for adverse deviation.
6
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(i) Insurance revenues and expenses
Premiums on traditional life insurance products are recognized as
revenues as they become due. Benefits and expenses are matched with
premiums in arriving at profits by providing for policy benefits over
the lives of the policies and by amortizing acquisition costs. For
universal life and investment annuity contracts, revenues consist of
investment earnings and policy charges for the cost of insurance, policy
administration, and surrender charges assessed during the period.
Expenses for these policies include interest credited to policy account
balances, benefit claims incurred in excess of policy account balances,
and administrative expenses. The related deferred policy acquisition
costs are amortized in relation to the present value of expected gross
profits from surrender charges and investment, mortality, and expense
margins.
(j) Funds on deposit
Funds on deposit are liabilities for universal life and investment-
related products. These liabilities are determined following the
"retrospective deposit" method and consist principally of policy account
balances before applicable surrender charges.
(k) Participating business
Certain life insurance policies contain dividend payment provisions
which enable the policyholder to participate in the earnings of the life
insurance operations. The participating insurance in force accounted
for 9% of the total life insurance in force at December 31, 1996, and
10% of life insurance in force at December 31, 1995. Participating
policies accounted for 15% of the premium income in 1996 and 14% of the
premium income in 1995. The provision for policyholders' dividends is
based on current dividend scales.
The Company guarantees to pay dividends in aggregate, on all policies
issued after December 31, 1983, in the total amount of $12,667 in 1997.
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.
7
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
2) Basis of accounting
The 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 practices, to the amounts
included in the accompanying consolidated financial statements are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------- --------- --------
<S> <C> <C> <C>
Statutory net income $ 62,998 55,213 48,775
Loss on sale of investments (6,422) (1,719) (8,199)
Deferred policy acquisition costs 17,728 18,993 13,162
Tax adjustment 8,386 397 5,652
Participating policyholder earnings (787) (40) (147)
Other 3,387 (6,537) 9,825
-------- -------- -------
GAAP net income $ 85,290 66,307 69,068
======== ======== =======
Statutory capital and surplus $470,263 396,676 341,166
Increases (decreases):
Deferred policy acquisition costs 189,298 164,831 161,861
Federal income taxes 28,236 19,974 53,420
Asset valuation reserve 103,482 96,742 56,490
Interest maintenance reserve - 4,894 6,625
Participating policyholder liability (6,583) (5,398) (5,337)
Policyholder reserve and funds (69,279) (75,052) (62,138)
Investment unrealized gain (loss)
adjustments:
Investment valuation difference - debt
securities 56,285 145,352 (76,083)
Policyholder accounts and other assets (96,828) (155,588) -
Other adjustments (4,190) (3,989) (2,393)
-------- -------- -------
GAAP capital and surplus $670,684 588,442 473,611
======== ======== =======
</TABLE>
8
<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, 1996 were as follows:
<TABLE>
<CAPTION>
Held-to-Maturity
-----------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair Carrying
cost gains losses value value
--------- --------- --------- ---------- --------
<S> <C> <C> <C> <C> <C>
Debt securities
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 21,132 1,530 4 22,658 21,132
Obligations of states and
political subdivisions 42,844 807 - 43,651 42,844
Debt securities issued by
foreign governments and
corporations 53,333 280 893 52,720 53,333
Mortgage-backed securities 870,583 24,443 9,694 885,333 870,583
Corporate securities 481,906 17,374 3,517 495,762 481,906
Redeemable preferred stock 1,909 - - 1,909 1,909
---------- ------ ------ --------- ---------
Total debt securities $1,471,707 44,434 14,108 1,502,033 1,471,707
========== ====== ====== ========= =========
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 $ 327,091 885 4,372 323,604 323,604
Obligations of states and
political subdivisions 7,848 723 66 8,505 8,505
Debt securities issued by
foreign governments and
corporations 127,213 3,619 425 130,407 130,407
Mortgage-backed securities 1,232,769 38,654 3,982 1,267,441 1,267,441
Corporate securities 2,372,767 35,073 18,133 2,389,707 2,389,707
---------- ------ ------ --------- ---------
Total debt securities $4,067,688 78,954 26,978 4,119,664 4,119,664
========== ====== ====== ========= =========
Equity Securities
Common stock $ 202,313 70,095 1,481 270,927 270,927
Nonredeemable preferred stock 37,298 4,872 29 42,141 42,141
---------- ------ ------ --------- ---------
Total equity securities $ 239,611 74,967 1,510 313,068 313,068
========== ====== ====== ========= =========
</TABLE>
9
<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, 1995 were as follows:
<TABLE>
<CAPTION>
Held-to-Maturity
-----------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair Carrying
cost gains losses value value
---------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Debt securities
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 21,125 2,603 - 23,728 21,125
Obligations of states and
political subdivisions 43,492 2,482 47 45,927 43,492
Debt securities issued by
foreign governments and
corporations 53,328 1,063 4 54,387 53,328
Mortgage-backed securities 1,004,373 37,119 2,202 1,039,290 1,004,373
Corporate securities 585,440 36,125 2,218 619,347 585,440
Redeemable preferred stock 3,091 118 - 3,209 3,091
---------- ------ ----- --------- --------
Total debt securities $1,710,849 79,510 4,471 1,785,888 1,710,849
========== ====== ===== ========= ========
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 $ 127,491 1,862 1 129,352 129,352
Obligations of states and
political subdivisions 9,777 1,640 8 11,409 11,409
Debt securities issued by
foreign governments and
corporations 103,719 6,410 - 110,129 110,129
Mortgage-backed securities 1,792,252 66,021 4,235 1,854,038 1,854,038
Corporate securities 1,427,379 67,519 1,041 1,493,857 1,493,857
Redeemable preferred stock 10,000 - 550 9,450 9,450
---------- ------- ----- --------- ---------
Total debt securities $3,470,618 143,452 5,835 1,608,235 3,608,235
========== ======= ===== ========= =========
Equity Securities
Common stock $ 130,991 45,851 1,369 175,473 175,473
Nonredeemable preferred stock 26,883 8,804 87 35,600 35,600
---------- ------- ----- --------- ---------
Total equity securities $ 157,874 54,655 1,456 211,073 211,073
========== ======= ===== ========= =========
</TABLE>
In December, 1995, the Company transferred held-to-maturity securities with an
amortized cost of $1,349,015 to the available for sale category. The transfer
of these securities resulted in an unrealized gain of $28,119. The securities
were transferred in accordance with the special one-time reassessment of held-
to-maturity securities allowed by the Financial Accounting Standards Board, and
was deemed by management to better position the Company's portfolio.
10
<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, 1996, 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 $ 42,789 43,309
Due after one year through five years 266,156 275,747
Due after five years through ten years 236,865 239,414
Due after ten years 53,405 56,321
---------- ---------
599,215 614,791
Mortgage-backed securities 870,583 885,333
Redeemable preferred stock 1,909 1,909
---------- ---------
$1,471,707 1,502,033
========== =========
Available-for-Sale
---------------------
Estimated
Amortized fair
cost value
---------- ---------
Due in one year or less $ 19,950 19,984
Due after one year through five years 778,431 784,496
Due after five years through ten years 1,903,619 1,909,594
Due after ten years 132,919 138,149
---------- ---------
2,834,919 2,852,223
Mortgage-backed securities 1,232,769 1,267,441
---------- ---------
$4,067,688 4,119,664
=========== =========
</TABLE>
Proceeds from sales of available-for-sale securities during 1996, 1995, and 1994
were $495,039, $416,071, and $244,383, respectively. Gross gains and losses of
$25,566 and $18,317 respectively for 1996, and $7,820 and $9,268 respectively
for 1995, and $17,455 and $19,452 respectively for 1994, were realized on those
sales.
Gross investment income during 1996, 1995, and 1994 was $431,893, $410,912, and
$375,636, respectively. Investment expenses were $3,731, $3,990, and $3,282 for
1996, 1995, and 1994, respectively.
11
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(4) Federal income taxes
The expected statutory Federal income tax amounts for the years ended
December 31, 1996, 1995, and 1994 differ from the effective tax amounts as
follows:
1996 1995 1994
-------- -------- -------
Income before income taxes $ 120,886 101,647 105,914
========= ======= =======
Federal income tax expense at 35% statutory
rate 42,310 35,577 37,070
Increase (decrease) in tax resulting from:
Dividends received deduction (660) (536) (807)
1989 - 1996 R&E tax credit (6,188) - -
Other, net 134 299 583
--------- ------- -------
Federal income tax expense $ 35,596 35,340 36,846
========= ======= =======
Deferred income tax benefit for the years ended December 31, 1996, 1995, and
1994 was primarily attributable to differences between the valuation of
assets and insurance liabilities for financial reporting and tax purposes.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31 are presented below:
1996 1995 1994
-------- -------- -------
Deferred tax assets:
Investments $ - 628 518
Depreciable assets - 22 100
Insurance reserves 62,358 58,624 55,290
Accounts payable and accrued expenses 1,612 2,001 4,892
Policyholder dividends 6,738 6,619 4,878
Other, net 6,929 4,315 3,042
--------- ------- -------
Total gross deferred tax assets 77,637 72,209 68,720
--------- ------- -------
Deferred tax liabilities:
Investments 2,641 1,117 193
Depreciable assets 1 - -
Deferred policy acquisition costs 37,025 35,344 33,982
Insurance reserves - - 801
Other, net 331 - 1,124
--------- ------- -------
Total gross deferred tax liabilities 39,998 36,461 36,100
--------- ------- -------
Deferred tax (liability) benefit on
unrealized gains (losses) on investments (9,395) (15,870) 20,811
========= ======= =======
Net deferred tax asset $ 28,244 19,878 53,431
========= ======= =======
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.
12
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
At December 31, 1996, 1995, and 1994, other liabilities included the following
Federal income tax payable amounts:
1996 1995 1994
---- ---- ----
Current Federal income taxes $ 3,157 3,976 10,636
Aggregate cash payments to (receipts from) USAA for income taxes were
$38,064, $44,965, and $41,314 for USAA Life Insurance Company and $(155),
$126, and $214 for its subsidiary during the years ended December 31, 1996,
1995, and 1994, respectively.
(5) Fair value of financial instruments
The following tables present the carrying amounts and estimated fair values
of the Company's financial instruments at December 31. Financial Accounting
Statement No. 107, "Disclosures about Fair Value of Financial Instruments",
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing
parties.
<TABLE>
<CAPTION>
1996 1995
--------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 9,444 9,444 $ 31,476 31,476
Debt securities 5,591,371 5,621,697 5,319,084 5,394,122
Equity securities 313,068 313,068 211,073 211,073
Mortgage loans 4,746 5,232 5,775 6,112
Other invested assets 2,373 2,828 2,392 2,916
Policy loans 118,683 118,683 106,609 106,609
Premium balances receivable 1,655 1,655 1,611 1,611
Accrued investment income 71,636 71,636 59,423 59,423
Separate Account 93,804 93,804 122,819 122,819
Financial liabilities:
Deferred annuities and annuities without
life contingencies 3,720,373 3,720,373 3,583,573 3,583,573
Policyholder dividend accumulations 23,191 23,191 24,867 24,867
Policy dividends declared but unpaid 29,415 29,415 24,016 24,016
Accounts payable and accrued expenses 34,295 34,295 54,421 54,421
Separate Account 93,804 93,804 21,709 21,709
</TABLE>
The carrying amounts of financial assets and liabilities shown in the above
table are included in the balance sheet under the indicated captions with
the following exceptions: deferred annuities and annuities without life
contingencies are included in funds on deposit, policyholder dividend
accumulations are included in funds on deposit, and policy dividends
declared and unpaid are included in other liabilities.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash and cash equivalents: Cash and cash equivalents approximate fair value
because of the short maturity of these instruments.
Debt and equity securities: Fair market values for bonds and stocks are
determined using quoted market prices from Merrill Lynch Pricing Services,
Bloomberg Services or individual brokers.
Mortgage loans: The fair value of mortgage loans and the mortgage loan
component of other assets is 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
13
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
loans are shown on the financial statements at face value, and carry
interest rates ranging from 4.8% to 7.4% in advance.
Short-term securities: Short-term securities approximates fair value
because of the short maturity of these instruments.
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. Carrying value of policyholder dividends approximates fair
value.
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.
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 borrowed $0 from Bankers Trust Company through the use of
reverse repurchase agreements for 1996 and 1995, respectively, with no
outstanding balances as of December 31, 1996 and 1995. The borrowings were
$251,755 in 1994 with no outstanding December 31 balance for the year then
ended. The interest associated with the reverse repurchase agreements was
$0, for the years 1996 and 1995, respectively and $102 for the year 1994.
Additional borrowing agreements are described in note 7, "Transactions with
affiliates".
(7) Transactions with affiliates
Certain services have been contracted from USAA, 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 the USAA contracted
services was $70,713, $66,787, and $55,651 for 1996, 1995, and 1994,
respectively. The aggregate amount of the Company's allocations to
affiliates was $4,742, $3,910, and $3,246 for 1996, 1995, and 1994,
respectively.
14
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
The Company has an agreement with USAA Investment Management Company
regarding the reimbursement of costs for investment services provided. The
aggregate amount of such contracted services was $2,793, $2,941, and $1,509
for 1996, 1995 and 1994, respectively.
The Company also received premium and annuity considerations from USAA of
$4,093, $6,145, and $7,526 in 1996, 1995, and 1994, respectively,
representing amounts received for structured settlements issued to claimants
of USAA and for group insurance on USAA employees. A contribution in the
amount of $1,684 was made to the USAA Foundation in 1994. No contributions
were made to the USAA Foundation in 1996 and 1995.
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, 1996 and 1995 the
Company had no liability for borrowed money. The Company borrowed
$2,566,042 during 1996, $1,809,466 during 1995, and $2,160,999 during 1994,
through the use of these funding agreements. The interest associated with
these intercompany funding agreements was $660, $898, and $893 in 1996,
1995, and 1994, respectively.
In 1996, the Company exercised a put option on a $20,000 medium term note
from CAPCO. In 1995, the Company retired a $30,000 note receivable from
FUNDCO.
(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. Although the ceding
of reinsurance does not discharge the Company from its primary legal
liability to a policyholder, the reinsurance company assumes the related
risk. Life insurance in force in the amounts of $3,595,801, $3,690,040, and
$3,658,829 is ceded on a yearly renewable term basis; $939,290, $716,596,
and $472,032 is ceded on a coinsurance basis; and $952,599, $1,000,581, and
$989,819 is ceded under a stop-loss agreement at December 31, 1996, 1995,
and 1994, respectively. In accordance with the reinsurance contracts,
reinsurance receivables include amounts related to claims incurred but not
reported and liabilities for future policy benefits totaled $13,284 and
$11,693 at December 31, 1996 and 1995, respectively. Premium revenues were
reduced by $14,954, $14,206, and $11,765 for reinsurance premiums ceded
during the years ended December 31, 1996, 1995, and 1994, respectively.
Benefits were reduced by $7,325, $8,257, and $5,678 for reinsurance
recoverables during the years ended December 31, 1996, 1995, and 1994,
respectively.
15
<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 for the year ended December
31, 1996 are summarized below:
<TABLE>
<CAPTION>
Accident
Life Annuity and health Total
--------- ------- ---------- -------
<S> <C> <C> <C> <C>
Balance at
January 1, 1994 $ 110,350 18,913 10,885 140,148
--------- ------- ------ -------
Additions 15,617 1,524 2,120 19,261
Amortization (4,256) (662) (1,397) (6,315)
FAS 115 DAC 427 8,340 - 8,767
--------- ------- ------ -------
Net change 11,788 9,202 723 21,713
--------- ------- ------ -------
Balance at
December 31, 1994 $ 122,138 28,115 11,608 161,861
--------- ------- ------ -------
Additions 15,676 4,498 2,658 22,832
Amortization (4,375) 1,926 (1,466) (3,915)
FAS 115 DAC (2,051) (13,896) - (15,947)
--------- ------- ------ -------
Net change 9,250 (7,472) 1,192 2,970
--------- ------- ------ -------
Balance at
December 31, 1995 $ 131,388 20,643 12,800 164,831
--------- ------- ------ -------
Additions 18,436 2,999 2,364 23,799
Amortization (5,006) 634 (1,699) (6,071)
FAS 115 DAC 141 6,598 - 6,739
--------- ------- ------ -------
Net change 13,571 10,231 665 24,467
--------- ------- ------ -------
Balance at
December 31, 1996 $ 144,959 30,874 13,465 189,298
========= ======= ====== =======
1996 Premiums $ 264,382 7,792 65,268 337,442
========= ===== ====== =======
1995 Premiums $ 240,234 4,630 61,034 305,898
========= ===== ====== =======
1994 Premiums $ 217,336 2,854 59,576 279,766
========= ===== ====== =======
</TABLE>
The liabilities for future policy benefits and related insurance in force at
December 31, 1996 and 1995 are summarized below:
<TABLE>
<CAPTION>
Future Policy
Benefits
-----------------------
1996 1995
----------- ----------
<S> <C> <C>
Life and annuity:
Individual $775,659 750,881
Group 1,449 1,306
----------- ----------
Total life and annuity 777,108 752,187
=========== ==========
Accident and health $ 34,305 39,060
=========== ==========
Insurance in force
-----------------------
1996 1995
----------- ----------
Life and annuity:
Individual $67,650,451 62,648,704
Group 1,659,106 1,500,896
----------- ----------
Total life and annuity $69,309,557 64,149,600
=========== ==========
</TABLE>
16
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
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.
(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 $1,830, $1,601, and $599
were paid in 1996, 1995, and 1994 respectively, and $89 has accrued since
the last payment on December 15, 1996.
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,
1996, 1995, and 1994. A cash dividend of $14,000 was paid on the common
stock during 1996, $18,000 was paid in 1995, and $10,000 was paid in 1994.
11) Unassigned surplus and dividend restrictions
In accordance with the interpretation of the New York statutes by the
Superintendent of Insurance of the State, the Company has acquiesced with
the Superintendent's interpretation that so long as participating policies
and contracts are held by residents of New York, no profits on participating
policies and contracts in excess of the larger of (a) ten percent of such
profits or (b) fifty cents per year per thousand dollars of participating
life insurance in force at the year-end shall inure to the benefit of the
Company's stockholders. Such New York statutes further provide that such
excess profits shall be exhibited as "participating policyholders' surplus"
in annual statements filed with the Superintendent and shall be used only
for the payment or apportionment of dividends to participating policyholders
at least to the extent required by statute or for the purposes of making up
any loss on participating policies.
17
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
In the opinion of counsel for the Company, ultimate ownership of the entire
surplus, regardless of classification, is a matter to be determined under
Texas law. Under Texas law, in counsel's opinion, such surplus ownership
resides in the Company's stockholders, subject, of course, to the authority
of the Texas Insurance Commissioner (and the similar authority of the other
state insurance regulators) to require the maintenance of certain regulatory
deposits, minimum surplus, and reserves for the protection of policyholders
until all policy contracts are discharged.
The Company is relying on the legal opinion that the earnings attributable
to participating policies in excess of the amounts paid as dividends to
policyholders belong to the stockholders rather than the policyholders, and
such earnings are so treated by the Company.
Due to capital and surplus restrictions imposed by various state regulations
(including New York), unassigned surplus available for distribution as
dividends to the stockholders was $352,567, $281,381 and $185,560 at
December 31, 1996, 1995 and 1994, respectively.
Texas law limits the payment of dividends to stockholders. 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 stockholders were limited to
approximately $52,722 in 1996 and are limited to $47,976 in 1997. Dividends
are paid as determined by the Board of Directors and at its discretion.
The Texas Department of Insurance imposes minimum risk-based capital
requirements on insurance companies that were developed by the National
Association of Insurance Commissioners (NAIC). The formulas for determining
the amount of risk-based capital (RBC) specify various weighting factors
that are applied to statutory financial balances or various levels of
activity based on the perceived degree of risk. Regulatory compliance is
determined by a ratio of the Company's regulatory total adjusted capital to
its authorized control level RBC, as defined by the NAIC. Companies below
specific trigger points, or ratios are classified within certain levels,
each of which requires specified corrective action. The Company's current
statutory capital and surplus is significantly in excess of the threshold
RBC requirements.
(12) Employee benefit plans
(a) Pension plan
Substantially all employees are covered under a pension plan administered
by USAA which is accounted for on a group basis. The benefits are
determined based on years of service and the employee's salary at date of
retirement. The total net pension cost allocated to the Company on the
basis of salary expense was $4,847, $1,913, and $2,095 in 1996, 1995 and
1994, respectively. At December 31, 1996 and 1995 a liability of $1,612
and $1,250, 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 $682, $843, and $817 in 1996, 1995, and 1994,
respectively. At December 31, 1995, a prepaid asset totaling $545 had
been recorded which represents the excess of the Company's allocated
funding requirements over the net periodic postretirement benefit cost
allocated to the Company. At December 31, 1996, a liability of $186 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.
18
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(c) Postemployment benefits
All employees of the Company who suffer total disability as a result of
illness or injury are eligible for long-term disability benefits under a
plan administered by USAA.
The postemployment cost allocated to the Company is not significant.
(13) Separate account
The Separate Account is a segregated asset account established under Texas
law through which USAA Life Insurance Company invests the premium payments
received from Contract Owners. The assets of the Separate Account are the
property of the Company. However, only the assets of the Separate Account
in excess of the reserves, and other Contract liabilities with respect to
the Separate Account, are chargeable with liabilities arising out of any
other business the Company may conduct. Income, gains and losses, whether
or not realized, are, in accordance with the Contracts, credited to or
charged against the Separate Account without regard to other income, gains
or losses of the Company. The Company's obligations arising under the
Contracts are general corporate obligations.
The Separate Account currently is divided into seven Variable Annuity Fund
Accounts, each of which invests in a corresponding Fund. The Funds that are
available under this Contract include five funds of USAA Life Investment
Trust, the Capital Growth Portfolio Class-A Shares of the Scudder Variable
Life Investment Fund, and the Growth Portfolio of The Alger American Fund.
The Accumulated Unit Value of the Contract in a Variable Fund Account will
vary, primarily based on the investment experience of the Fund in whose
shares the Variable Fund Account invests. The value of the Funds'
securities are carried at market value, or, in the case of the USAA Life
Variable Annuity Money Market Fund, at amortized cost, which approximates
market value.
The Company incurs mortality and administrative expenses on behalf of
Separate Account contract holders. The Company collects fees for these
expenses from contract holders at set amounts. In addition, the Company
incurs various expenses related to conducting the business or operations of
the USAA Life Investment Trust (Trust) as outlined by an underwriting and
administrative services agreement. The Company, out of its general account,
has agreed to pay directly or reimburse the Trust for Trust expenses
exceeding established limits.
The Separate Account had an excess of assets over liabilities in 1995 which
represented the account value of Company invested seed money. As of
December 31, 1996, all of the Company's investment, including the associated
unrealized gains has been transferred from the Separate Account to the
General Account.
(14) Commitments and contingencies
The Company is required by law to participate in the guaranty associations
of the various states in which it does business. The state guaranty
associations ensure payment of guaranteed benefits, with certain
restrictions to policyholders of impaired or insolvent insurance companies,
by assessing all other companies involved in similar lines of business.
There are currently several insurance companies which had substantial
amounts of annuity business, in the process of liquidation or
rehabilitation. The Company paid $2,437, $4,823 and $2,012 to various state
guaranty associations during the years ended December 31, 1996, 1995, and
1994, respectively. The Company accrues its best estimate for known
insolvencies. At December 31, 1996 and 1995 accounts payable and accrued
expenses include $9,292 and $12,038, respectively, related to estimated
assessments.
19
<PAGE>
PART C - OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) List of Financial Statements
1. Part A. Condensed financial information reflecting the results of the
Separate Account's operations for its fiscal year ended December 31, 1996
and for its first fiscal period of operations (commencing February 6, 1995
and ended December 31, 1995) is included in Part A of this Registration
Statement.
2. Part B. The most recent audited financial statements of the Separate
Account are incorporated into Part B of this Registration Statement by
reference to the Separate Account's Annual Report, dated December 31, 1996.
3. Part B. The following financial statements of USAA Life Insurance Company
("USAA Life") are included in Part B of the Registration Statement:
Consolidated Financial Statements as of December 31, 1996 and 1995, and
each of the years in the three-year period ended December 31, 1996:
Independent Auditors' Report
Consolidated Balance Sheet
Consolidated Statement of Income
Consolidated Statement of Stockholder's Equity
Consolidated Statement of Cash Flows
Notes to Consolidated Financial Statements
Consolidated Financial Statement Schedules
1
<PAGE>
(b) Exhibits
1. Copies of the Resolution of the Board of Directors of USAA Life Insurance
Company, effective February 8, 1994, establishing the Separate Account of
USAA Life Insurance Company, and Amendment thereto, dated July 29, 1994/1/.
2. Not Applicable.
3. Distribution and Administration Agreement by and between USAA Life
Insurance Company and USAA Investment Management Company, dated December
16, 1994/2/.
4. (a) Form of Flexible Premium Deferred Combination Fixed and Variable
Annuity Contract, including endorsements/1/.
(b) TSA Loan Endorsement/2/.
5. (a) Forms of Applications for Flexible Premium Deferred Combination
Fixed and Variable Annuity Contract/1/.
(b) Proposed Telephone Authorization Form/2/.
(c) Proposed Section 1035 Exchange Form/2/.
6. (a) Articles of Incorporation of USAA Life Insurance Company, as
amended/1/.
(b) Bylaws of USAA Life Insurance Company/1/.
7. Not Applicable.
8. (a) (i) Third Party Administrator Agreement by and between USAA Life
Insurance Company and Vantage Computer Systems, Inc. (now known
as Alliance-One Services, L.P.) dated July 5, 1994 (excluding
exhibits)/1/.
(ii) Amendment to Third Party Administrator Agreement by and between
USAA Life Insurance Company and Continuum Administrative
Services Corporation (formerly known as Vantage Computer
Systems, Inc.), dated December 14, 1995.
(iii) Amendment to Third Party Administrator Agreement by and between
USAA Life Insurance Company and Alliance-One Services, L.P.
(formerly known as Continuum Administrative Services
Corporation), dated July 29, 1996.
(b) Servicing Agreement by and between USAA Life Insurance Company and
USAA Transfer Agency Co. d/b/a USAA Shareholder Account Services, dated
February 3, 1995/3/.
(c) Underwriting and Administrative Services Agreement by and between
USAA Life Insurance Company, USAA Life Investment Trust and USAA
Investment Management Company, dated December 14, 1994/3/.
(d) (i) Participation Agreement by and between Scudder Variable Life
Investment Fund and USAA Life Insurance Company, dated February
3, 1995/3/.
(ii) Participating Contract and Policy Agreement by and between
Scudder Investor Services, Inc. and USAA Investment Management
Company, dated February 3, 1995/3/.
(iii) Reimbursement Agreement by and between Scudder, Stevens &
Clark, Inc. and USAA Life Insurance Company, dated February 3,
1995/3/.
2
<PAGE>
(iv) Letter Agreement by and between Scudder, Stevens & Clark, Inc.,
Scudder Investor Services, Inc., Scudder Variable Life
Investment Fund, USAA Life Insurance Company and USAA
Investment Management Company, dated February 3, 1995/3/.
(e) (i) 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, 1994/2/.
(ii) Expense Allocation Agreement by and between Fred Alger
Management, Inc., Fred Alger & Company, Incorporated, and USAA
Life Insurance Company, dated December 16, 1994 /2/
9. Opinion and Consent of Counsel concerning the legality of the securities
being registered /1/
10. Consent of KPMG Peat Marwick LLP, Independent Auditors.
11. Not Applicable.
12. (a) Subscription Agreement by and between USAA Life Insurance Company
and USAA Life Investment Trust, dated December 16, 1994. /3/
(b) Ratification of Subscription Agreement Modification approved by the
Board of Trustees of USAA Life Investment Trust ("Trust") on November 30,
1995, incorporated by reference to Exhibit 13(b) to Post-Effective
Amendment No. 2 to the USAA Life Investment Trust's Registration
Statement on Form N-1A (File No. 33-82270).
(c) Subscription Agreement by and between USAA Life Insurance Company
and USAA Life Investment Trust, with respect to the VA Aggressive Growth
and VA International Funds, dated February 7, 1997, incorporated by
reference to Exhibit 13(c) to Post-Effective Amendment No. 3 to the USAA
Life Investment Trust's Registration Statement on Form N-1A (File No. 33-
82270).
13. (a) Schedules showing computation of hypothetical average annual and
cumulative total returns of the Variable Annuity Fund Accounts investing
in the Scudder VLIF Capital Growth Portfolio--Class A Shares and Alger
American Growth Portfolio, based on the historical performance of those
Portfolios./2/
(b) Schedules showing computation of yield quotation for USAA Life
Variable Annuity Money Market Fund Account for the seven days ended
December 31, 1995, and average annual and cumulative total returns for
the fiscal period ended December 31, 1995 for each Variable Annuity Fund
Account. /4/
14. The Financial Data Schedule required to be filed pursuant to Form N-4,
Item 24(b)(14), is filed herewith as Exhibit 27, as dictated by the
Securities and Exchange Commission's Electronic Data Gathering, Analysis,
and Retrieval System.
16. (a) Powers of Attorney for: Robert T. Herres, Edwin L. Rosane, Michael
J.C. Roth, and James A. Robinson /1/
(b) Power of Attorney for Josue Robles, Jr./2/
(c) Power of Attorney for Bradford W. Rich. /4/
(d) Power of Attorney for Robert G. Davis.
3
<PAGE>
27. Financial Data Schedule
- ---------
/1/ Previously filed on August 1, 1994 in the initial filing of this
Registration Statement.
/2/ Previously filed on December 22, 1994 in Pre-Effective Amendment No. 1 to
this Registration Statement.
/3/ Previously filed on April 28, 1995 in Post-Effective Amendment No. 1 to
this Registration Statement.
/4/ Previously filed on April 30, 1996 in Post-Effective Amendment No. 2 to
this Registration Statement.
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
The Directors and officers of USAA Life, the depositor of the Separate
Account, are set out below. The principal business address for all of the
following Directors and officers of USAA Life is 9800 Fredericksburg Road, San
Antonio, Texas 78288.
DIRECTORS: POSITIONS ON THE BOARD:
---------- -----------------------
Robert T. Herres Chairman
Edwin L. Rosane Vice Chairman
Robert G. Davis Director
Bradford W. Rich Director
Michael J. C. Roth Director
Josue Robles, Jr. Director
DIRECTORS: POSITIONS WITH USAA LIFE:
---------- -------------------------
Edwin L. Rosane Chief Executive Officer and President
John W. Douglas Senior Vice President
Kenneth A. McClure Senior Vice President
James A. Robinson Senior Vice President and Treasurer
Edward R. Dinstel Vice President
Larkin W. Fields Vice President and Assistant Treasurer
Robert J. Flannery Vice President
King Mawhinney Vice President
Bradford W. Rich Vice President and Secretary
Pattie S. McWilliams Vice President
Stephen N. Patzman Vice President
Leldon W. (Jack) Ward Vice President
Dwain A. Akins Assistant Vice President and
Assistant Secretary
Bruce W. Clements Assistant Vice President and
Assistant Secretary
Richard T. Halinski, Jr. Vice President and
Assistant Secretary
James Middleton Assistant Vice President
Allen Pierce Assistant Vice President
James R. Latham Assistant Vice President
Gary Younglove Assistant Vice President
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT
Information in response to this Item is incorporated by reference to Exhibit
20 to Post-Effective Amendment No. 4 to the USAA Life Investment Trust's
Registration Statement on Form N-1A (File No. 33-82270).
4
<PAGE>
ITEM 27. NUMBER OF CONTRACT OWNERS
As of March 31, 1997, there were 4,027 owners of Contracts covered by this
Registration Statement.
ITEM 28. INDEMNIFICATION
The information called for by this Item is incorporated herein by reference to
Article IX of the By-Laws of USAA Life, filed as Exhibit 6(b) to this
Registration Statement; to Section 9 of the Underwriting and Administrative
Services Agreement, filed as Exhibit 8(c) to this Registration Statement; to
Section 14 of the Distribution and Administration Agreement, filed as Exhibit 3
to this Registration Statement; to paragraph 8(b) of the Participating Contract
and Policy Agreement, filed as Exhibit 8(d)(ii) to this Registration Statement;
and to Section 14 of the Transfer Agent Agreement, filed as Exhibit 8(c) of Pre-
Effective Amendment No. 1 to the Form N-1A Registration Statement of USAA Life
Investment Trust (File No. 33-82270 and No. 811-8672), filed on December 22,
1994.
Insofar as indemnification for liability arising under the Securities Act of
1933 (the "1933 Act") may be permitted for Directors, Officers and controlling
persons of USAA Life pursuant to the foregoing, or otherwise, USAA Life has been
advised that in the opinion of the Securities and Exchange Commission (the
"Commission"), such indemnification is against public policy as expressed in the
1933 Act and, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by USAA Life of
expenses incurred or paid by a Director, officer or controlling person of USAA
Life 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, USAA Life will, unless in the opinion of its counsel this
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 1933 Act and will be governed by the
final adjudication of such issue.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) USAA Investment Management Company ("USAA IMCO") is the principal
underwriter for the Contracts. USAA IMCO also serves as the investment
adviser and principal underwriter to USAA Life Investment Trust, USAA
Investment Trust, USAA State Tax-Free Trust, USAA Mutual Fund, Inc., and
USAA Tax Exempt Fund, Inc.
(b) The following are the Directors and officers of USAA IMCO:
DIRECTORS: POSITIONS WITH USAA IMCO:
---------- -------------------------
Robert G. Davis Chairman
Michael J. C. Roth Vice Chairman
Harry W. Miller Director
John W. Saunders, Jr. Director
OFFICERS: POSITIONS WITH USAA IMCO:
--------- -------------------------
Michael J.C. Roth CEO and President
John J. Dallahan Senior Vice President
Harry W. Miller Senior Vice President
John W. Saunders, Jr. Senior Vice President
Patricia P. Cavazos Vice President
Alex M. Ciccone Vice President & Assistant Secretary
Christopher W. Claus Vice President
Jane L. Hill Vice President
Sherron A. Kirk Vice President and Controller
David G. Miller Vice President
William R. Pederson Vice President
David G. Peebles Vice President
Thomas Ramos Vice President
5
<PAGE>
Michael D. Wagner Vice President & Secretary
Kenneth E. Willmann Vice President
R. Matthew Freund Assistant Vice President
Clifford A. Gladson Assistant Vice President
Mark W. Johnson Assistant Vice President
Robert R. Pariseau Assistant Vice President
David G. Parsons Assistant Vice President
R. David Ullom Assistant Vice President
John K. Cabell Assistant Vice President
Eric M. Efron Assistant Vice President
Stephen J. Klaffke Assistant Vice President
Paul H. Lundmark Assistant Vice President
Curt Rohrman Assistant Vice President
Albert C. Sebastian Assistant Vice President
W. Travis Selmier, II Assistant Vice President
The principal business address for all of the above Directors and officers of
USAA IMCO is 9800 Fredericksburg Rd., San Antonio, Texas 78288.
(c) Not Applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The accounts and records of Registrant are located at the offices of its
depositor, USAA Life, located at 9800 Fredericksburg Road, San Antonio, Texas,
78288; the offices of the principal underwriter of the Contracts, USAA IMCO,
located at 10750 Robert F. McDermott Freeway, San Antonio, Texas, 78288; and at
the office of its administrator, Alliance-One Services, L.P., at 301 West 11th
Street, Kansas City, Missouri, 64105.
ITEM 31. MANAGEMENT SERVICES
None.
ITEM 32. UNDERTAKINGS
(a) Registrant hereby undertakes to file a Post-Effective Amendment to this
Registration Statement as frequently as is necessary to ensure that the
audited financial statements in the Registration Statement are never more
than sixteen months old for so long as payments under the Variable Annuity
Contracts may be accepted;
(b) Registrant hereby undertakes to include either (1) as part of any
Application to purchase a Contract offered by the Prospectus, a space that
an applicant can check to request a Statement of Additional Information
("SAI"), or (2) a toll-free number that an applicant can call or a
postcard or similar written communication affixed to or included in the
Prospectus that the applicant can remove to send for a SAI;
(c) Registrant undertakes to deliver any SAI and any financial statements
required to be made available under this Form promptly upon written or
oral request; and
(d) USAA Life represents that the fees and charges deducted under the
Contracts described in this Registration Statement, in the aggregate, are
reasonable in relation to the services rendered, the expenses expected to
be incurred, and the risks assumed by USAA Life under the Contracts. 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 Contracts 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.
6
<PAGE>
Registrant hereby represents that it is relying upon the letter, dated
November 28, 1988, from the Commission staff to the American Council of Life
Insurance, regarding Sections 22(e), 27(c)(1) and 27(d) of the Investment
Company Act of 1940 and the redeemability of variable annuity contracts offered
as funding vehicles for retirement plans meeting the requirements of Section
403(b) of the Internal Revenue Code. Registrant further represents that it
intends to comply with the provisions of paragraphs (1)-(4) of that letter.
7
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, as amended, Registrant certifies that it meets the requirements of
Securities Act Rule 485 for effectiveness of this Registration Statement and has
duly caused this amended Registration Statement to be signed on its behalf by
the undersigned thereunto duly authorized, in the City of San Antonio and State
of Texas on this 24th day of April, 1997.
THE 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
President and Chief Executive Officer
Attest: /s/RICHARD T. HALINSKI, JR.
-------------------------------
Richard T. Halinski, Jr.
Assistant Secretary
8
<PAGE>
As required by the Securities Act of 1933, this amended Registration Statement
has been signed by the following Directors and officers of the Depositor on the
dates indicated:
NAME POSITION DATE
- ---- -------- ----
Robert T. Herres Chairman April 26, 1996
Edwin L. Rosane Vice Chairman, Chief Executive Officer, April 24, 1996
and President
Robert G. Davis Director April 24, 1996
Bradford W. Rich Director April 27, 1996
Josue Robles, Jr. Director April 23, 1996
Michael J.C. Roth Director April 24, 1996
James A. Robinson Senior Vice President and Treasurer April 24, 1996
(Principal Financial and Accounting Officer)
9
<PAGE>
EXHIBIT INDEX
EXHIBIT
8(a)(ii) First Amendment to Third Party Administrator Agreement
8(a)(iii) Second Amendment to Third Party Administrator Agreement
10 Consent of KPMG Peat Marwick LLP, Independent Auditors
16(c) Power of Attorney for Robert G. Davis
27 Financial Data Schedule
<PAGE>
Exhibit 8(a)(ii)
AMENDMENT TO FULL SERVICE AGREEMENT
THIS AMENDMENT TO FULL SERVICE AGREEMENT (the "Amendment") dated as of
December 14, 1995, is between Continuum Administrative Services Corporation,
formerly known as Vantage Computer Systems, Inc. ("CASCO"), and USAA LIFE
INSURANCE COMPANY (the "CLIENT").
WHEREAS, CASCO and the CLIENT have entered into that certain Full Service
Agreement dated as of June 1994 (the "Prior Agreement"); and
WHEREAS, CASCO and CLIENT now desire to amend the Prior Agreement as herein
set forth.
NOW, THEREFORE, in consideration of the premises herein contained and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
SECTION 1 - AMENDMENT
1.1 Amendment of Prior Agreement. The Prior Agreement is hereby amended to
include each of the following provisions set forth in this Section 1. The Prior
Agreement, as amended by this Amendment, is hereinafter referred to as the
"Agreement." In the event of a conflict between the terms of the Prior Agreement
and the terms of this Amendment, the terms of this Amendment shall control.
1.2 Fiduciary Account. Section 3.2 of the Prior Agreement is hereby amended
by replacing the third sentence with the following sentence:
"CASCO will immediately (and in any event within fifteen days) remit such funds
to the person or persons entitled thereto, or shall promptly (and in any event
within fifteen days) deposit them in a fiduciary account established and
maintained by CASCO in the name of CLIENT, which fiduciary account, with respect
to funds relating to Nevada policyholders, shall be deposited in an account
located at a financial institution located in Nevada."
1.3 Termination. Section 6.1 of the Prior Agreement is hereby amended to add
the following after the second sentence:
"CLIENT must fulfill all lawful obligations with respect to policies affected by
the Agreement, regardless of any dispute between CLIENT and CASCO."
1.5 Notices. New Section 8.9 and 8.10 are hereby added to state as follows:
"8.9 Any policies, certificates, booklets, termination notices or other written
communications delivered by CLIENT to CASCO for delivery to its policyholders
shall be delivered by CASCO promptly after receipt of instructions from CLIENT
to do so."
"8.10 CASCO shall provide a written notice approved by CLIENT to insured
individuals advising them of the identity of, and relationship among, CASCO, the
policyholder and CLIENT. CASCO shall identify and state separately in writing,
to the persons paying to CASCO any charge or premium for coverage, the amount of
any such charge or premium specified by CLIENT for such coverage."
1.6 Name Change. All references to VANTAGE in the Prior Agreement shall be
amended to refer to CASCO.
<PAGE>
SECTION 2 - MISCELLANEOUS
2.1 Ratifications. The terms and provisions set forth in this Amendment
shall modify and supersede all inconsistent terms and provisions set forth in
the Prior Agreement and, except as expressly modified and superseded by this
Amendment, the terms and provisions of the Prior Agreement are ratified and
confirmed and shall continue in full force and effect.
2.2 Successors and Assigns. This Amendment is binding upon and shall inure
to the benefit of CLIENT and CASCO and their respective successors and permitted
assigns.
2.3 Corporate Authority. Each party thereto represents and warrants to each
other party that it is empowered under the applicable laws and regulations and
by its charter and bylaws to enter into this Amendment and to perform the
Agreement and that all requisite corporate proceedings have been taken to
authorize it to enter into this Amendment and perform the Agreement.
EXECUTED as of this date first written above.
CASCO:
CONTINUUM ADMINISTRATIVE SERVICES
CORPORATION
By: /s/ Robert Maltempo
Name: Robert Maltempo
Title: Executive Vice President
CLIENT:
USAA LIFE INSURANCE COMPANY
By: /s/ Larkin W. Fields
Name: Larkin Fields
Title: Vice President, Life Marketing
Services
<PAGE>
Exhibit 8(a)(iii)
AMENDMENT TO FULL SERVICE AGREEMENT
THIS AMENDMENT TO FULL SERVICE AGREEMENT (the "Amendment") dated as of July
24, 1996, is between ALLIANCE-ONE Services, L.P. ("ALLIANCE"), successor-by-
merger to Continuum Administrative Services Corporation, formerly known as
Vantage Computer Systems, Inc., and USAA LIFE INSURANCE COMPANY (the "CLIENT").
WHEREAS, Continuum Administrative Services Corporation and the CLIENT have
entered into that certain Full Service Agreement dated as of June 1994 (the
"Prior Agreement"); and
WHEREAS, ALLIANCE and CLIENT now desire to amend the Prior Agreement as herein
set forth.
NOW, THEREFORE, in consideration of the premises herein contained and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
SECTION 1 - AMENDMENT
1.1 Amendment of Prior Agreement. The Prior Agreement is hereby amended to
include each of the following provisions set forth in this Section 1. The Prior
Agreement, as amended by this Amendment, is hereinafter referred to as the
"Agreement." In the event of a conflict between the terms of the Prior
Agreement and the terms of this Amendment, the terms of this Amendment shall
control.
1.2 Fiduciary Account. Section 3.2 of the Prior Agreement is hereby amended
by replacing the third sentence with the following sentence:
"ALLIANCE will immediately (and in any event within fifteen days) remit such
funds to the person or persons entitled thereto, or shall promptly (and in any
event within fifteen days) deposit them in a fiduciary account established and
maintained by ALLIANCE in the name of CLIENT, which fiduciary account, with
respect to funds relating to Nevada policyholders, shall be deposited in an
account located at a financial institution located in Nevada."
1.3 Termination. Section 6.1 of the Prior Agreement is hereby amended to add
the following after the second sentence:
"CLIENT must fulfill all lawful obligations with respect to policies affected by
the Agreement, regardless of any dispute between CLIENT and ALLIANCE."
1.5 Notices. New Section 8.9 and 8.10 are hereby added to state as follows:
"8.9 Any policies, certificates, booklets, termination notices or other written
communications delivered by CLIENT to ALLIANCE for delivery to its policyholders
shall be delivered by ALLIANCE promptly after receipt of instructions from
CLIENT to do so."
"8.10 ALLIANCE shall provide a written notice approved by CLIENT to insured
individuals advising them of the identity of, and relationship among, ALLIANCE,
the policyholder and CLIENT. ALLIANCE shall identify and state separately in
writing, to the persons paying to ALLIANCE any charge or premium for coverage,
the amount of any such charge or premium specified by CLIENT for such coverage."
1.6 Name Change. All references to VANTAGE in the Prior Agreement shall be
amended to refer to ALLIANCE.
<PAGE>
SECTION 2 - MISCELLANEOUS
2.1 Ratifications. The terms and provisions set forth in this Amendment
shall modify and supersede all inconsistent terms and provisions set forth in
the Prior Agreement and, except as expressly modified and superseded by this
Amendment, the terms and provisions of the Prior Agreement are ratified and
confirmed and shall continue in full force and effect.
2.2 Successors and Assigns. This Amendment is binding upon and shall inure
to the benefit of CLIENT and ALLIANCE and their respective successors and
permitted assigns.
2.3 Corporate Authority. Each party thereto represents and warrants to each
other party that it is empowered under the applicable laws and regulations and
by its charter and bylaws to enter into this Amendment and to perform the
Agreement and that all requisite corporate proceedings have been taken to
authorize it to enter into this Amendment and perform the Agreement.
EXECUTED as of this date first written above.
ALLIANCE:
ALLIANCE-ONE SERVICES, L.P.
By Continuum New TPA Corporation
Its Managing General Partner
By: /s/ Jack Dennison
Name: Jack Dennison
Title: Assistant Secretary
CLIENT:
USAA LIFE INSURANCE COMPANY
By: /s/ Dwain A. Akins
Name: Dwain A. Akins
Title: Assistant Vice President,
Managing Attorney
<PAGE>
EXHIBIT 10
The Board of Directors of USAA Life Insurance Company
and Contractowners of the Separate Account of
USAA Life Insurance Company
We consent to the use of our report, dated February 5, 1997, on the
financial statements of each Variable Annuity Fund Account of the Separate
Account of USAA Life, Insurance Company, including the USAA Life Variable
Annuity Money Market, Income, Growth and Income, World Growth and Diversified
Assets Fund Accounts, the Scudder VLIF Capital Growth Portfolio, and the Alger
American Growth Portfolio, which along with the report, appear in the Separate
Account's Annual Report, dated December 31, 1996. We also consent to the
incorporation of the report, by reference to the Annual Report, into Post-
Effective Amendment No. 3 under the Securities Act of 1933, and Amendment No. 4
under the Investment Company Act of 1940, to the Separate Account's Registration
Statement on Form N-4. We further consent to the references to our firm under
the headings "Financial Statements" and "Selected Accumulation Unit Data" in the
Registration Statement.
We also consent to the use of our report, dated March 28, 1997, on the
consolidated balance sheets of USAA Life Insurance Company and subsidiary as of
December 31, 1996 and 1995, and the related consolidated statements of income,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1996, included as part of the Registration Statement
and to the references to our firm under the heading "Independent Auditors".
---------------------------------
KPMG PEAT MARWICK LLP
San Antonio, Texas
April 28, 1997
<PAGE>
EXHIBIT 16(C)
POWER OF ATTORNEY
STATE OF: TEXAS
COUNTY OF: BEXAR
Know all men by these presents that the undersigned Director of USAA Life
Insurance Company, a Texas corporation ("Corporation"), constitutes and appoints
Richard T. Halinski, Jr. and Dwain A. Akins, and each of them, as his true and
lawful attorney-in-fact and agent, with full power of substitution, for him and
in his name, place and stead, in any and all capacities to sign registration
statements on any form or forms filed under the Securities Act of 1933 and the
Investment Company Act of 1940 and any and all amendments thereto, with all
exhibits, instruments, and other documents necessary or appropriate in
connection therewith and to file them with the Securities and Exchange
Commission or any other regulatory authority as may be necessary or desirable,
hereby ratifying and confirming all that said attorney-in-fact and agent or his
substitute, may lawfully do or cause to be done by virtue hereof.
/s/ Robert G. Davis 4/28/97
- ------------------- -------
Robert G. Davis Date
Director
On this 28th day of April 1997, before me, Sharon K. Gonzales the undersigned
Notary Public, personally appeared Robert G. Davis, known to me to be the
person whose name is subscribed to the above Power of Attorney, and acknowledged
that he executed it.
WITNESS my hand and official seal
/s/ Sharon Kay Gonzales
-----------------------
Notary Public
My commission expires 12-31-2000.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 1
<NAME> USAA LIFE VA MONEY MARKET FUND ACCOUNT
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 11,245
<INVESTMENTS-AT-VALUE> 11,245
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 11,245
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2
<TOTAL-LIABILITIES> 2
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 10,383
<SHARES-COMMON-PRIOR> 5,478
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 11,243
<DIVIDEND-INCOME> 484
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> (109)
<NET-INVESTMENT-INCOME> 375
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 375
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 60,478
<NUMBER-OF-SHARES-REDEEMED> (55,573)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 5,541
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 2
<NAME> USAA LIFE VA INCOME FUND ACCOUNT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 5,220
<INVESTMENTS-AT-VALUE> 5,074
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 5,074
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1
<TOTAL-LIABILITIES> 1
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 430
<SHARES-COMMON-PRIOR> 89
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 5,073
<DIVIDEND-INCOME> 398
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> (52)
<NET-INVESTMENT-INCOME> 346
<REALIZED-GAINS-CURRENT> (77)
<APPREC-INCREASE-CURRENT> (111)
<NET-CHANGE-FROM-OPS> 158
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 729
<NUMBER-OF-SHARES-REDEEMED> (388)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 4,022
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 3
<NAME> USAA LIFE VA GROWTH AND INCOME FUND ACCOUNT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 21,737
<INVESTMENTS-AT-VALUE> 23,420
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 23,420
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3
<TOTAL-LIABILITIES> 3
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 1,518
<SHARES-COMMON-PRIOR> 205
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 23,417
<DIVIDEND-INCOME> 866
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> (136)
<NET-INVESTMENT-INCOME> 730
<REALIZED-GAINS-CURRENT> 241
<APPREC-INCREASE-CURRENT> 1,670
<NET-CHANGE-FROM-OPS> 2,641
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,457
<NUMBER-OF-SHARES-REDEEMED> (144)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 20,843
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 4
<NAME> USAA LIFE VA WORLD GROWTH FUND ACCOUNT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 9,552
<INVESTMENTS-AT-VALUE> 9,949
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 9,949
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1
<TOTAL-LIABILITIES> 1
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 695
<SHARES-COMMON-PRIOR> 161
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 9,948
<DIVIDEND-INCOME> 496
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> (68)
<NET-INVESTMENT-INCOME> 428
<REALIZED-GAINS-CURRENT> 106
<APPREC-INCREASE-CURRENT> 437
<NET-CHANGE-FROM-OPS> 971
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 605
<NUMBER-OF-SHARES-REDEEMED> (71)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 8,024
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 5
<NAME> USAA LIFE VA DIVERSIFIED ASSETS FUND ACCOUNT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 9,483
<INVESTMENTS-AT-VALUE> 9,676
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 9,676
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1
<TOTAL-LIABILITIES> 1
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 699
<SHARES-COMMON-PRIOR> 86
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 9,675
<DIVIDEND-INCOME> 501
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> (57)
<NET-INVESTMENT-INCOME> 444
<REALIZED-GAINS-CURRENT> 65
<APPREC-INCREASE-CURRENT> 192
<NET-CHANGE-FROM-OPS> 701
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 668
<NUMBER-OF-SHARES-REDEEMED> (55)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 8,628
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 6
<NAME> SCUDDER VLIF CAPITAL GROWTH PORTFOLIO-CLASS A SHARES
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 9,492
<INVESTMENTS-AT-VALUE> 10,267
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 10,267
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1
<TOTAL-LIABILITIES> 1
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 689
<SHARES-COMMON-PRIOR> 93
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 10,266
<DIVIDEND-INCOME> 236
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> (62)
<NET-INVESTMENT-INCOME> 174
<REALIZED-GAINS-CURRENT> 41
<APPREC-INCREASE-CURRENT> 743
<NET-CHANGE-FROM-OPS> 958
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 647
<NUMBER-OF-SHARES-REDEEMED> (51)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 9,101
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 7
<NAME> ALGER AMERICAN GROWTH PORTFOLIO
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 22,816
<INVESTMENTS-AT-VALUE> 24,171
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 24,171
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3
<TOTAL-LIABILITIES> 3
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 1,648
<SHARES-COMMON-PRIOR> 630
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 24,168
<DIVIDEND-INCOME> 490
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> (210)
<NET-INVESTMENT-INCOME> 280
<REALIZED-GAINS-CURRENT> 382
<APPREC-INCREASE-CURRENT> 1,269
<NET-CHANGE-FROM-OPS> 1,931
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,462
<NUMBER-OF-SHARES-REDEEMED> (444)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 15,923
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
