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[USAA LOGO APPEARS HERE]
USAA LIFE INSURANCE COMPANY
VARIABLE ANNUITY
MAY 1, 1998
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USAA LIFE INSURANCE COMPANY
VARIABLE ANNUITY
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TABLE OF CONTENTS
SECTION
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A. Flexible Premium Deferred Combination
Fixed and Variable Annuity Contract Prospectus 3A - 36A
B. USAA Life Investment Trust Prospectus 37B - 58B
C. Scudder Variable Life Investment Fund Prospectus
(Capital Growth Portfolio) 59C - 76C
D. Alger American Fund Prospectus
(American Growth Portfolio) 77D - 86D
E. BT Insurance Funds Trust Prospectuses 87E - 129E
(Equity 500 Index Fund) 87E - 100E
(Small Cap Index Fund) 101E - 114E
(EAFE/R/ Equity Index Fund) 115E - 129E
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VARIABLE ANNUITY
Flexible Premium Deferred Combination
Fixed amd Variable Annuity Contract
OFFERED BY
USAA Life Insurance Company
9800 Fredericksburg Road, San Antonio, Texas 78288
Telephone: (1-800-531-2923) Prospectus dated: May 1, 1998
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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 twelve Variable Fund Accounts (referred
to herein as "Variable 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 Money Market Fund
("Money Market Fund"), USAA Life Income Fund ("Income Fund"), USAA Life Growth
and Income Fund ("Growth and Income Fund"), USAA Life World Growth Fund ("World
Growth Fund"), USAA Life Diversified Assets Fund ("Diversified Assets Fund"),
USAA Life Aggressive Growth Fund ("Aggressive Growth Fund"), and USAA Life
International Fund ("International Fund"); the Capital Growth Portfolio-Class A
shares of the Scudder Variable Life Investment Fund (the "Scudder VLIF Capital
Growth Portfolio"); the Growth Portfolio of The Alger American Fund (the "Alger
American Growth Portfolio"); and the Equity 500 Index Fund, Small Cap Index Fund
and EAFE/R/ Equity Index Fund of the BT Insurance Funds Trust (the "BT Equity
500 Index Fund," "BT Small Cap Index Fund" and "BT EAFE/R/ Equity Index Fund").
The Equity 500 Index Fund, Small Cap Index Fund and EAFE/R/ Equity Index Fund of
the BT Insurance Funds Trust 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 FUND ACCOUNTS ARE NOT
DEPOSITS OR OTHER OBLIGATIONS OF, OR GUARANTEED BY, THE USAA FEDERAL SAVINGS
BANK, ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC) OR ANY
OTHER GOVERNMENT AGENCY, ARE SUBJECT TO INVESTMENT RISKS, AND MAY LOSE VALUE.
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, 1998 ("SAI"), about the Separate Account with the
Securities and Exchange Commission ("SEC" or the "Commission"). The SAI, dated
May 1, 1998, 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 1-800-531-2923 or write the Company at the address above. A Table
of Contents for the SAI appears on page 36 A of this Prospectus.
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THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE
SECURITIES DESCRIBED IN THIS PROSPECTUS NOR HAS IT 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 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, THE ALGER AMERICAN GROWTH PORTFOLIO,
THE BT EQUITY 500 INDEX FUND, THE BT SMALL CAP INDEX FUND, AND THE BT EAFE/R/
EQUITY FUND. EACH PROSPECTUS SHOULD BE READ CAREFULLY BEFORE INVESTING AND THEN
RETAINED FOR FUTURE REFERENCE.
3 A
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TABLE OF CONTENTS
DEFINITIONS OF SPECIAL TERMS................................................. 7A
SUMMARY...................................................................... 8A
EXPENSE TABLE................................................................ 9A
SELECTED ACCUMULATION UNIT DATA..............................................11A
FINANCIAL STATEMENTS.........................................................12A
USAA LIFE....................................................................12A
THE SEPARATE ACCOUNT.........................................................13A
THE FUNDS....................................................................13A
Investment Objectives of the Funds.........................................13A
Management of the Funds....................................................14A
Substitution of Funds......................................................14A
Dividends and Capital Gain Distributions...................................14A
Voting Privileges..........................................................14A
Special Considerations.....................................................14A
FIXED FUND ACCOUNT...........................................................15A
Fixed Fund Account Withdrawal Charge.......................................15A
CONTRACT ISSUANCE AND PREMIUM PAYMENTS.......................................16A
Who May Purchase a Contract................................................16A
How to Purchase a Contract................................................16A
Minimum Premium Payments...................................................17A
Initial Premium Payments...................................................17A
Subsequent Premium Payments................................................17A
Distributor................................................................17A
Return Privilege...........................................................18A
Minimum Contract Value.....................................................18A
ACCUMULATION PHASE...........................................................18A
Fixed Fund Account Value...................................................18A
Variable Fund Account Value................................................18A
Net Investment Factor......................................................19A
TRANSFERS AND WITHDRAWALS....................................................19A
Transfers..................................................................19A
Full and Partial Withdrawals...............................................20A
CHARGES AND DEDUCTIONS.......................................................20A
Premium Taxes..............................................................20A
Contract Maintenance Charge................................................20A
Administrative Expense Charge..............................................20A
Mortality and Expense Risk Charge..........................................21A
Income Taxes...............................................................21A
Expenses of the Funds......................................................21A
Transfer Fee...............................................................21A
Fixed Fund Account Withdrawal Charge.......................................21A
SPECIAL SERVICES.............................................................21A
Dollar Cost Averaging Program..............................................21A
Systematic Withdrawal Program..............................................22A
Automatic Payment Plan.....................................................22A
DISTRIBUTION PHASE...........................................................22A
Annuity Date...............................................................22A
Application of Contract Value..............................................23A
Fixed and Variable Annuity Payments........................................23A
4 A
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<TABLE>
<CAPTION>
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Number of Annuity Units....................................................23A
Annuity Unit Value.........................................................23A
Distribution Options.......................................................23A
Transfers of Annuity Units.................................................25A
Minimum Contract Value.....................................................25A
POSTPONEMENT OF PAYMENTS.....................................................25A
DEATH BENEFITS...............................................................25A
Death Benefits Prior to the Annuity Date...................................25A
Death Benefits On or After the Annuity Date................................26A
OTHER ASPECTS OF THE CONTRACT................................................26A
Contract Agreement.........................................................26A
Contract Owner.............................................................26A
Change of Ownership and Assignment.........................................26A
Annuitant..................................................................27A
Beneficiary................................................................27A
Change of Beneficiary......................................................27A
TAX MATTERS..................................................................27A
Tax Considerations Relating to Your Annuity................................27A
Natural Persons............................................................27A
Non-Natural Persons........................................................28A
Distributions During the Accumulation Phase from Nonqualified Plans........28A
Distributions During the Distribution Phase from Nonqualified Plans........28A
Distributions from Qualified Plans.........................................28A
Penalty on Distributions...................................................28A
Multiple Contracts.........................................................29A
Federal Income Tax Withholding.............................................29A
Assignments................................................................29A
Tax-Free Exchanges.........................................................29A
Transfers Between Investment Options.......................................29A
Generation-Skipping Transfers..............................................29A
Diversification............................................................29A
Contract Owner Control.....................................................30A
Qualified Plans............................................................30A
TYPES OF QUALIFIED RETIREMENT PLANS..........................................30A
Individual Retirement Annuity ("IRA")......................................30A
Roth IRA...................................................................30A
Simplified Employee Pension-Individual Retirement Annuity ("SEP-IRA")......31A
Salary Reduction Simplified Employee Pension (SARSEP-IRA)..................31A
Simple Retirement Accounts.................................................31A
Tax Sheltered Annuity ("TSA")..............................................31A
Texas Optional Retirement Program ("ORP")..................................31A
LEGAL PROCEEDINGS............................................................32A
ANNUAL STATEMENTS AND REPORTS................................................32A
ADMINISTRATION OF THE CONTRACTS..............................................32A
Telephone Transactions.....................................................32A
OWNER INQUIRIES..............................................................33A
PERFORMANCE INFORMATION......................................................33A
Yield and Total Return.....................................................33A
Performance Comparisons....................................................33A
Variable Fund Account Performance.........................................33A
Effect of Tax-Deferred Accumulations.......................................33A
CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION..............................36A
</TABLE>
5 A
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DEFINITIONS OF SPECIAL TERMS:
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ACCOUNT - The Fixed Fund Account or a Variable 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 Fund Account under the Contract before the Company starts making
income payments from the Variable 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 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.
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.
6 A
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DEFINITIONS OF SPECIAL TERMS, CONTINUED:
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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"), The Alger American Fund ("Alger Fund"), and BT Insurance Funds Trust
("BT Funds"). In some cases, only certain Funds of the latter three 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 twelve Variable Fund
Accounts, through which the Company invests in the twelve 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 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 Fund Accounts of the
Separate Account.
VARIABLE FUND ACCOUNT - Any of the several investment alternatives under this
Contract that correspond to a particular Fund. Premium payments allocated to a
Variable Fund Account are invested by the Company through its Separate Account
in the corresponding Fund.
VARIABLE FUND ACCOUNT VALUE - The amount of your Contract Value that is in a
Variable 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.
7 A
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SUMMARY
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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 twelve Variable 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 twelve
Variable Fund Accounts, each of which invests in a corresponding Fund of a
Mutual Fund. The twelve Funds that are available through the Variable Fund
Accounts include the following:
USAA LIFE INVESTMENT TRUST
--------------------------
USAA Life Money Market Fund
USAA Life Income Fund
USAA Life Growth and Income Fund
USAA Life World Growth Fund
USAA Life Diversified Assets Fund
USAA Life Aggressive Growth Fund
USAA Life International Fund
SCUDDER VARIABLE LIFE INVESTMENT FUND
-------------------------------------
Scudder Capital Growth Portfolio - Class A shares
THE ALGER AMERICAN FUND
-----------------------
Alger American Growth Portfolio
BT INSURANCE FUNDS TRUST
------------------------
BT Equity 500 Index Fund
BT Small Cap Index Fund
BT EAFE/R/ Equity Index Fund
For more information, see "The Funds" below.
WHO MANAGES MY INVESTMENT?
The investment advisers for the Trust, the Scudder VLIF Capital Growth
Portfolio, the Alger American Growth Portfolio, and the BT Funds, are USAA
Investment Management Company ("USAA IMCO"), Scudder Kemper Investments, Inc.
("Scudder"), Fred Alger Management, Inc. ("Alger Management"), and Bankers
Trust Company ("Bankers Trust"), 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 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
8 A
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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 Fund Accounts you select in connection with the Variable Annuity
Distribution Option. The net investment return of the Variable 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
0.65% 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.)
In addition to the Contract charges, each Fund pays a fee to its Adviser,
based upon Fund assets under management. There are also 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 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 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 calendar days, your initial premium payment will be allocated
to the USAA Life Money Market Fund Account (See "Initial Premium Payments,"
below.)
EXPENSE TABLE
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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.
9 A
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CONTRACT OWNER TRANSACTION EXPENSES
Sales Load Imposed on Premium Payments......................................None
Deferred Sales Load.........................................................None
Surrender Fee for Variable Fund Account................................None/(1)/
Transfer Fee...........................................................None/(1)/
Contract Maintenance Charge /(2)/.........................................$30.00
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SEPARATE ACCOUNT ANNUAL EXPENSES
(AS A PERCENTAGE OF AVERAGE DAILY NET ASSET VALUE)
Mortality and Expense Risk Charge /(3)/....................................0.65%
Administrative Expense /(3)/...............................................0.10%
Total Separate Account Annual Expenses /(3)/...............................0.75%
<TABLE>
<CAPTION>
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ANNUAL EXPENSES OF THE FUNDS (AS A PERCENTAGE OF AVERAGE NET ASSETS)/(4)/
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MANAGEMENT OTHER EXPENSES AFTER TOTAL FUND ANNUAL
NAME OF FUND FEES EXPENSE REIMBURSEMENT /(5)/ EXPENSES/(5)/
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<S> <C> <C> <C>
USAA Life Money Market Fund .20% .15% .35%
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USAA Life Income Fund .20 .15 .35
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USAA Life Growth and Income Fund .20 .14 .34
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USAA Life World Growth Fund .20 .39 .59
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USAA Life Diversified Assets Fund .20 .15 .35
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USAA Life Aggressive Growth Fund .50 .20 .70
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USAA Life International Fund .65 .45 1.10
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Scudder VLIF Capital Growth Portfolio .475 .035 .51
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Alger American Growth Portfolio .75 .04 .79
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BT Equity 500 Index Fund .20 .10 .30
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BT Small Cap Index Fund .35 .10 .45
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BT EAFE/R/ Equity Index Fund .45 .21 .65
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</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 twelve Variable 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 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 World Growth Fund, .70% of the monthly average net assets of the
Aggressive Growth Fund, 1.10% of the monthly average net assets of the
International Fund, and .35% of the monthly average net assets of each other
Fund. In the absence of expense reimbursement arrangements, the expenses of
certain of the Trust's Funds for the 1997 fiscal year would have been as
follows: .70%, .52%, .85% and 1.24% for the Money Market, Income,
Diversified Assets, Aggressive Growth and International Funds, respectively.
The Underwriting Agreement is terminable by any party thereto upon 120 days'
notice to the other parties. Pursuant to a voluntary expense reimbursement
arrangement, Bankers Trust reimburses the BT Funds for certain expenses so
that the Equity 500 Index Fund, Small Cap Index Fund and EAFE/R/ Equity
Index Fund total operating expenses will not exceed 0.30%, 0.45% and 0.65%
respectively. Such expense reimbursements may be terminated at the
discretion of Bankers Trust. Absent such voluntary reimbursement
arrangement, the expenses for the 1997 fiscal year for the Equity 500 Index
Fund, the Small Cap Index Fund and the EAFE/R/ Equity Index Fund would have
been 2.78%, 3.27% and 2.75% respectively.
- --------------------------------------------------------------------------------
10A
<PAGE>
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 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 $32,325 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 Money Market Fund Account 12 38 67 153
- -----------------------------------------------------------------------------------------
USAA Life Income Fund Account 12 38 67 153
- -----------------------------------------------------------------------------------------
USAA Life Growth and Income Fund Account 12 38 67 152
- -----------------------------------------------------------------------------------------
USAA Life World Growth Fund Account 15 46 81 184
- -----------------------------------------------------------------------------------------
USAA Life Diversified Assets Fund Account 12 38 67 153
- -----------------------------------------------------------------------------------------
USAA Life Aggressive Growth Fund Account 16 50 87 198
- -----------------------------------------------------------------------------------------
USAA Life International Fund Account 20 63 110 250
- -----------------------------------------------------------------------------------------
Scudder VLIF Capital Growth Portfolio Account 14 44 76 174
- -----------------------------------------------------------------------------------------
Alger American Growth Portfolio Account 17 53 92 210
- -----------------------------------------------------------------------------------------
BT Equity 500 Index Fund Account 12 37 65 147
- -----------------------------------------------------------------------------------------
BT Small Cap Index Fund Account 13 42 73 166
- -----------------------------------------------------------------------------------------
BT EAFE/R/ Equity Index Fund Account 15 48 85 193
- -----------------------------------------------------------------------------------------
</TABLE>
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 Fund Account, other than the Variable Fund Accounts
corresponding to the Funds of the BT Funds, which Fund Accounts had not yet
commenced operations. When reading the table, please bear in mind that the unit
value of each Variable 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 Fund Account.
In addition, dividends declared by each corresponding Fund are reinvested by the
Variable 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 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> SCUDDER
USAA LIFE VLIF ALGER
USAA LIFE GROWTH USAA LIFE USAA LIFE USAA LIFE CAPITAL AMERICAN
MONEY USAA LIFE AND WORLD DIVERSIFIED USAA LIFE INTER- GROWTH GROWTH
MARKET INCOME INCOME GROWTH ASSETS AGGRESSIVE NATIONAL PORTFOLIO PORTFOLIO
FUND FUND FUND FUND FUND GROWTH FUND FUND FUND FUND
ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT ACCOUNT
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Accumulation Unit
Value 1.127755 13.002940 19.287258 16.144375 16.518656 11.735078 10.113861 19.989715 18.239579
- ----------------------------------------------------------------------------------------------------------------------------------
Number of
Accumulation Units
(000) 13,416 545 3,242 1,168 1,401 197 153 1,125 1,722
- ----------------------------------------------------------------------------------------------------------------------------------
December 31, 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Accumulation Unit
Value $1.082816 $11.785992 $15.432048 $14.314911 $13.844197 - - $14.894774 $14.672583
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
11A
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Number of
Accumulation Units
(000) 10,383 430 1,515 692 696 - - 689 1,639
- ----------------------------------------------------------------------------------------------------------------------------------
December 31, 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
- ----------------------------------------------------------------------------------------------------------------------------------
Date of Inception
February 6, 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Accumulation Unit
Value* $ 1.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00 $ 10.00
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Accumulation Unit Value at date of inception. The date of inception for the
Fund Accounts listed, other than the USAA Life Aggressive Growth Fund and USAA
Life International Fund, was February 6, 1995. The date of inception for the
Aggressive Growth Fund and International Fund was May 1, 1997.
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 states including the District of Columbia but
excluding New York. The Company on a consolidated statutory basis had total
assets of $6,862,829,054 on December 31, 1997. 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 SEC as a unit investment trust under the Investment Company
Act of 1940, as amended (the "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 twelve Variable Fund
Accounts, each of which invests in a corresponding Fund or Portfolio, described
below.
THE FUNDS
- ---------
THE VARIABLE FUND ACCOUNTS
- ---------------------------
Each of the twelve Fund Accounts of the Separate Account invests solely in a
corresponding Fund. Seven of the Fund Accounts invest in Funds of the Trust;
one Fund Account invests in a Fund of the Scudder Fund; one Fund Account invests
in a Fund of the Alger Fund; and three Fund Accounts invest in Funds of the BT
Funds. The Trust, the Scudder Fund, the Alger Fund and the BT Funds are all
Mutual Funds
12A
<PAGE>
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 MONEY MARKET FUND - The Fund's investment objective is to seek the
highest level of current income consistent with preservation of capital and
maintenance of liquidity.
USAA LIFE INCOME FUND - The Fund's investment objective is to seek maximum
current income without undue risk to principal.
USAA LIFE GROWTH AND INCOME FUND - The Fund's investment objective is to seek
capital growth and current income.
USAA LIFE WORLD GROWTH FUND - The Fund's investment objective is to seek long-
term capital appreciation.
USAA LIFE 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 AGGRESSIVE GROWTH FUND - The Fund's investment objective is
appreciation of capital.
USAA LIFE 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.
BT EQUITY 500 INDEX FUND - The Fund's investment objective is to replicate as
closely as possible (before deduction of Fund expenses) the total return of the
Standard & Poor's 500 Composite Stock Price Index.
BT SMALL CAP INDEX FUND - The Fund's investment objective is to replicate as
closely as possible (before deduction of Fund expenses) the total return of the
Russell 2000 Small Stock Index.
BT EAFE/R/ EQUITY INDEX FUND - The Fund's investment objective is to replicate
as closely as possible (before deduction of Fund expenses) the total return of
the Morgan Stanley Capital International Europe, Australia, Far East ("EAFE")
Index.
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 Kemper
Investments, 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. Bankers Trust
Company, 130 Liberty Street, New York, New York, 10006, serves as the investment
manager of the BT Funds. Neither Scudder Kemper Investments, Inc., Fred Alger
Management, Inc., nor Bankers Trust Company 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 Fund Accounts to permit
investment in additional mutual funds.
13A
<PAGE>
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 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 corresponding Variable 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, the Alger
American Growth Portfolio, the BT Equity 500 Index Fund, the BT Small Cap Index
Fund and the BT EAFE/R/ Equity Index Fund held directly by it or through the
Separate Account in the Variable 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
Fund Accounts. The person having the voting interest in a Variable 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 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, the Alger Fund and the BT Funds do not hold regular shareholder
meetings.
SPECIAL CONSIDERATIONS
The Scudder Fund, the Alger Fund, and the BT Funds offer shares to separate
accounts of unaffiliated life insurance companies to fund benefits under
variable annuity contracts and variable life insurance policies. The Trust
offers its shares to separate accounts of the Company to fund benefits under the
Contracts and the variable life insurance policies. The Company does not
foresee any disadvantage to Contract Owners arising out of these arrangements.
Nevertheless, differences in treatment under tax and other laws, as well as
other considerations, could cause the interests of various purchasers of
contracts and policies to conflict. For example, violation of the federal tax
laws by one separate account investing in a Mutual Fund could cause the
contracts or policies funded through another separate account to lose their tax-
deferred status, unless remedial action were taken. If a material
irreconcilable conflict arises between separate accounts, a separate account may
be required to withdraw its participation in a Mutual Fund. If it becomes
necessary for any separate account to replace shares of a Mutual Fund with
another investment, the Mutual Fund may have to liquidate portfolio securities
on a disadvantageous basis. At the same time, each Mutual Fund and the Company
are subject to conditions imposed by the Securities and Exchange Commission that
are designed to prevent or remedy any conflict of interest. In this connection,
the Board of Trustees of each Mutual Fund has the obligation to monitor events
in order to identify any material irreconcilable conflict that may possibly
arise and to determine what action, if any, should be taken to remedy or
eliminate the conflict.
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. THE
FIXED FUND ACCOUNT IS ALSO NOT PART OF THE CONTRACT ISSUED UNDER THE TEXAS
OPTIONAL RETIREMENT PROGRAM. (SEE "TEXAS OPTIONAL RETIREMENT PROGRAM ("ORP").
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. 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.
14A
<PAGE>
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 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 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 PAYMENTS
WITHDRAWAL OR TRANSFER AND WITHDRAWN OR TRANSFERRED IN EXCESS
DATE OF PAYMENT INTO THE OF A 15% FREE WITHDRAWAL AMOUNT
FIXED FUND ACCOUNT
- --------------------------------------------------------------------------------
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 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.
15A
<PAGE>
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.
MINIMUM PREMIUM PAYMENTS
The current minimum initial and subsequent premium payments under the
Contracts are set out below.
MINIMUM MINIMUM
TYPE OF PLAN INITIAL PREMIUM SUBSEQUENT PREMIUM
- --------------------------------------------------------------------------------
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 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 Fund
Accounts, we will allocate it to the USAA Life Money Market Fund Account on the
Effective Date. That premium will remain in the USAA Life Money Market Fund
Account for the Free Look Period plus five calendar days. On the Valuation Date
immediately following the end of that
16A
<PAGE>
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 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 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 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 ("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 Fund Accounts or (2) the Variable Fund
Accounts' 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
Fund Accounts under the Contract. All premium payments credited to the Fixed
Fund Account or Variable 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 Fund Accounts' 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 transferred from the Variable
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 FUND ACCOUNT VALUE
The value of your Contract in each Variable Fund Account ("Variable 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 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 Fund Account when you allocate
premium payments or transfer amounts from other Variable Fund Accounts or the
Fixed Fund Account to that particular Variable Fund Account. The number of
17A
<PAGE>
Accumulation Units credited to a Variable 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 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 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 Fund Account's Accumulation Units are valued separately.
Initially, the Accumulation Unit Value of each Variable Fund Account was set at
$10, except for the Money Market Fund Account, which was set at $1. Thereafter,
the Accumulation Unit Value of a Variable 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 Fund Account from one Valuation Period to the next Valuation Period.
The NIF for each Variable 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 Fund Account
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 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 0.75% (0.65% 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 Fund Accounts. There is no charge for a transfer from a
Variable 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 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.
(5) We reserve the right at any time and without prior notice to terminate,
suspend, or modify these transfer privileges.
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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 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 Fund Accounts
from which you wish the partial withdrawal to be made. If you do not specify the
Variable Fund Accounts, the withdrawal will be taken pro rata from your
Contract Value in each Variable Fund Account. In connection with a partial
withdrawal, the minimum amount that you may request for withdrawal from the
Fixed Fund Account or a Variable 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
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. The Contract Maintenance Charge is waived by the
Company for contracts issued under the Texas Optional Retirement Program.
ADMINISTRATIVE EXPENSE CHARGE
The Company assesses each Variable Fund Account a daily charge at an
annualized rate of 0.10% of the average daily net assets of each Variable 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 Fund Account. These expenses
include, but are not limited to: preparation of the Contracts, confirmations,
periodic 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.
The investment advisers or other affiliates of the Alger Fund and the BT
Funds, respectively, certain Mutual Funds reimburse the Company for the cost of
administrative services provided to those Funds as investment options under the
Contracts. Compensation is paid out of fee earnings, based on a percentage of
each of these Mutual Fund's average net assets attributable to a Contract.
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MORTALITY AND EXPENSE RISK CHARGE
To compensate it for assuming mortality and expense risks under the Contracts,
the Company assesses each Variable Fund Account a daily charge at the
annualized rate of 0.65% of the average daily net assets of each Variable Fund
Account attributable to the Contracts. This charge consists of approximately
0.40% for mortality risks and 0.25% 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 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 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
Fund Accounts, or for transfers from a Variable Annuity Fund Account to the
Fixed Fund Account. Transfers from the Fixed Account to a Variable 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 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 Fund Accounts, by
transferring a fixed dollar amount or a specified percentage at regular
intervals from one or more Variable 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 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.
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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 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 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 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 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.
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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 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 Fund Accounts funding the Variable
Annuity Payment multiplied by (2) the values of those Annuity Units ("Annuity
Unit Values"). The payments from each Variable 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 Fund
Account under your Contract will depend on the amount of Contract Value that you
have allocated to each Variable Fund Account. The Contract Value allocated to
each Variable Fund Account that is applied to provide Variable Annuity Payments
is converted to a number of Annuity Units for each Variable 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 Fund Account which thereafter remains
constant.
ANNUITY UNIT VALUE - The Annuity Unit Value for each Variable Fund Account was
established initially at $10 ($1 in the case of Money Market Fund Account).
Thereafter, the Annuity Unit Value of a Variable Fund Account 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 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
(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 Fund Account is
credited instead).
As a result of the foregoing computations, if the net investment return for a
Variable Fund Account for any month is at an annual rate of more than 3%, any
Variable Annuity Payment based on that Variable 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 Fund Account for any
month is at an annual rate of less than 3%, any Variable Annuity Payment based
on that Variable 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 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 Fund Account Value will be applied to effect a Variable Annuity with
payments funded
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from each Variable Fund Account in the same proportion as each Account's value
has to the total value of all Variable 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 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 Fund Accounts (up to a maximum of four Variable Fund
Accounts), or from a Variable 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
Fund Account is $100.
Transfers from a Variable Fund Account to another Variable 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.
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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 Fund Account Value as of that Date of
Receipt. In addition, we will normally effect transfers of Contract Value among
the Fixed and Variable Fund Accounts using the Fixed or Variable 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
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.
(2) If the Owner and the Annuitant are the same person and the Beneficiary is
the Owner's spouse, or if the Owner and the Annuitant are not the same
person and 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 distributions 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
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(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 survive 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.
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TAX MATTERS
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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. The United States
Congress has in the past and may again in the future enact legislation changing
the tax treatment of annuities in both Qualified Plans and Nonqualified Plan.
The Treasury Department may issue new or amended regulations or other
interpretations of existing law. Judicial interpretations may also affect the
tax treatment of annuities. It is possible that such changes could have
retroactive effect. 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
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.
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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 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.
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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 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, the Alger Fund
and the BT Funds have agreed that those Funds also be managed to comply.
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. Such guidelines may apply only prospectively, although
retroactive application is possible if such guidelines are considered not to
embody a new position.
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.
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TYPES OF QUALIFIED RETIREMENT PLANS
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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.
ROTH IRA
Individuals who are eligible may maintain a Roth IRA. Contributions to a Roth
IRA are not tax deductible. However, distributions from a Roth IRA may be tax
free depending on how and when the taxpayer withdraws the money from the Roth
IRA account. Subject to certain income limitations, an individual may make a
rollover contribution from a non-Roth IRA to a Roth IRA. While a rollover
contribution will be taxable currently, any future distributions from a Roth IRA
may be tax free. The maximum non-deductible contribution to a Roth IRA is
$2,000, not counting rollover contributions. Contributions to a Roth IRA may be
made beyond age 70 1/2. The maximum yearly contributions allowed for any
individual to all Roth IRAs and IRAs set forth in the preceding paragraph is
$2,000.
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 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).
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TEXAS OPTIONAL RETIREMENT PROGRAM ("ORP")
The ORP is a defined 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 are
vested in the ORP and retain control over all investments, both employee and
employer contributions. Participants with one year or less of participation in
the ORP are not vested and 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 MONEY MARKET FUND
ACCOUNT. AFTER THE FIRST YEAR, EMPLOYER CONTRIBUTIONS CAN BE MAINTAINED IN THE
MONEY MARKET FUND ACCOUNT OR TRANSFERRED TO ANY OF THE OTHER VARIABLE 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. IN PARTICULAR, THE FIXED FUND
ACCOUNT IS NOT PART OF THE CONTRACT ISSUED UNDER THE ORP. YOU SHOULD CAREFULLY
READ YOUR CONTRACT, RIDERS AND ENDORSEMENTS TO REVIEW 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
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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 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
Fund Accounts, periodic reports for the Separate Account, and any other
information.
ADMINISTRATION OF THE CONTRACTS
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The Company has the responsibility for administration of the Contracts, which
among other things, includes application and premium processing, issuing the
Contracts, and maintaining the required Owner's records.
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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, 9800 Fredericksburg Road, San Antonio, Texas 78288, 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 Fund Accounts. These figures will be based on
historical results and are not intended to indicate future performance. The
"yield" of a Variable Fund Account refers to the income generated by an
investment in the Variable 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 Money Market Fund Account,
which is calculated similarly but, when annualized, the income earned by an
investment in the Variable 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 Fund Account is the total change in value of
an investment in the Variable 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 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 FUND ACCOUNT PERFORMANCE
The investment performance information for each Variable Fund Account will
generally reflect the investment performance of the corresponding Fund. Table I
below shows the average annual total return of each Variable Fund Account for
the periods indicated. 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 Fund Account for the periods indicated.
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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 Variable Annuity Surrender Value as
indicated 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.
VARIABLE FUND ACCOUNT PERFORMANCE TABLE I
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (THROUGH DECEMBER 31, 1997)
<TABLE>
<CAPTION>
YEAR ENDED
NAME OF VARIABLE FUND ACCOUNT SINCE INCEPTION* DECEMBER 31, 1997
<S> <C> <C>
USAA Life Money Market Fund Account 4.13 3.95
USAA Life Income Fund Account 9.36 10.14
USAA Life Growth and Income Fund Account 25.23 24.83
USAA Life World Growth Fund Account 17.82 12.62
USAA Life Diversified Assets Fund Account 18.74 19.15
USAA Life Aggressive Growth Fund Account - -
USAA Life International Fund Account - -
Scudder VLIF Capital Growth Portfolio Fund Account 26.78 34.05
Alger American Growth Portfolio Fund Account 22.86 24.15
</TABLE>
TABLE II
- --------------------------------------------------------------------------------
CUMULATIVE TOTAL RETURN (THROUGH DECEMBER 31, 1997)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED
NAME OF VARIABLE FUND ACCOUNT SINCE INCEPTION* DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
USAA Life Money Market Fund Account 12.45 3.95
USAA Life Income Fund Account 29.70 10.14
USAA Life Growth and Income Fund Account 92.49 24.83
USAA Life World Growth Fund Account 61.09 12.62
USAA Life Diversified Assets Fund Account 64.81 19.15
</TABLE>
32A
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
USAA Life Aggressive Growth Fund Account 17.24 -
USAA International Fund Account 1.03 -
Scudder VLIF Capital Growth Portfolio Fund Account 99.51 34.05
Alger American Growth Portfolio Fund Account 82.03 24.15
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Each of the Variable Fund Accounts, indicated above (with the exception of
the USAA Life Aggressive Growth and International Fund Accounts) commenced
operations on February 6, 1995. The Aggressive Growth and International Fund
Accounts commenced operations on May 1, 1997. Average Annual Total Return
figures for the Aggressive Growth and International Fund Accounts are not
annualized.
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.
33A
<PAGE>
QUALIFIED VARIABLE ANNUITY
[A CHART IN THE FORM OF A LINE GRAPH APPEARS HERE. THE DATA POINTS FROM THE
GRAPH ARE AS FOLLOWS:
BEFORE TAX VARIABLE VARIABLE ANNUITY
ANNUITY PLAN SURRENDER VALUE TAXABLE INVESTMENT
------------ --------------- ------------------
10 years $ 33,134 $ 23,856 $ 21,531
20 years $113,392 $ 81,642 $ 64,683
30 years $307,795 $221,612 $151,171]
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. If different tax rates apply to each investment, comparative values
will differ.
NONQUALIFIED VARIABLE ANNUITY
[A CHART IN THE FORM OF A LINE GRAPH APPEARS HERE. THE DATA POINTS FROM THE
GRAPH ARE AS FOLLOWS:]
BEFORE TAX VARIABLE VARIABLE ANNUITY
ANNUITY PLAN SURRENDER VALUE TAXABLE INVESTMENT
------------ --------------- ------------------
10 years $ 88,131 $ 78,182 $ 78,741
20 years $290,461 $237,300 $227,337
30 years $780,550 $603,604 $525,158]
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. If different tax rates apply to each investment
comparative values will differ.
34A
<PAGE>
CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
A Statement of Additional Information (the "SAI"), dated May 1, 1998, is
incorporated by reference into this Prospectus and will be provided on request
and without charge.
FOR A COPY CALL 1-800-531-2923 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 Fund Account
Other Variable Fund Accounts
ANNUITY PAYMENTS
Gender of Annuitant
Misstatement of Age or Sex and Other Errors
Annuity Unit Value
FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
35A
<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, 1998
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, 1998 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 1-800-531-2923.
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............................... 5
LEGAL MATTERS...................................... 5
CALCULATION OF PERFORMANCE INFORMATION............. 5
USAA Life Money Market Fund Account............ 5
Other Variable Fund Accounts................... 6
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 states, including the District of
Columbia, except New York. USAA Life is a wholly-owned stock subsidiary of the
United Services Automobile Association ("USAA"), the parent company of the USAA
group of companies (a large diversified financial services conglomerate).
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 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.
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.
3
<PAGE>
SERVICES
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 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.
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 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 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
4
<PAGE>
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 59-1/2. 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.
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, 1997 and 1996
and for each of the years in the three-year period ended December 31, 1997 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 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 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 $32,325 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
Fund Account.
USAA LIFE MONEY MARKET FUND ACCOUNT
- ------------------------------------
YIELD and EFFECTIVE YIELD quotations for the USAA Life Money Market Fund
Account are computed in accordance with standard methods prescribed by the SEC.
Under these methods, the USAA Life 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 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
5
<PAGE>
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 Fund Account.
The effective yield of the USAA Life Money Market Fund Account reflects the
effects of compounding, and is computed according to the following formula
prescribed by the SEC:
Effective Yield = [(Base Period Return + 1)365/7] - 1
For the seven day period ended December 31, 1997, the current yield of the
USAA Life Money Market Fund Account was 4.29%.
OTHER VARIABLE FUND ACCOUNTS
- -----------------------------
Each Variable 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 Fund Account, other than yield quotations of the
USAA Life Money Market Fund Account, will be accompanied by information on that
Variable 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 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.
6
<PAGE>
The standardized average annual and cumulative total returns for each Variable
Fund Account for periods ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
STANDARDIZED AVERAGE
ANNUAL TOTAL RETURN CUMULATIVE TOTAL RETURN
---------------------------- ---------------------------
VARIABLE FUND ACCOUNT SINCE INCEPTION* ONE YEAR SINCE INCEPTION* ONE YEAR
- --------------------------------------- ----------------- --------- ----------------- ---------
<S> <C> <C> <C> <C>
USAA Life Money Market 4.13% 3.95% 12.45% 3.95%
USAA Life Income 9.36% 10.14% 29.70% 10.14%
USAA Life Growth and Income 25.23% 24.83% 92.49% 24.83%
USAA Life World Growth 17.82% 12.62% 61.09% 12.62%
USAA Life Diversified Assets 18.74 19.15% 64.81% 19.15%
USAA Life Aggressive Growth - - 17.24 -
USAA Life International - - 1.03 -
Scudder VLIF Capital Growth Portfolio 26.78% 34.05% 99.51% 34.05%
Alger American Growth Portfolio 22.86% 24.15% 82.03% 24.15%
</TABLE>
* Each of the Variable Fund Accounts indicated above (with the exception of the
USAA Life Aggressive Growth and International Fund Accounts) commenced
operations on February 6, 1995. The Aggressive Growth and International Fund
Accounts commenced operation on May 1, 1997. Average Annual Total Return
Figures for the Aggressive Growth and International Fund Accounts are not
annualized.
The three year average annual total return* and cumulative total return* for
certain Variable Fund Accounts for the period ended March 31, 1998 were as
follows:
<TABLE>
<CAPTION>
Three Year Three Year
Average Annual Cumulative
Variable Fund Account Total Return Total Return
- ---------------------- ------------ ------------
<S> <C> <C>
USAA Life Money Market 4.11% 12.84%
USAA Life Income 8.92% 29.21%
USAA Life Growth and Income 27.70% 108.23%
USAA Life World Growth 21.38% 78.84%
USAA Life Diversified Assets 19.82% 72.04%
USAA Life Aggressive Growth - -
USAA Life International - -
Scudder VLIF Capital Growth Portfolio 30.28% 121.10%
Alger American Growth Portfolio 26.80% 103.87%
</TABLE>
* The three year average annual total return and three year cumulative total
return are calculated using the applicable formulas described above.
30-DAY YIELD. Each Variable Fund Account, other than the USAA Life 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
YIELD =2 [(a-b +1) -1]
---
[(cd ) ]
7
<PAGE>
Where:
a = Net investment income earned during the period by the Fund whose shares
are owned by the Variable 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.
Illustration of Calculation of Annuity Unit Value
- -------------------------------------------------
Annuity at age 65: Life with 120 payments certain:
<TABLE>
<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)
</TABLE>
8
<PAGE>
Illustration of Annuity Payments
- --------------------------------
Annuity at age 65: Life with 120 payments certain:
<TABLE>
<S> <C> <C>
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, 1997 and 1996, and
for each of the years in the three-year period ended December 31, 1997, 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, 1997,
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 as of December 31, 1997, and 1996, 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, 1997. 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 as of December 31, 1997, and 1996, and the results of their operations
and their cash flows for each of the years in the three-year period ended
December 31, 1997 in conformity with generally accepted accounting principles.
March 20, 1998
KPMG PEAT MARWICK LLP
<PAGE>
USAA LIFE INSURANCE COMPANY
Consolidated Balance Sheets
December 31, 1997 and 1996
(Dollars in Thousands)
<TABLE>
<CAPTION>
Assets 1997 1996
- ------ ---------- ---------
<S> <C> <C>
Investments:
Debt securities, at amortized cost $1,245,257 1,471,707
Debt securities, at fair value 4,869,912 4,119,664
Equity securities, at fair value 352,863 313,068
Mortgage loans 4,462 4,746
Policy loans 130,246 118,683
---------- ---------
Total investments 6,602,740 6,027,868
Cash and cash equivalents 39,642 9,444
Premium balances receivable 2,899 1,655
Accounts receivable - affiliates 50 20
Furniture and equipment 1,403 1,156
Accrued investment income 78,929 71,636
Deferred policy acquisition costs 207,090 189,298
Deferred tax 22,230 28,244
Other assets 34,631 20,712
Separate account assets 184,797 93,804
---------- ---------
Total assets $7,174,411 6,443,837
========== =========
Liabilities
- -----------
Insurance reserves $ 992,983 811,413
Funds on deposit 5,097,272 4,763,093
Accounts payable and accrued expenses 87,315 34,295
Accounts payable - affiliates 12,072 13,441
Other liabilities 55,099 57,107
Separate account liabilities 184,797 93,804
---------- ---------
Total liabilities 6,429,538 5,773,153
---------- ---------
Stockholders' Equity
- --------------------
Preferred capital stock, $100 par value;
1,200,000 shares authorized (600,000
in 1996); 600,000 shares issued and
outstanding 60,000 60,000
Common capital stock, $100 par value;
30,000 shares authorized; 25,000 shares
issued and outstanding 2,500 2,500
Additional paid-in capital 51,408 51,408
Net unrealized gains on investments 33,403 22,300
Retained earnings 597,562 534,476
---------- ---------
Total stockholders' equity 744,873 670,684
---------- ---------
Total liabilities
and stockholders' equity $7,174,411 6,443,837
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
USAA LIFE INSURANCE COMPANY
Consolidated Statements of Income
Years ended December 31, 1997, 1996, and 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Revenues
Premiums $355,825 337,442 305,898
Investment income, net 452,104 428,161 406,922
Fees, sales and loan income 9,403 8,752 8,345
Net realized investment gains 43,524 13,773 1,748
Other revenues 31,315 13,335 14,587
-------- ------- -------
Total revenues 892,171 801,463 737,500
-------- ------- -------
Benefits and expenses
Losses, benefits and settlement expenses 542,880 498,341 462,032
Deferred policy acquisition costs 11,898 6,071 3,915
Dividends to policyholders 53,082 53,691 45,588
Other operating expenses 117,354 122,474 124,318
-------- ------- -------
Total benefits and expenses 725,214 680,577 635,853
-------- ------- -------
Income before income taxes 166,957 120,886 101,647
-------- ------- -------
Federal income tax expense (benefit):
Current 57,799 37,090 38,447
Deferred (1,674) (1,494) (3,107)
-------- ------- -------
Total Federal income tax expense 56,125 35,596 35,340
-------- ------- -------
Net income $110,832 85,290 66,307
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
USAA LIFE INSURANCE COMPANY
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1997, 1996, and 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Capital
Balance at beginning of year $113,908 93,908 93,908
Issuance of preferred stock - 20,000 -
-------- ------- -------
End of year 113,908 113,908 93,908
-------- ------- -------
Retained Earnings
Beginning of year 534,476 465,016 418,310
Net income 110,832 85,290 66,307
Dividends to stockholders (47,746) (15,830) (19,601)
-------- ------- --------
End of year 597,562 534,476 465,016
-------- ------- -------
Net unrealized gains (losses) on investments
Beginning of year 22,300 16,446 (38,607)
Increase (decrease) in net unrealized
gains (losses) on investments 11,103 (398) 55,053
Transfer of unrealized capital gains on
separate account - 6,252 -
End of year 33,403 22,300 16,446
-------- ------- -------
Net unrealized gains on separate account
Beginning of year - 13,072 -
Increase (decrease) in net unrealized
gains on separate account - (6,820) 13,072
Transfer of unrealized capital gains on
separate account - (6,252) -
End of year - - 13,072
-------- ------- -------
Total stockholders' equity $744,873 670,684 588,442
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
USAA LIFE INSURANCE COMPANY
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996, and 1995
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996 1995
--------- ------- -------
<S> <C> <C> <C>
Cash from operating activities:
Net income $110,832 85,290 66,307
Adjustments to reconcile net income to net
cash provided by operating activities:
Net realized investment gains (43,524) (13,773) (1,748)
Non-cash investment income (13,148) (5,185) -
(Increase) in deferred policy acquisition costs (19,938) (17,728) (18,993)
Depreciation and amortization (7,951) (5,442) (5,298)
Deferred income tax benefit (1,974) (1,494) (3,107)
(Increase) in premium balances receivable (1,244) (44) (346)
(Increase) in accounts receivable-affiliate (30) (20) -
(Increase) in accrued investment income (7,292) (12,213) (7,171)
(Increase) Decrease in other assets (14,583) (8,495) 6,197
Increase in insurance reserves 102,790 78,926 65,721
Increase (Decrease) in accounts payable and
accrued expense 53,022 (20,126) 8,852
Increase (Decrease) in accounts payable-affiliates (1,370) 3,379 3,394
Increase (Decrease) in other liabilities 432 7,089 (4,712)
Other (3,016) 759 40
-------- ------- -------
Net cash provided by operating activities 153,306 90,923 109,136
-------- ------- -------
Cash flows from investing activities:
Proceeds from sales and maturities of
available-for-sale securities 370,972 587,945 420,818
Proceeds from maturities of held-to-maturity
securities 117,667 106,504 184,729
Proceeds from principal collections on
investments 271,471 351,540 292,673
Other investments sold 948 1,123 934
Retirement of notes receivable - - 30,000
Securities purchased - available-for-sale (1,181,564) (1,460,349) (1,313,784)
Other investments purchased (165) (451) (1,382)
Investment in variable annuity separate account - 87,280 (81,000)
---------- ---------- ----------
Net cash used in investing activities (420,671) (326,408) (467,012)
---------- ---------- -----------
Cash flows from financing activities:
Deposits and interest credited to funds
on deposit 742,374 571,941 655,626
Withdrawals from funds on deposit (419,611) (362,658) (344,774)
Proceeds from issuance of preferred stock - 20,000 -
Dividends to stockholders (25,200) (15,830) (19,601)
-------- -------- --------
Net cash provided by financing activities 297,563 213,453 291,251
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents 30,198 (22,032) (66,625)
Cash and cash equivalents at beginning of year 9,444 31,476 98,101
--------- -------- --------
Cash and cash equivalents at end of year $ 39,642 9,444 31,476
========= ======== ========
</TABLE>
Significant Non-Cash Financing Activities:
In 1997, the Company declared and paid a dividend to stockholders by
transferring equity securities with a fair value of $22,546, a cost of $11,560,
and recognized a gain of $10,986.
See accompanying notes to consolidated financial statements.
5
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(1) Summary of significant accounting policies
------------------------------------------
(a) Organization
------------
USAA LIFE INSURANCE COMPANY (the Company) is a wholly-owned subsidiary
of UNITED SERVICES AUTOMOBILE ASSOCIATION (USAA). The Company markets
individual life insurance policies, annuity contracts, and individual
and group accident and health policies primarily to individuals eligible
for membership in USAA. The Company is licensed to do business in all
states including the District of Columbia but excluding New York. The
Company has a subsidiary company (USAA Life Insurance Company of New
York) licensed to sell Life and Annuity contracts in that state. The
Company's other business (USAA Life General Agency) offers additional
products of other insurance companies requested by USAA membership,
which are not sold by the Company. The consolidated financial
statements include the accounts of the Company and its subsidiaries.
All significant intercompany balances and transactions have been
eliminated in consolidation.
(b) Investments
-----------
Debt securities, including bonds, mortgage-backed securities (MBS's),
and redeemable preferred stocks, have been classified as either held-to-
maturity or available-for-sale. Debt securities classified as held-to-
maturity are carried at amortized cost. Securities classified as
available-for-sale are carried at fair value with unrealized gains or
losses (net of related deferred income taxes, deferred policy
acquisition costs, and future policyholder benefits) reflected in
stockholders' equity.
Bonds, at amortized cost of approximately $281,206, and $2,876 were on
deposit with various state governmental agencies at December 31, 1997,
and 1996 respectively. When the New York subsidiary was formed in 1997,
the Company withdrew its license in the State of New York. To be in
compliance with the New York Regulation 109, the 1997 deposits include
$278,333 held for the security of the New York policyholders.
Mortgage-backed securities held represent participating interests in
pools of long term first mortgage loans originated and serviced by the
issuers of the securities. Market interest rate fluctuations can affect
the prepayment speed of principal and the yield on the securities.
All equity securities, which include common and nonredeemable preferred
stocks, have been classified as available-for-sale. Equity securities
are carried at fair value with unrealized gains or losses (net of
related deferred income taxes, deferred policy acquisition costs, and
future policyholder benefits) reflected in stockholders' equity.
Real estate mortgages and policy loans are carried at their unpaid
principal balances with interest rates ranging from 4.80% to 10.0% at
December 31, 1997.
Short-term securities are carried at cost.
Interest is not accrued on debt securities or mortgage loans for which
principal or interest payments are determined to be uncollectible.
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.
6
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(c) Cash and cash equivalents
-------------------------
For purposes of the consolidated statement of cash flows, all highly
liquid marketable securities that have a maturity at purchase of three
months or less and money market mutual funds are considered to be cash
equivalents. At December 31, 1997 and 1996, cash and cash equivalents
include $268, and $362, respectively, of separate account purchases
awaiting reinvestment. These funds are restricted from the Company's
use.
(d) Federal income taxes
--------------------
The Company and its subsidiaries are included in the consolidated
Federal income tax return filed by USAA. Taxes are allocated to the
separate companies of USAA based on a tax allocation agreement, whereby
companies receive a current benefit to the extent their losses are
utilized by the consolidated group. Separate company current taxes are
the higher of taxes computed at a 35% rate on regular taxable income or
taxes computed at a 20% rate on alternative minimum taxable income,
adjusted for any consolidated benefits allocated to the companies based
on the use of separate company losses within the group.
Deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and
liabilities. The effect on deferred income taxes of a change in tax
rates is recognized in income in the period that includes the enactment
date.
(e) Fair value of financial instruments
-----------------------------------
The fair value estimates of the Company's financial instruments were
made at a point in time, based on relevant market information about the
related financial instrument. These estimates do not reflect any premium
or discount that could result from offering for sale at one time the
Company's entire holding of a particular financial instrument. In
addition, the tax ramifications related to the effect of fair market
value estimates have not been considered in the estimates.
(f) Use of estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(g) Deferred policy acquisition costs
---------------------------------
Policy acquisition costs, consisting primarily of certain underwriting
and selling expenses, are deferred and amortized. Traditional
individual life and health acquisition costs are amortized in proportion
to 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.
7
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(h) Insurance reserves
------------------
Included in reserves are traditional life and health products and payout
annuities with life contingencies. Payout annuities without life
contingencies, deferred annuities, and universal life products are
classified as funds on deposit. Traditional life and individual health
reserves are computed using a net level premium method and are based on
assumed or guaranteed investment yields and assumed rates of mortality,
morbidity, withdrawals, expenses and anticipated future policyholder
dividends. These assumptions vary by such characteristics as plan, year
of issue, policy duration, date of receipt of funds, and may include
provisions for adverse deviation.
(i) Insurance revenues and expenses
-------------------------------
Premiums on traditional life insurance products are recognized as
revenues as they become due. Benefits and expenses are matched with
premiums in arriving at profits by providing for policy benefits over
the lives of the policies and by amortizing acquisition costs. For
universal life and investment annuity contracts, revenues consist of
investment earnings and policy charges for the cost of insurance, policy
administration, and surrender charges assessed during the period.
Expenses for these policies include interest credited to policy account
balances, benefit claims incurred in excess of policy account balances,
and administrative expenses. The related deferred policy acquisition
costs are amortized in relation to the present value of expected gross
profits from surrender charges and investment, mortality, and expense
margins.
(j) Funds on deposit
----------------
Funds on deposit are liabilities for universal life and investment-
related products. These liabilities are determined following the
"retrospective deposit" method and consist principally of policy account
balances before applicable surrender charges.
(k) Participating business
----------------------
Certain life insurance policies contain dividend payment provisions
which enable the policyholder to participate in the earnings of the life
insurance operations. The participating insurance in force accounted
for 8% of the total life insurance in force at December 31, 1997, and 9%
of life insurance in force at December 31, 1996. Participating policies
accounted for 13% of the premium income in 1997, and 15% of the premium
income in 1996. The provision for policyholders' dividends is based on
current dividend scales.
The Company guarantees to pay dividends in aggregate, on all policies
issued after December 31, 1983, in the total amount of $15,092 in 1998.
Income attributable to participating policies in excess of policyholder
dividends is restricted by several states for participating
policyholders of those states, otherwise income in excess of
policyholder dividends is accounted for as belonging to the
stockholders.
(l) Reclassifications
-----------------
Certain reclassifications of prior period amounts have been made to
conform with the current year's presentation.
8
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(2) Basis of accounting
-------------------
The Company prepares separate statutory financial statements in accordance
with accounting practices prescribed or permitted by the Insurance
Department of Texas. Prescribed statutory accounting practices include a
variety of publications of the NAIC as well as state laws, regulations, and
general administrative rules. Permitted statutory accounting practices
encompass all accounting practices not so prescribed. The NAIC is currently
undergoing a codification project whereby a comprehensive accounting and
reporting basis may be adopted which is intended to replace prescribed or
permitted accounting practices.
These consolidated financial statements have been prepared on the basis of
generally accepted accounting principles (GAAP), which differs from the
basis of accounting followed in reporting to insurance regulatory
authorities. Reconciliations of statutory net income and capital and
surplus, as determined using statutory accounting principles, to the amounts
included in the accompanying consolidated financial statements are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory net income $ 97,588 62,998 55,213
Gain(loss) on sale of investments 980 (6,422) (1,719)
Deferred policy acquisition costs 19,938 17,728 18,993
Tax adjustment 7,253 8,386 397
Participating policyholder earnings 3,294 (787) (40)
Insurance reserves and other (18,221) 3,387 (6,537)
--------- ------- --------
GAAP net income $ 110,832 85,290 66,307
========= ======= ========
Statutory capital and surplus 540,053 470,263 396,676
Increases (decreases):
Deferred policy acquisition costs 207,090 189,298 164,831
Federal income taxes 22,354 28,236 19,974
Asset valuation reserve 99,651 103,482 96,742
Interest maintenance reserve - - 4,894
Participating policyholder liability (4,143) (6,583) (5,398)
Policyholder reserve and funds (91,468) (69,279) (75,052)
Investment unrealized gain (loss) adjustments:
Investment valuation difference 150,686 56,285 145,352
Policyholder accounts and other assets (175,607) (96,828) (155,588)
Other adjustments (3,743) (4,190) (3,989)
--------- ------- --------
GAAP capital and surplus $ 744,873 670,684 588,442
========= ======= ========
</TABLE>
(3) Investments
-----------
The amortized cost, estimated fair values and carrying values of investments
in debt and equity securities as of December 31, 1997 were as follows:
9
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
<TABLE>
<CAPTION>
Held-to-Maturity
---------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair Carrying
cost gains losses value value
----------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Debt securities
- ---------------
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 11,060 1,912 - 12,972 11,060
Obligations of states and
political subdivisions 5,525 373 (2) 5,896 5,525
Debt securities issued by
foreign governments and
corporations 41,153 1,051 (13) 42,191 41,153
Mortgage backed securities 759,916 26,262 (1,546) 784,632 759,916
Corporate securities 427,603 16,220 (713) 443,110 427,603
---------- ------ ------ --------- ---------
Total debt securities $1,245,257 45,818 (2,274) 1,288,801 1,245,257
========== ====== ====== ========= =========
Available-for-Sale
-------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair Carrying
cost gains losses value value
----------- ---------- ---------- --------- --------
Debt securities
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 301,875 2,500 (994) 303,381 303,381
Obligations of states and
political subdivisions 66,443 2,933 - 69,376 69,376
Debt securities issued by
foreign governments and
corporations 128,144 4,866 (19) 132,991 132,991
Mortgage backed securities 1,230,196 54,906 (37) 1,285,065 1,285,065
Corporate securities 2,995,524 85,527 (1,952) 3,079,099 3,079,099
---------- ------- ------ --------- ---------
Total debt securities $4,722,182 150,732 (3,002) 4,869,912 4,869,912
========== ======= ====== ========= =========
Equity Securities
Common stock $ 216,508 82,854 (1,678) 297,684 297,684
Nonredeemable preferred stock 51,696 3,610 (127) 55,179 55,179
---------- ------- ------ --------- ---------
Total equity securities $ 268,204 86,464 (1,805) 352,863 352,863
========== ======= ====== ========= =========
</TABLE>
10
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
The amortized cost, estimated fair values and carrying values of investments in
debt and equity securities as of December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Held-to-Maturity
---------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair Carrying
cost gains losses value value
----------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Debt securities
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 21,132 1,530 (4) 22,658 21,132
Obligations of states and
political subdivisions 42,844 807 - 43,651 42,844
Debt securities issued by
foreign governments and
corporations 53,333 280 (893) 52,720 53,333
Mortgage backed securities 870,583 24,443 (9,694) 885,332 870,583
Corporate securities 481,906 517,374 (3,517) 495,763 481,906
Redeemable preferred stock 1,909 - - 1,909 1,909
---------- ------- ------- --------- ---------
Total debt securities $1,471,707 44,434 (14,108) 1,502,033 1,471,707
========== ======= ======= ========= =========
Available-for-Sale
---------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair Carrying
cost gains losses value value
----------- ---------- ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Debt securities
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 327,091 885 (4,372) 323,604 323,604
Obligations of states and
political subdivisions 7,848 723 (66) 8,505 8,505
Debt securities issued by
foreign governments and
corporations 127,213 3,619 (425) 130,407 130,407
Mortgage backed securities 1,232,769 38,654 (3,982) 1,267,441 1,267,441
Corporate securities 2,372,767 35,073 (18,133) 2,389,707 2,389,707
---------- ------ ------- --------- ---------
Total debt securities $4,067,688 78,954 (26,978) 4,119,664 4,119,664
========== ====== ======= ========= =========
Equity Securities
Common stock $ 202,313 70,095 (1,481) 270,927 270,927
Nonredeemable preferred stock 37,298 4,872 (29) 42,141 42,141
---------- ------ ------- --------- ---------
Total equity securities $ 239,611 74,967 (1,510) 313,068 313,068
========== ====== ======= ========= =========
</TABLE>
The amortized cost and estimated fair values of debt securities classified as
held to maturity and available for sale at December 31, 1997, by contractual
maturity, are shown by category below. Expected maturities may differ from
contractual maturities because borrowers may have the right to prepay
obligations.
11
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
<TABLE>
<CAPTION>
Held-to-Maturity
----------------------------
Estimated
Amortized fair
cost value
----------- ----------
<S> <C> <C>
Due in one year or less $ 108,753 109,699
Due after one year through five years 147,757 153,194
Due after five years through ten years 180,975 187,965
Due after ten years 47,856 53,311
--------- -------
485,341 504,169
Mortgage-backed securities 759,916 784,632
---------- --------
$1,245,257 1,288,801
========== =========
Available-for-Sale
----------------------------
Estimated
Amortized fair
cost value
----------- ----------
<S> <C> <C>
Due in one year or less $ 58,514 58,809
Due after one year through five years 1,666,587 1,694,623
Due after five years through ten years 1,562,265 1,616,995
Due after ten years 204,620 214,420
---------- ---------
3,491,986 3,584,847
Mortgage-backed securities 1,230,196 1,285,065
---------- ---------
$4,722,182 4,869,912
========== =========
</TABLE>
Proceeds from sales of available-for-sale securities during 1997, 1996, and 1995
were $317,851, $495,039, and $416,071, respectively. Gross gains and losses of
$29,049 and $2,913 respectively for 1997, and $25,566 and $18,317 respectively
for 1996, and $7,820 and $9,268 respectively for 1995, were realized on those
sales.
Gross investment income during 1997, 1996, and 1995 was $456,322, $431,893, and
$410,912, respectively and consists primarily of interest income on fixed
maturity securities. Investment expenses were $4,218, $3,732, and $3,990 for
1997, 1996, and 1995, respectively.
(4) Federal income taxes
---------------------
The expected statutory Federal income tax amounts for the years ended
December 31, 1997, 1996, and 1995 differ from the effective tax amounts as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Income before income taxes $166,957 120,886 101,647
======== ======= =======
Federal income tax expense at 35% statutory rate 58,435 42,310 35,577
Increase (decrease) in tax resulting from:
Dividends received deduction (604) (660) (536)
Tax credits - R&E (548) (6,188) -
Other, net (1,158) 134 299
-------- ------- -------
Federal income tax expense $ 56,125 35,596 35,340
======== ======= =======
</TABLE>
12
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
Deferred income tax benefit for the years ended December 31, 1997, 1996, and
1995 was primarily attributable to differences between the valuation of
assets and insurance liabilities for financial reporting and tax purposes.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31 are presented below:
<TABLE>
<CAPTION>
1997 1996
-------- ------
<S> <C> <C>
Deferred tax assets:
Insurance reserves $ 70,361 62,358
Accounts payable and accrued expenses 1,497 1,612
Policyholder dividends 6,778 6,738
Other, net 3,686 6,929
-------- ------
Total gross deferred tax assets 82,322 77,637
-------- ------
Deferred tax liabilities:
Investments 7,590 2,641
Depreciable assets 39 1
Deferred policy acquisition costs 34,517 37,025
Other, net 9 331
-------- ------
Total gross deferred tax liabilities 42,155 39,998
-------- ------
Deferred tax liability on net
unrealized gains on investments (17,937) (9,395)
-------- ------
Net deferred tax asset $ 22,230 28,244
======== ======
</TABLE>
Management believes that the realization of the deferred tax asset is more
likely than not based on the expectation that such benefits will be utilized
in the future consolidated tax returns of the USAA group.
At December 31, 1997, and 1996, the Company had the following Federal income
tax payable/receivable amounts:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Current Net Federal income taxes payable (receivable) $ (1,552) 3,157
</TABLE>
Aggregate cash payments to (receipts from) USAA for income taxes were
$62,345, $38,064, and $44,965 for USAA Life Insurance Company and $163,
$(155), and $126 for its subsidiaries during the years ended December 31,
1997, 1996, and 1995, respectively.
(5) Fair value of financial instruments
-----------------------------------
The following tables present the carrying amounts and estimated fair values
of the Company's financial instruments at December 31. Financial Accounting
Statement No. 107, "Disclosures about Fair Value of Financial Instruments",
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing
parties.
13
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
<TABLE>
<CAPTION>
1997 1996
--------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 39,642 39,642 9,444 9,444
Debt securities 6,115,169 6,158,713 5,591,371 5,621,697
Equity securities 352,863 352,863 313,068 313,068
Mortgage loans 4,462 5,114 4,746 5,232
Other invested assets 2,352 2,736 2,373 2,828
Policy loans 130,246 130,246 118,683 118,683
Premium balances receivable 2,899 2,899 1,655 1,655
Accrued investment income 78,929 78,929 71,636 71,636
Separate Account 184,797 184,797 93,804 93,804
Financial liabilities:
Deferred annuities and annuities without
life contingencies 3,787,507 3,787,507 3,720,373 3,720,373
Policyholder dividend accumulations 28,593 28,593 23,191 23,191
Policy dividends declared but unpaid 31,081 31,081 29,415 29,415
Accounts payable and accrued expenses 87,315 87,315 34,295 34,295
Separate Account 184,797 184,797 93,804 93,804
</TABLE>
The carrying amounts of financial assets and liabilities shown in the above
table are included in the balance sheet under the indicated captions with
the following exceptions: other invested assets are included in other
assets, deferred annuities and annuities without life contingencies are
included in funds on deposit, policyholder dividend accumulations are
included in funds on deposit, and policy dividends declared and unpaid are
included in other liabilities.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash and cash equivalents: Cash and cash equivalents approximate fair value
because of the short maturity of these instruments.
Debt and equity securities: Fair market values for bonds and stocks are
determined using quoted market prices from Merrill Lynch Pricing Services,
Bloomberg Services or individual brokers.
Mortgage loans: The fair value of mortgage loans and the mortgage loan
component of other assets are estimated by discounting the future cash flows
using interest rates currently being offered for mortgage loans with similar
characteristics and maturities.
Policy loans: In the Company's opinion, the book value of the policy loans
approximates their fair value. Policy loans are shown on the financial
statements at face value, and carry interest rates ranging from 4.8% to 7.4%
in advance.
Premiums receivable: The recorded amount for premiums receivable
approximates fair value because only a slight percentage of total policies
issued by the Company lapse.
Accrued investment income: The accrued amount of investment income
approximates its fair value because of the quality of the Company's
investment portfolio combined with the short term nature of the collection
period.
Deferred annuities and annuities without life contingencies: The fair value
of the deferred annuities is estimated as the aggregate cash value of the
annuity, which approximates the carrying value. The fair value of annuities
without life contingencies is estimated as the commuted value of the
annuity.
14
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
Policyholder dividend accumulations: The fair value of policyholder
dividend accumulations is estimated using the book value less a percentage
of accrued interest anticipated to be forfeited as a result of policy
cancellations. Estimated annual interest to be forfeited is not
significant.
Policy dividends declared but unpaid: The carrying value of policy
dividends declared but unpaid approximates the fair value because the
carrying value reflects anticipated forfeitures as a result of policy
cancellations. Estimated annual interest to be forfeited is not
significant.
Accounts payable and accrued expenses: The fair value of accounts payable
and accrued expenses approximates its carrying value because of the short
term nature of the obligations.
Separate account assets and liabilities: The separate account assets
reflect the net asset value of the underlying mutual funds, therefore
carrying value is considered fair value. The separate account liabilities
are reflected at the underlying balances due to the contract holders,
excluding seed money, without consideration for applicable surrender
charges, if any.
(6) Borrowings
----------
The Company has no borrowing activity outside of the agreements described in
Note 7 "Transactions with affiliates."
(7) Transactions with affiliates
----------------------------
Certain services have been contracted from USAA and its affiliates, such as
rental of office space, utilities, mail processing, data processing,
printing, and employee benefits. The Company allocates these and other
expenses to affiliates for administrative services performed by the Company.
The contracted services and allocations are based upon various formulas or
agreements with the net amounts included in expenses. The aggregate amount
of such contracted services was $73,136, $70,713, and $66,787 for 1997,
1996, and 1995, respectively. The aggregate amount of the Company's
allocations to affiliates was $4,376, $4,742, and $3,910 for 1997, 1996, and
1995, respectively.
The Company has an agreement with USAA Investment Management Company
regarding the reimbursement of costs for investment services provided. The
aggregate amount of the USAA Investment Management Company contracted
services was $3,037, $2,793, and $2,941 for 1997, 1996 and 1995,
respectively.
The Company also received premium and annuity considerations from USAA of
$4,201, $4,093, and $6,145 in 1997, 1996, and 1995, respectively,
representing amounts received for structured settlements issued to claimants
of USAA and for group insurance on USAA employees.
The Company has intercompany funding agreements with USAA Capital
Corporation (CAPCO) and USAA Funding Company (FUNDCO) for unsecured
borrowings up to $150,000 in the aggregate, at an interest rate based upon
CAPCO's or FUNDCO's cost of funding. As of December 31, 1997, 1996, and
1995 the Company had no liability for borrowed money. The Company borrowed
$3,598,125 during 1997, $2,566,042 during 1996, and $1,809,466 during 1995,
through the use of these funding agreements. The interest associated with
these intercompany funding agreements was $855, $660, and $898 in 1997,
1996, and 1995, respectively.
In 1996, the Company exercised a put option on a $20,000 medium term note
from CAPCO.
15
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(8) Reinsurance
-----------
The Company is party to several reinsurance agreements. The Company's
general policy is to reinsure that portion of any risk in excess of $600
with a $100 corridor on the life of any one individual. However in 1997 the
Company entered into certain reinsurance treaties which are based on a first
dollar quota share pool. The Company retains 10% of the risk on each life
up to the normal $600 retention and the remaining 90% goes to a coinsurance
pool which is placed with a number of reinsurers on a quota share basis.
Additionally, the Company's entry into the Bank Owned Life Insurance (BOLI)
business resulted in two reinsurance treaties, one Yearly Renewable Term
(YRT) and one Coinsurance treaty, both of which are with one reinsurer on a
first dollar basis, with the Company retaining 50% of the business in the
coinsurance arrangement.
Although the ceding of reinsurance does not discharge the Company from its
primary legal liability to a policyholder, the reinsuring company assumes
the related liability.
Life insurance in force in the amounts of $4,077,094, $3,595,801 and
$3,690,040 is ceded on a yearly renewable term basis; $4,684,726, $939,290,
and $716,596 is ceded on a coinsurance basis; and $957,267, $952,599, and
$1,000,581 is ceded in accordance with a stop loss agreement at December 31,
1997, 1996, and 1995, respectively. Reinsurance amounts related to insurance
reserves, funds on deposit, and paid losses totaled $204,607, and $13,023 at
December 31, 1997 and 1996, respectively. Premium revenues and interest
credited to policyholders were reduced by $204,109, $11,837, and $11,072 for
reinsurance premiums ceded during the years ended December 31, 1997, 1996,
and 1995, respectively. Benefits were reduced by $196,062, $7,838, and
$7,435 for reinsurance recoverables during the years ended December 31,
1997, 1996, and 1995, respectively. One reinsurer accounts for 90% of the
amount recoverable from reinsurers at December 31, 1997.
Reinsurance amounts related to accident and health insurance reserves and
paid losses totaled $17,981 and $15,786 at December 31, 1997 and 1996,
respectively. Premium revenues were reduced by $3,297, $3,117, and $3,134
for reinsurance premiums ceded during the years ended December 31, 1997,
1996, and 1995, respectively. Benefits were reduced by $3,268, $3,604, and
$3,299 for reinsurance recoverables during the years ended December 31,
1997, 1996, and 1995, respectively.
(9) Deferred policy acquisition costs and future policy benefits
------------------------------------------------------------
Deferred policy acquisitions costs and premiums are summarized below:
<TABLE>
<CAPTION>
Accident
Life Annuity and health Total
------ ------- ---------- -------
<S> <C> <C> <C> <C>
Balance at
January 1, 1995 $ 122,138 28,115 11,608 161,861
Additions 15,676 4,498 2,658 22,832
Amortization (4,375) 1,926 (1,466) (3,915)
FAS 115 DAC (2,051) (13,896) - (15,947)
------ ------- ------ -------
Net change 9,250 (7,472) 1,192 2,970
------ ------- ------ -------
Balance at
December 31, 1995 $ 131,388 20,643 12,800 164,831
Additions 18,436 2,999 2,364 23,799
Amortization (5,006) 634 (1,699) (6,071)
FAS 115 DAC 141 6,598 - 6,739
------ ------ ------ ------
Net change 13,571 10,231 665 24,467
------ ------ ------ ------
</TABLE>
16
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
<TABLE>
<S> <C> <C> <C> <C>
Balance at
December 31, 1996 $144,959 30,874 13,465 189,298
Additions 24,674 3,942 3,073 31,689
Amortization (7,764) (2,373 (1,761) (11,898)
FAS 115 DAC 1,201 (3,200) - (1,999)
Net change 18,111 (1,631) 1,312 17,792
Balance at
December 31, 1997 $163,070 29,243 14,777 207,090
1997 Premiums $277,631 8,143 70,051 355,825
1996 Premiums $264,382 7,792 65,268 337,442
1995 Premiums $240,234 4,630 61,034 305,898
</TABLE>
The liabilities for future policy benefits and related insurance in force at
December 31, 1997, and 1996 are summarized below:
<TABLE>
<CAPTION>
Future Policy
Benefits
---------------
1997 1996
---- ----
<S> <C> <C>
Life and annuity:
Individual $948,565 775,659
Group 2,792 1,449
-------- -------
Total life and annuity 951,357 777,108
======== =======
Accident and health $ 41,626 34,305
======== ========
Insurance in force
-----------------------
1997 1996
---- ----
<S> <C> <C>
Life and annuity:
Individual $69,540,314 67,650,451
Group 1,870,085 1,659,106
----------- ----------
Total life and annuity $71,410,399 69,309,557
=========== ==========
</TABLE>
Life Insurance and Annuities:
Interest assumptions used in the calculation of future policy benefits for
Traditional Life policies are as follows:
Participating term 9.28%
Participating permanent 8.68% to 9.28%
Non - Participating term 6.00% to 8.91%
Future policy benefits for Universal Life and Deferred Annuities are equal
to the current account value without anticipation of any applicable
surrender charges.
Future policy benefits for Payout Annuities use the original pricing
interest rates.
17
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
Mortality and withdrawal assumptions are based on the Company's experience.
Health Insurance:
Interest assumptions used for future policy benefits on health policies are
calculated using a level interest rate of 6%.
Morbidity for Income Replacement policies are based on the 1985 CIDA table.
Morbidity for In Hospital Cash policies are based on 1966-67 Intercompany
Experience table.
Termination assumptions are based on the Company and industry experience.
(10) Capital stock
-------------
The Company has outstanding 600,000 shares of Annually Adjustable
Cumulative Perpetual Preferred Stock; 100,000 shares each of Series A,
Series B, Series C, Series D, Series E, and Series F. All preferred stock
is owned by FUNDCO. No other stock ranks Senior to the Series A-F preferred
stock. The dividend rate will be 65% of the cost of the funds for CAPCO on
Commercial paper having a 180-day maturity on the first business day of
each Dividend Period. The preferred stock has a par value of $100 and a
liquidation value of $100 per share. The preferred stock shares are
redeemable at the option of the Company for cash, in whole or in part, on
the 15th day of each December for Series A and Series B and on the 15th day
of each June for Series C, Series D, Series E, and Series F at par value
plus accrued and unpaid dividends. Preferred stock dividends of $2,200,
$1,830, and $1,601 were paid in 1997, 1996, and 1995 respectively, and $94
has accrued since the last payment on December 15, 1997.
The Company has authorized 30,000 shares of common capital stock, $100 par
value, of which 25,000 shares were issued and outstanding at December 31,
1997, 1996, and 1995. Dividends of $45,546, $14,000, and $18,000 were paid
on the common stock during 1997, 1996, and 1995, respectively. The 1997
dividend was paid in cash and equity securities. The equity securities
transferred had an original cost of $11,560, a fair value of $22,546, and
the Company recognized gain of $10,986.
(11) Unassigned surplus and dividend restrictions
--------------------------------------------
Texas law limits the payment of dividends to shareholders. The maximum
dividend that may be paid without prior approval of the Insurance
Commissioner is limited to the greater of net gain from operations of the
preceding calendar year or 10% of capital and surplus as of the prior
December 31. As a result, dividend payments to shareholders were limited to
approximately $47,976 in 1997 and are limited to $66,872 in 1998. Dividends
are paid as determined by the Board of Directors and at its discretion.
The Texas Department of Insurance imposes minimum risk-based capital
requirements on insurance companies that were developed by the National
Association of Insurance Commissioners (NAIC). The formulas for determining
the amount of risk-based capital (RBC) specify various weighting factors
that are applied to statutory financial balances or various levels of
activity based on the perceived degree of risk. Regulatory compliance is
determined by a ratio of the Company's regulatory total adjusted capital to
its authorized control level RBC, as defined by the NAIC. Companies below
specific trigger points or ratios are classified within certain levels, each
of which requires specified corrective action. The Company's current
statutory capital and surplus is significantly in excess of the threshold
RBC requirements.
18
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(12) Employee benefit plans
----------------------
(a) Pension plan
------------
Substantially all employees are covered under a pension plan
administered by USAA which is accounted for on a group basis. The
benefits are determined based on years of service and the employee's
salary at date of retirement. The total net pension cost allocated to
the Company on the basis of salary expense was $3,746, $4,847, and
$1,913 in 1997, 1996 and 1995, respectively. At December 31, 1997 and
1996, a liability of $899 and $1,612, respectively, has been recorded
which represents the excess of net periodic pension cost allocated to
the Company over its allocated funding requirements.
(b) Postretirement benefit plan
---------------------------
Substantially all employees may become eligible for certain medical and
life insurance benefits provided for retired employees under a plan
administered by USAA, if they meet minimum age and service requirements
and retire while working for USAA. The total postretirement benefit
cost allocated to the Company was approximately $737, $682, and $843 in
1997, 1996, and 1995, respectively. At December 31, 1997 and 1996, a
liability of $974 and $186, respectively, was recorded which represents
the excess of the net periodic postretirement benefit cost allocated to
the Company over its allocated funding requirements.
(c) Postemployment benefits
-----------------------
All employees of the Company who suffer total disability as a result of
illness or injury are eligible for long-term disability benefits under
a plan administered by USAA.
The postemployment benefit cost allocated to the Company is not
significant.
(13) Separate account
----------------
The Separate Account is a segregated asset account established under Texas
law through which USAA Life Insurance Company invests the premium payments
received from Contract Owners. The assets of the Separate Account are the
property of the Company. However, only the assets of the Separate Account
in excess of the reserves, and other Contract liabilities with respect to
the Separate Account, are chargeable with liabilities arising out of any
other business the Company may conduct. Income, gains and losses, whether
or not realized, are, in accordance with the Contracts, credited to or
charged against the Separate Account without regard to other income, gains
or losses of the Company. The Company's obligations arising under the
Contracts are general corporate obligations.
The Separate Account currently is divided into nine Variable Annuity Fund
Accounts, each of which invests in a corresponding Fund. The Funds that are
available under this Contract include seven funds of USAA Life Investment
Trust, the Capital Growth Portfolio of the Scudder Variable Life Investment
Fund, and the Growth Portfolio of The Alger American Fund. The Accumulated
Unit Value of the Contract in a Variable Fund Account will vary, primarily
based on the investment experience of the Fund in whose shares the Variable
Fund Account invests. The value of the Funds' securities are carried at
market value, or, in the case of the USAA Life Variable Annuity Money
Market Fund, at amortized cost, which approximates market value.
The Company incurs mortality and administrative expenses on behalf of
Separate Account contract holders. The Company collects fees for these
expenses from contract holders at set amounts. In addition, the Company
incurs various expenses related to conducting the business or operations of
the USAA Life Investment Trust (Trust) as outlined by an underwriting and
administrative services agreement. The Company, out of its general account,
has agreed to pay directly or reimburse the Trust for Trust expenses
exceeding established limits. Such reimbursements were not significant in
1997 and 1996.
19
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(14) Commitments and contingencies
-----------------------------
The Company is required by law to participate in the guaranty associations
of the various states in which it does business. The state guaranty
associations ensure payment of guaranteed benefits, with certain
restrictions to policyholders of impaired or insolvent insurance companies,
by assessing all other companies involved in similar lines of business.
There are currently several insurance companies which had substantial
amounts of annuity business, in the process of liquidation or
rehabilitation. The Company paid $1,953, $2,437 and $4,823 to various state
guaranty associations during the years ended December 31, 1997, 1996, and
1995, respectively. The Company accrues its best estimate for known
insolvencies. At December 31, 1997 and 1996 accounts payable and accrued
expenses include $8,931 and $9,292, respectively, related to estimated
assessments.
(15) Subsequent Event
----------------
In January 1998, the Company declared and paid a dividend to stockholders
of $33,928. The dividend was paid in equity securities with an original
cost of $21,951, resulting in a realized gain of $11,977.
20
