<PAGE>
As filed with the Securities and Exchange Commission on April 29, 1999.
Registration Nos.: 33-82268 and
811-8670
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 6 X
and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940
Amendment No. 7 X
SEPARATE ACCOUNT OF USAA LIFE INSURANCE COMPANY
(Exact Name of Registrant)
USAA LIFE INSURANCE COMPANY
(Name of Depositor)
9800 Fredericksburg Road
San Antonio, Texas 78288
(Address of Depositor's Principal Executive Offices)
Depositor's Telephone Number, including Area Code: 210-498-8000
RICHARD T. HALINSKI, JR., ESQ.
DWAIN A. AKINS, ESQ.
Life & Health Insurance Counsel
USAA Life Insurance Company
9800 Fredericksburg Road, C-3-W
San Antonio, Texas 78288
(Name and Address of Agents for Service)
Copies to:
GARY O. COHEN, ESQ.
RICHARD T. CHOI, ESQ.
Freedman, Levy, Kroll & Simonds
1050 Connecticut Avenue, N.W.
Washington, D.C. 20036
EXHIBIT INDEX ON PAGE ___
PAGE 1 TO ___
<PAGE>
Approximate Date of Proposed Public Offering: Continuous.
It is proposed that this filing will become effective (check the appropriate
box):
[ ] Immediately upon filing pursuant to paragraph (b) of Rule 485
[X] On May 1, 1999 pursuant to paragraph (b) of Rule 485
[ ] 60 days after filing pursuant to paragraph (a)(1) of Rule 485
[ ] On (date) pursuant to paragraph (a)(1) of Rule 485
If appropriate, check the following:
[ ] This post-effective amendment designates a new effective date
for previously filed post-effective amendment.
Title of Securities Being Registered: Units of Interest in Separate Account of
USAA Life Insurance Company under Flexible Premium Deferred Combination Fixed
and Variable Annuity Contract.
<PAGE>
PROSPECTUS
[LOGO OF USAA LIFE INSURANCE COMPANY APPEARS HERE]
USAA Life Insurance Company
VARIABLE ANNUITY
MAY 1, 1999
<PAGE>
USAA Life Insurance Company
VARIABLE ANNUITY
Table of Contents
SECTION
- -------
A. Flexible Premium Deferred Combination
Fixed and Variable Annuity Contract Prospectus 3A-39A
B. USAA Life Investment Trust Prospectus 1B-23B
C. Scudder Variable Life Investment Fund Prospectus
(Capital Growth Portfolio)
D. Alger American Fund Prospectus
(American Growth Portfolio)
E. BT Insurance Funds Trust Prospectuses
(BT Equity 500 Index Fund)
(BT Small Cap Index Fund)
(BT EAFE(R) Equity Index Fund)
1
<PAGE>
This page left blank intentionally.
2
<PAGE>
VARIABLE ANNUITY
PROSPECTUS
May 1, 1999
[LOGO OF USAA
APPEARS HERE]
USAA Life Insurance Company
9800 Fredericksburg Road
San Antonio, Texas 78288
Telephone: 1-800-531-2923
USAA Life Insurance Company ("USAA LIFE") is offering a flexible premium
deferred combination fixed and variable annuity contract ("CONTRACT") to the
general public. This prospectus contains information about the Contract that
you should know before investing. Please keep it for future reference.
The Contract offers 13 investment choices, including a Fixed Fund Account, which
pays a guaranteed rate of interest, and 12 Variable Fund Accounts of our
Separate Account, each of which invests in one of the following mutual funds
("FUNDS"):
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
-------------------------------------
Capital Growth Portfolio
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
USAA Life ("WE") have filed a statement of additional information, dated May 1,
1999, with the Securities and Exchange Commission ("SEC"). It contains more
information about the Contract and is incorporated herein by reference, which
means it is legally part of this Prospectus. Its table of contents appears on
page 39A. For a free copy, call 1-800-531-2923.
<TABLE>
<S> <C>
INVESTMENTS IN 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
IMPORTANT GOVERNMENT AGENCY, ARE SUBJECT TO INVESTMENT RISKS, AND MAY LOSE VALUE.
NOTICES
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE
SECURITIES DESCRIBED IN THIS PROSPECTUS OR PASSED UPON THE ADEQUACY OF THIS
PROSPECTUS. ANYONE WHO TELLS YOU OTHERWISE IS COMMITTING A FEDERAL CRIME.
</TABLE>
3A
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
Index of Important Terms 5A
The Contract At A Glance 6A
How the Contract Works 8A
Expenses 9A
CONTRACT FEATURES Investment Choices 11A
Special Services 13A
Automatic Payment Plan 13A
Dollar Cost Averaging Program 14A
Systematic Withdrawal Program 14A
Your Contract Value 14A
Annuity Benefits 15A
Death Benefits 18A
How Do I
... Buy a Contract 19A
... Invest More Money 19A
... Access My Money 19A
... Change My Investment Choices 20A
TRANSACTIONS ... Change My Premium Allocations 20A
... Change My Annuity Date 20A
... Change My Annuitant 21A
... Change My Beneficiary 21A
... Transfer or Assign Ownership 21A
... Place a Telephone Request 21A
... Cancel My Contract 21A
... Keep Track of My Investments 22A
... Start Receiving Annuity Payments 22A
... Report a Death 23A
... Contact USAA Life 23A
Processing Dates 23A
Postponement of Payments 24A
More Information About
... USAA Life 25A
... The Separate Account 25A
OTHER INFORMATION ... The Funds 25A
... The Contract 26A
... Charges and Deductions 27A
... Year 2000 30A
Tax Information 30A
Financial Information 33A
Performance Information 34A
Contents of Statement of Additional Information 39A
</TABLE>
CONTRACT FEATURES
4A
<PAGE>
INDEX OF IMPORTANT TERMS
TERM PAGE
- ---- ----
ACCUMULATION UNIT 15A
ANNUITANT 9A
ANNUITY DATE 8A
ANNUITY UNIT 16A
BENEFICIARY 9A
CONTRACT 3A
CONTRACT YEAR 14A
DISTRIBUTION OPTION 15A
EFFECTIVE DATE 8A
FIXED ANNUITY PAYMENTS 16A
FIXED FUND ACCOUNT 13A
FIXED FUND ACCOUNT VALUE 14A
FREE LOOK 6A
FUND 3A
GENERAL ACCOUNT 13A
NONQUALIFIED PLAN 8A
PROOF OF DEATH 23A
QUALIFIED PLAN 8A
VARIABLE ANNUITY PAYMENTS 16A
VARIABLE FUND ACCOUNT 12A
VARIABLE FUND ACCOUNT VALUE 15A
CONTRACT FEATURES
5A
<PAGE>
THE CONTRACT AT A GLANCE
The following is a snapshot of the Contract. Please read the remainder of this
prospectus for more information.
<TABLE>
<S> <C>
FLEXIBLE PAYMENTS You can purchase a Contract with as little as $1,000. You can add to
your Contract as often and as much as you like, but each payment must
be at least $100. You must maintain a minimum account size of
$1,000. In summary:
Minimum initial payment: $1,000
Minimum subsequent payment: $100
Minimum account size: $1,000
Lower minimums apply to USAA employees and Contracts held in IRA and
other tax-qualified plans.
- ------------------------------------------------------------------------------------------------
FREE LOOK You may cancel your Contract within 10 days of receipt (or a longer
period depending on where you reside) ("FREE LOOK PERIOD").
- ------------------------------------------------------------------------------------------------
EXPENSES You will bear the following expenses:
. 0.75% total separate account annual fees (as a percentage of net
assets)
. $30 annual contract maintenance charge
. No charge for withdrawals from any Variable Fund Account
. 0 to 7% range of charges for withdrawals from the Fixed Fund
Account
. State premium tax (if your state imposes one)
In addition, total fund annual expenses range from .30% to 1.10% (as a
percentage of net assets).
- ------------------------------------------------------------------------------------------------
SPECIAL SERVICES For your convenience, we offer these special services:
. Automatic Payment Plan
. Dollar Cost Averaging Program
. Systematic Withdrawal Program
- ------------------------------------------------------------------------------------------------
INVESTMENT CHOICES The Contract offers 13 investment choices including:
. 1 Fixed Fund Account (guaranteed to earn at least 3% interest)
. 12 Variable Fund Accounts investing in mutual fund portfolios
managed by these professional money managers:
. USAA Investment Management Company ("USAA IMCO")
. Scudder Kemper Investments, Inc. ("SCUDDER")
. Fred Alger Management, Inc. ("ALGER MANAGEMENT")
. Bankers Trust Company ("BANKERS TRUST")
To find out current rates being paid on the Fixed Fund Account, call
us at 1-800-531-2923. To find out how the Variable Fund Accounts
have performed, check out "Performance Information" beginning on page
34A, or call us for more current information.
- ------------------------------------------------------------------------------------------------
</TABLE>
CONTRACT FEATURES
6A
<PAGE>
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------------------------
ANNUITY BENEFITS You can choose from a variety of annuity payment options:
. 5 fixed annuity payment options
. 3 variable annuity payment options
. 1 systematic withdrawal option
- ------------------------------------------------------------------------------------------------
DEATH BENEFITS If you die before annuity payments begin, we will pay a death benefit
that is the greater of:
. the value of your Contract ("CONTRACT VALUE") on the
date we receive proof of death, or
. total premiums paid less withdrawals and premium
taxes.
If you die on or after the day annuity payments begin, your
Beneficiary may or may not receive death benefits, depending on the
annuity payment option you selected.
- ------------------------------------------------------------------------------------------------
TRANSFERS You may transfer your money among your investment choices up to 6
times per Contract year. You must transfer at least $100 or, if
less, the remaining balance in the Fixed or Variable Fund Account from
which you are transferring. You may incur a charge if you transfer
money from the Fixed Fund Account.
- ------------------------------------------------------------------------------------------------
WITHDRAWALS You may withdraw some or all of your money at anytime before annuity
payments begin. The minimum amount you may withdraw is $500, or, if
less, the remaining balance in the Fixed or Variable Fund Account from
which you are withdrawing. A 10% federal tax penalty may apply if you
withdraw before you are 59 1/2 years old. A withdrawal charge may
apply if you withdraw money from the Fixed Fund Account.
- ------------------------------------------------------------------------------------------------
</TABLE>
CONTRACT FEATURES
7A
<PAGE>
HOW THE CONTRACT WORKS
The Contract basically works in two ways.
1ST, the Contract can help you save for retirement because you can invest in up
to 13 investment choices and pay no federal income taxes on any earnings until
you withdraw them. You do this during what we call the "ACCUMULATION PHASE"
of the Contract. The Accumulation Phase begins when you buy a Contract (we
call this the "EFFECTIVE DATE") and continues to the date you begin receiving
annuity payments (we call that the "ANNUITY DATE"). During the Accumulation
Phase, if you invest in the Fixed Fund Account, you will earn a fixed rate of
interest (not less than 3%) that we declare periodically. If you invest in
the Variable Fund Accounts, your investment return will vary up or down
depending on the performance of the corresponding Funds.
2ND, the Contract can help you plan for retirement because you can use it to
receive retirement income for life, or for a pre-set number of years, by
selecting one of the annuity payment options described on page 17A. You do
this during what we call the "DISTRIBUTION PHASE" of the Contract. The
Distribution Phase is the period beginning on and continuing after the Annuity
Date. During the Distribution Phase, if you select a fixed annuity payment
option, we guarantee the amount of your payments, which will remain fixed. If
you select a variable annuity payment option, based on up to four of the
Variable Fund Accounts, the amount of your payments will vary up or down
depending on the performance of the corresponding Funds.
You can use the Contract with a "NONQUALIFIED PLAN" or a "QUALIFIED PLAN."
. A Nonqualified Plan is a retirement plan that permits deferral of federal
income tax on earnings.
. A Qualified Plan is a personal retirement savings plan, such as an
individual retirement annuity ("IRA") or tax-sheltered annuity ("TSA") that
permits (1) money to be contributed on a pre-federal income tax basis, and
(2) deferral of federal income tax on earnings.
The timeline below illustrates how you might use your Contract.
<TABLE>
<CAPTION>
Effective Accumulation
Date Phase Annuity Date Distribution Phase
<S> <C> <C> <C>
[DIAGRAM APPEARS HERE]
You save for retirement
You buy You start receiving You can receive Or you can receive
a Contract annuity payments or annuity payments annuity payments
receive a lump sum for a set period for as long as you live
payment
</TABLE>
CONTRACT FEATURES
8A
<PAGE>
As the Contract owner, you exercise all of the rights and privileges provided by
the Contract. That means it is up to you to select or change (to the extent
permitted):
. the investment choices during the Accumulation and Distribution Phases;
. the amount and timing of your premium payments and withdrawals;
. the special services you want to use to invest or withdraw money;
. the annuity payment option you want to use to receive retirement income;
. the annuitant (either yourself or someone else) on whose life the annuity
payments will be based ("ANNUITANT");
. the beneficiary or beneficiaries who will receive the benefits that the
Contract provides when you or the Annuitant dies ("BENEFICIARIES"); and
. any other rights that the Contract provides.
If you die, the Annuitant or Beneficiary will exercise the rights and privileges
provided by the Contract. See "More Information The Contract." In addition,
if you die before the Annuity Date, we will pay a death benefit to your
Annuitant or Beneficiary according to the Contract.
Please call us at 1-800-531-4265 if you have any question about how the Contract
works.
EXPENSES
The table below lists the expenses that you will bear directly or indirectly
under the Contract. The table does not show premium taxes imposed by the state
where you reside. For more information about Separate Account expenses, see
"Charges and Deductions," below. For more information about Fund expenses, see
the prospectuses for the Funds.
Transaction Expenses
- --------------------
Sales Load Imposed on Premium Payments None
Deferred Sales Load None
Withdrawal Fee for Variable Fund Account None
Withdrawal Fee for Fixed Fund Account(1) 0%-7%
Transfer Fee /(1)/ None
Annual Contract Fee
- -------------------
Contract Maintenance Charge /(2)/ $30.00
SEPARATE ACCOUNT ANNUAL EXPENSES (as a percentage of average net assets)
- --------------------------------
Mortality and Expense Risk Charge /(3)/ 0.65%
Administrative Expense /(3)/ 0.10%
-----
Total Separate Account Annual Expenses /(3)/ 0.75%
=====
CONTRACT FEATURES
9A
<PAGE>
Annual Expenses of the Funds (as a percentage of average net assets)(4)
- ----------------------------
<TABLE>
<CAPTION>
Management Other Expenses After Total Fund Annual
Name of Fund Fees Expense Reimbursement(5) Expenses(5)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
USAA Life Money Market .20% .15% .35%
- -------------------------------------------------------------------------------------------------------------------------------
USAA Life Income .20 .15 .35
- -------------------------------------------------------------------------------------------------------------------------------
USAA Life Growth and Income .20 .15 .35
- -------------------------------------------------------------------------------------------------------------------------------
USAA Life World Growth .20 .45 .65
- -------------------------------------------------------------------------------------------------------------------------------
USAA Life Diversified Assets .20 .15 .35
- -------------------------------------------------------------------------------------------------------------------------------
USAA Life Aggressive Growth .50 .20 .70
- -------------------------------------------------------------------------------------------------------------------------------
USAA Life International .65 .45 1.10
- -------------------------------------------------------------------------------------------------------------------------------
Scudder VLIF Capital Growth Portfolio .475 .035 .51
- -------------------------------------------------------------------------------------------------------------------------------
Alger American Growth Portfolio .75 .04 .79
- -------------------------------------------------------------------------------------------------------------------------------
BT Equity 500 Index .20 .10 .30
- -------------------------------------------------------------------------------------------------------------------------------
BT Small Cap Index .35 .10 .45
- -------------------------------------------------------------------------------------------------------------------------------
BT EAFE(R) Equity Index .45 .20 .65
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) We may deduct a charge of up to 7% from transfers or withdrawals from the
Fixed Fund Account depending upon how long the money transferred or
withdrawn has been on deposit with us. (See "Fixed Fund Account Withdrawal
Charge.")
(2) Applies annually during the Accumulation Phase.
(3) Applies only to the Variable Fund Accounts.
(4) The figures shown in the table are as of each Fund's most recently
completed fiscal year. These expenses are reflected in the daily price of
each Fund's shares.
(5) USAA Life has agreed to assume the expenses of the USAA Life Investment
Trust Funds that exceed, annually, .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. We may stop assuming these expenses by giving the USAA Life
Investment Trust 120 days advance notice. Absent our agreement to assume
these expenses, the expenses of the USAA Life Money Market, Income, Growth
& Income, World Growth, Diversified Assets, Aggressive Growth, and
International Funds for the 1998 fiscal year would have been: .80%, .55%,
.37%, .66%, .45%, .84% and 1.35%, respectively. Bankers Trust has agreed
to reimburse the BT Equity 500 Index Fund, BT Small Cap Index Fund, and BT
EAFE(R) Equity Index Fund to the extent their total operating expenses
exceed 0.30%, 0.45%, and 0.65%, respectively. Bankers Trust may stop
reimbursing these Funds at any time. Without this reimbursement
arrangement, the expenses for the 1998 fiscal year for the BT Equity 500
Index Fund, BT Small Cap Index Fund, and BT EAFE(R) Equity Index Fund would
have been 1.19%, 1.58% and 1.66% respectively.
CONTRACT FEATURES
10A
<PAGE>
EXAMPLE:
The example below shows the dollar amount of expenses that you would bear
directly or indirectly if you:
. invested $1,000 in a Variable Fund Account,
. earned a 5% annual return on your investment,
. surrendered your Contract or chose to receive annuity payments
at the end of each time period, and
. assumed a $39,030 average Contract account size to express the $30
Contract Maintenance Charge as a percentage.
Please remember that you are looking at an example. Your actual expenses may be
lower or greater than those shown.
<TABLE>
<CAPTION>
Name of Variable Fund Account 1 yr. 3 yrs. 5 yrs. 10 yrs.
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
USAA Life Money Market $12 $38 $ 67 $152
- ------------------------------------------------------------------------------------------------------------------------
USAA Life Income 12 38 67 152
- ------------------------------------------------------------------------------------------------------------------------
USAA Life Growth and Income 12 38 67 152
- ------------------------------------------------------------------------------------------------------------------------
USAA Life World Growth 15 48 84 190
- ------------------------------------------------------------------------------------------------------------------------
USAA Life Diversified Assets 12 38 67 152
- ------------------------------------------------------------------------------------------------------------------------
USAA Life Aggressive Growth 16 49 86 197
- ------------------------------------------------------------------------------------------------------------------------
USAA Life International 20 62 109 248
- ------------------------------------------------------------------------------------------------------------------------
Scudder VLIF Capital Growth Portfolio 14 43 76 172
- ------------------------------------------------------------------------------------------------------------------------
Alger American Growth Portfolio 17 52 92 208
- ------------------------------------------------------------------------------------------------------------------------
BT Equity 500 Index 12 36 64 145
- ------------------------------------------------------------------------------------------------------------------------
BT Small Cap Index 13 41 72 165
- ------------------------------------------------------------------------------------------------------------------------
BT EAFE(R) Equity Index 15 48 84 190
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
ACCUMULATION UNIT DATA
- -----------------------
The accumulation unit data for the Variable Fund Accounts appear under the
heading "Financial Information" in this prospectus.
INVESTMENT CHOICES
During the Accumulation Phase, you may select up to 13 investment choices,
including 12 Variable Fund Accounts and our Fixed Fund Account. You may allocate
your premium payments among the investment choices in amounts no smaller than
1/10 of 1%, so long as the total equals 100%. During the Distribution Phase,
you may base your annuity payments on any 4 Variable Fund Accounts and our Fixed
Fund Account.
CONTRACT FEATURES
11A
<PAGE>
Variable Fund Accounts
- ----------------------
The Contract offers 12 Variable Fund Accounts. Each Variable Fund Account
invests in a corresponding Fund. A brief description of the Funds appears below.
More complete information, including a discussion of risks, appears in each
Fund's prospectus. Please read each Fund prospectus carefully.
<TABLE>
<CAPTION>
NAME OF FUND INVESTMENT OBJECTIVE IS TO SEEK: FUND ADVISER
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
USAA Life the highest level of current income consistent with
Money Market preservation of capital and maintenance of liquidity.
- ---------------------------------------------------------------------------------
USAA Life maximum current income without undue risk to principal.
Income
- ---------------------------------------------------------------------------------
USAA Life capital growth and current income. USAA IMCO
Growth and Income 9800 Fredericksburg Road
- --------------------------------------------------------------------------------- San Antonio, Texas 78288
USAA Life long-term capital appreciation.
World Growth
- ----------------------------------------------------------------------------------
USAA Life Long-term capital growth, consistent with preservation
Diversified Assets of capital and balanced by current income.
- ----------------------------------------------------------------------------------
USAA Life appreciation of capital.
Aggressive Growth
- ----------------------------------------------------------------------------------
USAA Life capital appreciation with current income as a secondary
International objective.
- ----------------------------------------------------------------------------------
Scudder VLIF to maximize long-term capital growth. SCUDDER
Capital Growth Two International Place Boston,
Portfolio Massachusetts 02110
Class A Shares
- ------------------------------------------------------------------------------------------------------------------------
Alger American long-term capital appreciation. ALGER MANAGEMENT
Growth Portfolio 75 Maiden Lane
New York, New York 10038
- ------------------------------------------------------------------------------------------------------------------------
BT Equity 500 Index to replicate as closely as possible (before deduction BANKERS TRUST
of Fund expenses) the total return of the Standard & 130 Liberty Street
Poor's 500 Composite Stock Price Index. New York, New York 10006
- ------------------------------------------------------------------------------------------------------------------------
BT Small Cap Index 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 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.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
USAA IMCO is a wholly owned indirect subsidiary of USAA. Scudder Kemper
Investments, Inc.; Fred Alger Management, Inc.; and Bankers Trust Company are
not affiliated with USAA.
CONTRACT FEATURES
12A
<PAGE>
Fixed Fund Account
- ------------------
THE FIXED FUND ACCOUNT IS NOT AVAILABLE TO RESIDENTS OF MARYLAND, MASSACHUSETTS,
PENNSYLVANIA, OREGON, OR WASHINGTON. THE FIXED FUND ACCOUNT ALSO IS NOT
AVAILABLE WITH CONTRACTS ISSUED UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
("ORP"). AMOUNTS INVESTED IN THE FIXED FUND ACCOUNT AS WELL AS AMOUNTS
SUPPORTING FIXED ANNUITY PAYMENTS ARE PART OF OUR GENERAL ACCOUNT ("GENERAL
ACCOUNT"). WE HAVE NOT REGISTERED THE INTERESTS IN THE GENERAL ACCOUNT WITH THE
SEC, NOR HAVE WE REGISTERED THE GENERAL ACCOUNT WITH THE SEC AS AN INVESTMENT
COMPANY. THE STAFF OF THE SEC HAS NOT REVIEWED THE DISCLOSURES IN THIS
PROSPECTUS THAT RELATE TO THE FIXED FUND ACCOUNT OR FIXED ANNUITY PAYMENTS. AT
THE SAME TIME, WE HAVE LEGAL RESPONSIBILITY FOR THE ACCURACY AND COMPLETENESS OF
THIS PROSPECTUS.
The money that you invest in or transfer to the Fixed Fund Account during any
month ("NEW MONEY") will earn interest at what we call the "NEW MONEY INTEREST
RATE." We declare this rate of interest at the beginning of each month and it
applies to all New Money that we receive that month. We credit the New Money
Interest Rate through the end of the current calendar year in which you invest
the New Money in the Fixed Fund Account.
The Contract Value in your Fixed Fund Account that is not attributable to New
Money will earn interest at what we call the "PORTFOLIO INTEREST RATE." We
declare this rate of interest at the beginning of each calendar year for that
year. We also may declare, before the beginning of each month, additional
interest on all amounts in the Fixed Fund Account other than New Money.
We guarantee both the New Money Interest Rate and the Portfolio Interest Rate.
These rates 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 you 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,
for the remainder of the year in which the transfer occurred. You should be
aware, however, that because any amounts transferred in this manner would be
considered New Money, they would again be subject to the Fixed Fund Account
Withdrawal Charge. (See "Charges and Deductions - Fixed Fund Account Withdrawal
Charge.")
Our General Account assets support our obligations with respect to the Fixed
Fund Account, and also support our obligations under other insurance contracts.
We own the investments purchased with amounts allocated to the Fixed Fund
Account. You have no legal rights in such investments.
SPECIAL SERVICES
To begin or end any of the special services described below, simply call or
write to us at the phone number or address on the cover of this prospectus. We
will provide you with instructions and a copy of any forms you need to complete.
During the Accumulation Phase, we may suspend, terminate, or modify the dollar
cost averaging or systematic withdrawal programs by giving you 30 days advance
notice. The suspension or termination of a program will not affect you if you
are already in a program.
Automatic Payment Plan
- ----------------------
This plan allows you to make regular premium payments from your checking or
savings account. We will automatically withdraw the amount you specify and
invest it according to your instructions on file with us.
CONTRACT FEATURES
13A
<PAGE>
Dollar Cost Averaging Program
- -----------------------------
This program allows you to regularly transfer money from one or more Variable
Fund Accounts (for example, the USAA Life Money Market Fund Account) to your
other investment choices. We will automatically transfer the amount or
percentage you specify and invest it according to your instructions on file with
us. The program does not permit transfers from the Fixed Fund Account. The
program is available only during the Accumulation Phase.
To begin the 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 you
may transfer is $100, or, if less, the remaining balance of your investment in
the Variable Fund Account from which you are transferring. You must schedule
transfers over a period of at least 12 months at monthly, quarterly, or
semiannual intervals.
Transfers under the program do not count toward your limit of six transfers per
Contract Year. A "CONTRACT YEAR" is the 12-month period following the Effective
Date and each 12-month period thereafter.
Currently, there is no charge for this program. We reserve the right to
suspend, terminate or modify the offering of the program.
Systematic Withdrawal Program
- -----------------------------
This program allows you to withdraw pre-set amounts monthly, quarterly,
semiannually, or annually from the Fixed and/or Variable Fund Accounts. We will
withdraw the amounts you specify proportionately from all of your investment
choices or only from the investment choices you specify. You may change the
amount or frequency of withdrawals once each Contract Year.
You must have a minimum Contract Value of $20,000 to participate in the program
($5,000 if the Contract funds a Qualified Plan). The minimum amount you may
withdraw from the Fixed or a Variable Fund Account is $250, or, if less, the
remainder of the Account.
A withdrawal charge and federal income taxes and penalties may apply to your
systematic withdrawals. See "Charges and Deductions - Fixed Fund Account
Withdrawal Charge" and "Tax Information." You should seek the advice of a tax
adviser before choosing this program.
Currently, there is no charge for this program. We reserve the right, however,
to charge for this program during the Accumulation Phase of the Contract. We do
not intend to profit from any such charge.
YOUR CONTRACT VALUE
Your Contract Value during the Accumulation Phase equals the sum of the values
you have invested in the Fixed and Variable Fund Accounts.
Fixed Fund Account Value
- ------------------------
The value of your Contract in the Fixed Fund Account ("FIXED FUND ACCOUNT
VALUE") on any business day will equal:
. the sum of premium payments you invested in the Fixed Fund Account;
. plus accumulated interest;
. plus any amounts transferred from the Variable Fund Accounts to the Fixed
Fund Account;
. less the Fixed Fund Account portion of any Contract Maintenance Charges;
. less any withdrawals or transfers of value; and
. less any applicable premium tax.
CONTRACT FEATURES
14A
<PAGE>
Variable Fund Account Value
- ---------------------------
We measure the value of your Variable Fund Accounts ("VARIABLE FUND ACCOUNT
VALUE") using a unit of measure we call the "ACCUMULATION UNIT." When you invest
in a Variable Fund Account, we credit your Contract with a number of
Accumulation Units. Your Variable Fund Account Value on any business day will
equal the number of Accumulation Units credited to you multiplied by the price
of the Accumulation Unit on that date.
EXAMPLE:
You pay us $6,000 in premium on Wednesday. You allocate the premium to the
USAA Life Growth and Income Fund Account. When the New York Stock Exchange
closes that day, we determine that the value of an Accumulation Unit for
that Variable Fund Account is $20.00. We then divide your $6,000 payment
by $20.00 and credit your Contract with 300 Accumulation Units.
We calculate the value of an Accumulation Unit ("ACCUMULATION UNIT VALUE") for
each Variable Fund Account after the New York Stock Exchange closes each
business day based on the formula below. To receive a quotation of daily
Accumulation Unit Values, call us at 1-800-531-4265.
To calculate the Accumulation Unit Value of a Variable Fund Account each
business day, we:
. calculate the change in market value from the previous day for the
underlying fund.
. subtract insurance charges such as mortality and expense risk charge and
administrative charge.
. add or subtract the result to the prior day's Accumulation Unit Value.
Minimum Contract Value
- ----------------------
If your Contract Value during the Accumulation Phase is less than $1,000 and we
haven't received premium payments for two years, we may cancel your Contract.
This minimum does not apply to Contracts issued in connection with Qualified
Plans. We will notify you 30 days before we cancel your Contract. You will have
an opportunity to satisfy the minimum requirement before we cancel your
Contract. If we cancel your Contract, we will pay your contract value in a lump
sum and we will have no further obligations.
ANNUITY BENEFITS
You may choose to receive annuity payments during the Distribution Phase. We
will pay you according to the annuity payment option or "DISTRIBUTION OPTION"
you select. Payments will start on the Annuity Date and will continue for the
period specified in the Distribution Option you select.
Annuity Date
- ------------
You select your Annuity Date when you apply for a Contract. If you are using
your Contract as a Qualified Plan, the Annuity Date may not be later than the
date required by federal income tax law. (See "Tax Information.") If you are
using your Contract as a Nonqualified Plan, the Annuity Date may not be later
than the Annuitant's 95th birthday. The Annuity Date must also be at least six
months after the Effective Date of your Contract, unless we choose to waive this
requirement. You may change the Annuity Date by submitting a written request,
at least 30 days before the Annuity Date.
CONTRACT FEATURES
15A
<PAGE>
Types of Annuity Payments
- -------------------------
You may choose:
. fixed annuity payments,
. variable annuity payments,
. a combination of fixed and variable annuity payments, or
. systematic withdrawals.
Fixed annuity payments are monthly payments of fixed amount that we guarantee
for the dollar amount or number of years that you choose. Variable annuity
payments are monthly payments that vary in amount, depending on the performance
of the Variable Fund Accounts you select. We do not guarantee the amount of
variable annuity payment.
Amount of Annuity Payments
- --------------------------
The amount of your first annuity payment, whether fixed or variable, will depend
on the amount of Contract Value you apply to a Distribution Option. Your
Contract contains tables showing examples of the first monthly annuity payment
that you would receive for each $1,000 of Contract Value you apply to a
Distribution Option.
The amount of each subsequent fixed annuity payment is fixed by the terms of the
Distribution Option you choose. To calculate the amount of your subsequent
variable annuity payments, we use a unit of measure called an "ANNUITY UNIT."
The amount of each subsequent variable annuity payment will equal the product
of:
. the number of Annuity Units credited to you multiplied by
. the values of those Annuity Units ("ANNUITY UNIT VALUES").
Number of Annuity Units. When you apply your Contract Value to a Distribution
Option, we credit you with a number of Annuity Units for each Variable Fund
Account that you select. To determine the number of Annuity Units to credit you,
we divide the amount of your first variable annuity payment by the Annuity Unit
Values of each Variable Fund Account on the business day we determine the
credit. The number of Annuity Units for each Variable Fund Account will remain
constant thereafter.
Annuity Unit Values. To determine the Annuity Unit Values of each Variable Fund
Account on a given business day, we take the previous day's Values and adjust
them to reflect:
. the performance of the corresponding Funds (including any dividends or
capital gains distributions);
. any charges or credits for any income or other taxes relating to the
Variable Fund Account operation;
. Separate Account charges; and
. an assumed annual rate of return of 3% on the Variable Fund Accounts (we
call this the "3% ASSUMED RATE"). If the actual performance of a Variable
Fund Account for the month is at an annual rate that exceeds the 3% assumed
rate, your annuity payments will increase. Conversely, if the actual
performance is at an annual rate below the 3% assumed rate, your annuity
payment will decrease.
CONTRACT FEATURES
16A
<PAGE>
Distribution Options
- --------------------
The Contract offers 6 Distribution Options ("OPTIONS"). You may receive
payments under other options, including a lump sum, that you and we agree upon
in writing. Also, we may, at our option, offer more favorable Distribution
Options in the future. Once annuity payments have begun, you may not change
your Distribution Option. However, if you are receiving variable annuity
payments under a Distribution Option that is not based on the life of the
Annuitant, you may receive a lump sum payment equal to the present value of any
future variable annuity payments remaining under that Distribution Option.
If you want to receive fixed annuity payments, you may select any one of the
Options 1 through 5. If you want to receive variable annuity payments, you must
select Option 1, 2, or 3. Option 6 provides for systematic withdrawals out of
the Fixed Fund Account and/or Variable Fund Accounts. A Fixed Fund Account
withdrawal charge may apply under Option 6.
Please note that, although Distribution 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 Variable
Fund Accounts you select is poor, the amount of future annuity payments could
fall substantially, possibly to zero.
<TABLE>
<S> <C>
- --------------------------------------------------------------------------------------------------------------------
OPTION 1
Income Payments for Life Annuity payments for as long as the Annuitant is alive. Please note that the
Annuitant or other payee could receive only one annuity payment if the Annuitant
dies before the second annuity payment.
- --------------------------------------------------------------------------------------------------------------------
OPTION 2
Income Payments for Life with Annuity payments for a certain period of time even if the Annuitant dies before
a Certain Period Guaranteed that period of time has expired.
- --------------------------------------------------------------------------------------------------------------------
OPTION 3
Joint and Survivor Life Income Annuity payments for as long as the Annuitant or the Joint Annuitant is alive.
Please note that an Annuitant or other payee could receive only one annuity
payment if both Annuitants die before the second annuity payment. If one of these
persons dies before the Annuity Date, the survivor becomes the sole Annuitant and
may elect to receive any one or more of the other Distribution Options.
- --------------------------------------------------------------------------------------------------------------------
OPTION 4
Income for Specified Period Equal payments for an agreed upon period of time (not longer than 30 years). We
determine the amount of each payment pursuant to an annuity payment table
contained in the Contract.
- --------------------------------------------------------------------------------------------------------------------
OPTION 5
Income of Fixed Amount A sum of money is transferred to us. In exchange, we agree, 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 for as long as the principal and interest earnings last.
- --------------------------------------------------------------------------------------------------------------------
OPTION 6
Systematic Withdrawals Substantially equal monthly, quarterly, semi-annual, or annual payments made over
the life expectancy of the Annuitant or a shorter period of time. See "Special
Services Systematic Withdrawal Program" in this prospectus for details.
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
No partial or full withdrawals are permitted under Options 1 through 5 after the
Annuity Date.
If you are using this Contract to fund a Qualified Plan and if you are required
to take distributions under federal income tax law, we offer a service to
determine the minimum amount of distribution that you must take each year. You
may arrange with us to have this amount distributed by systematic withdrawal.
CONTRACT FEATURES
17A
<PAGE>
DEATH BENEFITS
Death Benefits Prior to the Annuity Date
- ----------------------------------------
If you are the Contract owner as well as the Annuitant and you die before the
Annuity Date, we will pay a death benefit to your Beneficiary. If you are the
Contract owner but not the Annuitant and you die before the Annuity Date, we
will pay a death benefit to the Annuitant, or the Beneficiary if the Annuitant
does not survive you.
The death benefit is the greater of:
. the Contract Value on the date we receive proof of death; or
. the sum of the premium payments credited to the Contract, less the amount
of any withdrawals and less any required premium tax.
We will pay the death benefit in a lump sum. Instead of receiving the death
benefit in a lump sum, the Beneficiary or the Annuitant, if entitled, may choose
a Distribution Option.
If you are the Contract owner and you die before the Annuity Date, federal
income tax law requires your death benefits to be paid out as follows:
. If you are also the Annuitant and you did not designate a Beneficiary or no
Beneficiary survived you, then full distribution to your estate must occur
within five years after your death.
. If you are also the Annuitant and the Beneficiary is your spouse, or if you
are not the Annuitant but your spouse is, then your spouse may:
. assume ownership as the Annuitant and defer distribution until the
Annuity Date, or
. receive distributions over a period of time not exceeding your
surviving spouse's life or life expectancy, in which case payments must
begin within one year after your death.
. If you are also the Annuitant and the Beneficiary is not your spouse, then
distribution must begin within one year after your 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 your death.
. If you are not the Annuitant and the Annuitant is not your spouse, then
distribution must begin within one year after your 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 you, or, in
the alternative, full distribution must occur within five years after
your death.
Death Benefits On or After the Annuity Date
- -------------------------------------------
Under current federal income tax law, if you are the Contract owner as well as
the Annuitant and you die on or after the Annuity Date, any payment that remains
under the terms of the Contract must continue at least as rapidly as before your
death. To the extent that the Distribution Option then in effect provides for
any benefits following the Annuitant's death, the Beneficiary may:
. continue to receive the same payments as the Annuitant; or
. if permitted under the Distribution Option, receive higher payments, but
over a shorter period of time, than the Annuitant was receiving; or
. if permitted under the Distribution Option, take full distribution of the
remaining value at the Annuitant's death.
CONTRACT FEATURES
18A
<PAGE>
HOW DO I...?
...Buy a Contract
--------------
To buy a Contract, you must complete an application and submit it, along with
your initial premium payment, to us at the address on the cover of this
prospectus. You must be of legal age and reside in a state where we are offering
the Contract. The Contract is not available to you if you have attained the age
of 85.
If a premium payment accompanies your application and it is complete, we will
either accept it and issue a Contract to you, or reject it and return the
premium payment, within two days after we receive it. If your application is
not complete, or is incorrectly completed, we will ask you to complete it within
five days after we receive it. If we do not receive a correctly completed
application within this five-day period, we will return your premium payment to
you immediately, unless you consent to our retaining the premium payment until
you complete the application. We will credit your initial premium payment
within two business days after we receive the last information we need to
process your application.
The current minimum initial and additional premium payments we accept are as
follows:
<TABLE>
<CAPTION>
Minimum Minimum
Type of Plan Initial Premium Subsequent Premium
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Nonqualified Annuity $1,000* $100*
- --------------------------------------------------------------------------------------------------
IRA and SEP-IRA $ 100 $ 50*
- --------------------------------------------------------------------------------------------------
SARSEP-IRA $ 25 $ 25
- --------------------------------------------------------------------------------------------------
TSA or ORP $ 50 $ 50
- --------------------------------------------------------------------------------------------------
</TABLE>
* 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, IRAs and SEP-IRAs.
...Invest More Money
-----------------
As long as your Contract Value does not fall below $1,000 (other than for
Contracts issued as part of Qualified Plans), you need not make any more premium
payments. You may, however, make subsequent premium payments at any time before
the Annuity Date. Simply send us your subsequent premium payments at the
address on the cover of this prospectus. We will allocate them among the
various Fixed and Variable Fund Accounts in the same way as the initial premium
payment. The minimum amount we will accept is shown in the table above.
..Access My Money
---------------
You may withdraw some or all of your money at any time during the Accumulation
Phase. The minimum amount that you may withdraw is $500, or, if less, the
remaining balance in the Fixed and/or Variable Fund Account from which you are
withdrawing.
To withdraw money, simply contact us at the telephone number or address on the
cover page of this prospectus. Unless you are withdrawing all of your Contract
Value, you must specify the Fixed and/or Variable Fund Accounts that you want to
withdraw from. If you do not specify the Variable Fund Accounts, we will
withdraw money proportionately from your Contract Value in each Variable Fund
Account.
TRANSACTIONS
19A
<PAGE>
There is no charge for withdrawing money from a Variable Fund Account. However,
we will deduct the $30 Contract Maintenance Charge if you withdraw all of your
money from the Contract. We also may deduct a withdrawal charge from the amount
you withdraw from the Fixed Fund Account. (See "Charges and Deductions - Fixed
Fund Account Withdrawal Charge.") A 10% federal income tax penalty may apply if
you withdraw money before age 59 1/2. You also will pay taxes on any earnings
that you withdraw. For a discussion of tax aspects, see "Tax Information,"
below. You should seek the advice of a tax adviser before withdrawing
money.
...Change My Investment Choices
----------------------------
During the Accumulation Phase, you may change your investment choices by
transferring money among the Fixed and Variable Fund Accounts. There is no
charge to transfer money from a Variable Fund Account, but money that you
transfer from the Fixed Fund Account may be subject to a withdrawal charge. (See
"Charges and Deductions - Fixed Fund Account Withdrawal Charge.") The following
restrictions apply during the Accumulation Phase:
1. You may make six transfers each Contract Year.
2. The minimum amount of value that you may transfer from one Account to
another is $100, or, if less, your total remaining Account balance.
3. Your 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.
During the Distribution Phase, 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 made during the Distribution Phase are subject to
restriction 3 noted above, as well as the following restrictions:
1. You may make up to 3 transfers per Contract Year from a Variable Fund
Account to another Variable Fund Account or to a Fixed Annuity.
2. You may not transfer from a Fixed Annuity to a Variable Annuity or to a
new Distribution Option.
3. The minimum amount that you may transfer from a Variable Fund Account is
$100.
4. Once you have transferred Annuity Unit Value to the Fixed Fund Account,
it is locked in and cannot be transferred out.
We can terminate, suspend, or modify these transfer privileges without prior
notice.
...Change My Premium Allocations
-----------------------------
You may change the allocation of your subsequent premium payments at any time by
calling or writing to us at the number or address on the cover page of this
prospectus. A request to change subsequent premium payment allocations will be
effective with the first premium payment we receive on or after the business day
we receive the request.
...Change My Annuity Date
----------------------
You may change the Annuity Date by sending a written request to us at the
address on the cover of this prospectus at least 30 days before the Annuity
Date.
TRANSACTIONS
20A
<PAGE>
HOW DO I...?
...Change My Annuitant
-------------------
You may change your Annuitant by sending a written request to us at the address
on the cover of this prospectus. We must receive you request at least 15 days
before the Annuity Date. The change will take effect as of the business day we
receive your request.
...Change My Beneficiaries
-----------------------
During the Annuitant's life, you may change your Beneficiaries by sending a
written request to us at the address on the cover of this prospectus. The
change will take effect as of the date you sign the request. If we make any
payments before receiving your request to change the Beneficiary, we will
receive credit against our obligations under the Contract.
...Transfer or Assign Ownership
----------------------------
You may transfer or assign ownership of the Contract, subject to legal
restrictions. To transfer or assign ownership, you must notify us in writing at
the address on the cover page of this prospectus. An assignment is not
effective until we receive it at our address. We are not responsible for
determining the validity of an assignment.
...Place a Telephone Request
-------------------------
Simply call 1-800-531-4265 to:
. change your premium payment allocation,
. withdraw money, or
. transfer money among your investment choices.
We will ask you for your:
. name,
. USAA number or Contract number, and
. social security number. We treat requests made by facsimile, telegraph, or
other electronic transmission device as telephone requests, so please be
sure to provide the same identifying information on those requests as well.
We will use reasonable procedures to confirm that instructions given by
telephone are genuine, and only if we do not, will we be liable for any losses
because of unauthorized or fraudulent instructions. In addition to asking you
for identifying information, we record all telephone communications that concern
purchases, redemptions or transfers. We also send confirmations of all
transactions to the Contract owner's address. We may modify, suspend or
discontinue this telephone transaction privilege at any time without prior
notice.
...Cancel My Contract
------------------
You may return your Contract to us within the Free Look Period. If you return
your Contract within the Free Look Period, we will give you a refund. We will
refund any premium payment allocated to the Fixed Fund Account, plus the greater
of:
. premium payments allocated to the Variable Fund Accounts, or
. the value of the Variable Fund Accounts as of the day we receive your
cancellation request plus any mortality and expense risk charge,
administrative expense charge and any premium taxes that we have deducted.
We will void the Contract and treat it as if we had not issued it.
TRANSACTIONS
21A
<PAGE>
...Keep Track of My Investments
----------------------------
At least once each Contract Year, we will send you a statement of information
about your Contract. The statement will show the number of Accumulation Units
we recently credited to your Contract for each Variable Fund Account and the
dollar value of the Accumulation Units. We may send you a statement more
frequently. We also will send you semiannual reports for the Funds that
correspond to the Variable Fund Accounts, periodic reports for the Separate
Account, and any other information that the law requires us to send to you.
You now have access to information about your Contract 24-hours a day, 7 days a
week through USAA's TouchLineSM.
TouchLine provides a fast, convenient way to find out:
. your total Contract Value,
. a listing of Variable Fund Accounts and current Accumulation Unit Values,
and
. the date and amount of your last premium payment or withdrawal.
You may access TouchLine by using your touch-tone phone and dialing 1-800-531-
5433. You will need your USAA number or Social Security number and your USAA
PIN (personal identification number).
You may also visit us online at www.usaa.com.
...Start Receiving Annuity Payments
--------------------------------
To receive annuity payments, you must notify us in writing at least 30 days
before the Annuity Date of:
. the Distribution Option you want to use to begin annuity payments;
. the type of annuity payments you want (fixed, variable, a combination of
fixed and variable annuity payments, or systematic withdrawals); and
. if you want to receive variable annuity payments, the Variable Fund
Accounts (up to 4) you want to use to fund your payments.
Once we have the necessary information, we will apply your Contract Value, less
any required premium tax, to the Distribution Option that you have selected.
If you have not chosen a Distribution Option at least 30 days before the Annuity
Date, we will apply your Contract Value, less any required premium tax, to
Distribution Option 2, with monthly payments guaranteed for 10 years. In
addition, we will apply any Fixed Fund Account Value to provide you with fixed
annuity payments. Similarly, we will apply any Variable Fund Account Value to
provide variable annuity payments funded from the same Variable Fund Accounts to
which you have allocated your Contract Value as of the Annuity Date and in the
same proportions. We will apply your Contract Value as of the end of the
business day immediately preceding the tenth day before the Annuity Date.
If you have assigned your Contract, the amount due the assignee must be paid in
a lump sum before we can determine or begin any annuity payments.
If at the time you want to begin annuity payments, your Contract Value is less
than $2,000 or would provide a monthly distribution payment of less than $20 per
month, we may cancel your Contract. In that event, we will pay the Annuitant
the Contract Value in a lump sum and be released of any further obligations.
TRANSACTIONS
22A
<PAGE>
...Report a Death
--------------
To report a death, you (or someone else) must notify us in writing at the
address on the cover of this prospectus. Also, you (or someone else) must send
"PROOF OF DEATH", which can be:
. a death certificate,
. 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 that we find satisfactory.
We will not pay any death benefit unless we receive a written request and proof
of death.
...Contact USAA Life
-----------------
If you have any other questions about your Contract, you can call us at 1-800-
531-4265 or write to us at 9800 Fredericksburg Road, San Antonio, Texas 78288.
PROCESSING DATES
Generally, we will process the following transactions using the Fixed and
Variable Fund Account Values (including Accumulation and Annuity Unit Values)
computed on the business day that we receive your payment, request, notice,
and/or other documents or information necessary to complete your transaction:
. premium payments;
. transfers of money or Annuity Units among investment choices (including
transfers in the dollar cost averaging program);
. withdrawals of money (including withdrawals in the systematic withdrawal
program); and
. death benefit claims.
If we receive your payment, request, etc. BEFORE 3 P.M. Central time on a
business day, we will process your transaction using that day's Fixed and
Variable Fund Account Values. If you miss the 3 p.m. deadline that day, we will
process your transaction using the next business day's Fixed and Variable Fund
Account Values.
In this prospectus, we use the term "business day" to mean any day Monday
through Friday when the New York Stock Exchange is open for regular trading.
The Exchange usually closes at 4 p.m. New York time (3-p.m. Central time) and is
not open on federal holidays. Business day does not include:
. any day when the funds do not compute the value of their shares; or
. any day when we do not receive an order to purchase, withdraw, or transfer
Accumulation Units or purchase or transfer Annuity Units.
Please keep in mind that we cannot process your telephone or written requests if
you do not provide all of the information we need to complete the transaction.
If the transaction requires you to notify us in writing, you must sign your
written request.
TRANSACTIONS
23A
<PAGE>
Special Processing
- ------------------
Initial Premium Payments
. If your initial premium payment accompanies a completed application, we
will credit your payment within two business days after we receive the
payment and completed application.
. If your initial premium payment accompanies an incomplete application, we
will credit your initial premium payment within two business days after we
receive the last information we need to process your application.
. If you allocate any part of your initial premium payment to the Fixed Fund
Account, we will credit it to that Account on the Effective Date.
. If you allocate any part of your initial premium payment to any of the
Variable Fund Accounts, we will credit it to the USAA Life Money Market
Fund Account on the Effective Date. Your premium will remain in the USAA
Life Money Market Fund Account for the Free Look Period plus five calendar
days. On the business day immediately after the end of that period, we will
allocate your initial premium payment, together with any subsequent premium
payments that you have made, plus any earnings, to the Variable Fund
Accounts as you directed on the application.
Initial annuity payments
To calculate the amount of the initial annuity payment, we use the Contract
Value and Annuity Unit Values of the business day preceding the 10th day before
the Annuity Date.
POSTPONEMENT OF PAYMENTS
We will normally pay amounts withdrawn from a Contract within 7 days after we
receive your written or telephone request. In addition, we will normally
process your transactions using the Fixed or Variable Fund Account Values as of
the business day we receive your request.
However, we may not be able to determine the value of the assets of the Variable
Fund Accounts if:
. the New York Stock Exchange is closed for other than customary weekends
and holidays;
. trading on the New York Stock Exchange is restricted; or
. an emergency exists and 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 also may postpone payments or defer such other
transactions where the SEC permits us to do so for the protection of Contract
owners. In addition, we will defer requests for withdrawals that would be
derived from a premium payment made to us by a check that has not cleared the
banking system, to the extent permitted by law at the time, until payment of the
check has been honored.
We can defer the payment of a withdrawal from the Fixed Fund Account for up to
six months from the business day we receive your written or telephone request.
TRANSACTIONS
24A
<PAGE>
MORE INFORMATION ABOUT...
...USAA Life
---------
USAA Life is a Texas insurance company organized in 1963. We are principally
engaged in writing life insurance policies, annuity contracts and health
insurance policies. We are authorized to transact insurance business in all
states including the District of Columbia but excluding New York. On a
consolidated basis prepared in accordance with Generally Accepted Accounting
Principles ("GAAP"), we had total assets of $8,500,568,000 on December 31, 1998.
We are a wholly owned 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. Our Home Office is 9800
Fredericksburg Road, San Antonio, Texas 78288.
As of the date of this Prospectus, both we and USAA held the highest ratings
from A.M. Best Company (A++ Superior) and Standard & Poor's Corporation (AAA
Superior). Both we and USAA also held the second-highest and highest ratings
(AA1 Excellent and Aaa Exceptional), respectively, from Moody's Investors
Service. The ratings published by these independent financial rating agencies
serve as measurements of an insurer's financial condition. The ratings are
based on an evaluation of many factors, including:
. profitability
. asset quality
. adequacy of reserves
. capitalization
. management practices.
These ratings are not a rating of investment performance that our customers have
experienced or are likely to experience in the future.
...The Separate Account
--------------------
We own the assets of the Separate Account. The Separate Account is a segregated
asset account under Texas law. That means we account for the Separate Account's
income, gains, and losses separately from the results of our other operations.
It also means that only the assets of the Separate Account that are in excess of
the reserves and other Contract liabilities with respect to the Separate Account
are subject to liabilities relating to our other operations. The Separate
Account consists of 12 Variable Fund Accounts, each of which invests in a
corresponding Fund.
...The Funds
---------
Substitution of Funds
If the shares of any Fund should no longer be available for investment by the
Separate Account, or if in our judgment further investment in such shares would
be undesirable in view of the purposes of the Contracts, we may eliminate that
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.
We also may add new Variable Fund Accounts that invest in additional mutual
funds.
Dividends and Capital Gain Distributions
We have elected to automatically reinvest any dividends or capital gain
distributions paid on a Fund's shares in additional shares of the Fund at the
net asset value of the Fund's shares on the date payable. Dividends and
distributions lower the net asset value of each share of the corresponding Fund,
other than the Money Market Fund, but also increase the number of outstanding
shares of the Fund. The value of your interest in the corresponding Variable
Fund Account does not change as a result of any dividends or distributions.
OTHER INFORMATION
25A
<PAGE>
Voting Privileges
Based on our present view of the law, we will vote the shares of the Funds that
we hold directly or indirectly through the Separate Account in accordance with
instructions that we receive from Contract owners entitled to give such
instructions. The persons entitled to give voting instructions and the number
of shares that a person has a right to instruct will be determined based on
Variable Fund Account Values as of the record date of the meeting.
We will vote shares attributable to Contracts for which we have not received
instructions, as well as shares attributable to us, in the same proportion as we
vote shares for which we have received instructions, unless we determine that
we may vote such shares in our own discretion. None of the Funds hold regular
shareholder meetings.
Special Considerations
The Funds managed by Scudder, Alger Management, and Bankers Trust offer shares
to separate accounts of unaffiliated life insurance companies to fund benefits
under variable annuity contracts and variable life insurance policies. The
Funds managed by USAA IMCO offer shares only to our separate accounts to fund
benefits under the Contracts and the variable life insurance policies that we
offer. The boards of directors or trustees of these Funds monitor for possible
conflicts among separate accounts buying shares of the Funds. Conflicts could
develop for a variety of reasons. For example, differences in treatment under
tax and other laws or the failure by a separate account to comply with such laws
could cause a conflict.
To eliminate a conflict, a Fund's board of directors or trustees may require a
separate account to withdraw its participation in a Fund. A Fund's net asset
value could decrease if it had to sell investment securities to pay redemption
proceeds to a separate account withdrawing because of a conflict.
...The Contract
------------
Our obligations arising under the Contracts are general corporate obligations.
We have the responsibility for administration of the Contracts. Among other
things, this responsibility includes application and premium processing, issuing
the Contracts, and maintaining the required Contract owner's records.
Our affiliate, USAA IMCO, is the principal underwriter of the Contracts. USAA
IMCO has agreed to offer the Contracts for sale and distribution through certain
of 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.
Contract Agreement
The Contract and the application form the entire agreement between you and USAA
Life. We will consider statements in the application to be representations and
not warranties. Only an officer of the Company has authority to:
. waive a provision of the Contract, or
. agree with you to changes in the Contract, and then only in writing.
We reserve the right to change the Contract to comply with all federal and state
laws that apply to variable annuity contracts. Among other things, we may
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.
OTHER INFORMATION
26A
<PAGE>
Contract Owner
The rights and privileges of the Contract belong to the Contract owner during
the Annuitant's lifetime. The Contract owner is the Annuitant unless the
application designates a different Contract owner, and we have approved. If the
Contract 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 Contract owner and dies, then the rights and
privileges of ownership will vest in the Beneficiary.
Annuitant
The Annuitant must be a natural person. The maximum age of the Annuitant on the
Annuity Date is age 95. If an Annuitant who is not the Contract owner dies
before the owner prior to the Annuity Date, then the Beneficiary becomes the
Annuitant, unless the Contract owner designates another Annuitant by written
request. An Annuitant who is not the Contract owner 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 chosen 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 we provide upon the Contract
owner's or 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, we will
pay any remaining payments due to the Beneficiary's estate.
Unless otherwise provided, we will pay benefits as follows:
. If two or more Beneficiaries have been named, we will pay all benefits in
equal shares to those living at the time of the Annuitant's death; and
. If no Beneficiary survives the Annuitant, we will pay benefits to the
Annuitant's estate.
...Charges and Deductions
----------------------
As a Contract owner, you will bear, directly or indirectly, the charges and
expenses described below.
Premium taxes
We will deduct any premium taxes or other similar assessments that states,
municipalities or other governmental entities may impose. Premium taxes
currently imposed range from 0% to 3.5%. We will deduct these charges from your
Contract Value either when we receive the premium payment or when annuity
payments start, as required by state law. The amount of any premium tax charge
will depend on your state of residence. You may not deduct any premium tax
charge on your federal income tax return.
Contract Maintenance Charge
We will deduct a $30 Contract Maintenance Charge from your Contract Value on
each Contract anniversary. If you surrender your Contract, we will deduct the
entire Contract Maintenance Charge for that year. We will deduct the charge
proportionately from your investment in the Fixed and Variable Fund Accounts.
We will not deduct this charge:
. once you have elected to receive annuity payments under the Contract,
. from death benefits paid on the death of a Contract owner or Annuitant,
. from a lump sum payment in lieu of annuitization, or
. upon termination due to insufficient Contract Value.
We also will waive the charge for Contracts issued under the Texas Optional
Retirement Program.
OTHER INFORMATION
27A
<PAGE>
Administrative Expense Charge
We assess 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, along with the Contract Maintenance Charge, reimburses us for the
expenses we incur in the issuance 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 Contract 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 Contract owner servicing
. all accounting, valuation, regulatory and reporting requirements.
We do not intend to profit from this charge. We will reduce it to the extent
it is in excess of what is necessary to reimburse us for administrative
expenses. Should this charge prove to be insufficient, we will not increase
this charge (or the Contract Maintenance Charge) and we will bear the loss.
Alger Management and Bankers Trust, or their affiliates, reimburse us for the
cost of administrative services that we provide to the Funds they manage as
investment choices under the Contracts. Compensation is paid out of fee
earnings, based on a percentage of each of these Fund's average net assets
attributable to a Contract.
Mortality and Expense Risk Charge
To compensate us for assuming mortality and expense risks, we assess 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. We assume mortality risks:
. by our contractual obligation to make annuity payments after the Annuity
Date for the life of the Annuitant based on annuity rates guaranteed in the
Contracts under Distribution Options that involve life contingencies; and
. by our contractual obligation to pay a death benefit upon the death of an
Annuitant or Contract owner prior to the Distribution Phase.
The expense risk we assume 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.
We guarantee the Mortality and Expense Risk Charge. We cannot increase it. If
the Mortality and Expense Risk Charge is insufficient to cover the actual costs
associated with the Contracts, we will bear the loss. Conversely, if the amount
deducted proves more than sufficient, the excess will be our profit. We expect
to profit from this charge.
Income Taxes
We reserve 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
Expenses paid out of the assets of the Funds are described in detail in the
accompanying prospectuses for the Funds.
OTHER INFORMATION
28A
<PAGE>
Transfer Fee
We do not charge a fee for transfers among the Variable Fund Accounts, or for
transfers from a Variable Fund Account to the Fixed Fund Account. Transfers
from the Fixed Account to a Variable Fund Account may be subject to a withdrawal
charge. (See "Fixed Fund Account Withdrawal Charge," below.)
Fixed Fund Account Withdrawal Charge
We will deduct a charge from some premium payments or other payments withdrawn
or transferred from the Fixed Fund Account. In setting interest rates for the
Fixed Fund Account, we take numerous factors into account, including the length
of time that we expect Owners to leave funds in the Fixed Fund Account.
Generally speaking, a high degree of Contract 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 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 percentage will
depend on how many years have passed since the Payment being withdrawn or
transferred was credited to the Fixed Fund Account, according to the following
schedule:
<TABLE>
<CAPTION>
NUMBER OF YEARS CHARGE
- -----------------------------------------------------------------------------------------
<S> <C>
less than 1 7%
- -----------------------------------------------------------------------------------------
1 6%
- -----------------------------------------------------------------------------------------
2 5%
- -----------------------------------------------------------------------------------------
3 4%
- -----------------------------------------------------------------------------------------
4 3%
- -----------------------------------------------------------------------------------------
5 2%
- -----------------------------------------------------------------------------------------
6 1%
- -----------------------------------------------------------------------------------------
7 or more 0%
- -----------------------------------------------------------------------------------------
</TABLE>
The Fixed Fund Account Withdrawal Charge does not apply to the Variable Fund
Accounts.
In determining the charge, we consider a year to be a period of 365 days unless
a leap year is involved. In addition, we treat Payments that you withdraw or
transfer on a first-in first-out ("FIFO") basis. This means the earliest
Payments will be considered withdrawn first and before any earnings are deemed
to be withdrawn. We calculate the Fixed Fund Account Withdrawal Charge
separately for each Payment into the Fixed Fund Account. We will calculate the
Fixed Fund Account Withdrawal Charge in accordance with applicable state law.
Please refer to your Contract for more information.
The Fixed Fund Account Withdrawal Charge will not apply:
. to payments of death benefits prior to the Annuity Date.
. to payments of a lump sum in lieu of a Distribution Option.
. upon termination of a Contract due to insufficient Contract Value.
. upon commencement of a Distribution Option.
. to any Payment received 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 future Contract Years.
OTHER INFORMATION
29A
<PAGE>
...Year 2000
-------
Like other organizations around the world, USAA Life could be adversely affected
by the so-called "Year 2000 problem." The problem exists because many computer
programs use only the last two digits to refer to a year and may not properly
recognize a year that begins with a "20" instead of a "19." As a result, such
programs might not properly process and calculate information that relates to
dates beginning January 1, 2000 and beyond.
USAA Life has spent much effort and expense to confront the Year 2000 problem
and we expect to have our computer systems ready for the year 2000 by mid-1999.
In addition, we are assessing the Year 2000 readiness of the Funds in which the
Separate Account invests. Although we cannot say that you will experience no
effect from this situation, we can tell you that we are making a large effort to
avoid any ill effects upon our Contract owners.
TAX INFORMATION
We base this discussion of taxes on current federal income tax law and
interpretations. Congress has in the past changed and may again in the future
change the tax treatment of annuities. The Treasury Department may issue new or
amended regulations or other interpretations of that law. The courts may also
interpret the law. These changes could affect you retroactively. The following
is for general information purposes only. You should consult a qualified tax
advisor for tax advice about the Contracts.
THIS DISCUSSION DOES NOT ADDRESS STATE OR LOCAL TAX, ESTATE AND GIFT TAX, OR
SOCIAL SECURITY TAX CONSEQUENCES OF THE CONTRACTS.
Nonqualified Plan Contracts
- ---------------------------
THE FOLLOWING DISCUSSION APPLIES TO CONTRACTS UNDER NONQUALIFIED PLANS.
Increases in Value
General Rule. Generally, Section 72 of the Internal Revenue Code of 1986
("CODE") governs the federal income taxation of annuities. If you are a natural
person, you will not be taxed currently on increases in your Contract's Fixed
Fund Account Value or Variable Fund Account Value.
Owners Other Than Natural Persons. If you are not a natural person, such as a
corporation, the Code taxes you currently on increases in a contract's Fixed
Fund Account Value or Variable Fund Account Value. The Code also contains
exceptions to this rule.
Diversification. The Code and underlying Treasury Regulations set forth
requirements for investment diversification that each Variable Fund Account must
meet. Generally, a Variable Fund Account will satisfy these requirements if its
corresponding Fund satisfies them. A Fund's failure to meet the diversification
requirements will subject the Contract owner that invests in a Variable Fund
Account corresponding to that Fund to current taxation on any increases in the
Contract's Fixed Fund Account Value and Variable Fund Account Value for the
period of such diversification failure, and any subsequent period.
Contract Owner Control. The Treasury Department has stated that it may issue
guidelines that limit a Contract owner's control of investments underlying a
variable annuity. If a Contract failed to meet those guidelines, you would be
taxed on the Contract's current income. The Treasury Department has said
informally that those guidelines may limit the number of investment funds and
the frequency of transfers among those funds. The issuance of such guidelines
may require us to limit your right to control the investment. The guidelines may
apply only prospectively, although they could apply retroactively if they do not
reflect a new Treasury Department position.
OTHER INFORMATION
30A
<PAGE>
Withdrawals During the Accumulation Phase
During the Accumulation Phase, you will be taxed on partial and full withdrawals
from a Nonqualified Plan Contract to the extent of any income in the Contract.
Income in the Contract equals income earned on previous premium payments. The
amount of any partial or full withdrawal exceeding income in the Contract is not
taxable. We combine all Contracts we have issued to you in the same calendar
year in determining the amount of any withdrawal that is includible in your
income for tax purposes.
Assignments
An assignment of a Nonqualified Plan Contract will receive the same tax
treatment as a partial withdrawal, discussed immediately above.
Distributions During the Distribution Phase
During the Distribution Phase, each annuity payment from a Nonqualified Plan
Contract is taxable in part and nontaxable in part. You calculate the nontaxable
part first.
For fixed annuity payments, the nontaxable part of each payment is the product
of (1) the amount of the payment times (2) the ratio of (a) the investment in
the Contract to (b) the total value of expected payments. Investment in the
Contract is the total of all your premium payments less any previous
distributions that were not included in your income.
For variable annuity payments, the nontaxable part of each payment is (1) the
investment in the contract divided by (2) the total number of expected payments.
The taxable part of each payment is the balance left after you subtract the
nontaxable part. The taxable part is taxed at ordinary income tax rates.
Penalty on Distributions
Distributions prior to age 59 1/2 during either the Accumulation or Distribution
Phase are subject to a penalty tax equal to 10% of the amount includible in
income. The penalty tax will not apply to certain distributions, including
those:
. made on or after the recipient reaches age 59 1/2.
. made after the death of the Contract owner, or, where the owner is not a
natural person, the death of the Annuitant.
. made on account of the recipient's disability.
. that are part of a series of substantially equal periodic payments made at
least annually for the life (or life expectancy) of the recipient's
Beneficiary (under current Internal Revenue Service interpretation,
distributions under a systematic withdrawal program will not qualify for
this exception).
. made under an immediate annuity, which the Code defines in Section
72(u)(4).
There is a similar penalty, also subject to exceptions, on certain distributions
from Contracts from Qualified Plans.
Death Benefits
Special rules apply to the distribution of death benefits under the Contract
either during the Accumulation Phase or during the Distribution Phase. (See
"Death Benefits.")
Tax-free Exchanges
The Code allows a tax-free exchange of one annuity Contract for another annuity
if the annuitant and the owner are the same under each Contract. This rule also
applies to variable annuity Contracts.
Transfers
The Code does not currently tax transfers between investment options.
OTHER INFORMATION
31A
<PAGE>
Qualified Plan Contracts
- ------------------------
THE FOLLOWING DISCUSSION APPLIES TO CONTRACTS UNDER QUALIFIED PLANS.
You may use the Contracts with several types of Qualified Plans. The tax rules
applicable to Owners, Annuitants, and other benefit recipients vary according to
the type of Qualified Plan and the terms and conditions of the Qualified Plan.
These terms and conditions may limit the rights otherwise available to you under
the Contracts.
Accumulation Phase
In general, purchase payments made under a Qualified Plan on your behalf are
excludable from your gross income during the Accumulation Phase. The portion, if
any, of any purchase payment excluded from your gross income during the
Accumulation Phase constitutes your "investment in the contract."
Distribution Phase
When payments during the Distribution Phase begin, you will begin to receive
back your "investment in the contract," if any, as a tax-free return of capital.
The Code's rules for which portion of each payment is taxable and which is
nontaxable may vary depending on the type of Qualified Plan.
Types of Qualified Plans
The Contracts are available with the following types of Qualified Plans:
. Individual Retirement Annuity ("IRA")
. Roth IRA
. Simplified Employee PensionIndividual Retirement Annuity ("SEP-IRA")
. Salary Reduction Simplified Employee Pension-Individual Retirement
Annuity ("SARSEP-IRA"). Beginning in 1997, employers may no longer
establish a new SARSEP-IRA, but may maintain an existing SARSEP-IRA
. Simple Retirement Accounts
. Tax-Sheltered Annuity ("TSA"). 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)
. the Texas Optional Retirement Program ("ORP")
. State and Local Government and Tax-Exempt Organization Deferred
Compensation Plans ("457 Plans"). Under 457 Plans, employees may defer a
portion of their compensation without paying taxes until distributed.
Distributions are restricted until: (1) age 70 1/2, (2) termination of
employment, or (3) an unforeseen emergency. The deferred compensation and
related earnings are the property of the employer, subject only to the
claims of the employer's general creditors (including the employees) until
distributed.
Federal Income Tax Withholding
- ------------------------------
Amounts distributed from a Contract are subject to federal income tax
withholding, to the extent includible in a recipient's taxable income. A
recipient may choose not to have taxes withheld or to have taxes withheld at a
different rate by filing a withholding exemption form with us.
OTHER INFORMATION
32A
<PAGE>
FINANCIAL INFORMATION
The financial statements for the Separate Account appear in its Annual Report.
USAA Life's financial statements appear in the Statement of Additional
Information. To obtain a copy of the Annual Report or Statement of Additional
Information, call us at the phone number on the cover page of this prospectus.
These financial statements have been included in reliance thereon of KPMG LLP,
and the firm's authority as experts in accounting and auditing. You should
consider our financial statements only as bearing on our ability to meet our
obligations under the Contracts. Our financial statements do not bear on the
investment performance of the Separate Account.
Accumulation Unit Data
- ----------------------
The table below shows the Accumulation Unit Values of the Variable Fund Accounts
at various periods. Please note that a Variable Fund Account's Accumulation
Unit Values are not the same as the share price of the corresponding Fund in
which that Account invests. This difference between the two is due to the
deduction of the Separate Account annual expenses from the Accumulation Unit
Values. Please read the Separate Account's financial statements for more
complete information.
<TABLE>
<CAPTION>
Fund
Account Starting
Name December 31, 1998 December 31, 1997 December 31, 1996 December 31, 1995 Date*
- -----------------------------------------------------------------------------------------------------------------------------------
Accum. No. of Accum. Unit No. of Accum. No. of Accum. No. of Accum. Unit
Unit Value Accum. Value Accum. Unit Value Accum. Unit Value Accum. Value
Units (000) Units (000) Units (000) Units (000)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
USAA LIFE $ 1.178565 18,760 $ 1.127755 13,416 $ 1.082816 10,383 $ 1.040729 5,478 $ 1.00
MONEY
MARKET
- -----------------------------------------------------------------------------------------------------------------------------------
USAA LIFE $14.089499 1,280 $13.002940 545 $11.785992 430 $11.848795 89 $10.00
INCOME
- -----------------------------------------------------------------------------------------------------------------------------------
USAA LIFE $20.468785 3,697 $19.287258 3,242 $15.432048 1,515 $12.579981 205 $10.00
GROWTH
AND INCOME
- ----------------------------------------------------------------------------------------------------------------------------------
USAA LIFE $17.860722 1,066 $16.144375 1,168 $14.314911 692 $11.947438 161 $10.00
WORLD
GROWTH
- ----------------------------------------------------------------------------------------------------------------------------------
USAA LIFE $17.974654 1,841 $16.518656 1,401 $13.844197 696 $12.243941 86 $10.00
DIVERSIFIED
ASSETS
- ---------------------------------------------------------------------------------------------------------------------------------
USAA LIFE $13.993064 317 $11.735078 197 - - - - $10.00
AGGRESSIVE
GROWTH
- ---------------------------------------------------------------------------------------------------------------------------------
USAA LIFE $10.417977 153 $10.113861 153 - - - - $10.00
INTERNATIONAL
- ---------------------------------------------------------------------------------------------------------------------------------
SCUDDER VLIF $24.448446 1,543 $19.989715 1,125 $14.894774 689 $12.543192 93 $10.00
CAPITAL GROWTH
PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
ALGER AMERICAN $26.806157 2,053 $18.239579 1,722 $14.672583 1,639 $13.095503 630 $10.00
GROWTH
PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
BT EQUITY $11.003536 1,136 - - - - - - $10.00
500 INDEX
- ---------------------------------------------------------------------------------------------------------------------------------
BT SMALL CAP $ 8.825971 257 - - - - - - $10.00
INDEX
- ---------------------------------------------------------------------------------------------------------------------------------
BT EAFE(R) $10.386978 55 - - - - - - $10.00
EQUITY
INDEX
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Accumulation Unit Value at starting date. The starting date for the Variable
Fund Accounts listed, other than the USAA Life Aggressive Growth Fund, the
USAA Life International Fund, the BT Equity 500 Index Fund Account, the BT
Small Cap Index Fund Account, and the BT EAFE(R) Equity Index Fund Account,
was February 6, 1995. The starting date for the Aggressive Growth and
International Fund Accounts was May 1, 1997. The starting date for the BT
Equity 500 Index, BT Small Cap Index and the BT EAFE(R) Equity Index Fund
Accounts was May 1, 1998.
OTHER INFORMATION
33A
<PAGE>
PERFORMANCE INFORMATION
Yield and Total Return
- ----------------------
We 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. We also may
advertise the "effective yield" of the Money Market Variable Fund Account, which
is calculated similarly but, when annualized, the income earned by an investment
in the Money Market 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
- -----------------------
We may compare a Variable Fund Account's performance to that of other variable
annuity separate accounts or investment products, as well as to generally
accepted indices or analyses, such as those provided by research firms and
rating services. In addition, we may use performance ratings that may be
reported periodically in financial publications, such as Money Magazine, Forbes,
Business Week, Fortune, Financial Planning, and The Wall Street Journal.
Performance information for any Variable Fund Account reflects the performance
of a hypothetical Contract and are not illustrative of how actual investment
performance would affect the benefits under your Contract. Therefore, you
should not consider such performance information to be an estimate or guarantee
of future performance. For more information, see the Statement of Additional
Information.
OTHER INFORMATION
34A
<PAGE>
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 by
using a formula required by the SEC. Table II shows the cumulative total
returns of each Variable Fund Account for the periods indicated.
TABLE I AVERAGE ANNUAL TOTAL RETURN (through December 31, 1998)
- -------
<TABLE>
<CAPTION>
Year Ended
Name of Variable Fund Account Since Inception* December 31, 1998*
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
USAA Life Money Market 4.20% 4.32%
- -----------------------------------------------------------------------------------------------------------------------
USAA Life Income 9.10 8.19
- -----------------------------------------------------------------------------------------------------------------------
USAA Life Growth and Income 20.08 6.02
- -----------------------------------------------------------------------------------------------------------------------
USAA Life World Growth 15.95 10.50
- -----------------------------------------------------------------------------------------------------------------------
USAA Life Diversified Assets 16.14 8.69
- -----------------------------------------------------------------------------------------------------------------------
USAA Life Aggressive Growth 22.26 19.16
- -----------------------------------------------------------------------------------------------------------------------
USAA Life International 2.43 2.91
- -----------------------------------------------------------------------------------------------------------------------
Scudder VLIF Capital Growth Portfolio 25.68 22.20
- -----------------------------------------------------------------------------------------------------------------------
Alger American Growth Portfolio 28.68 46.83
- -----------------------------------------------------------------------------------------------------------------------
BT Equity 500 Index 9.94 9.94
- -----------------------------------------------------------------------------------------------------------------------
BT Small Cap Index -11.83 -11.83
- -----------------------------------------------------------------------------------------------------------------------
BT EAFE(R) Equity Index 3.78 3.78
- -----------------------------------------------------------------------------------------------------------------------
TABLE II CUMULATIVE TOTAL RETURN (through December 31, 1998)
- -----------------------------------------------------------------------------------------------------------------------
Year Ended
Name of Variable Fund Account Since Inception* DECEMBER 31, 1998*
- -----------------------------------------------------------------------------------------------------------------------
USAA Life Money Market 17.43% 4.32%
- -----------------------------------------------------------------------------------------------------------------------
USAA Life Income 40.44 8.19
- -----------------------------------------------------------------------------------------------------------------------
USAA Life Growth and Income 104.20 6.02
- -----------------------------------------------------------------------------------------------------------------------
USAA Life World Growth 78.14 10.50
- -----------------------------------------------------------------------------------------------------------------------
USAA Life Diversified Assets 79.25 8.69
- -----------------------------------------------------------------------------------------------------------------------
USAA Life Aggressive Growth 39.84 19.16
- -----------------------------------------------------------------------------------------------------------------------
USAA International 4.09 2.91
- -----------------------------------------------------------------------------------------------------------------------
Scudder VLIF Capital Growth Portfolio 143.93 22.20
- -----------------------------------------------------------------------------------------------------------------------
Alger American Growth Portfolio 167.45 46.83
- -----------------------------------------------------------------------------------------------------------------------
BT Equity 500 Index 9.94 9.94
- -----------------------------------------------------------------------------------------------------------------------
BT Small Cap Index -11.83 -11.83
- -----------------------------------------------------------------------------------------------------------------------
BT EAFE(R) Equity Index 3.78 3.78
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
* Each of the Variable Fund Accounts, shown above (with the exception of the
USAA Life Aggressive Growth and International Fund Accounts and the Funds
managed by Bankers Trust) started operations on February 6, 1995. The
Aggressive Growth and International Fund Accounts started operations on May 1,
1997. The Funds managed by Bankers Trust started operations on May 1, 1998.
Average Annual Total Return figures for the BT Fund Accounts are not
annualized.
OTHER INFORMATION
35A
<PAGE>
Effect of Tax-Deferred Accumulations
- ------------------------------------
Unlike taxable investments, variable annuities, such as the Contract, enable you
to defer paying federal income taxes on any earnings on your premium payments
until you withdraw them. In addition, if you are using variable annuities, such
as the Contract, with a Qualified Plan, you can defer paying federal income
taxes on your premium payments until you withdraw them. The chart below shows
how investing on a tax-deferred basis can increase the accumulation power of
savings over time. The more taxes saved and reinvested, the more money you are
able to accumulate over the years. The "Variable Annuity Surrender Value" shown
represents the lump-sum net withdrawal after payment of federal income tax.
Assuming a 28% federal tax bracket and an annual fixed yield (before the
deduction of any fees or charges) of 10% under a Qualified Plan in which tax
savings are reinvested has an equivalent annual fixed yield of 13.9% under a
conventional savings program. This example helps demonstrate the advantage of
tax-deferred savings. The 10% yield on the Qualified Plan would be reduced by
the assumed impact of income tax upon withdrawal. The amount of this reduction
in yield will vary depending upon when withdrawals are made. 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 discussed above, contributions to Qualified Plans are not subject to federal
income tax unless and until withdrawn. Accumulations under 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.
OTHER INFORMATION
36A
<PAGE>
The first chart below compares the potential difference in savings between a (1)
taxable investment and (2) a Contract purchased with pre-tax dollars under a
Qualified Plan. 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 might apply.
QUALIFIED VARIABLE ANNUITY
[A CHARE 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 Phase. It also assumes 28% tax rate and a 10%
rate of return and reflects the deduction of all 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.
OTHER INFORMATION
37A
<PAGE>
The second chart below compares the potential difference in savings between (1)
a taxable investment and (2) a Nonqualified Contract purchased with after-tax
dollars. 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 might apply.
NONQUALIFIED VARIABLE ANNUITY
[A CHARE IN THE FORM OF A LINE GRAPH APPEARS HERE. THE DATA POINTS FROM THE
GRAPH ARE AS FOLLOWS:]
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
start of each month during the Accumulation Phase. It also assumes a 28% tax
rate and a 10% rate of return and reflects the deduction of all 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.
OTHER INFORMATION
38A
<PAGE>
CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
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 Accumulation Unit Values
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
For a copy call 1-800-531-2923 or write us at:
USAA Life Insurance Company
9800 Fredericksburg Road
San Antonio, Texas 78288
OTHER INFORMATION
39A
<PAGE>
This page left blank intentionally.
<PAGE>
[LOGO OF USAA APPEARS HERE]
USAA Life Insurance Company
9800 Fredericksburg Road
San Antonio, Texas 78288
(c) Copyright, 1999, USAA. All rights reserved.
<PAGE>
[LOGO OF USAA
APPEARS HERE] STATEMENT OF ADDITIONAL INFORMATION
VARIABLE ANNUITY
FLEXIBLE PREMIUM DEFERRED COMBINATION
FIXED AND VARIABLE ANNUITY CONTRACT
MAY 1, 1999
OFFERED BY:
USAA LIFE INSURANCE COMPANY
9800 FREDERICKSBURG ROAD
SAN ANTONIO, TEXAS 78288
This Statement of Additional Information ("Statement") is not a prospectus, but
should be read in conjunction with the prospectus, dated May 1, 1999 for the
Separate Account of USAA Life Insurance Company ("USAA Life"). Capitalized terms
used in this Statement that are not otherwise defined herein have the same
meanings given to them in the prospectus. You may obtain a copy of the
prospectus by writing USAA Life at the address above, or by calling
1-800-531-2923.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
GENERAL INFORMATION................................. 2
DISTRIBUTOR......................................... 2
SAFEKEEPING OF THE ASSETS OF THE SEPARATE ACCOUNT... 2
REGULATION AND RESERVES............................. 2
SERVICES............................................ 3
TAX SHELTERED ANNUITY LOANS......................... 3
INDEPENDENT AUDITORS................................ 4
LEGAL MATTERS....................................... 4
CALCULATION OF ACCUMULATION UNIT VALUES............. 4
CALCULATION OF PERFORMANCE INFORMATION.............. 5
USAA Life Money Market Fund Account............. 5
Other Variable Fund Accounts.................... 5
ANNUITY PAYMENTS.................................... 8
Gender of Annuitant.............................. 8
Misstatement of Age or Sex and Other Errors...... 8
Annuity Unit Value............................... 8
FINANCIAL STATEMENTS................................ 10
</TABLE>
<PAGE>
GENERAL INFORMATION
USAA Life is a stock insurance company incorporated in 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 the District of Columbia and all states, 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 organization).
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.
2
<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 should they become available 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 Contract
owner ("Owner") requests otherwise.
The entire loan balance must be repaid before a withdrawal from the Contract
or before annuitization begins. If the loan is repaid in full before the end of
the loan term, loan interest due will be prorated and an appropriate credit will
be provided. Upon the death of the Owner, the death benefit will be reduced by
the outstanding loan balance and loan interest.
A TSA loan is not a taxable distribution if the loan does not exceed the
maximum limitations and repayment does not become overdue. If a default in loan
repayment occurs, USAA Life Insurance Company may declare the entire outstanding
loan balance, plus interest plus any Fixed Fund Account Withdrawal Charge stated
in the Contract also immediately due and payable. Please note that a default as
to any installment payment under your loan amortization schedule may have
adverse tax consequences possibly subjecting you to tax on the defaulted payment
or possibly the
3
<PAGE>
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 of USAA Life
Insurance Company and its subsidiaries as of December 31, 1998 and 1997 and for
each of the years in the three-year period ended December 31, 1998 have been
included in the Annual Report and the registration statement in reliance upon
the accompanying reports thereon of KPMG 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 ACCUMULATION UNIT VALUES
Each Variable Annuity Fund Account's Accumulation Units are valued separately.
Initially, the Accumulation Unit Value of each Variable Annuity Fund Account was
set at $10, except for the Money Market Fund Variable Annuity Fund Account,
which was set at $1. Thereafter, the Accumulation Unit Value of a Variable
Annuity Fund Account as of the end of any Valuation Period is calculated as one
(1) multiplied by two (2) where:
(1) is the Accumulation Unit Value for the Account as of the end of the
immediately preceding Valuation Period; and
(2) is the net investment factor for the Valuation Period then ended.
NET INVESTMENT FACTOR
- ---------------------
The net investment factor ("NIF") is used to determine how the investment
experience of a Fund affects the Accumulation Unit Value of the corresponding
Variable Fund Account from one Valuation Period to the next Valuation Period.
The Valuation Period is the period of time from the end of one Valuation Date to
the end of the next Valuation date. The Valuation Date is 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.
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;
4
<PAGE>
(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).
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 $39,030 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 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:
365/7
Effective Yield = [(Base Period Return + 1) ] - 1
For the seven day period ended December 31, 1998, the current yield of the
USAA Life Money Market Fund Account was 4.16%.
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
5
<PAGE>
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.
The standardized average annual total returns and the cumulative total returns
for each Variable Fund Account for periods ended December 31, 1998 were as
follows:
6
<PAGE>
<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 4.20% 4.32% 17.43% 4.32%
USAA Life Income 9.10% 8.19% 40.44% 8.19%
USAA Life Growth and Income 20.08% 6.02% 104.20% 6.02%
USAA Life World Growth 15.95% 10.50% 78.14% 10.50%
USAA Life Diversified Assets 16.14% 8.69% 79.25% 8.69%
USAA Life Aggressive Growth 22.26% 19.16% 39.84% 19.16%
USAA Life International 2.43% 2.91% 4.09% 2.91%
Scudder VLIF Capital Growth Portfolio 25.68% 22.20% 143.93% 22.20%
Alger American Growth Portfolio 28.68% 46.83% 167.45% 46.83%
BT Equity 500 Index Fund 9.94%** 9.94%** 9.94% 9.94%**
BT Small Cap Index Fund -11.83%** -11.83%** -11.83% -11.83%**
BT EAFE(R) Equity Index Fund 3.78%** 3.78%** 3.78% 3.78%**
</TABLE>
* Each of the Variable Fund Accounts indicated above (with the exception of the
USAA Life Aggressive Growth Fund, the USAA Life International Fund, the BT
Equity 500 Index Fund, BT Small Cap Index Fund and the BT EAFE(R) Equity Index
Fund) commenced operations on February 6, 1995. The Aggressive Growth and
International Fund Accounts commenced operation on May 1, 1997. The BT Fund
Accounts commenced operation on May 1, 1998.
** Average Annual Total Return Figures for the BT 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 December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
Variable Fund Account Three Year Three Year
- ---------------------------------------- --------------- -------------
Average Annual Cumulative
--------------- -------------
Total Return Total Return
--------------- -------------
<S> <C> <C>
USAA Life Money Market 4.11% 12.83%
USAA Life Income 5.83% 18.53%
USAA Life Growth and Income 17.52% 62.32%
USAA Life World Growth 14.24% 49.10%
USAA Life Diversified Assets 13.55% 46.40%
USAA Life Aggressive Growth N/A N/A
USAA Life International N/A N/A
Scudder VLIF Capital Growth Portfolio 24.82% 94.47%
Alger American Growth Portfolio 26.87% 104.23%
BT Equity 500 Index Fund N/A N/A
BT Small Cap Index Fund N/A N/A
BT EAFE(R) Equity Index Fund N/A N/A
</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>
<CAPTION>
<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>
<CAPTION>
<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 consolidated financial statements of the Company as of December 31, 1998
and 1997, and for each of the years in the three-year period ended December 31,
1998, and the accompanying Independent Auditors' Report are set out below. The
consolidated 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. They do not bear on the investment performance
of the Separate Account. The most recent audited financial statements of the
Separate Account and the accompanying Independent Auditors' Report are
incorporated into this Statement by reference to the Separate Account's Annual
Report, dated December 31, 1998, which accompanies this Statement.
10
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors
USAA LIFE INSURANCE COMPANY:
We have audited the accompanying consolidated balance sheets of USAA LIFE
INSURANCE COMPANY and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, comprehensive income, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of USAA LIFE INSURANCE
COMPANY and subsidiaries as of December 31, 1998, and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
-------------------------
San Antonio, Texas KPMG LLP
March 11, 1999
<PAGE>
<TABLE>
<CAPTION>
USAA LIFE INSURANCE COMPANY
Consolidated Balance Sheets
December 31, 1998 and 1997
(Dollars in Thousands, Except Share Data)
Assets 1998 1997
------------ ------------
<S> <C> <C>
Investments:
Debt securities, at amortized cost $ 884,926 1,245,257
Debt securities, at fair value 5,455,606 4,869,912
Equity securities, at fair value 251,815 352,863
Mortgage loans 3,903 4,462
Policy loans 131,520 130,246
---------- ---------
Total investments 6,727,770 6,602,740
Cash and cash equivalents 62,203 39,642
Premium balances receivable 2,969 2,899
Accounts receivable affiliates 664 50
Furniture and equipment 3,955 1,403
Collateral for securities loaned at fair value 737,202 -
Accrued investment income 82,042 78,929
Deferred policy acquisition costs 226,986 207,090
Deferred tax 53,745 22,230
Reinsurance recoverable 308,262 204,626
Other assets 12,281 34,492
Separate account assets 282,489 184,797
---------- ---------
Total assets $8,500,568 7,378,898
========== =========
Liabilities
Insurance reserves $1,168,284 1,009,817
Funds on deposit 5,498,136 5,284,925
Accounts payable and accrued expenses 64,940 87,315
Accounts payable affiliates 10,593 12,072
Payable upon return of securities loaned 737,202 -
Other liabilities 48,872 55,099
Separate account liabilities 282,489 184,797
---------- ---------
Total liabilities 7,810,516 6,634,025
---------- ---------
Stockholders' Equity
Preferred capital stock, $100 par value; 1,200,000 shares
Authorized; 600,000 shares issued and outstanding 60,000 60,000
Common capital stock, $100 par value; 30,000 shares
authorized; 25,000 shares issued and outstanding 2,500 2,500
Additional paid-in capital 51,408 51,408
Accumulated other comprehensive income 18,108 33,403
Retained earnings 558,036 597,562
---------- ---------
Total stockholders' equity 690,052 744,873
---------- ---------
Total liabilities and stockholders' equity $8,500,568 7,378,898
========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE>
<TABLE>
<CAPTION>
USAA LIFE INSURANCE COMPANY
Consolidated Statements of Income
Years Ended December 31, 1998, 1997, and 1996
(Dollars in Thousands)
1998 1997 1996
------------- ------------- -----------
<S> <C> <C> <C>
Revenues
Premiums $364,012 355,825 337,442
Investment income, net 476,131 452,104 428,161
Fees, sales and loan income 10,946 9,403 8,752
Net realized investment gains 23,172 43,524 13,773
Other revenues 40,700 31,315 13,335
-------- ------- -------
Total revenues 914,961 892,171 801,463
-------- ------- -------
Benefits and expenses
Losses, benefits and settlement expenses 553,400 542,880 498,341
Deferred policy acquisition costs 13,170 11,898 6,071
Dividends to policyholders 59,704 53,082 53,691
Other operating expenses 139,193 117,354 122,474
-------- ------- -------
Total benefits and expenses 765,467 725,214 680,577
-------- ------- -------
Income before Federal income taxes 149,494 166,957 120,886
-------- ------- -------
Federal income tax expense (benefit):
Current 71,293 57,799 37,090
Deferred (18,930) (1,674) (1,494)
-------- ------- -------
Total Federal income tax expense 52,363 56,125 35,596
-------- ------- -------
Net income $ 97,131 110,832 85,290
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
USAA LIFE INSURANCE COMPANY
Consolidated Statements of Comprehensive Income
Years Ended December 31, 1998, 1997, and 1996
(Dollars in Thousands)
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Net Income $ 97,131 110,832 85,290
-------- ------- -------
Other comprehensive income(loss), net of income taxes
Unrealized gains(losses) on securities:
Unrealized holding gains arising during year 50,222 37,714 20,067
Reclassification adjustment for realized gains
included in net income (65,517) (26,611) (27,285)
-------- ------- -------
Other comprehensive income(loss), net of income taxes (15,295) 11,103 (7,218)
-------- ------- -------
Total comprehensive income $ 81,836 121,935 78,072
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
USAA LIFE INSURANCE COMPANY
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1998, 1997, and 1996
(Dollars in Thousands)
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Capital
Preferred capital stock $ 60,000 60,000 60,000
Common capital stock 2,500 2,500 2,500
Additional paid-in capital 51,408 51,408 51,408
--------- ------- -------
End of year 113,908 113,908 113,908
--------- ------- -------
Accumulated other comprehensive income
Balance at beginning of year 33,403 22,300 29,518
Unrealized gains(losses) on securities during year, net of
income taxes and reclassification adjustments (15,295) 11,103 (398)
Unrealized gains(losses) on separate account during year,
net of income taxes and reclassification adjustments - - (6,820)
--------- ------- -------
End of year 18,108 33,403 22,300
--------- ------- -------
Retained earnings
Beginning of year 597,562 534,476 465,016
Net income 97,131 110,832 85,290
Dividends to stockholders (136,657) (47,746) (15,830)
--------- ------- -------
End of year 558,036 597,562 534,476
--------- ------- -------
Total stockholders' equity $ 690,052 744,873 670,684
========= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
USAA LIFE INSURANCE COMPANY
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997, and 1996
(Dollars in Thousands)
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 97,131 110,832 85,290
Adjustments to reconcile net income to net
cash provided by operating activities:
Net realized investment gains (23,172) (43,524) (13,773)
Non-cash investment income (6,414) (13,148) (5,185)
(Increase) in deferred policy acquisition costs (21,068) (19,938) (17,728)
Depreciation and amortization (6,418) (7,951) (5,442)
Deferred income tax benefit (18,930) (1,974) (1,494)
(Increase) in premium balances receivable (70) (1,244) (44)
(Increase) in accounts receivable-affiliate (614) (30) (20)
(Increase) in accrued investment income (3,113) (7,292) (12,213)
(Increase) decrease in other assets (81,425) (14,583) (8,495)
Increase in insurance reserves 158,467 102,790 78,926
Increase (decrease) in accounts payable and
Accrued expense (22,375) 53,022 (20,126)
Increase (decrease) in accounts payable-affiliates 1,479 (1,370) 3,379
Increase (decrease) in other liabilities (6,227) 432 7,089
Other 2,220 (2,716) 759
----------- ---------- ----------
Net cash provided by operating activities 69,471 153,306 90,923
----------- ---------- ----------
Cash flows from investing activities:
Proceeds from sales and maturities of
Available-for-sale securities 582,584 370,972 587,945
Proceeds from maturities of held-to-maturity
Securities 170,271 117,667 106,504
Proceeds from principal collections on investments 494,809 271,471 351,540
Other investments sold 3,186 948 1,123
Securities purchased available-for-sale (1,331,934) (1,181,564) (1,460,349)
Other investments purchased (72) (165) (451)
Investment in variable annuity separate account - - 87,280
----------- ---------- ----------
Net cash used in investing activities (81,156) (420,671) (326,408)
----------- ---------- ----------
Cash flows from financing activities:
Deposits and interest credited to funds on deposit 594,433 742,374 571,941
Withdrawals from funds on deposit (457,459) (419,611) (362,658)
Proceeds from issuance of preferred stock - - 20,000
Dividends to stockholders (102,729) (25,200) (15,830)
----------- ---------- ----------
Net cash provided by financing activities 34,245 297,563 213,453
----------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents 22,561 30,198 (22,032)
Cash and cash equivalents at beginning of year 39,642 9,444 31,476
----------- ---------- ----------
Cash and cash equivalents at end of year $ 62,203 39,642 9,444
=========== ========== ==========
</TABLE>
Significant Non-Cash Financing Activities:
The Company declared and paid a dividend to stockholders by transferring equity
securities with a fair value, cost, and recognized gain of $33,928, $21,951, and
$11,977 respectively for 1998, $22,546, $11,560, and $10,986 respectively for
1997, and none for 1996.
See accompanying notes to consolidated financial statements.
5
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(Dollars in Thousands)
(1) Summary of significant accounting policies
------------------------------------------
(a) Organization
------------
USAA LIFE INSURANCE COMPANY (the Company) is a wholly-owned subsidiary
of UNITED SERVICES AUTOMOBILE ASSOCIATION (USAA). The Company markets
individual life insurance policies, annuity contracts, and individual
and group accident and health policies primarily to individuals
eligible for membership in USAA. The Company is licensed to do
business in all states including the District of Columbia but
excluding New York. The Company has a subsidiary company (USAA Life
Insurance Company of New York) licensed to sell life and annuity
contracts in that state. The Company's other subsidiary business (USAA
Life General Agency) offers additional products of other insurance
companies requested by USAA membership, which are not sold by the
Company. The consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany
balances and transactions have been eliminated in consolidation.
(b) Accounting standards adopted
----------------------------
The Company adopted Statement of Financial Accounting Standard No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", on January 1, 1997. SFAS No. 125
established criteria for determining whether transfers of financial
assets are sales or secured borrowings. The adoption of this statement
resulted in the recording of an asset and corresponding liability
representing the collateral received in connection with the Company's
securities lending program. The collateral held is recorded in
"Collateral for securities loaned at fair value" with the off setting
liability being reflected in "Payable upon return of securities
loaned." This accounting treatment has no effect on the Company's net
earnings or stockholders' equity.
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" on
January 1, 1998. This statement establishes standards for reporting
and presentation of comprehensive income and its components in a full
set of financial statements. Comprehensive income consists of net
income and net unrealized gains (losses) on securities and is
presented in the consolidated statements of comprehensive income. SFAS
No. 130 requires only additional disclosures in the consolidated
financial statements; it does not affect the Company's financial
position, results of operations, or liquidity.
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" on January 1, 1998. This statement
provides standards for reporting information about operating segments
in financial statements using the "management approach."
The Company adopted the provisions of the AICPA Statement of Position
(SOP) 98-1, "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use" on January 1, 1998. This SOP requires
that certain costs of computer software developed or obtained for
internal use be capitalized and amortized over the estimated useful
life of the software. Adoption of this SOP did not have a material
impact on the Company's financial position, results of operations, or
liquidity.
(Continued)
6
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(c) Investments
-----------
Debt securities, including bonds, mortgage-backed securities (MBS's),
and redeemable preferred stocks, have been classified as either held-
to-maturity or available-for-sale. Debt securities classified as held-
to-maturity are carried at amortized cost. Securities classified as
available-for-sale are carried at fair value with unrealized gains or
losses (net of related deferred income taxes, deferred policy
acquisition costs, and insurance reserves) reflected in stockholders'
equity.
Bonds, at amortized cost of approximately $289,788, and $281,206 were
on deposit with various state governmental agencies at December 31,
1998, and 1997, respectively. When the New York subsidiary was formed
in 1997, the Company withdrew its license in the State of New York. To
be in compliance with the New York Regulation 109, the 1998 and 1997
deposits include $286,825 and $278,333, respectively, held for the
security of the New York policyholders.
Mortgage-backed securities held represent participating interests in
pools of long term first mortgage loans originated and serviced by the
issuers of the securities. Market interest rate fluctuations can
affect the prepayment speed of principal and the yield on the
securities.
All equity securities, which include common and non-redeemable
preferred stocks, have been classified as available-for-sale. Equity
securities are carried at fair value with unrealized gains or losses
(net of related deferred income taxes, deferred policy acquisition
costs, and insurance reserves) reflected in stockholders' equity.
Mortgage and policy loans are carried at their unpaid principal
balances with interest rates ranging from 4.80% to 10.0% at December
31, 1998.
Short-term securities are carried at cost.
Interest is not accrued on debt securities or mortgage loans for which
principal or interest payments are determined to be uncollectible.
Realized gains and losses are included in net income based upon
specific identification of the investment sold. When impairment of the
value of an investment is considered to be other than temporary, a
provision for the writedown to estimated net realizable value is
recorded. Net realized capital gains of $56,720, $0, and $0 for 1998,
1997, and 1996 respectively, allocable to future policyholder
dividends and interest, were deducted from net realized capital gains
and an offsetting amount was reflected in insurance reserves.
(d) Cash and cash equivalents
-------------------------
For purposes of the consolidated statement of cash flows, all highly
liquid marketable securities that have a maturity at purchase of three
months or less and money market mutual funds are considered to be cash
equivalents. At December 31, 1998 and 1997, cash and cash equivalents
include $760 and $268, respectively, of separate account purchases
awaiting reinvestment. These funds are restricted from the Company's
use.
(Continued)
7
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(e) Federal income taxes
--------------------
The Company and its subsidiaries are included in the consolidated
Federal income tax return filed by USAA. Taxes are allocated to the
separate companies of USAA based on a tax allocation agreement,
whereby companies receive a current benefit to the extent their losses
are utilized by the consolidated group. Separate company current taxes
are the higher of taxes computed at a 35% rate on regular taxable
income or taxes computed at a 20% rate on alternative minimum taxable
income, adjusted for any consolidated benefits allocated to the
companies based on the use of separate company losses within the
group.
Deferred income taxes are recognized for the tax consequences of
"temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and
liabilities. The effect on deferred income taxes of a change in tax
rates is recognized in income in the period that includes the
enactment date.
(f) Fair value of financial instruments
-----------------------------------
The fair value estimates of the Company's financial instruments are
made at a point in time, based on relevant market information about
the related financial instrument. These estimates do not reflect any
premium or discount that could result from offering for sale at one
time the Company's entire holding of a particular financial
instrument. In addition, the tax ramifications related to the effect
of fair market value estimates have not been considered in the
estimates.
(g) Use of estimates
----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(h) Deferred policy acquisition costs
---------------------------------
Policy acquisition costs, consisting primarily of certain underwriting
and selling expenses, are deferred and amortized. Traditional
individual life and health acquisition costs are amortized in
proportion to anticipated premium income after allowing for lapses and
terminations (20 years; but not to exceed the life of the policy).
Acquisition costs for universal life and annuities are amortized in
relation to the present value of estimated gross profits from
surrender charges and investment, mortality and expense margins (20
years).
Deferred policy acquisition costs are reviewed to determine that the
unamortized portion does not exceed expected future income or gross
profits.
(Continued)
8
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(i) Insurance reserves
------------------
Included in insurance reserves are traditional life and health
products and payout annuities with life contingencies. Payout
annuities without life contingencies, deferred annuities, and
universal life products are classified as funds on deposit.
Traditional life and individual health reserves are computed using a
net level premium method and are based on assumed or guaranteed
investment yields and assumed rates of mortality, morbidity,
withdrawals, expenses and anticipated future policyholder dividends.
These assumptions vary by such characteristics as plan, year of issue,
policy duration, date of receipt of funds, and may include provisions
for adverse deviation.
(j) Insurance revenues and expenses
-------------------------------
Premiums on traditional life insurance products are recognized as
revenues as they become due. Benefits and expenses are matched with
premiums in arriving at profits by providing for policy benefits over
the lives of the policies and by amortizing acquisition costs. For
universal life and investment annuity contracts, revenues consist of
investment earnings and policy charges for the cost of insurance,
policy administration, and surrender charges assessed during the
period. Expenses for these policies include interest credited to
policy account balances, benefit claims incurred in excess of policy
account balances, and administrative expenses. The related deferred
policy acquisition costs are amortized in relation to the present
value of expected gross profits from surrender charges and investment,
mortality, and expense margins.
(k) Funds on deposit
----------------
Funds on deposit are liabilities for universal life and investment-
related products. These liabilities are determined following the
"retrospective deposit" method and consist principally of policy
account balances before applicable surrender charges.
(l) Participating business
----------------------
Certain life insurance policies contain dividend payment provisions
which enable the policyholder to participate in the earnings of the
life insurance operations. The participating insurance in force
accounted for 7% of the total life insurance in force at December 31,
1998, and 8% of life insurance in force at December 31, 1997.
Participating policies accounted for 16% of the premium income in
1998, and 13% of the premium income in 1997. The provision for
policyholders' dividends is based on current dividend scales.
The Company guarantees to pay dividends in aggregate, on all
participating policies issued after December 31, 1983, in the total
amount of $16,897 in 1999.
Income attributable to participating policies in excess of
policyholder dividends is restricted by several states for
participating policyholders of those states, otherwise income in
excess of policyholder dividends is accounted for as belonging to the
stockholders.
(m) Reclassifications
-----------------
Certain reclassifications of prior period amounts have been made to
conform with the current year's presentation.
(Continued)
9
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(2) Basis of accounting
-------------------
The Company prepares separate statutory financial statements in accordance
with accounting practices prescribed or permitted by the Texas Department
of Insurance. Prescribed statutory accounting practices include a variety
of publications of the NAIC as well as state laws, regulations, and general
administrative rules. Permitted statutory accounting practices encompass
all accounting practices not so prescribed. The NAIC has adopted
codification for standard accounting practices, which will be implemented
in 2001. It is currently unknown which states will adopt codification.
These consolidated financial statements have been prepared on the basis of
generally accepted accounting principles (GAAP), which differs from the
basis of accounting followed in reporting to insurance regulatory
authorities. Reconciliations of statutory net income and capital and
surplus, as determined using statutory accounting principles, to the
amounts included in the accompanying consolidated financial statements are
as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- --------
<S> <C> <C> <C>
Statutory net income $ 97,323 97,588 62,998
Gain (loss) on sale of investments (50,372) 980 (6,422)
Deferred policy acquisition costs 21,104 19,938 17,728
Tax adjustment 17,862 7,253 8,386
Participating policyholder earnings 778 3,294 (787)
Insurance reserves and other 10,436 (18,221) 3,387
--------- -------- -------
GAAP net income $ 97,131 110,832 85,290
========= ======== =======
Statutory capital and surplus 488,224 540,053 470,263
Increases (decreases):
Deferred policy acquisition costs 226,986 207,090 189,298
Federal income taxes 53,734 22,354 28,236
Asset valuation reserve 78,940 99,651 103,482
Participating policyholder liability (2,914) (4,143) (6,583)
Policyholder reserve and funds (65,710) (8,819) 7,437
Deferred and uncollected premiums (86,809) (82,649) (76,716)
Investment unrealized gain (loss) adjustments:
Investment valuation difference 185,432 150,686 56,285
Policyholder accounts and other assets (189,847) (175,607) (96,828)
Other adjustments 2,016 (3,743) (4,190)
--------- -------- -------
GAAP capital and surplus $ 690,052 744,873 670,684
========= ======== =======
</TABLE>
(Continued)
10
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(3) Investments
-----------
The amortized cost, estimated fair values and carrying values of
investments in debt and equity securities as of December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
Held-to-Maturity
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair Carrying
cost gains losses value value
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Debt securities
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies $ 11,040 1,933 - 12,973 11,040
Obligations of states and political subdivisions 4,175 151 - 4,326 4,175
Debt securities issued by foreign
governments and corporations 41,858 650 - 42,508 41,858
Mortgage-backed securities 536,040 16,969 (130) 552,879 536,040
Corporate securities 291,813 14,865 - 306,678 291,813
---------- ------- ------- --------- ---------
Total debt securities $ 884,926 34,568 (130) 919,364 884,926
========== ======= ======= ========= =========
Available-for-Sale
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized Unrealized fair Carrying
cost gains Losses value value
---------------------------------------------------------------------------
Debt securities
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies $ 287,283 4,795 - 292,078 292,078
Obligations of states and political subdivisions 57,874 2,039 - 59,913 59,913
Debt securities issued by foreign
governments and corporations 388,524 14,039 (1,630) 400,933 400,933
Mortgage-backed securities 1,012,224 45,178 (491) 1,056,911 1,056,911
Corporate securities 3,527,910 128,938 (11,077) 3,645,771 3,645,771
---------- ------- ------- --------- ---------
Total debt securities $5,273,815 194,989 (13,198) 5,455,606 5,455,606
========== ======= ======= ========= =========
Equity securities
Common stock $ 158,498 34,174 - 192,672 192,672
Non-redeemable preferred stock 55,500 3,744 (101) 59,143 59,143
---------- ------- ------- --------- ---------
Total equity securities $ 213,998 37,918 (101) 251,815 251,815
========== ======= ======= ========= =========
</TABLE>
(Continued)
11
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
The amortized cost, estimated fair values and carrying values of investments
in debt and equity securities as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
Held-to-Maturity
---------------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized Unrealized fair Carrying
cost gains Losses value value
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Debt securities
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies $ 11,060 1,912 - 12,972 11,060
Obligations of states and political 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
Non-redeemable preferred stock 51,696 3,610 (127) 55,179 55,179
---------- ------- ------ --------- ---------
Total equity securities $ 268,204 86,464 (1,805) 352,863 352,863
========== ======= ====== ========= =========
</TABLE>
(Continued)
12
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
The amortized cost and estimated fair values of debt securities classified as
held to maturity and available for sale at December 31, 1998, by contractual
maturity, are shown by category below. Expected maturities may differ from
contractual maturities because borrowers may have the right to prepay
obligations.
<TABLE>
<CAPTION>
Held-to-Maturity
---------------------------
Estimated
Amortized fair
cost value
---------------------------
<S> <C> <C>
Due in one year or less $ 23,987 24,391
Due after one year through five years 234,168 241,377
Due after five years through ten years 52,673 56,425
Due after ten years 38,058 44,292
---------- ---------
348,886 366,485
Mortgage-backed securities 536,040 552,879
---------- ---------
$ 884,926 919,364
========== =========
Available-for-Sale
---------------------------
Estimated
Amortized fair
cost value
---------------------------
Due in one year or less $ 60,652 61,270
Due after one year through five years 2,356,186 2,412,515
Due after five years through ten years 1,518,780 1,586,626
Due after ten years 325,973 338,284
---------- ---------
4,261,591 4,398,695
Mortgage-backed securities 1,012,224 1,056,911
---------- ---------
$5,273,815 5,455,606
========== =========
</TABLE>
Proceeds from sales of available-for-sale securities during 1998, 1997, and
1996 were $399,619, $317,851, and $495,039, respectively. Gross gains and
losses of $65,670 and $2,794 respectively for 1998, and $29,049 and $2,913
respectively for 1997, and $25,566 and $18,317 respectively for 1996, were
realized on those sales.
Gross investment income during 1998, 1997, and 1996 was $480,350, $456,322,
and $431,893, respectively, and consists primarily of interest income on fixed
maturity securities. Investment expenses were $4,219, $4,218, and $3,732 for
1998, 1997, and 1996, respectively.
The Company engages in securities lending whereby certain securities from its
portfolio are loaned to other institutions for short periods of time. Initial
collateral, primarily cash, is required at a rate of 102% of the market value
of a loaned security. The collateral is deposited by the borrower with a
lending agent, and retained and invested by the lending agent according to the
Company's guidelines to generate additional income. The market value of the
loaned securities is monitored on a daily basis with additional collateral
obtained or refunded as the market value of the loaned securities fluctuates.
(Continued)
13
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
At December 31, 1998 and 1997, net unrealized gains of $189,847 and
$175,607 were allocated to insurance reserves for participating life
insurance policies and interest sensitive contracts. In addition, net
unrealized gains of $6,865 and $5,683 were allocated against deferred
policy acquisition costs in 1998 and 1997 respectively.
(4) Federal income taxes
---------------------
The expected statutory Federal income tax amounts for the years ended
December 31, 1998, 1997, and 1996 differ from the effective tax amounts as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Income before income taxes $149,494 166,957 120,886
======== ======= =======
Federal income tax expense at 35% statutory rate 52,323 58,435 42,310
Increase (decrease) in tax resulting from:
Dividends received deduction (499) (604) (660)
Tax credits - R&E 32 (548) (6,188)
Other, net 507 (1,158) 134
-------- ------- -------
Federal income tax expense $ 52,363 56,125 35,596
======== ======= =======
</TABLE>
Deferred income tax benefit for the years ended December 31, 1998, 1997, and
1996 was primarily attributable to differences between the valuation of assets
and insurance liabilities for financial reporting and tax purposes.
(Continued)
14
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31 are presented below:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Insurance reserves $ 88,118 70,361
Accounts payable and accrued expenses 1,667 1,497
Policyholder dividends 7,544 6,778
Other, net 6,741 3,686
-------- -------
Total gross deferred tax assets 104,070 82,322
-------- -------
Deferred tax liabilities:
Investments 5,532 7,590
Depreciable assets 266 39
Deferred policy acquisition costs 36,478 34,517
Other, net 2,708 9
-------- -------
Total gross deferred tax liabilities 44,984 42,155
-------- -------
Deferred tax liability on net unrealized gains on investments (5,341) (17,937)
-------- -------
Net deferred tax asset $ 53,745 22,230
======== =======
</TABLE>
Management believes that the realization of the deferred tax asset is more
likely than not based on the expectation that such benefits will be utilized
in the future consolidated tax returns of the USAA group.
At December 31, 1998, and 1997, the Company had the following Federal income
tax payable/receivable amounts:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Current net Federal income taxes payable (receivable) $2,382 (1,552)
</TABLE>
Aggregate cash payments to (receipts from) USAA for income taxes were $66,643,
$62,345, and $38,064 for USAA Life Insurance Company and $(1,250), $163, and
$(155) for its subsidiaries during the years ended December 31, 1998, 1997,
and 1996, respectively.
(Continued)
15
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
Detailed tax amounts for items of comprehensive income are as follows:
<TABLE>
<CAPTION>
Tax
Before-tax (expense) Net-of-tax
amount or benefit amount
------------- ------------ -------------
<S> <C> <C> <C>
For the year ending December 31, 1996
Unrealized gains on securities:
Unrealized holding gains(losses) arising during year $ 30,872 (10,805) 20,067
Less: reclassification adjustment for gains realized in income (41,977) 14,692 (27,285)
--------- ------- -------
Net unrealized gains(losses) from securities (11,105) 3,887 (7,218)
--------- ------- -------
Other comprehensive income (11,105) 3,887 (7,218)
========= ======= =======
For the year ending December 31, 1997
Unrealized gains on securities:
Unrealized holding gains arising during year $ 58,022 (20,308) 37,714
Less: reclassification adjustment for gains realized in income (40,940) 14,329 (26,611)
--------- ------- -------
Net unrealized gains from securities 17,082 (5,979) 11,103
--------- ------- -------
Other comprehensive income 17,082 (5,979) 11,103
========= ======= =======
For the year ending December 31, 1998
Unrealized gains(losses) on securities:
Unrealized holding gains arising during year $ 77,265 (27,043) 50,222
Less: reclassification adjustment for gains realized in income (100,796) 35,279 (65,517)
--------- ------- -------
Net unrealized gains(losses) from securities (23,531) 8,236 (15,295)
--------- ------- -------
Other comprehensive income (23,531) 8,236 (15,295)
========= ======= =======
</TABLE>
(Continued)
16
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(5) Fair value of financial instruments
-----------------------------------
The following tables present the carrying amounts and estimated fair values
of the Company's financial instruments at December 31. SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments", defines the fair
value of a financial instrument as the amount at which the instrument could
be exchanged in a current transaction between willing parties.
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------------------
Carrying Fair Carrying Fair
amount value Amount value
---------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 62,203 62,203 39,642 39,642
Debt securities 6,340,532 6,374,970 6,115,169 6,158,713
Equity securities 251,815 251,815 352,863 352,863
Mortgage loans 3,903 4,707 4,462 5,114
Policy loans 131,520 131,520 130,246 130,246
Premium balances receivable 2,969 2,969 2,899 2,899
Accrued investment income 82,042 82,042 78,929 78,929
Separate account 282,489 282,489 184,797 184,797
Financial liabilities:
Deferred annuities and annuities
without life contingencies 3,773,742 3,773,742 3,787,507 3,787,507
Policyholder dividend accumulations 30,016 30,016 28,593 28,593
Policy dividends declared but unpaid 35,965 35,965 31,081 31,081
Accounts payable and accrued expenses 64,940 64,940 87,315 87,315
Separate account 282,489 282,489 184,797 184,797
</TABLE>
All carrying amounts are included in the balance sheet under the indicated
captions, except for deferred annuities and annuities without life
contingencies, and policyholder dividend accumulations both of which are
included in funds on deposit, and policy dividends declared but unpaid
which are included in other liabilities.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash and cash equivalents: Cash and cash equivalents approximate fair value
because of the short maturity of these instruments.
Debt and equity securities: Fair market values for bonds and stocks are
determined using quoted market prices from Merrill Lynch Pricing Services,
Bloomberg Services or individual brokers.
Mortgage loans: The fair value of mortgage loans are estimated by
discounting the future cash flows using interest rates currently being
offered for mortgage loans with similar characteristics and maturities.
Policy loans: In the Company's opinion, the book value of the policy loans
approximates their fair value. Policy loans are shown on the financial
statements at face value, and carry interest rates ranging from 4.8% to
7.4% in advance.
(Continued)
17
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
Premiums receivable: The recorded amount for premiums receivable
approximates fair value because only a slight percentage of total policies
issued by the Company lapse.
Accrued investment income: The accrued amount of investment income
approximates its fair value because of the quality of the Company's
investment portfolio combined with the short-term nature of the collection
period.
Deferred annuities and annuities without life contingencies: The fair value
of the deferred annuities is estimated as the aggregate cash value of the
annuity, which approximates the carrying value. The fair value of annuities
without life contingencies is estimated as the commuted value of the
annuity.
Policyholder dividend accumulations: The fair value of policyholder
dividend accumulations is estimated using the book value less a percentage
of accrued interest anticipated to be forfeited as a result of policy
cancellations. Estimated annual interest to be forfeited is not
significant.
Policy dividends declared but unpaid: The carrying value of policy
dividends declared but unpaid approximates the fair value because the
carrying value reflects anticipated forfeitures as a result of policy
cancellations. Estimated annual interest to be forfeited is not
significant.
Accounts payable and accrued expenses: The fair value of accounts payable
and accrued expenses approximates its carrying value because of the short-
term nature of the obligations.
Separate account assets and liabilities: The separate account assets
reflect the net asset value of the underlying mutual funds, therefore,
carrying value is considered fair value. The separate account liabilities
are reflected at the underlying balances due to the contract holders,
excluding seed money, without consideration for applicable surrender
charges, if any.
(6) Borrowings
----------
The Company has no borrowing activity outside of the agreements described
in Note 7 "Transactions with affiliates."
(7) Transactions with affiliates
----------------------------
Certain services have been contracted from USAA and its affiliates, such as
rental of office space, utilities, mail processing, data processing,
printing, and employee benefits. The Company allocates these and other
expenses to affiliates for administrative services performed by the
Company. The contracted services and allocations are based upon various
formulas or agreements with the net amounts included in expenses. The
aggregate amount of such contracted services was $127,604, $73,136, and
$70,713 for 1998, 1997, and 1996, respectively. The aggregate amount of the
Company's allocations to affiliates was $6,553, $4,376, and $4,742 for
1998, 1997, and 1996, respectively.
The Company has an agreement with USAA Investment Management Company
regarding the reimbursement of costs for investment services provided. The
aggregate amount of the USAA Investment Management Company contracted
services was $3,600, $3,039, and $2,793 for 1998, 1997 and 1996,
respectively.
(Continued)
18
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
The Company also received premium and annuity considerations from USAA of
$4,319, $4,201, and $4,093 in 1998, 1997, and 1996, respectively,
representing amounts received for structured settlements issued to
claimants of USAA and for group insurance on USAA employees.
The Company has intercompany funding agreements with USAA Capital
Corporation (CAPCO) and USAA Funding Company (FUNDCO) for unsecured
borrowings up to $150,000 in the aggregate, at an interest rate based upon
CAPCO's or FUNDCO's cost of funding. As of December 31, 1998, 1997, and
1996 the Company had no liability for borrowed money. The Company borrowed
$271,553, $3,598,125, and $2,566,042 during 1998, 1997 and 1996
respectively, through the use of these funding agreements. The interest
associated with these intercompany-funding agreements was $76, $855, and
$660 in 1998, 1997, and 1996, respectively.
(8) Reinsurance
-----------
The Company is party to several reinsurance agreements. The Company's
general policy is to reinsure that portion of any risk in excess of $600
with a $100 corridor on the life of any one individual. However in 1997 the
Company entered into certain reinsurance treaties which are based on a
first dollar quota share pool. The Company retains 10% of the risk on each
life up to the normal $600 retention and the remaining 90% is ceded to a
coinsurance pool which is placed with a number of reinsurers on a quota
share basis.
The Company assumes Bank Owned Life Insurance (BOLI) business through two
reinsurance treaties, one Yearly Renewable Term (YRT) and one Coinsurance
treaty, both of which are with one reinsurer on a first dollar basis, with
the Company retaining 50% of the business under the coinsurance
arrangement.
Although the ceding of reinsurance does not discharge the Company from its
primary legal liability to a policyholder, the reinsuring company assumes
the related liability.
Life insurance in force in the amounts of $4,500,994, $4,087,549, and
$3,595,801 is ceded on a yearly renewable term basis; $10,982,455,
$4,687,456, and $939,290 is ceded on a coinsurance basis; and $1,562,383,
$957,925, and $952,599 is ceded in accordance with a stop loss agreement at
December 31, 1998, 1997, and 1996, respectively. Reinsurance amounts
related to insurance reserves, funds on deposit, and paid losses totaled
$308,262 and $204,626 at December 31, 1998 and 1997, respectively. Premium
revenues and interest credited to policyholders were reduced by $104,262,
$204,123, and $11,837 for reinsurance premiums ceded during the years ended
December 31, 1998, 1997, and 1996, respectively. Benefits were reduced by
$114,351, $196,080, and $7,838 for reinsurance recoverables during the
years ended December 31, 1998, 1997, and 1996, respectively.
In accordance with accident and health reinsurance contracts, aggregate
reserves for policies and contracts and policy and contract claims are
reduced by $23,868 and $17,981 at December 31, 1998 and 1997, respectively.
Premium revenues were reduced by $3,266, $3,297, and $3,117 for reinsurance
premiums ceded during the years ended December 31, 1998, 1997, and 1996,
respectively. Benefits were reduced by $6,082, $3,268, and $3,604 for
reinsurance recoverables during the years ended December 31, 1998, 1997,
and 1996, respectively.
(Continued)
19
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(9) Deferred policy acquisition costs and future policy benefits
------------------------------------------------------------
Deferred policy acquisitions costs and premiums are summarized below:
<TABLE>
<CAPTION>
Accident
Life Annuity and health Total
-------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at
January 1, 1996 $131,388 20,643 12,800 164,831
-------- ------ ------ -------
Additions 18,436 2,999 2,364 23,799
Amortization (5,006) 634 (1,699) (6,071)
Fair Value Adjustment 141 6,598 - 6,739
-------- ------ ------ -------
Net change 13,571 10,231 665 24,467
-------- ------ ------ -------
Balance at
December 31, 1996 $144,959 30,874 13,465 189,298
-------- ------ ------ -------
Additions 24,674 3,942 3,073 31,689
Amortization (7,764) (2,373) (1,761) (11,898)
Fair Value Adjustment 1,201 (3,200) - (1,999)
-------- ------ ------ -------
Net change 18,111 (1,631) 1,312 17,792
-------- ------ ------ -------
Balance at
December 31, 1997 $163,070 29,243 14,777 207,090
-------- ------ ------ -------
Additions 20,220 8,486 5,532 34,238
Amortization (9,809) (1,608) (1,753) (13,170)
Fair Value Adjustment (256) (916) - (1,172)
-------- ------ ------ -------
Net change 10,155 5,962 3,779 19,896
-------- ------ ------ -------
Balance at
December 31, 1998 $173,225 35,205 18,556 226,986
======== ====== ====== =======
1998 Premiums $281,655 6,755 75,602 364,012
======== ====== ====== =======
1997 Premiums $277,631 8,143 70,051 355,825
======== ====== ====== =======
1996 Premiums $264,382 7,792 65,268 337,442
======== ====== ====== =======
</TABLE>
(Continued)
20
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
The liabilities for future policy benefits and related insurance in-force at
December 31, 1998 and 1997 are summarized below:
<TABLE>
<CAPTION>
Future Policy
Benefits
-------------------------
1998 1997
------------ --------
<S> <C> <C>
Life and annuity:
Individual $ 1,115,627 965,399
Group 2,881 2,792
----------- -------
Total life and annuity 1,118,508 968,191
=========== =======
Accident and health $ 49,776 41,626
=========== =======
Insurance in Force
---------------------------
1998 1997
----------- ----------
Life and annuity:
Individual $69,858,089 69,540,314
Group 2,215,752 1,870,085
----------- ----------
Total life and annuity $72,073,841 71,410,399
=========== ==========
</TABLE>
Life Insurance and Annuities:
Interest assumptions used in the calculation of future policy benefits for
Traditional Life policies are as follows:
Participating term 9.28%
Participating permanent 8.68% to 9.28%
Non - Participating term 6.00% to 8.91%
Future policy benefits for Universal Life and Deferred Annuities are equal to
the current account value without anticipation of any applicable surrender
charges.
Future policy benefits for Payout Annuities use the original pricing interest
rates.
Mortality and withdrawal assumptions are based on the Company's experience.
Health Insurance:
Interest assumptions used for future policy benefits on health policies are
calculated using a level interest rate of 6%.
Morbidity for Income Replacement policies are based on the 1985 CIDA table.
Morbidity for In Hospital Cash policies are based on 1966-67 Intercompany
Experience table.
Termination assumptions are based on the Company and industry experience.
(Continued)
21
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(10) Capital stock
-------------
The Company has outstanding 600,000 shares of Annually Adjustable
Cumulative Perpetual Preferred Stock; 100,000 shares each of Series A,
Series B, Series C, Series D, Series E, and Series F. All preferred stock
is owned by FUNDCO. No other stock ranks Senior to the Series A-F
preferred stock. The dividend rate will be 65% of the cost of the funds
for CAPCO on commercial paper having a 180-day maturity on the first
business day of each dividend period. The preferred stock has a par value
of $100 and a liquidation value of $100 per share. The preferred stock
shares are redeemable at the option of the Company for cash, in whole or
in part, on the 15th day of each December for Series A and Series B and on
the 15th day of each June for Series C, Series D, Series E, and Series F
at par value plus accrued and unpaid dividends. Preferred stock dividends
of $2,229, $2,200, and $1,830 were paid in 1998, 1997, and 1996
respectively, and $81 and $94 were accrued for each year after the last
payments on December 15, 1998 and 1997, respectively.
The Company has authorized 30,000 shares of common capital stock, $100 par
value, of which 25,000 shares were issued and outstanding at December 31,
1998, 1997, and 1996. Dividends of $134,428, $45,546, and $14,000 were
paid on the common stock during 1998, 1997, and 1996, respectively. The
equity securities transferred had an original cost of $21,951, $11,560,
$0, a fair value of $33,928, $22,546 and $0, and a realized gain of
$11,977, $10,986, and $0 in 1998, 1997 and 1996, respectively.
(11) Unassigned surplus and dividend restrictions
--------------------------------------------
Texas law limits the payment of dividends to shareholders. The maximum
dividend that may be paid without prior approval of the Insurance
Commissioner is limited to the greater of net gain from operations of the
preceding calendar year or 10% of capital and surplus as of the prior
December 31. As a result, dividend payments to shareholders were limited
to approximately $66,910 in 1998 and are limited to $56,811 in 1999.
Dividends are paid as determined by the Board of Directors and at its
discretion. Extraordinary dividends approved by the Texas Department of
Insurance, totaling $69,785, $0 and $0 were paid in 1998, 1997 and 1996,
respectively.
The Texas Department of Insurance imposes minimum risk-based capital
requirements on insurance companies that were developed by the National
Association of Insurance Commissioners (NAIC). The formulas for
determining the amount of risk-based capital (RBC) specify various
weighting factors that are applied to statutory financial balances or
various levels of activity based on the perceived degree of risk.
Regulatory compliance is determined by a ratio of the Company's regulatory
total adjusted capital to its authorized control level RBC, as defined by
the NAIC. Companies below specific trigger points or ratios are classified
within certain levels, each of which requires specified corrective action.
The Company's current statutory capital and surplus is significantly in
excess of the threshold RBC requirements.
(12) Business Segments
-----------------
The significant business segments of the Company are life insurance,
annuity products, and health insurance which are marketed primarily to
individuals eligible for membership in USAA. The life insurance segment
offers universal life, whole life, term, and other individual coverages.
The annuity segment offers both fixed and variable annuity products. The
health segment offers individual and group accident and health policies.
(Continued)
22
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
The following table shows total revenues, income before income taxes, and
total assets for these segments as of and for the years ended December 31,
1996, 1997, and 1998:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Premiums:
Life $ 281,655 277,631 264,382
Annuity 6,755 8,143 7,792
Health 75,602 70,051 65,268
---------- --------- ---------
$ 364,012 355,825 337,442
Investment income, net:
Life $ 168,938 138,001 124,133
Annuity 303,796 310,069 299,485
Health 3,397 4,034 4,543
---------- --------- ---------
$ 476,131 452,104 428,161
Realized capital gains, net:
Life $ (489) 35,148 18,075
Annuity 23,661 8,376 (4,302)
Health 0 0 0
---------- --------- ---------
$ 23,172 43,524 13,773
Other revenues:
Life $ 24,464 15,928 3,680
Annuity 15,061 14,316 8,613
Health 12,121 10,474 9,794
---------- --------- ---------
$ 51,646 40,718 22,087
Total revenues: $ 914,961 892,171 801,463
========== ========= =========
Income before income taxes:
Life $ 80,766 110,476 58,914
Annuity 72,449 55,053 44,029
Health (3,721) 1,428 17,943
---------- --------- ---------
$ 149,494 166,957 120,886
========== ========= =========
Income tax (expense) or benefit:
Life $ (28,290) (37,138) (17,348)
Annuity (25,376) (18,507) (12,965)
Health 1,303 (480) (5,283)
---------- --------- ---------
$ (52,363) (56,125) (35,596)
========== ========= =========
Total assets:
Life $3,143,667 2,462,903 1,971,134
Annuity 5,251,162 4,823,421 4,389,271
Health 105,739 92,574 83,432
---------- --------- ---------
$8,500,568 7,378,898 6,443,837
========== ========= =========
</TABLE>
(Continued)
23
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
(13) Employee benefit plans
----------------------
(a) Pension plan
------------
Substantially all employees are covered under a pension plan
administered by USAA which is accounted for on a group basis. The
benefits are determined based on years of service and the employee's
salary at date of retirement. The total net pension cost allocated to
the Company on the basis of salary expense was $4,422, $3,746, and
$4,847 in 1998, 1997 and 1996, respectively. At December 31, 1998 and
1997, a liability of $0 and $899, respectively, has been recorded
which represents the excess of net periodic pension cost allocated to
the Company over its allocated funding requirements.
(b) Postretirement benefit plan
---------------------------
Substantially all employees of the Company may become eligible for
certain medical and life insurance benefits provided for retired
employees under a plan administered by USAA if they meet minimum age
and service requirements and retire while working for USAA. The
postretirement benefit cost allocated to the Company based on the
number of employees was $1,084, $737 and $682 in 1998, 1997 and 1996,
respectively. At December 31, 1998 and 1997, a liability of $2,097
and $974, respectively, has been recorded which represents the under-
funding of the Company's allocated funding requirements under the net
periodic postretirement benefit cost allocated to the Company.
(c) Contributory retirement plan
----------------------------
Substantially all employees of the Company and its subsidiaries are
eligible to participate in USAA's contributory retirement plan. The
Company matches participant contributions dollar for dollar to a
maximum of 6% of a participant's compensation. The Company's
contributions vest on a graduated basis up to 100% after five years
of credited service. In 1998 and 1997, the Company's contributions to
the Plan totaled $2,415 and $2,122, respectively.
(14) Separate account
----------------
The Separate Account and the Life Insurance Separate Account are
segregated asset accounts established under Texas law through which USAA
Life Insurance Company invests the premium payments received from Contract
Owners and Policy Owners, respectively. The assets of the Separate
Accounts are the property of the Company. However, only the assets of the
Separate Accounts in excess of the reserves, and other Contract
liabilities with respect to the Separate Accounts, are chargeable with
liabilities arising out of any other business the Company may conduct.
Income, gains and losses, whether or not realized, are, in accordance with
the Contracts and Policies, credited to or charged against the Separate
Accounts without regard to other income, gains or losses of the Company.
The Company's obligations arising under the Contracts are general
corporate obligations.
(Continued)
24
<PAGE>
USAA LIFE INSURANCE COMPANY
Notes to Consolidated Financial Statements
(Dollars in Thousands)
The Separate Account currently is divided into twelve Variable Annuity
Fund Accounts, each of which invests in a corresponding Fund. The Funds
that are available under this Contract include seven funds of USAA Life
Investment Trust, the Capital Growth Portfolio of the Scudder Variable
Life Investment Fund, and the Growth Portfolio of the Alger American Fund,
and three funds of the Bankers Trust Insurance Funds Trust series. The
Accumulated Unit Value of the Contract in a Variable Fund Account will
vary, primarily based on the investment experience of the Fund in whose
shares the Variable Fund Account invests. The value of the Funds'
securities are carried at market value, or, in the case of the USAA Life
Variable Money Market Fund, at amortized cost, which approximates market
value.
The Company incurs mortality expenses on behalf of Separate Accounts
contract holders and policy owners. The Company also incurs administrative
expenses on behalf of contract owners. The Company collects fees for these
expenses from contract holders and policy owners, respectively at set
amounts. In addition, the Company incurs various expenses related to
conducting the business or operations of the USAA Life Investment Trust
(Trust) as outlined by an underwriting and administrative services
agreement. The Company, out of its general account, has agreed to pay
directly or reimburse the Trust for Trust expenses exceeding established
limits. Such reimbursements were not significant in 1998 and 1997.
(15) Year 2000
---------
The Company has entered into contracts under which information technology
support is provided by its affiliate, USAA Information Technology Company
("ITCO"), which is also an indirect, wholly-owned subsidiary of USAA. USAA
established a Change of Century Program Management Office in 1994, and has
since developed an extensive Change of Century Project Management Plan
which is followed by ITCO personnel in the assessment, evaluation,
testing, and certification of all systems utilized by the USAA companies,
including the USAA Life Insurance Company.
The Company, with assistance from ITCO and USAA, has also
identified and contacted critical vendors and business partners whose
computerized systems interface with the Company's systems, regarding their
plans and progress in addressing their Year 2000 issues.
(16) Commitments and contingencies
-----------------------------
The Company is required by law to participate in the guaranty associations
of the various states in which it does business. The state guaranty
associations ensure payment of guaranteed benefits, with certain
restrictions to policyholders of impaired or insolvent insurance
companies, by assessing all other companies involved in similar lines of
business.
There are currently several insurance companies which had substantial
amounts of annuity business, in the process of liquidation or
rehabilitation. The Company paid $1,898, $1,953 and $2,437 to various
state guaranty associations during the years ended December 31, 1998,
1997, and 1996, respectively. The Company accrues its best estimate for
known insolvencies. At December 31, 1998 and 1997 accounts payable and
accrued expenses include $6,052 and $8,931, respectively, related to
estimated assessments.
The Company is party to various lawsuits and claims generally incidental
to its business. The ultimate disposition of these matters is not expected
to have a significant adverse effect on the Company's financial position
or results of operations.
(Continued)
25
<PAGE>
PART C - OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) List of Financial Statements
1. Part A. Condensed financial information reflecting the values and
number of units outstanding for each class of accumulation units of the
Separate Account for its fiscal years ended December 31, 1998, December
31, 1997, and December 31, 1996, respectively, and for its first fiscal
period of operations (commencing February 6, 1995 and ended December 31,
1995) is included in Part A of this Registration Statement.
2. Part B. The most recent audited Financial statements of the Separate
Account are incorporated into Part B of this Registration Statement by
reference to the Separate Account's Annual Report, dated December 31,
1998.
3. Part B. The following financial statements of USAA Life Insurance
Company ("USAA Life") are included in Part B of the Registration
Statement:
Consolidated Financial Statements as of December 31, 1998 and 1997, and
each of the years in the three-year period ended December 31, 1998:
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(b) Exhibits
1. Copies of the Resolution of the Board of Directors of USAA Life
Insurance Company, effective February 8, 1994, establishing the Separate
Account of USAA Life Insurance Company, and Amendment thereto, dated
July 29, 1994. (The resolution is filed in lieu of a trust or indenture
creating a unit investment trust.) /3/
2. Not Applicable.
3. Amended and Restated Distribution and Administration Agreement by and
between USAA Life Insurance Company and USAA Investment Management
Company, dated December 16, 1994, and amended and restated, to encompass
variable universal life insurance, March 30, 1998. /3/
4. (a) Form of Flexible Premium Deferred Combination Fixed and Variable
Annuity Contract, including endorsements. /3/
(b) TSA Loan Endorsement. /3/
5. (a) Forms of Applications for Flexible Premium Deferred Combination
Fixed and Variable Annuity Contract. /3/
(b) Telephone Authorization Form. /3/
(c) Section 1035 Exchange Form. /3/
1
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6. (a) Articles of Incorporation of USAA Life Insurance Company, as
amended. /3/
(b) Bylaws of USAA Life Insurance Company. /3/
7. Not Applicable.
8. (a) Servicing Agreement by and between USAA Life Insurance Company and
USAA Transfer Agency Co. d/b/a USAA Shareholder Account Services, dated
February 3, 1995. /3/
(b) Amended and Restated Underwriting and Administrative Services
Agreement by and between USAA Life Insurance Company, USAA Life
Investment Trust and USAA Investment Management Company, dated December
14, 1994, amended February 7, 1997, amended and restated to encompass
variable universal life insurance, February 26, 1998, and amended and
restated, November 18, 1998. /4/
(c) (i) Amended Participation Agreement by and between Scudder
Variable Life Investment Fund and USAA Life Insurance Company,
dated February 3, 1995, and amended, May 21, 1998. /4/
(ii) Amended Participating Contract and Policy Agreement by and
between Scudder Investor Services, Inc. and USAA Investment
Management Company, dated February 3, 1995, and amended,
April 29, 1998. /4/
(iii) Amended Reimbursement Agreement by and between Scudder Kemper
Investments, Inc. and USAA Life Insurance Company, dated
February 3, 1995, and amended, May 21, 1998. /4/
(iv) Amended Letter Agreement by and between Scudder Kemper
Investments, Inc., Scudder Investor Services, Inc., Scudder
Variable Life Investment Fund, USAA Life Insurance Company and
USAA Investment Management Company, dated February 3, 1995,
and amended, March 16, 1998. /4/
(d) (i) Amended Participation Agreement by and between The Alger
American Fund, Fred Alger Management, Inc., Fred Alger &
Company, Incorporated and USAA Life Insurance Company, dated
December 16, 1994, as amended, March 16, 1998. /3/
(ii) Amended Expense Allocation Agreement by and between Fred Alger
Management, Inc., Fred Alger & Company, Incorporated, and USAA
Life Insurance Company, dated December 16, 1994, as amended,
March 16, 1998. /3/
(e) (i) Participation Agreement by and between BT Insurance Funds
Trust, Bankers Trust Company and USAA Life Insurance Company,
dated April 30, 1998. /4/
(ii) Expense Allocation Agreement by and between Bankers Trust
Company and USAA Life Insurance Company, dated April 30, 1998.
/4/
9. Opinion and Consent of Counsel concerning the legality of the securities
being registered. /3/
10. Consent of KPMG LLP, Independent Auditors. (Filed herewith.)
11. Not Applicable.
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<PAGE>
12. (a) Subscription Agreement by and between USAA Life Insurance Company
and USAA Life Investment Trust, dated December 16, 1994. /3/
(b) Subscription Agreement by and between USAA Life Insurance Company
and USAA Life Investment Trust, with respect to the Aggressive
Growth and International Funds, dated February 7, 1997,
incorporated by reference to Exhibit 13(c) to Post-Effective
Amendment No. 3 to the USAA Life Investment Trust's Registration
Statement on Form N-1A (File No. 33-82270).
13. (a) Schedules showing computation of yield quotation for USAA Life
Variable Annuity Money Market Fund Account for the seven days ended
December 31, 1995, and average annual and cumulative total returns
for the fiscal period ended December 31, 1995 for each Variable
Annuity Fund Account. /1/
14. Financial Data Schedule, (See Exhibit 27 below).
16. (a) Powers of Attorney for: Robert T. Herres, Edwin L. Rosane, Michael
J.C. Roth, and James A. Robinson. /3/
(b) Power of Attorney for Josue Robles, Jr. /3/
(c) Power of Attorney for Bradford W. Rich. /1/
(d) Power of Attorney for Robert G. Davis. /2/
(e) Powers of Attorney for Janice E. Marshall, William B. Tracy, and
Donald R. Walker. /3/
17. Persons Controlled By or Under Common Control with Registrant. /4/
27. Financial Data Schedule. (Inapplicable, because, not withstanding Item
24(b)(4) of Form N-4, the Commission staff has advised that no such
schedule is required).
- ------
/1/ Previously filed on April 30, 1996 in Post-Effective Amendment No. 2 to
this Registration Statement.
/2/ Previously filed on April 29, 1997 in Post-Effective Amendment No. 3 to
this Registration Statement.
/3/ Previously filed on April 29, 1998 in Post-Effective Amendment No. 4 to
this Registration Statement.
/4/ Previously filed on February 26, 1999 in Post-Effective Amendment No. 5 to
this Registration Statement.
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
The Directors and officers of USAA Life, the depositor of the Separate
Account, are set out below. The principal business address for all of the
following Directors and officers of USAA Life is 9800 Fredericksburg Road, San
Antonio, Texas 78288.
DIRECTORS: POSITIONS ON THE BOARD:
---------- -----------------------
Robert G. Davis Chairman
Edwin L. Rosane Vice Chairman
Bradford W. Rich Director
Michael J. C. Roth Director
Josue Robles, Jr. Director
Janice E. Marshall Director
Donald R. Walker Director
3
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OFFICERS: POSITIONS WITH USAA LIFE:
--------- -------------------------
Edwin L. Rosane Chief Executive Officer and President
John W. Douglas Senior Vice President
Kenneth A. McClure Senior Vice President
James A. Robinson Senior Vice President and Treasurer
Edward R. Dinstel Vice President
Larkin W. Fields Vice President
Robert J. Flannery Vice President
James E. Goral Vice President
Richard T. Halinski, Jr. Vice President and
Assistant Secretary
Ronald W. Holtkamp Vice President and
Assistant Treasurer
King Mawhinney Vice President
Pattie S. McWilliams Vice President
James M. Middleton Vice President
Stephen N. Patzman Vice President
Bradford W. Rich Vice President and Secretary
Leldon W. (Jack) Ward Vice President
Dwain A. Akins Assistant Vice President and
Assistant Secretary
Bobby L. Casey Assistant Vice President
Bruce W. Clements Assistant Vice President and
Assistant Secretary
Michael A. Moczygemba Assistant Vice President
Allen R. Pierce Assistant Vice President
Layne C. Roetzel Assistant Vice President
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT
Registrant is a separate account of USAA Life that invests exclusively in
mutual funds. Registrant may be deemed to be a control person of one or more of
these mutual funds to the extent that it beneficially owns more than 25% of the
voting securities thereof. It also may be deemed to be under common control
with companies affiliated with its depositor, USAA Life. For further
information, please refer to the organizational list that is filed as Exhibit 17
hereto and incorporated by reference in response to this item.
ITEM 27. NUMBER OF CONTRACT OWNERS
As of January 31, 1999, there were 7,350 owners of Contracts covered by this
Registration Statement.
ITEM 28. INDEMNIFICATION
The information called for by this Item is incorporated herein by reference to
Article IX of the By-Laws of USAA Life, filed as Exhibit 6(b) to this
Registration Statement; to Section 9 of the Amended and Restated Underwriting
and Administrative Services Agreement, filed as Exhibit 8(c) to this
Registration Statement; to Section 14 of the Amended and Restated Distribution
and Administration Agreement, filed as Exhibit 3 to this Registration Statement;
to paragraph 8(b) of the Participating Contract and Policy Agreement, as
amended, filed as Exhibit 8(d)(ii) to this Registration Statement; and to
Section 14 of the Transfer Agent Agreement, as amended, filed as Exhibit 8(c) of
Pre-Effective Amendment No. 1 to the Form N-1A Registration Statement of USAA
Life Investment Trust (File No. 33-82270 and No. 811-8672).
4
<PAGE>
Insofar as indemnification for liability arising under the Securities Act of
1933 (the "1933 Act") may be permitted for Directors, Officers and controlling
persons of USAA Life pursuant to the foregoing, or otherwise, USAA Life has been
advised that in the opinion of the Securities and Exchange Commission (the
"Commission"), such indemnification is against public policy as expressed in the
1933 Act and, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by USAA Life of
expenses incurred or paid by a Director, officer or controlling person of USAA
Life in the successful defense of any action, suit or proceeding) is asserted by
such Director, officer or controlling person in connection with the securities
being registered, USAA Life will, unless in the opinion of its counsel this
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the 1933 Act and will be governed by the
final adjudication of such issue.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) USAA Investment Management Company ("USAA IMCO") is the principal
underwriter for the Contracts. USAA IMCO also serves as the investment
adviser and principal underwriter to USAA Life Investment Trust, USAA
Investment Trust, USAA State Tax-Free Trust, USAA Mutual Fund, Inc., and
USAA Tax Exempt Fund, Inc.
(b) The following are the Directors and officers of USAA IMCO:
DIRECTORS: POSITIONS WITH USAA IMCO:
---------- -------------------------
Robert G. Davis Chairman
Michael J. C. Roth Vice Chairman
David G. Peebles Director
John W. Saunders, Jr. Director
OFFICERS: POSITIONS WITH USAA IMCO:
--------- -------------------------
Michael J.C. Roth CEO and President
John J. Dallahan Senior Vice President
David G. Peebles Senior Vice President
John W. Saunders, Jr. Senior Vice President
Carl (Bill) W. Shirley Senior Vice President
Patricia P. Cavazos Vice President
Alex M. Ciccone Vice President and Assistant Secretary
Christopher W. Claus Vice President
Sherron A. Kirk Vice President and Treasurer
David G. Miller Vice President
William R. Pedersen Vice President
Thomas Ramos Vice President
Michael D. Wagner Vice President, Secretary and Counsel
Kenneth E. Willmann Vice President
Pamela K. Bledsoe Assistant Vice President
Karl Borgerding Assistant Vice President
John K. Cabell Assistant Vice President
Eric M. Efron Assistant Vice President
R. Matthew Freund Assistant Vice President
Clifford A. Gladson Assistant Vice President
Mark S. Howard Assistant Vice President and Assistant
Secretary
Mark W. Johnson Assistant Vice President
Stephen J. Klaffke Assistant Vice President
Terri L. Luensmann Assistant Vice President
Paul H. Lundmark Assistant Vice President
Patrick O'Hare Assistant Vice President
Robert R. Pariseau Assistant Vice President
David G. Parsons Assistant Vice President
5
<PAGE>
Curt Rohrman Assistant Vice President
Albert C. Sebastian Assistant Vice President
W. Travis Selmier, II Assistant Vice President
Albert C. Sebastian Assistant Vice President
R. David Ullom Assistant Vice President
The principal business address for all of the above Directors and officers of
USAA IMCO is 9800 Fredericksburg Rd., San Antonio, Texas 78288.
(c) Not Applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The accounts and records of Registrant are located at the offices of its
depositor, USAA Life, located at 9800 Fredericksburg Road, San Antonio, Texas,
78288; the offices of the principal underwriter of the Contracts, USAA IMCO,
located at 10750 Robert F. McDermott Freeway, San Antonio, Texas, 78288.
ITEM 31. MANAGEMENT SERVICES
None.
ITEM 32. UNDERTAKINGS
(a) Registrant hereby undertakes to file a Post-Effective Amendment to this
Registration Statement as frequently as is necessary to ensure that the
audited financial statements in the Registration Statement are never more
than 16 months old for so long as payments under the Variable Annuity
Contracts may be accepted;
(b) Registrant hereby undertakes to include either (1) as part of any
Application to purchase a Contract offered by the prospectus, a space that
an applicant can check to request a Statement of Additional Information
("Statement"), or (2) a toll-free number that an applicant can call or a
postcard or similar written communication affixed to or included in the
prospectus that the applicant can remove to send for a Statement;
(c) Registrant undertakes to deliver any Statement and any financial
statements required to be made available under this Form promptly upon
written or oral request; and
(d) USAA Life represents that the fees and charges deducted under the
Contracts described in this Registration Statement, in the aggregate, are
reasonable in relation to the services rendered, the expenses expected to
be incurred, and the risks assumed by USAA Life under the Contracts. USAA
Life bases its representation on its assessment of all of the facts and
circumstances, including such relevant factors as: the nature and extent
of such services, expenses and risks; the need for USAA Life to earn a
profit; the degree to which the Contracts include innovative features; and
the regulatory standards for exemptive relief under the Investment Company
Act of 1940 used prior to October 1996, including the range of industry
practice. This representation applies to all Contracts sold pursuant to
this Registration Statement, including those sold on the terms
specifically described in the prospectus contained herein, or any
variations therein, based on supplements, endorsements, or riders to any
Contracts or prospectus, or otherwise.
Registrant hereby represents that it is relying upon the letter, dated
November 28, 1988, from the Commission staff to the American Council of Life
Insurance, regarding Sections 22(e), 27(c)(1) and 27(d) of the Investment
Company Act of 1940 and the redeemability of variable annuity contracts offered
as funding vehicles for retirement plans meeting the requirements of Section
403(b) of the Internal Revenue Code. Registrant further represents that it
intends to comply with the provisions of paragraphs (1)-(4) of that letter.
6
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, as amended, Registrant certifies that it meets the requirements of
Securities Act Rule 485(b) for effectiveness of this amended Registration
Statement and has duly caused this amended Registration Statement to be signed
on its behalf by the undersigned thereunto duly authorized, in the City of San
Antonio and State of Texas on this 27th day of April, 1999.
THE SEPARATE ACCOUNT
OF USAA LIFE INSURANCE COMPANY
(Registrant)
By: USAA LIFE INSURANCE COMPANY
(On behalf of Registrant and itself)
By: /s/ EDWIN L. ROSANE
--------------------------------------
Edwin L. Rosane
President and Chief Executive Officer
Attest: /s/ DWAIN A. AKINS
----------------------------------
Dwain A. Akins
Assistant Secretary
7
<PAGE>
As required by the Securities Act of 1933, this amended Registration Statement
has been signed by the following Directors and officers of the Depositor on the
dates indicated:
<TABLE>
<CAPTION>
NAME POSITION DATE
- --------------------- -------------------------------------------- --------------
<S> <C> <C>
*Robert G. Davis Chairman April 27, 1999
Edwin L. Rosane Vice Chairman, Chief Executive Officer, April 22, 1999
and President
Bradford W. Rich Director April 23, 1999
Josue Robles, Jr. Director April 22, 1999
Michael J.C. Roth Director April 26, 1999
Janice E. Marshall Director April 22, 1999
*Donald R. Walker Director April 27, 1999
James A. Robinson Senior Vice President and Treasurer April 25, 1999
(Principal Financial and Accounting Officer)
</TABLE>
*Signed by Dwain A. Akins, Attorney-in-fact.
8
<PAGE>
EXHIBIT INDEX
EXHIBIT
- -------
10 Consent of KPMG LLP, Independent Auditors.
<PAGE>
[Letterhead of KPMG LLP]
Exhibit 10
Consent of Independent Auditors
-------------------------------
The Board of Directors of USAA Life Insurance Company
and Contractowners of the Separate Account of
USAA Life Insurance Company:
We consent to the use of our report, dated February 5, 1999, on the financial
Statements of each Variable Fund Account of the Separate Account of USAA Life
Insurance Company, which along with the report, appear in the Separate Account's
Annual Report, date December 31, 1998. We also consent to the incorporation of
the report, by reference to the Annual Report, into Post-Effective Amendment
No. 6 under the Securities Act of 1933, and Amendment No. 7 under the Investment
Company Act of 1940, to the Separate Account's Registration Statement on Form
N-4. We further consent to the references to our firm under the headings,
"Financial Information" and "Independent Auditors" in the Registration
Statement.
We also consent to the use of our report dated March 11, 1999 on the
consolidated balance sheets of USAA Life Insurance Company as of December 31,
1998 and 1997, and the related consolidated statements of income, comprehensive
income, stockholders' equity, and cash flows for each of the years in the three-
year period ended December 31, 1998, included as part of the Registration
Statement and to the references to our firm under the headings "Financial
Information" and "Independent Auditors".
/s/ KPMG LLP
-----------------------
KPMG LLP
San Antonio, Texas
April 27, 1999
