-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VQ7NRNWEEbVWrHsRUkvsL/12fM44gtJM2A3RQaHNR1GVAiw+H6ucjP1qw/MT3xWz vSYhkz2Z1F+MCMbdOZc2HA== 0001110538-02-000082.txt : 20020430 0001110538-02-000082.hdr.sgml : 20020430 ACCESSION NUMBER: 0001110538-02-000082 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20020430 EFFECTIVENESS DATE: 20020501 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LIFE INSURANCE SEPARATE ACCOUNT OF USAA LIFE INSURANCE CO CENTRAL INDEX KEY: 0001052863 IRS NUMBER: 741472662 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 333-45343 FILM NUMBER: 02626954 BUSINESS ADDRESS: STREET 1: USAA BUILDING STREET 2: 9800 FREDERICKBURG RD CITY: SAN ANTONIO STATE: TX ZIP: 78288 BUSINESS PHONE: 2104988000 MAIL ADDRESS: STREET 1: USAA BUILDING STREET 2: 9800 FREDERICKSBURG RD CITY: SAN ANTONIO STATE: TX ZIP: 78288 485BPOS 1 report.txt FORM S-6, USAA LIFE INSURANCE COMPANY Registration No. 333-45343 As filed with the Securities and Exchange Commission on April 30, 2002 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 POST-EFFECTIVE AMENDMENT NO. 6 TO FORM S-6 FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM N-8B-2 LIFE INSURANCE SEPARATE ACCOUNT OF USAA LIFE INSURANCE COMPANY (Exact Name of Trust) USAA LIFE INSURANCE COMPANY (Name of Depositor) 9800 Fredericksburg Road, San Antonio, Texas 78288 (Complete Address of Depositor's Principal Executive Offices) CYNTHIA A. TOLES, ESQ. Vice President and Assistant Secretary USAA Life Insurance Company 9800 Fredericksburg Road, A-1-E San Antonio, Texas 78288-4501 (Name and Complete Address of Agent for Service) Please send copies of all communications to: DIANE E. AMBLER, ESQ. Kirkpatrick & Lockhart, LLP 1800 Massachusetts Ave., N.W., Suite 200 Washington, D.C. 20036-1800 (202) 778-9000 Exhibit Index on Page 114 Page 1 to 123 This filing is made pursuant to Rules 6c-3 and 6e-3(T) under the Investment Company Act of 1940. It is proposed that this filing will become effective (check the appropriate box): [ ] Immediately upon filing pursuant to paragraph (b) of Rule 485 [X] On May 1, 2002 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 and Amount of Securities Being Registered: An Indefinite Amount of Interests in Life Insurance Separate Account of USAA Life Insurance Company Under Variable Universal Life Insurance Policies. Approximate Date of Proposed Public Offering: Continuous. #830632v3 ii RECONCILIATION AND TIE BETWEEN ITEMS IN FORM N-8B-2 AND THE PROSPECTUS LIFE INSURANCE SEPARATE ACCOUNT OF USAA LIFE INSURANCE COMPANY
ITEM NO. OF FORM N-8B-2 * CAPTION IN PROSPECTUS** 1 Cover Page 2 Cover Page 3 Not Applicable 4 Policy Distribution 5 Definitions 6 Separate Account 7 Not Required*** 8 Not Required*** 9 Legal Matters 10 Death Benefit; Other Policy Benefits; Payment of Policy Benefits; Transfer of Cash Value; Loans; Surrenders; Policy Lapse and Reinstatement; Investment Options - Voting Privileges; Investment Options - Additions or Changes to Investment Options; The Contract 11 Investment Options 12 Investment Options 13 The Policy at a Glance - Policy Charges and Deductions; The Policy at a Glance - Fund Fees and Other Expenses; Charges and Deductions; USAA Life 14 Policy Issuance; Premium Payments 15 Premium Payments; Investment Options 16 Premium Payments; Allocation of Premiums; Investment Options 17 Death Benefit; Other Policy Benefits; Payment of Policy Benefits; Transfer of Cash Value; Loans; Surrenders; Policy Lapse and Reinstatement 18 Tax Matters - Taxation of Policy Proceeds: Our Taxes; Separate Account; Charges and Deductions - Monthly Deductions: Mortality and Expense Risk Charge; Financial Statements
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19 USAA Life; Reports and Records 20 Not Applicable 21 Loans 22 Not Applicable 23 Not Applicable** 24 Charges and Deductions; Cash Value; Telephone Transactions; Free Look Right; Postponement of Payments; More Policy Information 25 USAA Life 26 Not Applicable 27 USAA Life 28 USAA Life - Directors of USAA Life; USAA Life - Officers (other than Directors) 29 USAA Life 30 Not Applicable 31 Not Applicable 32 Not Applicable 33 Not Applicable 34 Not Applicable 35 Policy Distribution 36 Not Required*** 37 Not Applicable 38 Policy Distribution 39 Policy Distribution 40 Not Applicable 41 Policy Distribution; Investment Options 42 Not Applicable 43 Not Applicable 44 Charges and Deductions - Other Charges; Investment Options 45 Not Applicable
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46 Charges and Deductions - Other Charges; Investment Options 47 Not Applicable 48 Not Applicable 49 Not Applicable 50 Not Applicable 51 Not Applicable** 52 Investment Options - Additions or Changes to Investment Options 53 Tax Matters - Taxation of USAA Life 54 Not Applicable 55 Not Applicable** 56 Not Required*** 57 Not Required*** 58 Not Required*** 59 Not Required***
* Registrant includes this Reconciliation and Tie Sheet in the amendment to its Registration Statement in compliance with Instruction 4 as to the Prospectus as set out in Form S-6. Registrant filed a Notification of Registration as an investment company on Form N-8A and a Form N-8B-2 Registration Statement under the Investment Company Act of 1940 on January 30, 1998. Pursuant to Sections 8 and 30(b)(1) of the Investment Company Act of 1940, Rule 30a-1 under that Act, and Forms N-8B-2 and N-SAR under that Act, Registrant will keep its Form N-8B-2 Registration Statement current through the filing of periodic reports required by the Securities and Exchange Commission. ** Caption in Prospectus, to the extent relevant to this Form. Certain items are not relevant pursuant to the administrative practice of the Commission and its staff of adapting the disclosure requirements of the Commission's registration statement forms in recognition of the differences between variable life insurance policies and other periodic payment plan certificates issued by investment companies and between separate accounts organized as management companies and unit investment trusts. *** Not required pursuant to Instruction 1(a) as to the Prospectus as set out in Form S-6. v This page left blank intentionally USAA(R) [LOGO] USAA LIFE INSURANCE COMPANY VARIABLE UNIVERSAL LIFE PROSPECTUS May 1, 2002 USAA Life Insurance Company Variable Universal Life Table of Contents Section - ------- A. Variable Universal Life Insurance Policy Prospectus................3A-96A B. USAA Life Investment Trust Prospectus................................1B-27B (Income Fund).........................................................2B-5B (Growth and Income Fund)..............................................6B-7B (World Growth Fund)..................................................8B-10B (Diversified Assets Fund)...........................................11B-14B (Aggressive Growth Fund)............................................15B-17B C. Vanguard(R) Variable Insurance Fund Prospectuses........................C-C (Money Market Portfolio)................................................C-C (High Yield Bond Portfolio).............................................C-C (Diversified Value Portfolio)...........................................C-C (Equity Index Portfolio)................................................C-C (Mid-Cap Index Portfolio)...............................................C-C (Small Company Growth Portfolio)........................................C-C (International Portfolio)...............................................C-C (REIT Index Portfolio)..................................................C-C D. Fidelity(R) Variable Insurance Products Prospectuses....................D-D (Contrafund(R)Portfolio, Initial Class).................................D-D (Equity-Income Portfolio, Initial Class)................................D-D (Dynamic Capital Appreciation Portfolio, Initial Class).................D-D E. Scudder Variable Series I Prospectus....................................E-E (Capital Growth Portfolio, Class A Shares)..............................E-E F. Alger American Fund Prospectus..........................................F-F (Alger American Growth Portfolio).......................................F-F 1 This page left blank intentionally 2 A VARIABLE UNIVERSAL LIFE INSURANCE POLICY Prospectus May 1, 2002 Offered By: USAA LIFE INSURANCE COMPANY 9800 Fredericksburg Road, San Antonio, Texas 78288 Telephone: toll free 1-800-531-2923 This Prospectus describes a Variable Universal Life Insurance Policy ("Policy") that we are offering, through our Life Insurance Separate Account, to individual members of the United Services Automobile Association ("USAA"), the parent company of the USAA Group of Companies, as well as to the general public. The Policy offers you: o Life insurance protection guaranteed by USAA Life. (See "Payment of Policy Benefits.") o 18 investment options. ( See "Investment Options" and the accompanying Fund prospectuses for a description of the Funds.) USAA Life Investment Trust Fidelity(R) Variable Insurance Products - -------------------------- --------------------------------------- USAA Life Growth and Income Fund Fidelity VIP Contrafund(R) Portfolio, Initial Class USAA Life Aggressive Growth Fund Fidelity VIP Equity-Income Portfolio, Initial Class USAA Life World Growth Fund Fidelity VIP Dynamic Capital Appreciation Portfolio, USAA Life Diversified Assets Fund Initial Class USAA Life Income Fund Vanguard(R) Variable Insurance Fund Scudder Variable Series I - ----------------------------------- ------------------------- Vanguard Diversified Value Portfolio Scudder VS I Capital Growth Portfolio, Class A Shares Vanguard Equity Index Portfolio Vanguard Mid-Cap Index Portfolio The Alger American Fund ----------------------- Vanguard Small Company Growth Portfolio Alger American Growth Portfolio Vanguard International Portfolio Vanguard REIT Index Portfolio Vanguard High Yield Bond Portfolio Vanguard Money Market Portfolio
o Flexible premium payments. (See "Premium Payments.") Please read this Prospectus carefully and keep it for future reference. Your Prospectus and Policy may reflect variations required by the laws of your state. This Prospectus is not valid unless accompanied by the current prospectuses for the Funds. Defined terms used in this Prospectus appear at the beginning of this booklet. 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 government agency, are subject to investment risks, and may lose value. IMPORTANT The Securities and Exchange Commission("SEC") has not approved or disapproved NOTICES the securities described in this Prospectus or passed upon the adequacy of this Prospectus. Anyone who tells you otherwise is committing a federal crime. YOU MAY CANCEL THE POLICY WITHIN 10 DAYS AFTER RECEIVING IT, OR SUCH LONGER PERIOD AS THE LAWS OF YOUR STATE MAY REQUIRE.
3 A - ------------------ TABLE OF CONTENTS - ----------------- DEFINITIONS..................................................................7A THE POLICY AT A GLANCE......................................................10A QUESTIONS AND ANSWERS.......................................................14A POLICY INFORMATION..........................................................19A Policy Issuance........................................................19A Who May Purchase a Policy.........................................19A How to Purchase a Policy..........................................19A Effective Date of Your Policy.....................................19A Premium Payments.......................................................19A Methods of Payment................................................19A Amount and Frequency of Payments..................................19A Allocation of Premiums.................................................20A Planned Periodic Premium Payments.................................20A Annual Target Premium Payment.....................................21A Investment Options.....................................................21A Variable Fund Accounts............................................22A Additions or Changes to Investment Options........................26A Voting Privileges.................................................26A Special Considerations............................................26A Policy Lapse and Reinstatement.........................................26A Lapse.............................................................26A Grace Period......................................................27A Guaranteed Death Benefit..........................................27A Reinstatement.....................................................27A Charges and Deductions.................................................28A Premium Charge....................................................28A Monthly Deductions from Cash Value................................28A Separate Account Charges..........................................29A Transfer Charges..................................................29A Surrender Charges.................................................29A Other Charges.....................................................30A Deduction of Charges..............................................30A Death Benefit..........................................................30A Choosing Between Option A and Option B............................30A Illustrations of Option A and Option B............................31A Changing Your Death Benefit Option................................31A Changing Your Policy's Specified Amount...........................31A Other Policy Benefits..................................................32A Optional Insurance Benefits.......................................32A Benefits at Maturity..............................................33A Payment of Policy Benefits.............................................33A Payment of Death Benefit..........................................33A Payment of Maturity Benefit.......................................34A Death Benefit Payment Options.....................................34A Cash Value.............................................................34A Calculating Your Value in the Variable Fund Accounts..............35A
4 A Transfer of Value......................................................35A Loans..................................................................36A Loan Collateral...................................................36A Loan Interest.....................................................36A Repayment of Indebtedness.........................................36A Effect of Policy Loans............................................37A Surrenders.............................................................37A Full Surrenders...................................................37A Partial Surrenders................................................37A Telephone Transactions.................................................38A Dollar Cost Averaging Program..........................................38A Free Look Right........................................................38A Postponement of Payments...............................................39A MORE POLICY INFORMATION.....................................................40A Owners and Beneficiaries...............................................40A Owners............................................................40A Beneficiaries.....................................................40A Calculating Your Cost of Insurance.....................................41A Net Amount at Risk................................................41A Net Amount at Risk - More Than One Rate Class.....................41A Cost of Insurance Rates...........................................41A Minimum Amount Insured.................................................42A The Contract...........................................................42A Incontestability.......................................................42A Misstatement of Age or Sex.............................................43A Suicide Exclusion......................................................43A Non-Participating Policy...............................................43A Reports and Records....................................................43A PERFORMANCE INFORMATION.....................................................44A OTHER INFORMATION...........................................................45A USAA Life..............................................................45A Directors of USAA Life............................................45A Officers (other than Directors)...................................46A Separate Account.......................................................48A Policy Distribution....................................................48A Tax Matters............................................................49A Taxation of Policy Proceeds.......................................49A Taxation of USAA Life.............................................52A State Regulation of USAA Life..........................................53A Legal Matters..........................................................53A Independent Auditors...................................................53A Registration Statement.................................................53A Financial Statements...................................................54A
5 A This page left blank intentionally 6 A - ------------ DEFINITIONS - ------------ In This Prospectus: - ------------------- Accumulation Unit or UNIT means an accounting unit of measure that we use to calculate values in each Variable Fund Account. The value of one unit is known as the Accumulation Unit Value ("AUV"). Administrative Charge means a monthly charge deducted from the Policy's cash value during the first Policy Year only. The Administrative Charge compensates us for the start-up expenses we incur in issuing the Policy. The Administrative Charge is shown on the Policy Information Page. Anniversary means the same date each succeeding year as the Effective Date of the Policy. Annual Target Premium Payment means an annual amount of premium payment that we establish when we issue your Policy. It is shown on the Policy Information Page. We use it to determine whether a premium charge will be deducted from premium payments, whether a surrender charge is imposed on a full surrender, and whether the Guaranteed Death Benefit applies. Beneficiary means the person or entity designated to receive the death benefit upon the Insured's death. Cash Surrender Value means your Policy cash value less the surrender charge, if any, payable on full surrender of your Policy. Cash Value, on the Effective Date, means the Net Premium less the Monthly Deduction for the following month. Thereafter, on any Valuation Date, cash value means the sum of: o your Policy's value that you invest in the Variable Fund Accounts; o plus, if applicable, any value that you transfer from the Separate Account to USAA Life's general account to secure any Policy loan; o plus any interest earnings we credit on the value held in the general account; o less the amount of any outstanding loan including any unpaid loan interest; and o less any Monthly Deductions, transfer charges, and partial surrender charges we apply through that date. Date of Receipt means the date we actually receive the item at our Home Office, subject to two exceptions: o if we receive the item on a date other than a Valuation Date, the Date of Receipt will be the following Valuation Date; and o if we receive the item on a Valuation Date after close of regular trading of the New York Stock Exchange, the Date of Receipt will be the following Valuation Date. Death Benefit means the benefit we pay in accordance with the death benefit option in effect on the Insured's death (1) reduced by any Indebtedness and any due and unpaid Monthly Deductions; and (2) increased by any optional insurance benefits provided by rider. Death Benefit Option means one of the two death benefit options that the Policy provides, namely, Option A and Option B. Option A is the greater of the current Specified Amount or the Minimum Amount Insured. Option B is the greater of the current Specified Amount, plus the Policy's cash value, or the Minimum Amount Insured. Effective Date means the date we approve the application and issue your Policy or the date we approve any increase in Specified Amount under your Policy. The Effective Date is shown on the Policy Information Page. 7 A Free Look Period means the period of time required by state law during which you may return the Policy for cancellation and receive a refund. The Free Look Period is shown on the Policy Information Page. You may cancel your Policy within 10 days of receipt (or a longer period depending on where you reside). Your initial premium payment allocated to any of the Variable Fund Accounts is invested in the Vanguard Money Market Portfolio Variable Fund Account during the Free Look Period plus 5 calendar days. (See "Free Look Right.") Fund means an investment portfolio that has specific investment objectives and policies and is offered by a Mutual Fund. Guaranteed Death Benefit means that if you pay a sufficient amount of premium, we guarantee your Policy will not lapse during the first 5 Policy Years and that we will pay a death benefit. Home Office means USAA Life Insurance Company, USAA Building, 9800 Fredericksburg Road, San Antonio, Texas 78288. Indebtedness means the sum of all unpaid Policy loans and any unpaid accrued interest due on such loans. Insured means the person whose life is insured. The Insured is identified on the Policy Information Page. The Insured may or may not be the Owner. Lapse means your Policy has terminated because of insufficient cash value from which to deduct the Monthly Deduction and any loan interest then due. No insurance coverage exists when your Policy has lapsed. Maintenance Charge means a monthly charge that we deduct from the Policy's cash value. The Maintenance Charge compensates us for recurring administrative expenses related to the maintenance of the Policy and the Separate Account. The Maintenance Charge is shown on the Policy Information Page. Maturity Date means the date that we will pay your Policy's cash value to you, as long as the Policy has not terminated because of lapse, full surrender, or the Insured's death. The Maturity Date is shown on the Policy Information Page. Monthly Anniversary means the same date of each succeeding month as the Effective Date of your Policy. Monthly Deduction means a charge we make under your Policy each month against the Policy's cash value. The charge is equal to: o the cost of insurance and any riders; plus o the Administrative Charge that is applied during the first 12 months that the Policy is in effect; plus o the Maintenance Charge. Minimum Amount Insured means the amount of life insurance required by the Internal Revenue Code to qualify your Policy as life insurance and to exclude the death benefit from a Beneficiary's taxable income. Mutual Fund means an open-end investment company registered under federal securities law. It may offer shares of several different Funds for investment. Net Asset Value ("NAV") means the current value of each Fund's total assets, less all liabilities, divided by the total number of shares outstanding. Net Premium Payment means the amount of a premium payment less the Policy's premium charge. 8 A Notice to Us means your signed statement that we receive at our Home Office and that is in a form satisfactory to us. Owner means the person to whom we owe the rights and privileges of the Policy. Policy Information Page means the page that identifies certain information about the Policy and specifies certain terms of the Policy. Policy Year means a period of 12 calendar months starting with the Effective Date of the Policy, and each 12-month period thereafter. For example, if your Policy was issued on July 15, your first Policy Year would end on the following July 14. Each subsequent Policy Year would start on July 15 and end on July 14. Premium Charge means an amount that we deduct from premium payments to compensate us for sales charges and taxes related to the Policy. Separate Account means the Life Insurance Separate Account of USAA Life Insurance Company. The Separate Account is an investment account established under Texas law through which we invest the Net Premium Payments we receive for investment in the Variable Fund Accounts under the Policy. The Separate Account is divided into subdivisions called the Variable Fund Accounts. Each Variable Fund Account invests the Net Premium Payments allocated to it in a particular Fund. We own the assets of the Separate Account. To the extent that the assets are equal to the reserves and other contractual liabilities, they are not chargeable with liabilities arising out of any other business of ours. We credit or charge the income, gains, and losses, realized or unrealized, from the assets of the Separate Account against the Separate Account without regard to our other income, gains or losses. We registered the Separate Account as an investment company under federal securities law. Specified Amount means the minimum death benefit payable as long as the Policy is in effect. It is also the amount of life insurance we issue. The specified amount is shown on the Policy Information Page. Surrender Charge means an amount that we may deduct from your Policy's cash value if you surrender your Policy in full. Valuation Date means any business day, Monday through Friday, on which the New York Stock Exchange is open for regular trading, except o any day on which the value of the shares of a Fund is not computed, or o any day during which no order for the purchase, surrender or transfer of Accumulation Units is received. Valuation Period means the period of time from the end of any Valuation Date to the end of the next Valuation Date. Variable Fund Account means a subdivision of the Separate Account in which you may invest Net Premium Payments. The Policy provides several Variable Fund Accounts. Each Variable Fund Account corresponds to a particular Fund. Net Premium Payments that you allocate to a Variable Fund Account are invested in a particular Fund. We also refer to the Variable Fund Accounts as Accounts in this Prospectus. We, Our, Us, Or USAA Life means USAA Life Insurance Company. You, Your Or Yours refers to the Owner of the Policy. 9 A - ---------------------- THE POLICY AT A GLANCE - ---------------------- The following is a snapshot of the Policy. Please refer to the remainder of the Prospectus for further details and other information.
- ----------------------------------------------------------------------------------------------------------- Premium Payments and Withdrawals - ----------------------------------------------------------------------------------------------------------- MINIMUM AMOUNTS Initial Premium Depends on Specified Amount of insurance coverage Subsequent Premiums Depends on Specified Amount of insurance coverage Withdrawals None - ----------------------------------------------------------------------------------------------------------- Insurance Benefits - ----------------------------------------------------------------------------------------------------------- DEATH BENEFITS Option A Greater of Specified Amount or Minimum Amount Insured Option B Greater of Specified Amount plus cash value or Minimum Amount Insured Minimum Coverage Required $100,000 ($25,000 for Insureds under age 18) Minimum Increase or Decrease $25,000, subject to $50,000 minimum coverage amount in Coverage ($25,000 for Insureds under age 18) with certain exceptions OPTIONAL INSURANCE Accelerated Benefit for Terminal Illness BENEFITS AVAILABLE Accidental Death Benefit BY RIDER* Children Term Life Insurance (*Not available in all states) Extended Maturity Date Waiver of Monthly Deduction in Event of Permanent Disability BENEFITS AT MATURITY Current Policy cash value - ----------------------------------------------------------------------------------------------------------- Policy Charges and Deductions - ----------------------------------------------------------------------------------------------------------- PREMIUM CHARGE 3% from each premium payment received until 10 Annual Target Premium Payments paid MONTHLY DEDUCTIONS FROM CASH VALUE Cost of Insurance Charge(1) Issue Class Current Monthly Guaranteed Monthly(2) ----------- (per $1,000 of net amount at risk) Cost of Insurance Cost of Insurance ----------------- ----------------- Per (000) Per (000) Minimum Monthly Cost of Insurance Rates Male, Age 9 Standard $0.08 $0.12 Male, Age 26 Preferred Ultra $0.05 $0.12 Female, Age 9 Standard $0.08 $0.12 Female, Age 32 Preferred Ultra $0.03 $0.11 Maximum Monthly Cost of Insurance Rates Male, Age 99 Standard $53.50 $83.33 Male, Age 99 Preferred Ultra $22.20 $83.33 Female, Age 99 Standard $52.12 $83.33 Female, Age 99 Preferred Ultra $16.44 $83.33 - -----------------------------------------------------------------------------------------------------------
- ------------------------------------- (1) The cost of insurance charge for an Insured depends on the age, sex, and rate class of the Insured. (See "Calculating Your Cost of Insurance.") (2) Based on the 1980 Commissioners Standard Ordinary Mortality Table. 10 A - ------------------------------------------------------------------------------------------------------------ Administrative Charge $10 per month (applies only during first Policy Year) Maintenance Charge $5 per month Terminal Illness Rider None Accidental Death Benefit Rider $.07 per $1,000 coverage per month Children Term Life Insurance Rider $.50 per $1,000 coverage Extended Maturity Date Rider None Waiver of Monthly Deduction Rider Depends on age of Insured. We apply the Waiver of Monthly Deduction rates to the amount of Monthly Deduction to be waived. The rates vary from a minimum of $.05 per $1 of Monthly Deduction at ages 15-30 to a maximum of $.277 per $1 of Monthly Deduction at age 59. The rates do not vary by underwriting class or sex. TRANSFER CHARGE $0 for first 18 transfers each Policy Year; $25 per transfer in excess of 18 per Policy Year(3) SEPARATE ACCOUNT CHARGES Mortality and Expense Charge .75% of average net assets of Separate Account(4) Federal Income Tax Charge Currently none(5) SURRENDER CHARGES Partial Surrender Lesser of $25 or 2% of amount withdrawn Full Surrender Maximum of 50% of Annual Target Premium Payment (declines each Policy Year to 0% after the 10th Policy Year) Minimum and Maximum Surrender Charges: Minimum Surrender Charges Per $1,000 of Insurance Male, Standard Age 1 $ 2.45 at issue, grading to $0.00 after 10 Policy Years Male, Preferred Ultra Age 18 $ 1.76 at issue, grading to $0.00 after 10 Policy Years Female, Standard Age 1 $ 2.41 at issue, grading to $0.00 after 10 Policy Years Female, Preferred Ultra Age 18 $ 1.53 at issue, grading to $0.00 after 10 Policy Years Maximum Surrender Charges Per $1,000 of Insurance Male, Standard Age 80 $39.35 at issue, grading to $0.00 after 10 Policy Years Male, Preferred Ultra Age 80 $28.50 at issue, grading to $0.00 after 10 Policy Years Female, Standard Age 80 $36.89 at issue, grading to $0.00 after 10 Policy Years Female, Preferred Ultra Age 80 $24.70 at issue, grading to $0.00 after 10 Policy Years - ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- (3) We reserve the right at any time, and without prior notice, to terminate, suspend, or modify these transfer privileges. (4) We deduct the Mortality and Expense Charge on a daily basis at an annual rate of .75% of the average net assets of each Variable Fund Account. (5) We do not currently deduct a Federal Income Tax Charge from the assets of the Separate Account, because USAA Life does not currently incur any income tax on the earnings or the realized capital gains attributable to the Separate Account. 11 A
- --------------------------------------------------------------------------------------------------------------------- Fund Fees and Other Expenses - --------------------------------------------------------------------------------------------------------------------- Total Fund Total Fund Operating Other Expenses Other Expenses Operating Expenses Management Before Expense After Expense Expenses After Expense Variable Fund Account Fees Reimbursement Reimbursement Before Expense Reimbursement(6) Reimbursement - --------------------------------------------------------------------------------------------------------------------- USAA LIFE INVESTMENT TRUST(7) Growth and Income .20% .22% .15% .42% .35% - --------------------------------------------------------------------------------------------------------------------- Aggressive Growth .50 .53 .20 1.03 .70 - --------------------------------------------------------------------------------------------------------------------- World Growth .20 .91 .45 1.11 .65 - --------------------------------------------------------------------------------------------------------------------- Diversified Assets .20 .39 .15 .59 .35 - --------------------------------------------------------------------------------------------------------------------- Income .20 .65 .15 .85 .35 - --------------------------------------------------------------------------------------------------------------------- VANGUARD(R) VARIABLE INSURANCE FUND - --------------------------------------------------------------------------------------------------------------------- Diversified Value Portfolio .13 .32 .32 .45 .45 - --------------------------------------------------------------------------------------------------------------------- Equity Index Portfolio .01 .16 .16 .17 .17 - --------------------------------------------------------------------------------------------------------------------- Mid-Cap Index Portfolio .01 .27 .27 .28 .28 - --------------------------------------------------------------------------------------------------------------------- Small Company Growth Portfolio .15 .35 .35 .50 .50 - --------------------------------------------------------------------------------------------------------------------- International Portfolio .13 .30 .30 .43 .43 - --------------------------------------------------------------------------------------------------------------------- REIT Index Portfolio .01 .38 .38 .39 .39 - --------------------------------------------------------------------------------------------------------------------- High Yield Bond Portfolio .06 .22 .22 .28 .28 - --------------------------------------------------------------------------------------------------------------------- Money Market Portfolio .01 .17 .17 .18 .18 - --------------------------------------------------------------------------------------------------------------------- FIDELITY(R) VARIABLE INSURANCE PRODUCTS - --------------------------------------------------------------------------------------------------------------------- Contrafund(R) Portfolio, Initial Class(8) .58 .10 n/a .68 n/a - --------------------------------------------------------------------------------------------------------------------- Equity-Income Portfolio, Initial Class(8) .48 .10 n/a .58 n/a - --------------------------------------------------------------------------------------------------------------------- Dynamic Capital Appreciation Portfolio, Initial Class(8),(9) .58 3.01 .92 3.59 1.50 - --------------------------------------------------------------------------------------------------------------------- SCUDDER VARIABLE SERIES I Capital Growth Portfolio, Class A Shares .46 .04 .04 .50 .50 - --------------------------------------------------------------------------------------------------------------------- ALGER AMERICAN FUND Growth Portfolio .75 .06 .06 .81 .81 - ---------------------------------------------------------------------------------------------------------------------
12 A
- --------------------------------------------------------------------------------------------------------------------- Transfers - --------------------------------------------------------------------------------------------------------------------- Number of Free Transfers 18 per Policy Year. We reserve the right at any time, and without prior notice, to terminate, suspend, or modify these transfer privileges. (See "Transfer of Value.") Minimum Amount of $250 (or remaining value in Variable Fund Account, if less) Transfer - --------------------------------------------------------------------------------------------------------------------- Loans - --------------------------------------------------------------------------------------------------------------------- Minimum Loan Amount None Maximum Loan Amount 85% of cash surrender value Maximum Interest Rate 6% payable in advance, 4.5% preferred rate payable in advance - ---------------------------------------------------------------------------------------------------------------------
6 We based the fee and expense figures shown with respect to each Variable Fund Account on amounts incurred during the most recent fiscal year. 7 Certain expense reimbursement arrangements had the effect of reducing expenses actually paid by certain Funds of the USAA Life Investment Trust. The expense reimbursement arrangements for the Funds of the USAA Life Investment Trust exist pursuant to an Underwriting and Administrative Services Agreement, under which USAA Life, out of its general account, has agreed to assume Fund expenses to the extent that such expenses exceed, on an annual basis, .70% of the monthly average net assets of the Aggressive Growth Fund, .65% of the monthly average net assets of the World Growth Fund, and .35% of the monthly average net assets of each other Fund. This Agreement is terminable by any party thereto upon 120 days notice to the other parties. 8 Actual annual class operating expenses were lower because a portion of the brokerage commissions that the Funds paid were used to reduce the Funds' expenses. In addition, through arrangements with the Funds' custodian, credits realized as a result of uninvested cash balances are used to reduce a portion of the Funds' custodian expenses. These offsets may be discontinued at any time. See the accompanying Fund prospectuses for details. 9 The Fund's manager has voluntarily agreed to reimburse the class to the extent that total operating expenses (excluding interest, taxes, certain securities lending costs, brokerage commissions and extraordinary expenses) exceed 1.50%. This arrangement can be discontinued by the Fund's manager at any time. - -------------------------------------------------------------------------------- Log on to usaa.com day or night for policy details, fund account summaries and financial activity information. - -------------------------------------------------------------------------------- 13 A - --------------------------- QUESTIONS AND ANSWERS - --------------------------- The following are answers to some basic questions about the Policy. Please read the remainder of this Prospectus for further details. What kind of life insurance is the Policy? - ------------------------------------------ The Policy is a flexible premium variable life insurance policy. The Policy is called "flexible premium" because it gives you the flexibility to vary the amount and frequency of your premium payments, within certain limits. (See "Premium Payments.") The Policy is called "variable" life insurance because your cash value, your cost of insurance charges, and your life insurance (death) benefits can vary according to your investment in one or more Variable Fund Accounts. (See "Cash Value," "Charges and Deductions - Monthly Deductions from Cash Value," and "Death Benefit.") Your investment experience in the Variable Fund Accounts may be positive or negative. The Policy has no minimum guaranteed cash value, which means you bear the entire investment risk that your cash value could decline to zero. How do I buy a Policy? - ---------------------- You can buy a Policy by calling us at 1-800-531-2923 or by contacting one of our regional offices. Our licensed insurance representatives can help you complete an application and assist you through our application or "underwriting" process, which normally involves a medical exam. We will issue a Policy to you, provided you meet our requirements for insurability. We will not issue a Policy that insures a person older than age 80. We also reserve the right to reject an application for any reason. Insurance coverage under your Policy begins on its Effective Date. (See "Policy Issuance.") How much insurance can I buy? - ----------------------------- The minimum amount of insurance you can buy is $100,000 ($25,000 if the Insured is less than 18 years of age). We call the amount of insurance you specify on your application the "Specified Amount." Federal tax law limits your ability to make certain amounts of large premium payments relative to your Policy's Specified Amount and may impose penalties on amounts you take out of your Policy if you do not observe certain additional requirements. (See "Premium Payments - Amount and Frequency of Payments" and "Tax Matters.") We will monitor your premium payments to be sure that you do not exceed permitted amounts or inadvertently incur any tax penalties due to excess premium payments. You can change the Specified Amount, at any time, subject to the conditions described under "Death Benefit - Changing Your Policy's Specified Amount." What insurance protection does the Policy offer? - ------------------------------------------------ The Policy offers two types of insurance protection or "death benefit" options. If you select the Option A death benefit, upon the Insured's death, we will pay your Beneficiary the greater of: o your Policy's Specified Amount, or o the Minimum Amount Insured. If you select the Option B death benefit, upon the Insured's death, we will pay your Beneficiary the greater of: o the sum of your Policy's Specified Amount and your cash value, on the one hand, or o the Minimum Amount Insured on the other. (See "Death Benefit.") As long as the Policy remains in effect, under either option, the death benefit will never be less than the Policy's Specified Amount, less any Indebtedness and any due and unpaid Monthly Deductions. In addition, you can add optional insurance death benefits to a Policy by rider. (See "Other Policy Benefits - Optional Insurance Benefits.") 14 A How much are the premium payments? - ---------------------------------- Within certain limits, you have the flexibility to determine the amount and timing of your premium payments to reflect your changing financial conditions or objectives. We generally require a minimum initial premium to issue a Policy, but we do not impose a minimum on your subsequent premium payments. (See "Premium Payments.") You must, of course, maintain sufficient cash value to keep your Policy in effect, which may require you to make additional unscheduled premium payments. (See "Policy Lapse and Reinstatement.") You will usually plan a periodic premium schedule when applying for a Policy. If you wish, we will bill you for these amounts. However, you are not required to follow this schedule. (See "Premium Payments.") What are the charges and deductions? - ------------------------------------ We assess certain charges and deductions to support the operation of your Policy and the Separate Account. Some charges apply to your premium payments, some apply to your cash value, and others apply to the Separate Account. In addition, we assess administrative fees for processing Policy transactions, such as partial surrenders of cash value and transfer of value among Variable Fund Accounts in excess of 18 free transfers per Policy Year. (See "The Policy At a Glance" and "Charges and Deductions.") What factors affect my cost of insurance? - ----------------------------------------- If you are the Insured, your cost of insurance will depend on your age, sex, and rate class. The rate class that applies depends on your health, whether you use tobacco, and other factors that we use to determine your insurability. During the life of the Policy, the maximum monthly cost of insurance charges will never exceed the guaranteed monthly cost of insurance rates specified in your Policy. (See "Calculating Your Cost of Insurance.") What is the Separate Account? - ----------------------------- The Separate Account is a segregated asset account of USAA Life that supports the Policy's variable life insurance benefits. The Separate Account consists of 18 Variable Fund Accounts, each of which invests in a corresponding Fund. (See "Investment Options.") What are my investment choices? - ------------------------------- You may invest in up to 18 Variable Fund Accounts, each of which invests exclusively in a corresponding Fund of the USAA Life Investment Trust ("Trust"), the Vanguard(R) Variable Insurance Fund ("Vanguard Fund"), the Fidelity(R) Variable Insurance Products ("Fidelity Funds"), Scudder Variable Series I ("Scudder Series"), or The Alger American Fund ("Alger Fund"). (See "Investment Options.") How will my Policy's cash value vary? - ------------------------------------- Your Policy's cash value will vary on a daily basis to reflect the investment experience of the Variable Fund Accounts. Your Policy's cash value also will reflect the amount and frequency of premium payments, any partial surrenders of cash value, any Policy loans and the charges and deductions connected with the Policy. Your Policy has no minimum guaranteed cash value, which means you bear the entire investment risk that your cash value could decline to zero. (See "Cash Value.") 15 A How may I allocate my cash value? - --------------------------------- You may allocate your cash value to any of the Variable Fund Accounts by specifying on your Policy application how much of your Net Premium Payment you would like us to apply to each Account. We will allocate your Net Premium Payments in accordance with your allocation instructions on your application, until you direct otherwise. You may change future allocations at any time by telephone or by Notice to Us. You may allocate your Net Premium Payment in increments as small as 1/10th of one percent. (See "Premium Payments.") Can I transfer value among investment options? - ---------------------------------------------- Yes. You can transfer value among the Variable Fund Accounts up to 18 times per Policy Year without charge. Each transfer above 18 in a Policy Year is subject to a $25 transfer charge. We reserve the right at any time, and without prior notice, to terminate, suspend, or modify these transfer privileges. You may authorize transfers by telephone or by Notice to Us. (See "Telephone Transactions.") Each transfer must be at least $250, or the remaining value in the Variable Fund Account, if less. (See "Transfer of Value.") How do I keep track of my Policy's cash value? - ---------------------------------------------- Log on to usaa.com day or night for a convenient way to access information about: o your Policy details, o Variable Fund Account summaries, and o financial activity information. You may also access information about your Policy through USAA's Touchline(R), our 24-hour automated voice response system at 1-800-531-5433. You will need your USAA number or Social Security number and your USAA PIN (the unique personal identification number you use for all USAA Touchline(R) services and usaa.com or the last 4 digits of your Social Security number). We will also send you periodic reports concerning your Policy and the Separate Account. (See "Reports and Records.") How do I access my cash value? - ------------------------------ You can partially or fully surrender the Policy for a portion or all of its cash value, less any applicable charges, any Indebtedness, and any due and unpaid Monthly Deductions. We assess an Administrative Charge equal to the lesser of $25 or 2% of the amount withdrawn for each partial surrender paid. We also assess a surrender charge for full surrenders. (See "Surrenders" and "Charges and Deductions - Surrender Charges.") Partial surrenders and related surrender charges will reduce your Policy's death benefit on a dollar for dollar basis. (See "Changing Your Policy's Specified Amount" under "Death Benefits.") Full surrenders will terminate the Policy. (See "Tax Matters" for a discussion of the tax consequences of surrenders.) 16 A Can I borrow against the Policy's cash value? - --------------------------------------------- Yes. You may borrow money from us, after your Policy has been in effect one year. You may borrow by using your Policy as the sole security for the loan. The most you can borrow against your Policy is 85% of its cash surrender value. In some cases, we may reduce the amount you can borrow. Interest on any loan is payable in advance at the maximum annual interest rate of 6% (4.5% for preferred loans). Lower rates may be available. A loan, whether repaid or not, will have a permanent effect on the cash value and may have a permanent effect on the death benefit of your Policy. (See "Loans.") What will cause the Policy to lapse without value? - -------------------------------------------------- Lapse will only occur when your cash value is insufficient to pay the Monthly Deduction plus any loan interest then due and we do not receive sufficient payment during the grace period, unless you have paid enough premiums to qualify for the Guaranteed Death Benefit. (See "Lapse and Reinstatement.") Will the Policy's death benefit and cash value be taxed? - -------------------------------------------------------- The Policy is intended to meet the definition of a "life insurance contract" under federal tax law. Therefore, the Policy's death benefit should be fully excludable from the Beneficiary's gross income if paid by reason of the death of the Insured. In addition, any earnings on your investment in a Variable Fund Account should not be taxable to you while the Policy is in effect unless you surrender some or all of your Policy's cash value. We do not intend this discussion to be tax advice. You should consult with your own tax advisor before purchasing a Policy. (See "Tax Matters.") Can I obtain personalized illustrations demonstrating how the Policy might work? - -------------------------------------------------------------------------------- Yes. We will furnish, upon request and at no charge, a personalized illustration reflecting the proposed Insured's age, sex, and rate class. Where applicable, we will also furnish upon request an illustration for a Policy that is not affected by the sex of the Insured. We will base all such personalized illustrations, to the extent appropriate, upon the methodology and format of the form of illustration filed with the SEC. (See "Registration Statement.") Do I have a "free look" right to examine the Policy? - ---------------------------------------------------- Yes. You may cancel the Policy within 10 days after receiving it, or such longer period as state law may require. Your initial premium payment allocated to any of the Variable Fund Accounts is invested in the Vanguard Money Market Portfolio Variable Fund Account during the Free Look Period plus 5 calendar days. If you cancel, we will give you a refund. (See "Free Look Right.") 17 A This page left blank intentionally 18 A - ------------------ POLICY INFORMATION - ------------------ Policy Issuance - --------------- Who May Purchase a Policy Any individual of legal age in a state where we may lawfully sell the Policies can apply to purchase a Policy. However, we will not issue a Policy that insures a person who is over 80 years of age. How to Purchase a Policy To obtain a Policy, you must complete an application and submit it, along with your initial premium payment (if required), to our Home Office. You also must provide us with satisfactory evidence of your insurability as part of the application or "underwriting" process. During the underwriting process, we will normally ask you to complete a medical examination so that we can assign you to an underwriting or "rate" class that we will use to determine your cost of insurance charges. After we complete our underwriting process, we will promptly notify you of our decision regarding your application. We reserve the right to reject any application for any reason. If we accept your application, the insurance coverage provided by your Policy will begin as of the Effective Date. We may, at our discretion, backdate the Effective Date of a Policy by up to 6 months prior to the date of your application, if by doing so the Insured's issue age, and hence your cost of insurance charges, would be lower. If we backdate a Policy, your initial premium must include sufficient premium to cover the backdating period. We will make Monthly Deductions for the period the Policy is backdated. You will not receive any investment performance for the backdating period. Effective Date of Your Policy Insurance coverage begins on the Policy's Effective Date. We will need to receive your first premium payment to put your Policy into effect, unless the Specified Amount you are applying for, plus any other insurance you currently have with USAA Life, exceeds $500,000, in which case we will bill you. If you pay your first full premium with your Policy application and we issue the Policy as applied for, the Effective Date will ordinarily be the date we approve the application and issue your Policy. Premium Payments - ---------------- Methods of Payment We accept premium payments made by check or money order drawn on a U.S. bank in U.S. dollars and made payable to "USAA Life Insurance Company" or "USAA Life." We also accept premium payments made by bank draft, by wire, or by exchange from another insurance company. All premium payments must be sent directly to our Home Office. You can also use our Automatic Payment Plan to have monthly premium payments automatically deducted from your bank account. For further information about how to make premium payments by these methods and any other method we may make available, please contact us by calling 1-800-531-4265. Amount and Frequency of Payments You generally have the flexibility to determine the amount and frequency of your premium payments. You must, however, maintain sufficient cash value to keep your Policy in effect. (See "Lapse and Reinstatement.") In addition, you must observe the limitations described below. Initial Premium Payment. To issue a Policy, we generally require that you provide us with an initial premium payment equal to at least one full Planned Periodic Premium Payment, as specified in your Policy. If you have elected to use our Automatic Payment Plan, the minimum initial premium payment would equal 2 monthly payments under the Plan. 19 A Minimum and Maximum Premium Payments. Except for your initial premium payment, we do not require any minimum premium payment. However, at no time may the total amount of your premium payments exceed the maximum amount allowed by federal tax law, unless necessary to prevent lapse. We will monitor your Policy's cash value and the amount of life insurance at risk to us that is required to qualify the Policy as life insurance and to exclude the death benefit from the Beneficiary's taxable income. If a premium payment would cause you to exceed the maximum amount allowed by federal tax law, we will refund the excess premium payment to you. We also may invite you to apply, subject to proof of insurability, to increase the Specified Amount of your Policy. For more information, please refer to "Tax Matters." Allocation of Premiums - ---------------------- On your Policy application, you must specify how much of your Net Premium Payments you want to allocate to each Variable Fund Account. You can specify allocations in increments as small as 1/10th of one percent, provided that the total amount of your allocations equals 100%. Premiums Received During the Application Process. We will hold your initial premium payment in our general account during the application process. During this time, we will not credit any earnings to you. Premiums Received During Free Look Period. We will allocate your initial Net Premium Payment to the Vanguard Money Market Portfolio Variable Fund Account at the Account's Accumulation Unit Value (AUV) next computed on the date we accept your application. We will allocate any subsequent Net Premium Payment that you make during your Free Look Period to the Vanguard Money Market Portfolio Variable Fund Account at the Account's AUV next computed on the Date of Receipt of the payment. (See "Calculating Your Value in the Variable Fund Accounts.") Your Net Premium Payments will remain in the Vanguard Money Market Portfolio Variable Fund Account for the Free Look Period plus 5 days. On the Valuation Date immediately following the end of that period, we will allocate your Net Premium Payments, plus any earnings, among the Variable Fund Accounts in accordance with the allocation instructions you specify on your Policy application, at the AUV next computed on that Date. Premiums Received After Free Look Period. We will allocate Net Premium Payments that you make after your Free Look Period in accordance with the allocation instructions you specify on your Policy application, unless you direct otherwise. We will credit your Net Premium Payments to the Variable Fund Accounts on the Date of Receipt at the AUV next computed on that date. Changing Your Allocations. You may change your allocation instructions at any time by telephone or by Notice to Us. There are no charges or fees for changing your allocation instructions. The allocation change will become effective with the first premium payment we receive on or following the Date of Receipt of your request. Planned Periodic Premium Payments You may, for convenience, choose to make planned periodic premium payments. Your Policy will show a schedule of planned periodic premium payments and, if you like, we will send you premium notices at quarterly, semiannual, or annual intervals. To facilitate planned periodic premium payments, we also will accept monthly premium payments through our Automatic Payment Plan. You are not obligated to follow the schedule of planned periodic premium payments and failing to do so will not itself cause your Policy to lapse. Conversely, following the schedule will not guarantee that your Policy will remain in effect, unless you have made enough premium payments to qualify for the Guaranteed Death Benefit. (See "Guaranteed Death Benefit.") 20 A Annual Target Premium Payment We will use the Annual Target Premium Payment specified in your Policy to determine whether we will deduct a premium charge from your premium payments or a surrender charge if you fully surrender. (See "Premium Charge" and "Surrender Charge" under "Charges and Deductions.") We also will use the Annual Target Premium Payment to determine whether the Guaranteed Death Benefit applies. (See "Guaranteed Death Benefit" under "Lapse and Reinstatement.") We determine the Annual Target Premium Payment actuarially based on the age, sex and rate class of the Insured, and the insurance benefits contained in the Policy. Investment Options - ------------------ Currently, you may invest, through the Separate Account, in up to 18 Funds. The Separate Account consists of 18 Variable Fund Accounts, 5 of which correspond to Funds of the USAA Life Investment Trust ("Trust"), 8 of which correspond to Funds of the Vanguard(R) Variable Insurance Fund ("Vanguard Fund"), 3 of which correspond to Funds of the Fidelity(R) Variable Insurance Products ("Fidelity Funds"), and one each of which corresponds to a Fund of the Scudder Variable Series I ("Scudder Series") and The Alger American Fund ("Alger Fund"). You can invest in a Fund by allocating Net Premium Payments to the corresponding Variable Fund Account. The Variable Fund Accounts are managed by the following professional money managers: o USAA Investment Management Company ("USAA IMCO") o The Vanguard Group, Inc. (the "Vanguard Group") o Fidelity Management & Research Company ("Fidelity Management") o Deutsche Investment Management Americas Inc. ("DeIM") o Fred Alger Management, Inc. ("Alger Management") o Barrow, Hanley, Mewhinney & Strauss, Inc. ("Barrow Hanley") o Granahan Investment Management, Inc. ("Granahan Investment") o Grantham, Mayo, Van Otterloo & Co. LLC ("GMO") o Schroder Investment Management North America Inc. ("Schroder Investment") o Wellington Management Company, LLP ("Wellington Management") USAA IMCO is a wholly owned indirect subsidiary of USAA. USAA is not affiliated with the Vanguard Group, Fidelity Management Research Corporation, DeIM, Alger Management, Barrow Hanley, Granahan Investment, GMO, Schroder Investment, or Wellington Management. 21 A Variable Fund Accounts A brief description of each Variable Fund Account appears in the table below.For more information, including a discussion of potential investment and other risks, please refer to the accompanying prospectuses for the Funds.
================================================================================================================================= INVESTMENT OBJECTIVE PRINCIPAL INVESTMENT STRATEGIES INVESTOR PROFILE & INVESTMENT ADVISER - --------------------------------------------------------------------------------------------------------------------------------- Large-Cap Value Funds - --------------------------------------------------------------------------------------------------------------------------------- Fidelity VIP Equity-Income Portfolio, o Normally invests at least 80% of May be appropriate for investors who Initial Class total assets in income-producing equity are willing to ride out stock market securities, which tends to lead to fluctuations in pursuit of Objective: investments in large cap "value" stocks. potentially above-average long-term Reasonable income. The Fund will also o Potentially investing in other returns. Designed for those who consider the potential for capital types of equity securities and debt want some income from equity and appreciation. The Fund's goal is to securities, including lower-quality debt bond securities, but also want to be achieve a yield which exceeds the securities. invested in the stock market for its composite yield on the securities o Invests in domestic and foreign long-term growth potential. comprising the S&P 500(R)Index. issuers. o Uses fundamental analysis of each Adviser: issuer's financial condition and industry Fidelity Management & Research Company position and market and economic 82 Devonshire Street conditions to select investments. Boston, Massachusetts 02109 - --------------------------------------------------------------------------------------------------------------------------------- USAA Life Growth and Income Fund o Invests primarily in equity Designed for the investor seeking to securities that show the best potential benefit from long-term growth of Objective: for total return through a combination of capital and return. Because the Capital growth and current income capital appreciation and income. Fund emphasizes investments in o Investments in convertible common stocks, its value will Adviser: securities is limited to 5% of assets. fluctuate based on market USAA Investment Management Company May invest in nonconvertible debt conditions. Consequently, the Fund 9800 Fredericksburg Road securities and preferred stock. should not be relied upon for San Antonio, Texas 78288 o May invest up to 30% in American short-term financial needs or Depository Receipts ("ADRs") or similar short-term investment in the stock forms of ownership interest in securities market. of foreign issuers deposited with a depositary, and securities of foreign issuers that are traded on U.S. securities exchanges or in U.S. over-the-counter markets. - --------------------------------------------------------------------------------------------------------------------------------- Vanguard Diversified Value Portfolio o Invests primarily in common stocks May be a suitable investment for you of large and medium-size companies whose if: (1) You wish to add a stock Objective: stocks are considered by the adviser to fund to your existing holdings, Long-term growth of capital and a be undervalued and out of favor with which could include other stock moderate level of dividend income investors. Such "value" stocks typically investments as well as bond and have above-average dividend yields and/or money market investments. (2) You Adviser: below-average prices in relation to such want a stock fund employing a value Barrow, Hanley, Mewhinney & Strauss, Inc. financial measures as earnings, book approach in seeking long-term growth One McKinney Plaza value, and cash flow. in capital as well as moderate level 3232 McKinney Ave., 15th Floor of dividend income. Dallas, Texas 75204 - --------------------------------------------------------------------------------------------------------------------------------- Large-Cap Growth Funds - --------------------------------------------------------------------------------------------------------------------------------- Alger American Growth Portfolio o Invests primarily in equity May be appropriate for investors securities, such as common or preferred seeking long-term capital Objective: stocks, which are listed on U.S. appreciation. Long-term capital appreciation exchanges or in the over-the-counter market. Adviser: o The Portfolio invests primarily in Fred Alger Management, Inc. "growth" stocks. 30 Montgomery Street o Under normal circumstances, the Jersey City, New Jersey 07302 Portfolio invests primarily in the equity securities of large companies with a market capitalization of $1 billion or greater. - --------------------------------------------------------------------------------------------------------------------------------- Fidelity VIP Contrafund(R)Portfolio, o Normally invests primarily in May be appropriate for investors who Initial Class common stocks. are willing to ride out stock market o Invests in securities of companies fluctuations in pursuit of Objective: whose value it believes is not fully potentially above-average long-term Long-term capital appreciation recognized by the public. returns. o Invests in domestic and foreign Adviser: issuers. Fidelity Management & Research Company o Invests in either "growth" stocks 82 Devonshire Street or "value" stocks or both. Boston, Massachusetts 02109 o Uses fundamental analysis of each issuer's financial condition and industry position and market and economic conditions to select investments. =================================================================================================================================
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================================================================================================================================= INVESTMENT OBJECTIVE PRINCIPAL INVESTMENT STRATEGIES INVESTOR PROFILE & INVESTMENT ADVISER - --------------------------------------------------------------------------------------------------------------------------------- Large-Cap Blend Funds - --------------------------------------------------------------------------------------------------------------------------------- Scudder VS I Capital Growth Portfolio, o Invests at least 65% of total May be appropriate for investors Class A Shares assets in common stocks of U.S. seeking long-term growth. companies. Objective: o Although the Portfolio can invest Maximize long-term capital growth through in companies of any size, it generally a broad and flexible investment program focuses on established companies that are similar in size to the companies in the Adviser: S&P 500 Index. The Portfolio intends to Deutsche Investment Management Americas invest primarily in companies whose Inc. market capitalizations fall within the 345 Park Avenue normal range of the Index. New York, New York - --------------------------------------------------------------------------------------------------------------------------------- Vanguard Equity Index Portfolio o Employs a "passively" managed-or May be a suitable investment for you Objective: index-approach, by holding all of the if: (1) You wish to add a low-cost, stocks in the Standard & Poor's 500 large-capitalization stock index Long-term growth of capital and income by Composite Stock Price Index in roughly fund to your existing holdings, attempting to match the performance of a the same proportion to their weighting in which could include other stock broad-based market index of stocks of the Index. investments as well as bond and large U.S. companies o Stocks represented in the Index, money market investments. (2) You and thus the Portfolio's holding, are want the potential for long-term Adviser: weighted according to each stock's market capital appreciation, with a The Vanguard Group capitalization (shares outstanding x moderate level of dividend income. P.O. Box 2600 share price). For example, if a specific Valley Forge, Pennsylvania 19482 stock represented 2% of the S&P 500 Index, the Portfolio would invest 2% of its assets in that company. - --------------------------------------------------------------------------------------------------------------------------------- Vanguard Mid-Cap Index Portfolio o Employs a "passively" managed-or May be a suitable investment for you index-approach, by holding the stocks in if: (1) You wish to add a low-cost, Objective: the Standard & Poor's MidCap 400 Index in mid-capitalization stock index fund Long-term growth of capital by roughly the same proportion to their to your existing holdings, which attempting to match the performance of weighting in the Index. could include other stock a broad-based market index of stocks of o Stocks represented in the Index, investments as well as bond and medium-size U.S. companies and thus the Portfolio's holdings, are money market investments. (2) You weighted according to each stock's market want the potential for long-term Adviser: capitalization. For example, if a capital appreciation. The Vanguard Group specific stock represented 5% of the S&P P.O. Box 2600 MidCap 400 Index, the Portfolio would Valley Forge, Pennsylvania 19482 invest 5% of its assets in that company. - --------------------------------------------------------------------------------------------------------------------------------- Mid-Cap Growth Funds - --------------------------------------------------------------------------------------------------------------------------------- Fidelity VIP Dynamic Capital o Normally invests primarily in May be appropriate for investors Appreciation Portfolio, Initial Class common stocks. seeking broad exposure to the o Invests in domestic and foreign domestic equity market without Objective: issuers. investment style restrictions. Capital appreciation o Invests in either "growth" stocks or "value" stocks or both. Adviser: o Uses fundamental analysis of each Fidelity Management & Research Company issuer's financial condition and industry 82 Devonshire Street position and market and economic Boston, Massachusetts 02109 conditions to select investments. - --------------------------------------------------------------------------------------------------------------------------------- USAA Life Aggressive Growth Fund o Invests primarily in equity Designed for the investor seeking to securities of companies with the prospect benefit from long-term growth of Objective: of rapidly growing earnings. These capital. Generally, this Fund is Appreciation of capital investments will tend to be made in expected to have a greater potential smaller, less-recognized companies, but for long-term capital appreciation Adviser: may include larger, more widely than growth and income funds, but is USAA Investment Management Company recognized companies as well. also significantly more volatile. 9800 Fredericksburg Road o While most of the Fund's assets San Antonio, Texas 78288 will be invested in U.S. securities, up to 30% may also be invested in foreign securities purchased in either foreign or U.S. markets. =================================================================================================================================
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================================================================================================================================= INVESTMENT OBJECTIVE PRINCIPAL INVESTMENT STRATEGIES INVESTOR PROFILE & INVESTMENT ADVISER - --------------------------------------------------------------------------------------------------------------------------------- Small-Cap Growth Fund - --------------------------------------------------------------------------------------------------------------------------------- Vanguard Small Company Growth Portfolio o Invest mainly in the stocks of smaller companies (which, at the time of May be a suitable investment for you Objective: purchase, typically have a market value if: (1) You wish to add a Long-term growth of capital of less that $1-$2 billion). These small-capitalization growth stock companies are considered by the fund to your existing holdings, which Advisers: Portfolio's advisers to have could include other stock investments Granahan Investment Management, Inc. above-average prospects for growth, but as well as bond and money market 275 Wyman Street often provide little or no dividend investments. (2) You are seeking Waltham, Massachusetts 02154 income. growth of capital over the long term-at least five years. (3) You Grantham, Mayo, Van Otterloo & Co. LLC are not looking for dividend income. 40 Rowes Wharf (4) You are willing to assume the Boston, Massachusetts 02110 above-average risk associated with investing in small-cap growth stocks. - --------------------------------------------------------------------------------------------------------------------------------- Domestic Hybrid Fund - --------------------------------------------------------------------------------------------------------------------------------- USAA Life Diversified Assets Fund o Invests in a diversified program Designed for the investor seeking within one mutual fund by allocating the the benefits of both long-term Objective: Fund's assets, under normal market capital appreciation and current Long-term capital growth, consistent with conditions, in approximately 60% equity return. Generally, the Fund is preservation of capital and balanced by securities (selected for their potential expected to have less exposure to current income return) and approximately 40% in debt equity securities than growth funds. securities of varying maturities. Adviser: o The equity securities will consist USAA Investment Management Company significantly of domestic common stocks 9800 Fredericksburg Road and, to a much lesser extent, may include San Antonio, Texas 78288 shares of real estate investment trusts (REITs). o The fixed income component will be made up of the same types of debt securities in which the USAA Life Income Fund may invest. The Fund may also invest in municipal lease obligations. - --------------------------------------------------------------------------------------------------------------------------------- World Stock Fund - --------------------------------------------------------------------------------------------------------------------------------- USAA Life World Growth Fund o Invests primarily in equity Designed for the investor seeking to securities of both foreign and domestic diversify by investing in securities Objective: issuers. of both domestic and foreign issuers Long-term capital appreciation o May not invest more than 25% of and who is prepared to bear the risks assets in one industry. of such investments. Because of the Adviser: o Under normal market conditions, the Fund's emphasis on equity securities USAA Investment Management Company Fund's investments will be diversified in and securities of foreign issuers, 9800 Fredericksburg Road at least three countries. the Fund should not be relied upon as San Antonio, Texas 78288 a balanced investment program. - --------------------------------------------------------------------------------------------------------------------------------- Foreign Stock Fund - --------------------------------------------------------------------------------------------------------------------------------- Vanguard International Portfolio o Invests in the stocks of seasoned May be a suitable investment for you companies located outside of the United if: (1) You wish to add an Objective: States. international stock fund to your Long-term growth of capital o In selecting stocks, the investment existing holdings, which could adviser evaluates foreign markets around include other stock investments as Adviser: the world. Within markets regarded as well as bond and money market Schroder Investment Management having favorable investment climates, the investments. (2) You are seeking North America Inc. adviser selects companies with growth of capital over the 31 Gresham Street above-average growth potential whose long-term-at least five years. (3) London EC2V 7QA, England stocks sell at reasonable prices. You are not looking for income. (4) You are willing to assume the additional risks (including currency and country risk) associated with international stocks. =================================================================================================================================
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================================================================================================================================= INVESTMENT OBJECTIVE PRINCIPAL INVESTMENT STRATEGIES INVESTOR PROFILE & INVESTMENT ADVISER - --------------------------------------------------------------------------------------------------------------------------------- Long-Term Bond Fund - --------------------------------------------------------------------------------------------------------------------------------- USAA Life Income Fund o Invests primarily in U.S. Designed primarily for the investor dollar-denominated debt and seeking to benefit from returns Objective: income-producing securities that have higher than those available in a money Maximum current income without undue risk been selected for their high yields market fund. An investor in this Fund to principal relative to the risk involved. should also be willing to accept principal fluctuations. The Fund Adviser: should not be relied upon as a USAA Investment Management Company balanced investment program. 9800 Fredericksburg Road San Antonio, Texas 78288 - --------------------------------------------------------------------------------------------------------------------------------- High Yield Bond Fund - --------------------------------------------------------------------------------------------------------------------------------- Vanguard High Yield Bond Portfolio o Invests primarily in a May be a suitable investment for you diversified group of high-yielding, if: (1) You are seeking a high level Objective: higher-risk corporate bonds with of income and are willing to take High level of income medium- and lower-range credit-quality substantial risks in pursuit of higher ratings, commonly known as "junk returns. (2) You have a long-term Adviser: bonds." investment horizon-more than five Wellington Management Company, LLP o The Portfolio emphasizes higher years. 75 State Street grades of credit quality within the Boston, Massachusetts 02109 high-yield bond universe, and under normal circumstances will invest at least 80% of its assets in issuers that have received B or higher credit ratings from independent rating agencies or in unrated securities of comparable quality. o The Portfolio may not invest more than 20% of its assets in securities with credit ratings lower than B or that are unrated. o The adviser may consider a security's potential for capital appreciation only when it is consistent with the objective of high and sustainable current income. - --------------------------------------------------------------------------------------------------------------------------------- Specialty-Real Estate Fund - --------------------------------------------------------------------------------------------------------------------------------- Vanguard REIT Index Portfolio o Invests in the stocks of real May be a suitable investment for you estate investment trusts (REITs), which if: (1) You are looking for a simple Objective: own office buildings, hotels, shopping way to gain indirect exposure to the High level of income and moderate centers, and other properties. real estate market to further long-term growth of capital o The Portfolio employs a "passively" diversify your existing holdings, managed-or index-approach, by holding a which could include other stock, bond, Adviser: mix of securities that seeks to match and money market investments. (2) You The Vanguard Group the performance of the Morgan Stanley want a stock fund that offers the P.O. Box 2600 REIT Index, a benchmark of U.S. REITs. potential for above-average dividend Valley Forge, Pennsylvania 19482 Holdings of the Index, and thus of the income. (Historically, the securities Portfolio, are weighted according to each that make up the Index have provided stock's market capitalization. higher dividend income than those in o The Portfolio holds each stock the S&P 500 Index.) (3) You are found in the Index in approximately the seeking modest growth of capital over same proportion as represented in the the long term-at least five years. Index itself. For example, if a specific stock represented 2% of the Morgan Stanley REIT Index, the Portfolio would invest 2% in that stock. - --------------------------------------------------------------------------------------------------------------------------------- Money Market Fund - --------------------------------------------------------------------------------------------------------------------------------- Vanguard Money Market Portfolio o Invests in high-quality, May be a suitable investment for you short-term money market instruments, if: (1) You wish to add a money Objective: such as securities backed by the full market fund to your existing holdings, Income while maintaining liquidity and a faith and credit of the U.S. which might also include stock and stable share price of $1 government, securities issued by U.S. bond investments. (2) You are seeking agencies, or obligations issued by income and stability of principal. corporations and financial institutions. Adviser: The Vanguard Group P.O. Box 2600 Valley Forge, Pennsylvania 19482 =================================================================================================================================
25 A Additions or Changes to Investment Options We may, from time to time, make additional Funds or Mutual Funds available as investment options through corresponding Variable Fund Accounts. We may do so when, for example, we believe marketing or investment conditions warrant. We also reserve the right, subject to compliance with applicable law, to change the Funds that are or may be available as investment options. We may, for example, eliminate or merge one or more Funds or substitute the shares of a Fund for those of another Fund or Mutual Fund. We may do so, in our sole discretion, if in our judgment further investment in any Fund would be inconsistent with the purposes of the Policies. We will give you written notice of the addition, elimination, merger, or substitution of any Fund to the extent required by law. In any event, the Separate Account may purchase other securities for other classes of policies. In the event of any substitution or other change, we may, by appropriate endorsement, make any changes in your Policy and any future policies as may be necessary or appropriate to reflect the substitution or change. Also, we may operate the Separate Account as a management company, we may deregister it with the SEC in the event such registration is no longer required, or we may combine it with other USAA Life separate accounts. Voting Privileges 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 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 Policies 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, based on SEC rules or other authority, that we may vote such shares ourselves in our own discretion. None of the Funds holds regular shareholder meetings. Special Considerations The Funds managed by the Vanguard Group, Fidelity Management Research Corporation, DeIM, Alger Management, Barrow Hanley, Granahan Investment, GMO, Schroder Investment, and Wellington Management 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 Policies and the variable annuity contracts 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 (NAV) could decrease if it had to sell investment securities to pay redemption proceeds to a separate account withdrawing because of a conflict. Policy Lapse and Reinstatement - ------------------------------ Lapse Your Policy will lapse at any time that your Policy cash value is insufficient to pay the Monthly Deduction and any loan interest then due, unless you have paid enough premiums to qualify for the Guaranteed Death Benefit. (See "Guaranteed Death Benefit.") You should not consider any deduction for the cost of insurance after lapse a reinstatement of the Policy (or of any benefit provided by rider) nor a waiver by us of the lapse. 26 A Grace Period You have a grace period of 61 days during which to provide us with sufficient payment to keep your Policy in force. The grace period will begin on any Monthly Anniversary when your Policy cash value is insufficient to cover the Monthly Deduction for the following month and any loan interest then due. We will notify you, and any assignee of record, of the date the grace period expires and of the premium necessary to continue the Policy in effect. During the grace period, you must submit enough premium to cover 3 Monthly Deductions and any loan interest due. The grace period is 61 days long and begins on the date we send notice to you. If you fail to pay the necessary premium within the grace period, a Policy lapse will occur, terminating all insurance, including benefits provided by rider. If the Insured dies during the grace period, we will pay the death benefit, less any due and unpaid Monthly Deductions and any loan interest due through the month of death, to your Beneficiary. We will not refund any cash value remaining in the Policy at the beginning of the grace period during the grace period or at lapse. Guaranteed Death Benefit You have the option to pay planned periodic premium payments based on the Annual Target Premium Payment specified in your Policy. If on any Monthly Anniversary during your first 5 Policy Years the total premium you have paid, less any partial surrenders, is equal to or greater than the Annual Target Premium Payment specified in your Policy, adjusted to reflect the number of Monthly Anniversaries that have occurred since the Policy's Effective Date, then we guarantee that your Policy will not lapse, even if the cash value is insufficient to pay for the Monthly Deduction and any loan interest then due. The Guaranteed Death Benefit is only available during the first 5 Policy Years. To illustrate how the Guaranteed Death Benefit works, let's assume your Annual Target Premium Payment is $2,000. If you have paid an amount equal to 3 1/2 Annual Target Premium Payments or $7,000, your Policy will not lapse during the first 3 1/2 Policy Years, even if your cash value on any Monthly Anniversary during that period is insufficient to pay your Monthly Deduction and any loan interest then due. The same would be true on any Monthly Anniversary thereafter, until after the 5th Policy Year, provided you have met the then applicable Annual Target Premium Payment requirements. Conversely, if you have not met the applicable Annual Target Premium Payment requirements on any Monthly Anniversary, the Guaranteed Death Benefit would not apply and your Policy would lapse if your cash value is insufficient to pay your Monthly Deduction and any loan interest then due. If you change your Policy's Specified Amount within the first 5 Policy Years, we will declare a new Annual Target Premium Payment and use it to determine whether the Guaranteed Death Benefit applies. Reinstatement You may reinstate a lapsed Policy within 5 years from the date of lapse and before the Policy's Maturity Date. We will require the following for reinstatement: o a completed written application for reinstatement; o proof of insurability satisfactory to USAA Life; o payment of premium sufficient to pay the estimated Monthly Deductions for at least the 3 Policy months beginning with the effective date of reinstatement; and o payment of, or agreement to reinstate, any Policy Indebtedness. The Effective Date of the reinstated Policy will be the Monthly Anniversary on or before approval date of reinstatement. Upon reinstatement, we will reinstate your Policy's death benefit to the Specified Amount in effect at lapse, less, if applicable, any reinstated Indebtedness. Your Policy's initial reinstated cash value will be the net reinstated premium less the Monthly Deduction for the month following the Effective Date of the reinstatement plus, if applicable, any reinstated Indebtedness plus any interest earnings credited to 27 A the loan collateral held in the general account. You will not receive any past performance during the grace period. One advantage of reinstating a lapsed Policy is that we will not deduct the first-year-only Administrative Charge again if it has already been paid. A possible disadvantage of reinstatement is that you must pay or reinstate any Policy Indebtedness. Charges and Deductions - ---------------------- Premium Charge We deduct a 3% premium charge from each premium we receive to compensate us for selling expenses and taxes. The resulting Net Premium Payment is the amount we allocate to the Variable Fund Accounts that you select. We will deduct the premium charge from all of your premium payments until the gross amount of premium payments we receive exceeds the sum of the Annual Target Premium Payments payable over 10 years. (See "Annual Target Premium Payment.") If you increase or decrease the Specified Amount, we will calculate a new Annual Target Premium Payment for you and use it to determine whether the premium charge applies. To illustrate how this charge works, if your Annual Target Premium Payment is $2,000, we would no longer deduct the premium charge once you have paid in premiums of $20,000 ($2,000 per Policy Year for 10 years). Monthly Deductions from Cash Value On your Policy's Effective Date, and each Monthly Anniversary thereafter, we will deduct certain monthly charges from your Policy's cash value. (See "Deduction of Charges.") The Monthly Deduction will include your cost of insurance charges, charges for any optional insurance benefits provided by rider, an Administrative Charge, and a Maintenance Charge, as described below. Cost of Insurance Charges. Your monthly cost of insurance charges will depend on a number of variables, including: o the Specified Amount of insurance coverage and death benefit option you select (both of which affect the net amount at risk to us); o your cost of insurance rate (which is based on the Insured's age, sex, and rate class); and o the investment experience of your value in the Variable Fund Accounts. For more information on how we determine your cost of insurance charges, see "Calculating Your Cost of Insurance." Charges for Optional Insurance Benefits. The Monthly Deduction will include charges for any optional insurance benefits added to the Policy by rider. (See "Optional Insurance Benefits.") Administrative Charge (First Policy Year Only). During your first 12 Policy months only, we will deduct a monthly Administrative Charge of $10. This charge compensates us for start-up administrative expenses that we incur in issuing your Policy. These expenses include, for example, the cost of processing your application, conducting a medical examination, determining insurability and rate class, and establishing Policy records. The investment advisers or other affiliates of certain Mutual Funds reimburse USAA Life for the cost of administrative services provided to the Funds as investment options under the Policies. Compensation is paid out of fee earnings, based on a percentage of a Fund's average net assets attributable to a Policy. Recurring Maintenance Charge. The Monthly Deduction will include a recurring Maintenance Charge of $5. This charge compensates us for the recurring administrative expenses related to the maintenance of your Policy and of the Separate Account. These expenses include, for 28 A example, premium notices and collection, recordkeeping, processing death benefit claims, Policy changes, reporting, and overhead costs. We guarantee that this charge will not increase during the life of the Policy. Separate Account Charges We deduct certain charges on a daily basis as a percentage of the value of each Variable Fund Account of the Separate Account. These charges have the affect of reducing your Policy's cash value. Mortality and Expense Charge. We assess a daily charge of .00204% (equal to .75% annual rate) against the values of each Variable Fund Account for mortality and expense risks that we assume under the Policies. We guarantee that this charge will not increase during the life of your Policy. The mortality risk that we assume is that Insureds may live for a shorter period of time than we estimate and, thus a greater amount of death benefits than expected will be payable. The expense risk we assume is that expenses incurred in issuing and administering the Policies will be greater than we estimate. Federal Income Tax Charge. Currently, we make no charge against the Separate Account for federal income taxes that may be attributable to the Separate Account. We may, however, make such a charge in the future, should it be necessary. We also may make charges for other taxes, if any, attributable to the Separate Account. (See "Tax Matters.") Transfer Charges We assess a $25 charge for each value transfer between Variable Fund Accounts in excess of 18 per Policy Year. We reserve the right at any time, and without prior notice, to terminate, suspend, or modify these transfer privileges. (See "Transfer of Value" and "Deduction of Charges.") Surrender Charges Partial Surrender Charge. For each partial surrender of cash value, we assess a charge equal to the lesser of $25 or 2% of the amount withdrawn. We also refer to this charge as an "administrative processing fee." (See "Partial Surrenders" and "Deduction of Charges.") Full Surrender Charge. For full surrenders prior to the end of the 10th Policy Year, we assess the surrender charge described below. The purpose of the surrender charge is to compensate us for the expenses we incur in distributing the Policies. The amount of the surrender charge will equal a percentage of the Annual Target Premium Payment specified in your Policy, regardless of the amount of premiums you actually pay. (See "Annual Target Premium Payment.") The applicable percentage depends on when you surrender. As shown in the table below, the applicable percentage declines each Policy Year to 0% after the 10th Policy Year. - --------------------------------------------------------------------------------------------------------------------- Surrender Charge as a % of Annual Target Premium Payment Policy Year 1 2 3 4 5 6 7 8 9 10 11+ Applicable % 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% - ---------------------------------------------------------------------------------------------------------------------
To illustrate how the surrender charge works, if your Annual Target Premium Payment is $2,000 and you surrendered your Policy in full during the first Policy Year, the surrender charge would be determined by multiplying 50% times $2,000 = $1,000. Thus, in this example the surrender charge would be $1,000. If you increase or decrease your Policy's Specified Amount within the first 10 Policy Years, we will declare a new Annual Target Premium Payment for you, which we will use to determine the surrender charge. (See "Changing Your Policy's Specified Amount.") However, we will not impose a surrender charge at the time you decrease your Policy's Specified Amount. 29 A Other Charges The Variable Fund Accounts purchase shares of the Funds at the Net Asset Value (NAV) of the shares. The NAV reflects the investment management fees and other expenses already deducted from each Fund's assets. These fees and other expenses appear under "The Policy At a Glance." Please refer to the accompanying prospectuses for the Funds for more information on these fees and expenses. Deduction of Charges We will deduct the Monthly Deduction, any partial surrender charge, and any transfer charge from your value in each Variable Fund Account in the same proportion as each Variable Fund Account's value has to the total Policy cash value. If you direct us in advance, we will permit you to specify from which Variable Fund Account(s) you want the partial surrender charge and transfer charge deducted. Death Benefit - ------------- The Policy offers two death benefit options, Option A and Option B, which you select on your Policy application. If you select Option A, your death benefit will be the greater of: o your Policy's Specified Amount, or o the Minimum Amount Insured (which is a specified percentage of your cash value based on the Insured's age). (See "Minimum Amount Insured.") If you select Option B, your death benefit will be the greater of: o your Policy's Specified Amount plus your cash value, or o the Minimum Amount Insured. (See "Minimum Amount Insured.") Under either option, we will reduce the amount of death benefit we pay by the amount of any outstanding Indebtedness and any due and unpaid Monthly Deductions. (See "Payment of Policy Benefits.") Please note that partial surrenders and related surrender charges also will reduce the amount of your death benefit. (See "Changing Your Policy's Specified Amount.") The death benefit payment will be increased by any applicable optional insurance benefits provided by rider. (See "Optional Insurance Benefits.") Choosing between Option A and Option B. Both Option A and Option B provide insurance protection and the opportunity to build your cash value. When choosing between Option A and Option B, one way to differentiate the two may be to think of Option A as emphasizing potential cash value growth and Option B as emphasizing potential death benefit growth, as explained below. Under Option A, any cash value you build will decrease the net amount at risk to us relative to the amount of death benefit we must pay if the Insured dies. As a result, all other things being equal, your cost of insurance charges generally will be lower under Option A than under Option B for the same Specified Amount. Lower monthly cost of insurance charges may enable you to build cash value faster than if you were paying higher cost of insurance charges under Option B. There is, however, no minimum guaranteed cash value, which means you bear the entire investment risk that your cash value could fall to zero. (See "Cash Value.") Under Option B, unlike Option A, any cash value you build will increase the amount of your death benefit. As a result, all other things being equal, your death benefit under Option B generally will be greater than your death benefit under Option A for the same Specified Amount. 30 A Illustrations of Option A and Option B To illustrate the differences between Option A and Option B, let's assume that the Insured is less than 40 years old, that your Policy's Specified Amount is $100,000, that you have no loan or outstanding Monthly Deductions, and that your Policy cash value is $25,000. Under Option A, your death benefit would be the greater of $100,000 and the Minimum Amount Insured. Under Option B, your death benefit would be the greater of $125,000 ($100,000 plus $25,000) and the Minimum Amount Insured. Under both Options, the death benefit would be higher than the Minimum Amount Insured, which would be $62,500, in this example. (The Minimum Amount Insured is calculated by multiplying the cash value (ignoring the amount of any outstanding Indebtedness) by a specific percentage which is based on the Insured's age. In this example, the prescribed percentage would be 250%. Different percentages apply at different ages, and generally decline as you get older. (See "Minimum Amount Insured.") Now let's assume that instead of $25,000 your cash value is $50,000. The Minimum Insured Amount would be $125,000 (250% times $50,000). Under Option A, your Minimum Insured Amount would be greater than the Specified Amount. As a result, your death benefit would be $125,000. On the other hand, under Option B, your death benefit ($150,000) would be higher than the Minimum Amount Insured ($125,000). Changing Your Death Benefit Option After the death benefit option you selected on your application has been in effect for one Policy Year, you may change it by sending Notice to Us. The new death benefit option also must remain in effect for one Policy Year before we will allow another change. There is no charge or fee for changing the death benefit option. The change will become effective on the Monthly Anniversary on or following the date we approve the change. If you change your death benefit from Option A to Option B, your Policy's new Specified Amount will be the old Specified Amount decreased by your Policy's cash value (ignoring the amount of any outstanding Indebtedness) as determined on the Date of Receipt of your Notice to Us. We will not allow this change if it would result in a Specified Amount that is less than the minimum Specified Amount of $50,000 ($25,000 for Insureds less than 18 years of age). Changing from Option A to Option B will require proof of insurability, if you wish your Policy's new Specified Amount under Option B to be the same as the old Specified Amount under Option A. If you change your death benefit option from Option B to Option A, your Policy's new Specified Amount will be the old Specified Amount increased by your Policy's cash value (ignoring the amount of any outstanding Indebtedness) next determined on the Date of Receipt of your Notice to Us. Changing from Option B to Option A does not require proof of insurability, unless you make changes in your Policy's Specified Amount or elect optional benefits available by rider. A change in death benefit option will affect your cost of insurance. (See "Calculating Your Cost of Insurance.") We will recalculate the maximum premium limitation following a change in death benefit option. (See "Minimum Amount Insured" under "Calculating Your Cost of Insurance.") Changing Your Policy's Specified Amount Within certain limits, you may increase or reduce your Policy's Specified Amount. A change in Specified Amount may increase or decrease your cost of insurance charges. (See "Calculating Your Cost of Insurance.") A change in the Specified Amount also may have tax consequences. (See "Tax Matters.") Changes in Specified Amount do not necessarily require changes in planned periodic premiums. (See "Planned Periodic Premium Payments.") However, any increase or decrease in Specified Amount will require us to declare a new Annual Target Premium Payment for the new Specified Amount. (See "Annual Target Premium Payment.") Whether the premium charge applies will be determined using the new Annual Target Premium Payment. (See "Premium Charge.") We will recalculate the maximum 31 A premium limitation following an increase or decrease in Specified Amount. (See "Premium Payments" and "Tax Matters.") The minimum amount by which you can increase your Policy's Specified Amount is $25,000, unless such increase is made in conjunction with a change in death benefit option or to satisfy Internal Revenue Code requirements. For any increase, you must apply in writing and we will require satisfactory proof of insurability. The increase will become effective on the Monthly Anniversary on or following the date we approve the increase. Your rights to cancel your Policy do not apply to increases in Specified Amount. We will not allow a reduction in your Policy's Specified Amount (other than that resulting from a partial surrender of cash value under Option A) that results in a Specified Amount that is less than $50,000 ($25,000 if the Insured is less than 18 years of age), nor will we allow a reduction that would cause your Policy not to qualify as life insurance for federal tax law purposes. You must make requests for reduction in writing. For purposes of determining your cost of insurance charge, we will apply any decrease in Specified Amount against the most recent increase in Specified Amount. The decrease will become effective on the Monthly Anniversary on or following the Date of Receipt of your Notice to Us. Partial surrenders will reduce your Policy's death benefit on a dollar for dollar basis unless the death benefit is the Minimum Amount Insured, in which case your death benefit will be reduced by a multiple of the amount surrendered. Under death benefit Option A, we will reduce the Specified Amount and the cash value by the amount of the partial surrender. Under death benefit Option B, we will reduce only the cash value portion of the death benefit by the amount of the partial surrender. Other Policy Benefits - --------------------- Optional Insurance Benefits Subject to certain underwriting or issue requirements, you may add one or more of the following optional insurance benefits to your Policy by rider. Each rider's description in this Prospectus is subject to the specific terms of the rider as each contains definitions, contractual limitations, and conditions. We will deduct the cost of any optional insurance benefits as part of the Monthly Deduction. (See "Monthly Deductions.") Accelerated Benefits for Terminal Illness Rider. This rider provides for an early benefit payment to you upon receipt of proof that the Insured is terminally ill (as defined in the rider). The rider is not available in all states. The maximum amount you may receive under the rider prior to the Insured's death is 50% of the then current death benefit payable under the Policy (excluding additional benefits payable under other riders) or, if less, $250,000. We will deduct the amount of any Indebtedness from the amount of the early payment. We treat the early payment as a "lien" against Policy values. We reduce the death benefit by the amount of the lien and any Policy loans, plus accrued interest. We will continue to make Monthly Deductions after the early payment. The Owner's access to the cash value of the Policy through Policy loans, partial surrenders, or full surrender is limited to any excess of the cash value over the amount of the lien. We charge interest on the amount of the early payment and any unpaid Monthly Deductions. We require premium payments to be made for cost of insurance that are still required to be made after the early payment. If such payment is not paid when due, we will pay the premium on behalf of the Owner and add that amount to the early payment amount to be deducted from the death benefit. If the amount of the early payment plus accrued interest and required unpaid cost of insurance premiums ever exceed the amount of the death benefit, we will terminate the Policy and no additional insurance benefits will be payable. Accidental Death Benefit Rider. This rider provides an additional life insurance benefit if the Insured's death results from accidental bodily injury (as defined in the rider). You can select an additional life insurance benefit up to a maximum of $200,000, or the Specified Amount, whichever is less. The premium for this rider is $.84 per $1,000 of coverage per year. 32 A Children Term Life Insurance Rider. This rider provides level term life insurance on the lives of the Insured's children (as defined in the rider). The cost for this rider is $6 per $1,000 of coverage per year. Extended Maturity Date Rider. This rider permits you to extend your Policy's Maturity Date up to 10 years beyond what it otherwise would be (i.e., the Monthly Anniversary following the Insured's 100th birthday). The death benefit during the extended maturity period will be your Policy's cash value less any Indebtedness. Also during this period, the Policy's cash value will continue to accrue in the same manner as described in the Policy, and any Policy loans in effect will continue to accrue interest. We will not deduct cost of insurance charges or accept additional premium payments during this period. We will assess the Maintenance Charge during this period. Extension of the Maturity Date is subject to all of the terms and conditions of the Policy, except where they are inconsistent with the rider. Extending the maturity date of your Policy beyond the Insured's age 100 may result in the current taxation of any increases in your Policy's cash value that result from investment experience in the Variable Fund Accounts. You should consult a qualified tax advisor before making such an extension. Waiver of Monthly Deduction Rider. This rider waives your Monthly Deduction during periods of total and permanent disability of the Insured, but only if the Insured has been totally and permanently disabled (as defined in the rider) for at least 6 consecutive months. We will not deduct the amount of any Monthly Deduction waived under this rider from the cash value proceeds payable upon maturity of your Policy, or the death benefit proceeds payable if the Insured dies before the Policy matures. If Option A is in effect when we approve a claim under the rider, we will change your death benefit option from Option A to Option B as of the Monthly Anniversary after the disability began. While we are paying benefits under the rider, you may not increase your Policy's Specified Amount. Please note that the rider does not apply to interest under your Policy loans. As a result, it is possible that your Policy could lapse for nonpayment of loan interest. The premium for this rider varies based upon the age of the Insured. If you would like further information about the optional insurance benefits available under your Policy, please contact us at 1-800-531-2923. Please note that adding or deleting riders, or increasing or decreasing coverage under the riders, can have tax consequences. (See "Tax Matters.") You should consult a qualified tax advisor. Benefits at Maturity If the Insured is living, we will pay the cash value of your Policy, less any Indebtedness, when your Policy matures. All Policies will mature on the Monthly Anniversary following the Insured's 100th birthday unless extended by rider. Payment of Policy Benefits - -------------------------- Payment of Death Benefit As long as your Policy has not terminated due to lapse, maturity, or full surrender, we will pay your Policy's death benefit to your Beneficiary. We will usually pay the death benefit within 7 days after we receive due proof of death at our Home Office and all other requirements necessary to make payment. We will determine the cash value portion of the death benefit as of the Valuation Date immediately following the date of death. We will pay the death benefit in cash or under one or more of the payment options you have selected in advance. If you have not selected a payment option, your Beneficiary may select the payment option prior to (or after) the Insured's death. We may postpone payment of the death benefit in certain circumstances. (See "Postponement of Payments.") We will reduce the death benefit by any Indebtedness and any due and unpaid Monthly Deductions. These proceeds will be increased by any applicable additional optional insurance death benefits provided by rider. 33 A Payment of Maturity Benefit If your Policy matures before the Insured dies, we will normally pay you the cash value of your Policy (reduced by any Indebtedness and any due and unpaid Monthly Deductions) within 7 days after the Valuation Date on which the Policy matures. We may postpone payments in certain circumstances. (See "Postponement of Payments.") Death Benefit Payment Options We will pay the death benefit in a lump sum or under one of the payment options below. During the Insured's lifetime, you may select a payment option. If the Insured dies and you have not chosen a payment option, your Beneficiary can choose a payment option. If you have selected a payment option before the Insured's death, your Beneficiary may not change that option after the Insured's death. Proceeds applied under a payment option will no longer vary by the investment experience of the Variable Fund Accounts. The nature and timing of your choice of payment option can effect the tax consequences to you or your Beneficiary. You should consult your tax advisor. Interest Only Option. The Policy's principal amount may be left on deposit with USAA Life for a mutually determined period, not to exceed 30 years. We will make interest payments at mutually determined regular intervals. The principal amount will earn interest at a minimum rate of 3% compounded annually. At the end of the fixed period, we will pay the principal amount. Installments for a Fixed Period Option. Under this option, we will pay the principal amount plus interest in equal or unequal installments for a specified number of years (not more than 30), as mutually agreed upon. The amount of the installments will not be less than that shown in the Table of Guaranteed Payments contained in your Policy. Installments of a Fixed Amount Option. Under this option, we will pay the principal amount plus interest in equal or unequal installments, as mutually agreed upon, until the amount applied, together with interest on the unpaid balance, is paid in full. Other Options. We will apply the sum under any other option mutually agreed upon. Any arrangements involving more than one payment option, or involving a Beneficiary that is not a natural person (e.g., a corporation) or who is a fiduciary (e.g., a trustee) are subject to our approval. In addition, the details of the arrangements are subject to our rules in effect at the time the arrangements take effect. The Beneficiary may designate a successor payee as to any amount that we would otherwise pay to the Beneficiary's estate. Amounts applied under these payment options will not be subject to the claims of creditors or to legal process, to the extent permitted by law. Cash Value - ---------- Your Policy's cash value will vary: o on a daily basis with the investment experience of the Variable Fund Accounts to which you have allocated your Net Premium Payments; o to reflect the effect of various Policy transactions, such as additional premium payments, partial surrenders, and Policy loans; and o to reflect applicable charges and deductions. Your Policy does not provide a minimum guaranteed cash value, which means you bear the entire investment risk that your cash value could fall to zero. 34 A On your Policy's Effective Date, your cash value will equal your Net Premium Payments, less the Monthly Deduction for the following Policy month. Thereafter, your cash value on any Valuation Date will equal the sum of: o your Policy's value in each Variable Fund Account; o plus, if applicable, any value held in our general account to secure any Policy loan; o plus any interest earnings credited on the value held in the general account; o less the amount of any outstanding Indebtedness; o less any Monthly Deductions, transfer charges, and partial surrender charges applied through that date. (See "Loans.") On each Monthly Anniversary, the Monthly Deduction will reduce your Policy's cash value. Calculating Your Value in the Variable Fund Accounts When you invest in a Variable Fund Account, you are purchasing units of interest or "Accumulation Units" ("units") of that Account. You purchase units at their price next determined on any given Valuation Date following the receipt of your payment. Therefore, on any given Valuation Date, you can calculate the value of your investment in a Variable Fund Account by multiplying (1) the number of units of each Variable Fund Account credited to your Policy by (2) the price of the units on that Date. We determine the number of units to credit to you by dividing (1) the Net Premium Payment you allocate to a Variable Fund Account by (2) that Variable Fund Account's price per unit or "unit value" next computed on the Date of Receipt of the premium payment. Certain transactions will affect the number of units in a Variable Fund Account credited to you. Net Premium Payments will increase the number of full or fractional units. Loans, partial or full surrenders, partial surrender charges, transfer charges, and Monthly Deductions involve redemption of full or fractional units and will decrease the number of units. In addition, Transfer of Value among Variable Fund Accounts will decrease the number of units in the Variable Fund Accounts from which value is transferred and increase the number of units in the Variable Fund Accounts to which value is transferred. Each Variable Fund Account's units are valued separately. We calculate the value of an Accumulation Unit ("Accumulation Unit Value (AUV)") for each Variable Fund Account on any Valuation Date by adjusting the unit value from the previous Valuation Date for: o the investment performance of the corresponding Fund; o any dividends or distributions paid by that Fund; and o the Separate Account charges that we assess. (See "Separate Account Charges.") Log on to usaa.com day or night to access information about your Policy details, Variable Fund Account summaries, and financial activity information. You may also find out information about your cash value, including the value and number of units of each Variable Fund Account credited to your Policy, by calling us at 1-800-531-4265. Transfer of Value - ----------------- Except during the first 30 days after your Policy becomes effective, you may transfer all or part of the value in any Variable Fund Account to any other Variable Fund Account of the Separate Account, up to 18 times per Policy Year, without charge. Each transfer thereafter is subject to a $25 charge. Excessive transfer activity can disrupt portfolio management strategy and increase Variable Fund Account expenses, which are borne by all Policy owners participating in the Variable Fund Accounts regardless of their transfer activity. You should note that the product is not designed for professional "market timing" organizations, or other organizations or individuals engaged in market timing strategy, making programmed transfers, or frequent transfers that are large in relation to the total assets of the underlying Funds in which the Variable Fund Account options invest. Market timing strategies are disruptive to the underlying Funds in which the Variable Fund Account options invest. If we determine 35 A that your transfer patterns among the Variable Fund Account options reflect a market timing strategy, we reserve the right to take action including but not limited to: restricting the availability of transfers through telephone requests, facsimile transmissions, automated telephone services, internet services, or any electronic transfer services. We will inform you in writing of any such transfer restrictions on your Policy. The minimum amount you can transfer from any Variable Fund Account is $250 (or the remaining Account value if less). A transfer will result in the redemption or purchase (or both) of units of the Variable Fund Accounts involved. You may request a transfer by telephone or by Notice to Us. A request for transfer must clearly state the amount to be transferred, the Variable Fund Account from which it is to be withdrawn, and the Variable Fund Account to which it is to be credited. We will effect the transfer using the Variable Fund Account unit values next computed on the Date of Receipt of your request, unless a postponement of payments is in effect. (See "Postponement of Payments.") We reserve the right at any time, and without prior notice, to terminate, suspend, or modify these transfer privileges. Loans - ----- After your first Policy Year, you may borrow money from USAA Life by using your Policy as the sole security for the loan. The amount that you may borrow is the "loan value." The maximum loan value is 85% of your cash surrender value. You may request a loan by telephone or by Notice to Us, but you must obtain the written consent of all assignees and irrevocable Beneficiaries, if any, before we can make the loan. We will usually pay you the loan proceeds within 7 days after the Date of Receipt of your loan request, unless a postponement of payments is in effect. (See "Postponement of Payments.") Loan Collateral When you take a loan, we will transfer an amount equal to the loan from your value in the Variable Fund Accounts to our general account. We make this transfer of "loan collateral" to secure your loan. You may specify the Variable Fund Accounts from which you want us to withdraw the loan collateral. If you do not so specify, we will withdraw the loan collateral from the Variable Fund Accounts in the same proportion as each Account's value has to the total Policy cash value. While a loan is outstanding, we will credit the loan collateral on a daily basis with interest at an effective annual rate of 4%. Loan Interest You are charged interest on the loan at a maximum annual rate of 6% payable in advance. We have the option of charging less. For Policies that have been in effect more than 10 Policy Years and if the Insured is age 55 or older, we charge a preferred loan interest rate of 4.5%. We have the option of charging less for a preferred loan. The entire amount of interest on your loan balance for each Policy Year is payable in advance at the commencement of the loan and at the beginning of each Policy Year thereafter. We will automatically deduct the interest from your Variable Fund Account(s) in the same proportion as each Account's value has to the total Policy cash value on the date the loan starts. Similarly, we will deduct interest from your Variable Fund Account(s) at the beginning of each Policy Year in the same proportion as each Account's value has to the total Policy cash value as of that date. If there is insufficient value in your Variable Fund Account(s) to pay the interest in advance, your policy will enter its grace period. Because interest is paid in advance, loan repayments during a Policy Year may result in an overpayment of interest. We will credit any overpayment of interest to you on the date of any loan repayment. Repayment of Indebtedness You may repay your Indebtedness (i.e., loans and any unpaid interest) in full or in part at any time before the Insured's death and while the Policy is in effect. If not repaid, we will deduct the 36 A Indebtedness from any death benefit, maturity benefit, or full surrender proceeds. You may not repay loans and unpaid loan interest in existence at the end of the grace period until the Policy is reinstated. You must designate any loan repayment as such. Otherwise, we will treat it as a premium payment instead. You may direct how you want your loan repayment to be allocated among the Variable Fund Accounts. If you do not specify an allocation, we will allocate your loan repayment to the Variable Fund Accounts in the same proportion as Net Premium Payments are being allocated to the Accounts. Effect of Policy Loans A loan will reduce the value of the Variable Fund Accounts from which it is deducted. Thus, the amount loaned will not share in the investment experience of the Variable Fund Accounts. Therefore, a loan, whether repaid or not, will have a permanent effect on the cash value of the Policy. We will determine loan values as of the Date of Receipt of the loan request. A Policy loan may increase the chance that your Policy may lapse and result in adverse tax consequences. For situations where a Policy loan may be treated as a taxable distribution, see "Tax Matters." Surrenders - ---------- You may fully or partially surrender your Policy for all or part of its cash value to the extent described below. We will usually pay full or partial surrenders of cash value within 7 days after we receive your written request at our Home Office. We will determine the cash value of the surrendered amount as of the Date of Receipt of your request for surrender. There may be tax consequences in connection with a full or partial surrender. (See "Tax Matters.) You must obtain the written consent of all assignees or irrevocable Beneficiaries, if any, before we will process any request for surrender. We will effect any surrenders using the Variable Fund Account unit values next computed on the Date of Receipt of your Notice to Us or, in the case of partial surrenders, your Notice to Us or telephone request. In certain circumstances, we may postpone the payment of surrenders. (See "Postponement of Payments.") Full Surrenders At any time before the Insured's death and while the Policy is still in effect, you may surrender your Policy for its entire cash surrender value by sending Notice to Us. We may require the return of the Policy. We also may assess a surrender charge. (See "Surrender Charges.") We sometimes refer to the net amount you would receive as the Policy's "cash surrender value." We will terminate your Policy and all insurance on the Date of Receipt of your Notice to Us. Partial Surrenders After your first Policy Year and while your Policy is still in effect, but before the Insured's death, you may surrender a portion of your Policy for cash. We will assess an administrative processing fee equal to the lesser of $25 or 2% of the amount withdrawn. You may direct how you would like us to withdraw a partial surrender and the administrative processing fee from your current value in the Variable Fund Accounts. If you do not specify a withdrawal allocation, we will withdraw the partial surrender and the administrative processing fee from the Variable Fund Accounts in the same proportion as each Account's value has to the total Policy cash value. (See "Surrender Charges" and "Deduction of Charges.") You may request a partial surrender by telephone or by Notice to Us. Your Policy's remaining cash value after a partial surrender may not be less than an amount equal to the then current surrender charge for a full surrender. Partial surrenders and related surrender charges will reduce your death benefit. (See "Changing Your Policy's Specified Amount" under "Death Benefit.") 37 A Telephone Transactions - ---------------------- You may submit requests to change your premium payment allocation, requests for partial surrenders, requests for loans, and requests for Transfer of Value among Variable Fund Accounts by telephone. We will employ reasonable procedures to confirm that instructions communicated by telephone are genuine, and only if we do not, will we be liable for any losses because of unauthorized or fraudulent instructions. We will obtain information prior to any discussion regarding your Policy including, but not limited to: o your USAA number or Policy number, o your name, and o your Social Security number. In addition, we will record all telephone communications with you and will send confirmations of all transactions to your address. Your Policy automatically authorizes you to make telephone transactions, subject to our right to modify, suspend, or discontinue this telephone transaction privilege at any time without prior notice. You may decline the option of utilizing the telephone transaction privilege when filling out your Policy application. Dollar Cost Averaging Program - ----------------------------- The Dollar Cost Averaging Program enables you to make regular, equal investments over time into one or more of the Variable Fund Accounts, by transferring a fixed dollar amount at regular intervals from one or more Variable Fund Accounts under the Policy. To begin the Dollar Cost Averaging Program, you must have at least $5,000 in the Variable Fund Account from which you intend to transfer value. The minimum amount you may transfer is $100, or the remaining value of the Account, if less. The transfers must be scheduled to occur over a period of at least 12 months at monthly, quarterly, or semiannual intervals, as you elect. You may select this Program by submitting a written request to our Home Office or by making a request by telephone. You may cancel your participation in this Program in the same manner. We will process transfers under the Dollar Cost Averaging Program to be effective at the Accumulation Unit Values (AUV) at the end of the Valuation Period that includes the date of the transfer. No charges apply to transfers made under the Dollar Cost Averaging Program. Also, transfers under this Program do not count against your limit on free transfers. We reserve the right to suspend, terminate, or modify the offering of the Dollar Cost Averaging Program upon providing you written notice 30 days in advance. Should we suspend or terminate the Program, the suspension or cancellation will not affect any Policy for which the Dollar Cost Averaging Program is already in effect. Free Look Right - --------------- You may cancel your Policy within 10 days after receiving it, or such longer period as state law may require, by returning the Policy to us along with a written request for cancellation. Upon its return, we will refund the greater of: o your premium payments, or o the value of the Variable Fund Accounts as of the Date of Receipt of your written request to cancel, plus any premium charge, Monthly Deduction, and mortality and expense charge that we deducted. 38 A Postponement of Payments - ------------------------ We may postpone payments of partial surrenders, full surrenders, Policy loans, maturity benefits, death benefits, and Variable Fund Account transfers beyond 7 days whenever: o the New York Stock Exchange is closed, o the SEC, by order, permits postponement for the protection of Policy Owners, or o the SEC requires trading to be restricted or declares an emergency. We reserve the right to defer payment of any partial surrenders, full surrenders, Policy loans or refunds that would be derived from a premium payment made by a check until the check has cleared the banking system. - -------------------------------------------------------------------------------- Log on to usaa.com day or night for policy details, fund account summaries and financial activity information. - -------------------------------------------------------------------------------- 39 A - --------------------------- MORE POLICY INFORMATION - --------------------------- Owners And Beneficiaries - ------------------------ Owners If you are the Owner of the Policy, the rights and privileges of the Policy during the lifetime of the Insured belong to you. Generally, the Owner is also the Insured, unless a different Owner is designated in the application or at a later date. Successor Owner. As Owner, you may designate a successor Owner. If you die without designating a successor Owner, ownership of the Policy will pass to your estate. Change of Ownership. As Owner, you may change ownership of your Policy, at any time, during the Insured's lifetime, by submitting Notice to Us. The change will take effect on the Date of Receipt of the request. A change of ownership is subject to the rights of an assignee of record and those of any irrevocable Beneficiary. We are not responsible for any payments made or actions taken before we receive your Notice to Us. Collateral Assignment. As Owner, you may assign the Policy as collateral security by submitting a Notice to Us. You will need to obtain the written consent of any irrevocable Beneficiaries and assignees of record before we recognize any assignment; however, a collateral assignment takes precedence over the interest of a revocable Beneficiary. The assignment will take effect as of the date we receive your Notice to Us. We are not responsible for the validity or effect of any collateral assignment, nor are we responsible for any payment or other action taken before we receive the Notice to Us. We are not bound by an assignment until we receive it at our Home Office. We will pay any death benefit payable to an assignee in one lump sum. We will pay any remaining proceeds to the designated Beneficiary or Beneficiaries. A collateral assignee is not an Owner. A collateral assignment is not a transfer of ownership, unless it is an absolute assignment. All collateral assignees of record must consent to any full surrender, partial surrender, loan or payment from a Policy under an Accelerated Benefits for Terminal Illness Rider. There may be unfavorable tax consequences, including recognition of taxable income and the loss of income tax-free treatment for any death benefit payable to the Beneficiary. Therefore, you should consult a qualified tax advisor prior to making an assignment. Beneficiaries You may name one or more Beneficiaries in your Policy application. You may classify Beneficiaries as primary, contingent, revocable, or irrevocable. If no primary Beneficiary survives the Insured, we will pay the Policy proceeds to the contingent Beneficiaries. Beneficiaries in the same class will receive equal payments unless you direct otherwise. A Beneficiary must survive the Insured in order to receive his or her share of the death benefit proceeds. If a Beneficiary dies before the Insured dies, his or her unpaid share is divided among the remaining Beneficiaries of the same class who survive the Insured. If no Beneficiary survives the Insured, we will pay the proceeds to you, if you are alive, or, if not, to your estate. Change of Beneficiary. You may change the Beneficiary while the Insured is living, by submitting a Notice to Us. You must obtain the written consent of any irrevocable Beneficiaries before we will accept any change in Beneficiary. A change in Beneficiary will take effect on the Date of Receipt of the request. We will not be responsible for any payment or other action taken before receipt of your Notice to Us. If we make a payment of death benefits in good faith before receiving the Notice to Us, we will receive credit for the payment against our liability under the Policy. A change of Beneficiary is subject to the rights of an assignee of record. 40 A Calculating Your Cost of Insurance - ---------------------------------- For each Monthly Anniversary, we determine your monthly cost of insurance by multiplying (1) the net amount at risk under your Policy by (2) your cost of insurance rate, and (3) dividing the resulting amount by 1000. Net Amount at Risk We determine the net amount at risk by (1) subtracting your Policy's cash value on any Monthly Anniversary from (2) your Policy's current death benefit (divided by a factor that discounts the death benefit to the beginning of the month). Your Policy's death benefit may be the death benefit required to qualify the Policy as life insurance. (See "Minimum Amount Insured.") The net amount at risk may be greater if you have selected death benefit Option B rather than death benefit Option A. See "Death Benefits." Since the death benefit payable under Option B is the Specified Amount plus the cash value, the difference between the death benefit and the cash value will be greater under Option B than under Option A (unless the Minimum Amount Insured applies). As the net amount at risk will be greater, so the cost of insurance also will be greater. The net amount at risk also may be affected by changes in your Policy's cash value or in the Specified Amount. (See "Cash Value" and "Death Benefits.") The net amount at risk for each Policy continues to be determined generally by subtracting the Policy's cash value from the Policy's death benefit (divided by a factor that discounts the death benefit to the beginning of the month), regardless of whether the death benefit is the Policy's current Specified Amount or the Minimum Amount Insured. The cost of insurance rate applied against the net amount at risk will continue to increase as the Insured's age increases. Net Amount at Risk - More Than One Rate Class If you increase the Specified Amount and the rate class applicable to the increase is different from that of the initial Specified Amount, then, in determining the cost of insurance charge, we will calculate the net amount at risk separately for each rate class. The method of determining the net amount at risk for each rate class will differ between Option A and Option B. If Option A is in effect, we will apportion the cash value among the initial Specified Amount and any increases in Specified Amount. The cash value will first be considered a part of the initial Specified Amount. If the cash value is greater than the initial Specified Amount, the balance of the cash value will then be considered a part of each increase in Specified Amount, beginning with the first increase. If Option B is in effect, we will determine the net amount at risk by the proportional relationship of the initial Specified Amount and the Specified Amount increases for each new rate class to the total Specified Amount. Because the method of calculating the net amount at risk is different between Option A and Option B when more than one rate class is in effect, a change in the death benefit option may result in a different net amount at risk for each rate class than would have occurred had the death benefit option not been changed. Thus, the total cost of insurance will be increased or decreased. Cost of Insurance Rates Your cost of insurance rates are based on your Insured's age, sex, and rate class. Generally, we set cost of insurance rates based on our expectations as to future mortality experience. We apply any changes to cost of insurance rates to all persons of the same age, sex, and rate class. We will give you 30 days' notice before any increase in your current cost of insurance rates becomes effective. We guarantee that your cost of insurance rates will never be greater than the maximum cost of insurance rates shown in your Policy. These guaranteed rates are based on the 1980 Commissioners Standard Ordinary Mortality Table, and age on the Insured's last birthday. The rate class of the Insured will affect your cost of insurance rate. USAA Life currently places Insureds into one of three preferred rate classes or into one of two standard rate classes involving higher mortality risks. In an otherwise identical Policy, Insureds in the preferred rate class will have a 41 A lower cost of insurance rate than those in a standard rate class. We make all final determinations of an Insured's rate class. Minimum Amount Insured - ---------------------- The Minimum Amount Insured is the amount of insurance proceeds that the Internal Revenue Code requires for your Policy to qualify as life insurance and to exclude the death benefit from your Beneficiary's taxable income. If higher than the death benefit under Option A or Option B, we will pay you the Minimum Amount Insured. You can determine the Minimum Amount Insured by multiplying your Policy's cash value (ignoring the amount of any outstanding loan and any unpaid loan interest) by a specified percentage based on the Insured's age. The specified percentages, which generally decline as the Insured gets older, are:
- ----------------------------------------------------------------------------------------------------------------- Minimum Amount Insured as a Percentage of Cash Value - ----------------------------------------------------------------------------------------------------------------- Insured's 40 or 95 and Age* Under 45 50 55 60 65 70 75 to 90 older Percentage 250% 215% 185% 150% 130% 120% 115% 105% 100% - -----------------------------------------------------------------------------------------------------------------
* Last birthday at the beginning of the Policy Year. A more complete table appears in your Policy. If, prior to the Insured's death, unexpected increases in your Policy's cash value would cause your Policy not to satisfy Internal Revenue Code requirements, we will increase the death benefit to the Minimum Amount Insured so that the death benefit will be excluded from the Beneficiary's taxable income. The Contract - ------------ The Policy is a legal contract between you and us. The consideration for issuing the Policy is: o completion of the application, and o payment of the first full premium. The entire contract consists of: o your Policy, o your Policy application, and o any supplemental applications, riders, endorsements, and amendments. We will consider statements in the application as representations and not warranties. We will not use any representation to void your Policy or defend a claim under your Policy unless it is contained in your written application or supplemental application. Only the president or secretary of USAA Life has authority to change or waive a provision of your Policy, and then only in writing. All requests for changes to your Policy must be clear and in writing, and must be received by our Home Office. This Policy is subject to the laws of the state where it is issued. To the extent that the Policy may not comply, it will be interpreted and applied to comply. Incontestability - ---------------- We will not contest a Policy, or any increase in Specified Amount, except for lapse or fraud, after the Policy or increase has been in effect during the Insured's lifetime for 2 years. Each increase in the Specified Amount will have its own 2-year contestable period beginning with the Effective Date of the 42 A increase. During any 2-year contestable period, we have the right to contest the validity of your Policy based on material misstatements made in the application or any supplemental application. The 2-year contestable period begins on the Effective Date of your Policy, or, in the case of an increase, on the date the increase is approved and made effective. If your Policy is reinstated after lapse, a new 2-year contestable period begins on the date of reinstatement. If the Policy has been in force for 2 years during the lifetime of the Insured, it will be contestable only as to statements made in the reinstatement application. If the Policy has been in force for less than 2 years, it will be contestable as to statements made in any reinstatement applications as well as the initial application. The incontestability provisions do not apply to optional insurance benefits added to your Policy by rider. Each rider contains its own incontestability provision. If we contest and rescind your Policy, you will receive your premiums paid, less any Indebtedness and any previous partial surrenders. Misstatement of Age or Sex - -------------------------- Age means the Insured's age on his or her last birthday. If the Insured's age or sex has been misstated on the application or any supplemental application, we will adjust the cash value and death benefit to those based on the correct Monthly Deductions since the Policy's Effective Date. Suicide Exclusion - ----------------- Your Policy does not cover suicide by the Insured, while sane or insane, during an exclusion period after the Policy's Effective Date. This exclusion period is generally 2 years from the Policy's Effective Date but may vary by state. If the Insured commits suicide during this period, our sole liability will be to refund all premiums paid, less any Indebtedness and previous partial surrenders. We will not pay any death benefit in those circumstances. If your Policy lapses and is later reinstated, we will measure the 2-year suicide exclusion period from the Effective Date of reinstatement. If you increase your Policy's Specified Amount, we will measure the 2-year suicide exclusion period for the increase from the increase's Effective Date. If the Insured dies as a result of suicide (whether sane or insane) during the separate 2-year suicide exclusion period, we will only pay the death benefit attributable to the initial Specified Amount (on which the 2-year suicide exclusion period has expired). We will refund the premium payments less any Indebtedness and any partial surrenders attributable to the increase in the Specified Amount. Non-Participating Policy - ------------------------ Your Policy is "non-participating," which means you will not share in any of our profits or surplus earnings. We will not pay dividends on your Policy. Reports And Records - ------------------- We will maintain all records relating to the Policy and the Separate Account. We will mail to you a Policy annual statement showing: o the amount of death benefit; o the cash value; o any Indebtedness; o any loan interest charge; 43 A o any loan repayment since the last annual statement; o any partial surrender since the last annual statement; o all premium payments since the last annual statement; o all deductions and charges since the last annual statement; and o other pertinent information required by any applicable law or regulation, or that we deem helpful to you. We will mail the statement within 30 days after the Policy's anniversary, or, at our discretion, within 30 days after the end of each calendar year showing information as of a date not more than 60 days prior to the mailing of the annual statement. We also will send you periodic reports for the Funds that correspond to the Variable Fund Accounts, periodic reports for the Separate Account, and any other information, as required by state and federal law. We will mail confirmation notices (or other appropriate notification) promptly at the time of the following transactions: o Policy issue; o receipt of premium payments; o transfers among Variable Fund Accounts; o change of premium allocation; o change of death benefit option; o increases or decreases in Specified Amount; o partial surrenders; o receipt of loan repayments; and o reinstatement. - --------------------------- PERFORMANCE INFORMATION - --------------------------- From time to time, we may quote performance information for the Variable Fund Accounts of the Separate Account in advertisements, sales literature, or reports to Owners or prospective investors. We may quote performance information in any manner permitted under applicable law. We may, for example, present such information as a change in a hypothetical Owner's cash value or death benefit. We also may present the yield or total return of the Variable Fund Accounts based on a hypothetical investment in a Policy. The performance information shown may cover various periods of time, including periods beginning with the commencement of the operations of the Variable Fund Account or the Fund in which it invests. The performance information shown may reflect the deduction of only some of the applicable charges to the Policy. We may, for example, exclude the deduction of one or more charges, such as the premium charge or surrender charge, and we generally expect to exclude cost of insurance charges because of the individual nature of these charges. We may compare a Variable Fund Account's performance to that of other variable life separate accounts or investment products, as well as to generally accepted indices or analyses, such as those provided by research firms and rating services. In addition, we may use performance ratings that may be reported periodically in financial publications, such as Money Magazine, Forbes, Business Week, Fortune, Financial Planning, and The Wall Street Journal. We also may advertise ratings of USAA Life's financial strength or claims-paying ability as determined by firms that analyze and rate insurance companies and by nationally recognized statistical rating organizations. We may from time to time provide advertisements, sales literature or tools to assist you in choosing your investment options by defining your asset allocation strategy and appropriate risk tolerance. Performance information for any Variable Fund Account reflects the performance of a hypothetical Policy and are not illustrative of how actual investment performance would affect the benefits under your Policy. Therefore, you should not consider such performance information to be an estimate or guarantee of future performance. 44 A - --------------------- OTHER INFORMATION - --------------------- USAA Life - --------- USAA Life is a stock insurance company incorporated in the State of Texas in June 24, 1963. USAA Life is principally engaged in writing life insurance policies, health insurance policies, and annuity contracts. USAA Life is authorized to transact insurance business in all states of the United States (except New York) and the District of Columbia. On a consolidated basis prepared in conformity with accounting principles generally accepted in the United States of America, USAA Life had total assets of $9,081,541,000 on December 31, 2001. USAA Life is a wholly-owned stock subsidiary of USAA. The commitments under the Policies are USAA Life's, and USAA has no legal obligation to back those commitments. USAA Life is the depositor administering the Separate Account. USAA Life's obligations as depositor of the Separate Account may not be transferred without notice to and consent of the Owners. USAA Life also issues variable annuity contracts through another separate account, which is also a registered investment company. In addition, USAA Life serves as transfer agent of the USAA Life Investment Trust. Directors of USAA Life. USAA Life is managed by its Board of Directors, described below, all of whom are also officers of either USAA or USAA Life and have the same principal business address as USAA Life, as shown on the front cover page of this Prospectus.
Name Principal Occupation (Past Five Years) - ---- ----------------------------------- Robert G. Davis Chairman since June 1997; prior thereto, Director since December 1996; President and Chief Executive Officer, USAA, since April 2000; prior thereto, Chief Operating Officer and President, USAA, since June 1999; prior thereto; Deputy CEO-Capital Management, USAA, since June 1998 and Chief Executive Officer and President, USAA CAPCO, since December 1996; prior thereto, Special Assistant to CEO, USAA, since June 1996; prior thereto, Chief Executive Officer and President of Bank One, Columbus, since 1991. James M. Middleton Vice Chairman since March 2000; President and Chief Executive Officer, USAA Life, since March 1, 2000; prior thereto, Senior Vice President, Operations Integration & Program Control, USAA Life, since July, 1999; prior thereto, Vice President, Systems Integration & Program Control, USAA Life, since September 1997; prior thereto, Vice President, Systems Integration & Program Control, USAA Life, since September 1997; prior thereto, Assistant Vice President, Systems Integration & Analysis, USAA Life, since March 1994. Edward R. Dinstel Director since March, 2002; Senior Vice President, Sales, Service & Partnerships, since September 2001; prior thereto, Senior Vice President, Life & Health Underwriting/Issue, since November, 1999; prior thereto, Vice President, Life & Health Underwriting/Issue. Russell A. Evenson Director since May, 2001; Senior Vice President, Actuarial & Marketing, USAA Life, since September 2001; prior thereto, Senior Vice President, Chief Life Actuary, USAA Life, since April 2001; prior thereto, Senior Vice President, Aid Association for Lutheran, from May 1999 to March 2001; prior thereto, Senior Vice President and Chief Actuary/Director; Midland National Life Insurance Company, from March 1989 to April 45 A 1999; Senior Vice President & Corporate Actuary, North American Company for Life & Health, from November 1998 to April 1999; and Senior Vice President and Chief Actuary/Director for Investor Life Insurance Company of Nebraska, from March 1989 to December 1996. Larkin W. Fields Director since May, 2001; Treasurer/Senior Vice President, Finance, USAA Life, since May 1999; prior thereto, Vice President, Life Marketing Services, USAA Life, since November 1995. Bradford W. Rich Director since November 1996; General Counsel and Secretary; Senior Vice President, USAA, since January 1996. Josue Robles, Jr. Director since September 1994; Senior Vice President, Chief Financial Officer/Treasurer, USAA, since August 1995.
Officers (other than Directors). Set forth below are the officers of USAA Life, the depositor of the Separate Account, who are engaged directly or indirectly in activities relating to the Registrant or the variable universal life policies offered by the Registrant, including each senior executive officer of USAA Life. The principal business address of each person listed is same as the address of USAA Life, as shown on the cover page of this Prospectus.
Name Principal Occupation (Past Five Years) - ---- ------------------------------------- John W. Douglas Senior Vice President, Life & Health Operations, since January 2002; prior thereto, Senior Vice President, Health Planning/Operational Support, since January 1997; prior thereto, Senior Vice President, Life & Health Marketing. William J. O'Connor Senior Vice President, Business Development & Operations Integration, since January 2002; prior thereto, Vice President, Business Development & Operations Integration Control, USAA Life, since March 2000; prior thereto, Assistant Vice President, Life Customer Relationship Manager, USAA ITCO, since August 1998; prior thereto, Assistant Vice President, Life Applications, USAA ITCO, since May 1998; prior thereto, Assistant Vice President, Integration Service, Office of Chief Information Officer, USAA, since May 1997. King Mawhinney Vice President, Underwriting, since January 2002; prior thereto, Vice President, Partnerships, since July 1999; prior thereto, Vice President, Life Sales, since May 1997; prior thereto, Vice President, Health Insurance. Pattie S. McWilliams Vice President, Life/Annuity/Health Sales, since January 2002; prior thereto, Vice President, Member Relationship Management, since July 1999; prior thereto, Vice President, Life/Annuity Service & Claims. Allen R. Pierce Vice President, Product Development, since July 1999; prior thereto, Assistant Vice President, Actuarial Analysis & Life Products, since 46 A January 1998; prior thereto, Assistant Vice President, Actuarial Support & Management Accounting, since September 1994. Cynthia A. Toles Assistant Secretary/Vice President, Life/Health Insurance Counsel, USAA, since February 2000; prior thereto, Senior Vice President, General Counsel & Secretary, Variable Annuity Life Insurance Company ("VALIC"), since April 1981, and Senior Vice President, General Counsel & Secretary, American Annuity Insurance Company, since February 1999. Robert S. Buss Assistant Vice President, Partnerships, since January 2002; prior thereto, Executive Director, Financial Services Centers Operations, since January 2001; prior thereto, Executive Director, Life Regional Sales, since June 1999; prior thereto, Director, Life Regional Sales, since March 1999; prior thereto, Director, Special Annuities, since October 1997; prior thereto, Manager, Life Sales Central Region, since December 1996. Brenda E. Davis Assistant Vice President, Service, since January 2002; prior thereto, Assistant Vice President, Life/Annuity Member Relations, since June 2000; prior thereto, Executive Director, Life & Health Underwriting, since October 1998; prior thereto, Director, Life & Health Underwriting, since December 1994. Michael P. Egan Assistant Vice President, Life & Health Underwriting, since January 2002; prior thereto, Executive Director, Life & Health Underwriting, since December 1998; prior thereto, Director, Life & Health Underwriting, since 1988. Sharon Kaminsky Assistant Vice President, Accounting, since January 2002; prior thereto, Assistant Vice President, Underwriting New Business & Administration, since October 2001; prior thereto, Executive Director, Underwriting & New Business Administration, since June 2000; prior thereto, Director, Underwriting & New Business Administration, since April 2000; prior thereto, Director, Life Projects, since December, 1999; prior thereto, Project Manager, Systems Integration & Program Control, since April 1993. W. James Nabholz, III Assistant Vice President, Life/Health Insurance Counsel, USAA, since February 2001; prior thereto, Managing Attorney, American Family Insurance Group, since July 1997; prior thereto, sole practitioner, W. James Nabholz, III, P.C., since February 1993. Layne C. Roetzel Assistant Vice President, Compliance & Privacy, since January 2002; prior thereto, Assistant Vice President, Accounting & Compliance, since December 2000; prior thereto, Assistant Vice President, Plans & Administration, USAA Life, since May 1998; prior thereto, Executive Director/Controller, La Cantera Development Company, since March 1997; prior thereto, Director, Financial Statement Reporting, USAA Life, since September 1995. Diana L. Scheel Assistant Vice President, Life/Annuity Claims, Benefits, & Analysis since November, 1999; prior thereto, Executive Director, Life/Annuity Claims, Benefits and Analysis, since August, 1998; prior thereto, Director, Life Operations, since March, 1996. James Vitali Assistant Vice President, Life New Business Sales, since April 2002; prior thereto; Assistant Vice President, Life & Annuity Sales, since January 2002; prior thereto, Assistant Vice President, Business Process Management, USAA Life, since May 2001; prior thereto, Assistant Vice President, Health & Life General Agency, USAA Life General Agency, since November 1999; prior thereto, Executive Director, Plans, 47 A Administration and Operations, USAA Life General Agency, since March 1999; prior thereto, Operations Analyst, USAA Life General Agency, since November 1998; prior thereto, Business Systems Administrator, USAA Life General Agency, since July 1998; prior thereto, Independent Health Care Consultant, May 1998 to July 1998; prior thereto, Chief Executive Officer, NextCare Hospital of San Antonio, June 1997 to April 1998; prior thereto, Director of Marketing, South Central Texas Division, May 1997 to October 1994.
You should also review the accompanying Fund prospectuses for a description of the management of the Funds. Separate Account - ---------------- By a resolution of the Board of Directors of USAA Life, we established the Separate Account as a separate account on January 20, 1998. The Separate Account is organized as a unit investment trust and registered with the SEC under the Investment Company Act of 1940. Registration does not involve supervision of the management of the Separate Account by the SEC. The assets of the Separate Account are the property of USAA Life and are held for the benefit of the Owners and other persons entitled to payments under Policies issued through the Separate Account. The assets of the Separate Account equal to the reserves and other liabilities of the Separate Account are not chargeable with liabilities that arise from any other business which USAA Life may conduct. The Separate Account is divided into Variable Fund Accounts, each representing a different investment objective. Net Premium Payments are allocated to the Variable Fund Accounts in accordance with your instructions. (See "Investment Options.") Each Variable Fund Account invests exclusively in the shares at the Net Asset Value (NAV) of a Fund. Income and gains and losses from assets in each Variable Fund Account are credited to, or charged against, that Variable Fund Account without regard to income, gains, or losses in the other Variable Fund Accounts. Policy Distribution - ------------------- We intend to sell the Policy in all states in which we are licensed and the District of Columbia. USAA IMCO, located at 9800 Fredericksburg Road, San Antonio, Texas 78288, is the principal underwriter distributing the Policy. USAA IMCO, a Delaware corporation, organized in May 1970, is registered with the SEC under the Securities Exchange Act of 1934 as a broker-dealer and is an active member of the National Association of Securities Dealers, Inc. The Policy will be sold by licensed life insurance sales representatives who are also registered representatives of USAA IMCO. These licensed insurance sales representatives are salaried employees of USAA Life and receive neither direct nor indirect commissions nor any renewal commissions from the sale of the Policies. USAA IMCO serves as principal underwriter for the Policies pursuant to an amended and restated Distribution and Administration Agreement with USAA Life dated March 30, 1998. Pursuant to this agreement, USAA Life bears the cost of the salaries of the sales representatives who sell the Policies and substantially all other distribution expenses of the Policies. The agreement terminates upon its assignment or upon at least 60 days notice by either party. USAA IMCO serves as both principal underwriter and investment adviser for the following registered investment companies: USAA Tax Exempt Fund, Inc., USAA Investment Trust, USAA State Tax-Free Trust, USAA Mutual Fund, Inc., and USAA Life Investment Trust. In addition, USAA IMCO serves as principal underwriter for the Separate Account of USAA Life, a registered investment company. 48 A Tax Matters - ----------- The following is a discussion of certain federal income tax matters. We do not intend this to be tax advice, nor does the following summary purport to be complete or to cover all situations. The discussion is general in nature, and should not be considered tax advice, for which you should consult a qualified tax advisor. The particular situation of each Owner or Beneficiary will determine how ownership or receipt of Policy proceeds will be treated for purposes of the federal estate tax, the state inheritance tax and other taxes. Taxation of Policy Proceeds The following discussion is based on current federal income tax law and interpretations. It assumes that the Owner is a natural person who is a U.S. citizen and resident. The tax effects on non-U.S. residents or non-U.S. citizens may be different. General. A Policy will be treated as "life insurance" for federal income tax purposes (a) if it meets the definition of life insurance under Section 7702 of the Internal Revenue Code (the "Code") and (b) for as long as the investments made by the underlying Mutual Funds satisfy certain investment diversification requirements under Section 817(h) of the Code. We believe that the Policies will meet these requirements and that: o the death benefit received by the Beneficiary under your Policy will not be subject to federal income tax; and o increases in your Policy's cash value as a result of investment experience will not be subject to federal income tax unless and until there is a distribution from your Policy, such as a surrender or a partial surrender. The federal income tax consequences of a distribution from your Policy can be affected by whether your Policy is determined to be a "modified endowment contract ("MEC")" (which is discussed below). In all cases, however, the character of all income that is described below as taxable to the payee will be ordinary income (as opposed to capital gain). Testing for modified endowment contract (MEC) status. Your Policy will be a MEC if, at any time during the first 7 Policy Years, you have paid a cumulative amount of premiums that exceeds the premiums that would have been paid by that time under a similar fixed-benefit insurance policy that was designed (based on certain assumptions mandated under the Code) to provide for paid-up future benefits after the payment of 7 level annual premiums. This is called the "seven-pay" test. Whenever there is a "material change" under a Policy, the Policy will generally be (1) treated as a new contract for purposes of determining whether the Policy is a MEC, and (2) subject to a new seven-pay period and a new seven-pay limit. The new seven-pay limit would be determined taking into account, under a prescribed formula, the accumulation value of the Policy at the time of such change. A materially changed Policy would be considered a modified endowment if it failed to satisfy the new seven-pay limit. A material change for these purposes could occur as a result of a change in death benefit option, the selection of additional rider benefits, an increase in your Policy's Specified Amount of coverage, and certain other changes. If your Policy's benefits are reduced during the first 7 Policy Years (or within 7 years after a material change), the calculated seven-pay premium limit will be redetermined based on the reduced level of benefits and applied retroactively for purposes of the seven-pay test. (Such a reduction in benefits could include, for example, a decrease in Specified Amount you request or, in some cases, a partial surrender or termination of additional benefits under a rider.) If the premiums previously paid are greater than the recalculated seven-payment premium level limit, the Policy will become a MEC. A life insurance policy that is received in exchange for a MEC will also be considered a MEC. 49 A Other effects of Policy changes. Changes made to your Policy (for example, a decrease in benefits or a lapse or reinstatement of your Policy) may also have other effects on your Policy. Such effects may include impacting the maximum amount of premiums that can be paid under your Policy, as well as the maximum amount of accumulation value that may be maintained under your Policy. Taxation of pre-death distributions if your Policy is not a modified endowment contract (MEC). As long as your Policy remains in force during the Insured's lifetime as a non-MEC, a Policy loan will be treated as Indebtedness, and no part of the loan proceeds will be subject to current federal income tax. Interest on the loan generally will not be tax deductible. After the first 15 Policy Years, the proceeds from a partial surrender will not be subject to federal income tax except to the extent such proceeds exceed your "basis" in your Policy. (Your basis generally will equal the premiums you have paid, less the amount of any previous distributions from your Policy that were not taxable.) During the first 15 Policy Years, the proceeds from a partial surrender or a reduction in insurance coverage could be subject to federal income tax, under a complex formula, to the extent that your cash value exceeds your basis in your Policy. On the Maturity Date or upon full surrender, any excess in the amount of proceeds we pay (including amounts we use to discharge any Policy loan) over your basis in the Policy, will be subject to federal income tax. In addition, if a Policy terminates after a grace period while there is a Policy loan, the cancellation of such loan and accrued loan interest will be treated as a distribution and could be subject to tax under the above rules. Finally, if you make an assignment of rights or benefits under your Policy you may be deemed to have received a distribution from your Policy, all or part of which may be taxable. Taxation of pre-death distributions if your Policy is a modified endowment contract (MEC). If your Policy is a MEC, any distribution from your Policy during the Insured's lifetime will be taxed on an "income-first" basis. Distributions for this purpose include (1) a loan (including any increase in the loan amount to pay interest on an existing loan or an assignment or a pledge to secure a loan), or (2) partial surrender. Any such distributions will be considered taxable income to you to the extent your cash value exceeds your basis in the Policy. (For MECs, your basis is similar to the basis described above for other Policies, except that it also would be increased by the amount of any prior loan under your Policy that was considered taxable income to you.) For purposes of determining the taxable portion of any distribution, all MECs issued by the same insurer (or its affiliate) to the same owner (excluding certain qualified plans) during any calendar year are aggregated. The U.S. Treasury Department has authority to prescribe additional rules to prevent avoidance of "income-first" taxation on distributions from MECs. A 10% penalty tax also will apply to the taxable portion of most distributions from a Policy that is a MEC. The penalty tax will not, however, apply to distributions (1) to taxpayers 59 1/2 years of age or older, (2) in the case of a disability (as defined in the Code), or (3) received as part of a series of substantially equal periodic annuity payments for the life (or life expectancy) of the taxpayer or the joint lives (or joint life expectancies) of the taxpayer and his or her Beneficiary. If your Policy terminates after a grace period while there is a Policy loan, the cancellation of such loan will be treated as a distribution to the extent not previously treated as such and could be subject to tax, including the 10% penalty tax, as described above. In addition, on the Maturity Date and upon a full surrender, any excess of the proceeds we pay (including any amounts we use to discharge any loan) over your basis in the Policy, will be subject to federal income tax and, unless an exception applies, the 10% penalty tax. Distributions that occur during a Policy Year in which your Policy becomes a MEC, and during any subsequent Policy Years, will be taxed as described in the two preceding paragraphs. In addition, distributions from a Policy within 2 years before it becomes a MEC also will be subject to tax in this manner. This means that a distribution made from a Policy that is not a MEC could later become taxable as a distribution from a MEC. The Treasury Department has been authorized to prescribe rules which would treat similarly other distributions made in anticipation of a Policy becoming a MEC. 50 A Policy lapses and reinstatements. A Policy which has lapsed may have the tax consequences described above, even though you may be able to reinstate that Policy. For tax purposes, some reinstatements may be treated as the purchase of a new insurance contract. Terminal illness rider. Amounts received under an insurance policy on the life of an individual who is terminally ill, as defined by the tax law, are generally excludable from the payee's gross income. We believe that the benefits provided under our terminal illness rider meet the law's definition of terminally ill and can qualify for this income tax exclusion. This exclusion does not apply, however, to amounts paid to someone other than the Insured, if the payee has an insurable interest in the Insured's life because the Insured is a director, officer or employee of the payee or by reason of the Insured being financially interested in any trade or business carried on by the payee. Diversification. Under Section 817(h) of the Code, the Treasury Department has issued regulations that implement investment diversification requirements. Failure by us to comply with these regulations would disqualify your Policy as a life insurance policy under Section 7702 of the Code. If this were to occur, you would be subject to federal income tax on the income under the Policy for the period of the disqualification and for subsequent periods. Our Separate Account, through the Mutual Funds, intends to comply with these requirements. In connection with the issuance of then temporary diversification regulations, the Treasury Department stated that it anticipated the issuance of guidelines prescribing the circumstances in which the ability of a Policy Owner to direct his or her investment to particular Mutual Funds within a Separate Account may cause the Owner, rather than the insurance company, to be treated as the Owner of the assets in the account. If you were considered the Owner of the assets of the Separate Account, income and gains from the account would be included in your gross income for federal income tax purposes. USAA Life reserves the right to amend the Policies in any way necessary to avoid any such result. As of the date of this Prospectus, no such guidelines have been issued, although the Treasury Department has informally indicated that any such guidelines could limit the number of investment funds or the frequency of transfers among such funds. These guidelines may apply only prospectively, although retroactive application is possible if such standards are considered not to embody a new position. Estate and generation skipping taxes. If the Insured is the Policy Owner, the death benefit under a Policy will generally be includable in the Owner's estate for purposes of federal estate tax. If the Owner is not the Insured person, under certain conditions, only an amount approximately equal to the cash surrender value of the Policy would be includable. Federal estate tax is integrated with federal gift tax under a unified rate schedule. In general, estates less than $1,000,000 (increasing annually by $500,000 to $3,500,000 in 2009) will not incur a federal estate tax liability. In addition, an unlimited marital deduction may be available for federal estate tax purposes. As a general rule, if a "transfer" is made to a person two or more generations younger than the Policy's Owner, a generation skipping tax may be payable at rates similar to the maximum estate tax rate in effect at the time. The generation skipping tax provisions generally apply to "transfers" that would be subject to the gift and estate tax rules. Individuals are generally allowed an aggregate generation skipping tax exemption of $1,060,000 (indexed in future years by a cost of living adjustment). Because these rules are complex, you should consult with a qualified tax advisor for specific information, especially where benefits are passing to younger generations. If the Owner of the Policy is not the Insured, and the Owner dies before the Insured, the value of the Policy, as determined under Internal Revenue Service regulations, is includable in the federal gross estate of the Owner for federal estate tax purposes. Whether a federal estate tax is payable depends on a variety of factors, including those listed in the preceding paragraph. Pension and profit-sharing plans. If Policies are purchased by a trust or other entity that forms part of a pension or profit-sharing plan qualified under Section 401(a) of the Code for 51 A the benefit of participants covered under the plan, the federal income tax treatment of such Policies will be somewhat different from that described above. If purchased as part of a pension or profit-sharing plan, the reasonable net premium cost for such amount of insurance is required to be included annually in the plan participant's gross income. This cost (generally referred to as the "P.S. 58" cost) is reported to the participant annually. If the plan participant dies while covered by the plan and the Policy proceeds are paid to the participant's Beneficiary, then the excess of the death benefit over the Policy's cash value will not be subject to federal income tax. However, the Policy's cash value will generally be taxable to the extent it exceeds the participant's cost basis in the Policy. The participant's cost basis will generally include the costs of insurance previously reported as income to the participant. Special rules may apply if the participant had borrowed from the Policy or was an owner-employee under the plan. There are limits on the amounts of life insurance that may be purchased on behalf of a participant in a pension or profit-sharing plan. Complex rules, in addition to those discussed above, apply whenever life insurance is purchased by a tax qualified plan. You should consult a qualified tax advisor. Other employee benefit programs. Complex rules may also apply when a Policy is held by an employer or a trust, or acquired by an employee, in connection with the provision of other employee benefits. These Policy Owners must consider whether the Policy was applied for by or issued to a person having an insurable interest under applicable state law and with the Insured person's consent. The lack of an insurable interest or consent may, among other things, affect the qualification of the Policy as life insurance for federal income tax purposes and the right of the Beneficiary to receive a death benefit. ERISA. Employers and employer-created trusts may be subject to reporting, disclosure and fiduciary obligations under the Employee Retirement Income Security Act of 1974. You should consult a qualified legal advisor. When we withhold income taxes. Generally, unless you provide us with an election to the contrary before we make the distribution, we are required to withhold income tax from any proceeds we distribute as part of a taxable transaction under your Policy. In some cases, where generation skipping taxes may apply, we may also be required to withhold for such taxes unless we are provided satisfactory written notification that no such taxes are due. Tax changes. The U.S. Congress frequently considers legislation that, if enacted, could change the tax treatment of life insurance policies. In addition, the Treasury Department may amend existing regulations, issue regulations on the qualification of life insurance and MECs, or adopt new interpretations of existing law. State and local tax law or, if you are not a U.S. citizen and resident, foreign tax law, may also affect the tax consequences to you, the Insured, or your Beneficiary, and are subject to change. Any changes in federal, state, local or foreign tax law or interpretation could have a retroactive effect. We suggest you consult a qualified tax advisor. Taxation of USAA Life USAA Life is taxed as a life insurance company under federal income tax laws. USAA Life does not initially expect to incur any income tax on the earnings or the realized capital gains attributable to the Separate Account. If, in the future, USAA Life determines that the Separate Account may incur federal income taxes, then we may assess a charge against the Separate Account Variable Fund Accounts for those taxes. Any charge will reduce the Policy's cash value. 52 A We may have to pay state, local or other taxes in addition to applicable taxes based on premiums. At present, these taxes are not substantial. If they increase, we may make charges for such taxes when they are attributable to our Separate Account or allocable to the Policies. Certain mutual funds in which your cash value is invested may elect to pass through to USAA Life taxes withheld by foreign taxing jurisdictions on foreign source income. Such an election will result in additional taxable income and income tax to USAA Life. The amount of additional income tax, however, may be more than offset by credits for the foreign taxes withheld which are also passed through. These credits may provide a benefit to USAA Life. State Regulation of USAA Life - ----------------------------- USAA Life, a stock life insurance company organized under the laws of Texas, is subject to regulation by the Texas Department of Insurance. An annual statement is filed with the Texas Department of Insurance on or before March 1st of each year covering the operations and reporting on the financial condition of USAA Life as of December 31 of the preceding year. Periodically, the Commissioner of Insurance examines the liabilities and reserves of USAA Life and the Separate Account and certifies their adequacy. In addition, USAA Life is subject to the insurance laws and regulations of all other states and jurisdictions where it is licensed. Generally, the Insurance Department of any other state applies the laws of the state of Texas in determining USAA Life's permissible investments. Legal Matters - ------------- The firms of Kirkpatrick & Lockhart, LLP, and Foley & Lardner, Washington, D.C., have advised USAA Life on certain federal securities law matters. All matters of Texas law pertaining to the Policy, including the validity of the Policy and USAA Life's right to issue the Policy under Texas insurance law, have been passed upon by Cynthia A. Toles, Vice President and Assistant Secretary of USAA Life. Independent Auditors - -------------------- The audited financial statements and financial highlights of the Separate Account as of December 31, 2001, and for each of the years or periods presented, and the audited consolidated financial statements of USAA Life Insurance Company and its subsidiaries as of December 31, 2001 and 2000, and for each of the years in the three-year period ended December 31, 2001, are included in this Prospectus. The information has been audited by KPMG LLP, independent certified public accountants, through their offices located at 112 E. Pecan, Suite 2400, San Antonio, Texas 78205. Registration Statement - ---------------------- USAA Life has filed a registration statement under the Securities Act of 1933 with the SEC relating to the offering described in this Prospectus. This Prospectus does not contain all the information set forth in the registration statement and amendments thereto and the exhibits filed as part thereof, to all of which reference is hereby made for additional information concerning the Separate Account, USAA Life and the Policies. The exhibits to the registration statement include a form of hypothetical illustration of the Policy that shows how cash value, cash surrender value, and the death benefit could vary over an extended period of time assuming hypothetical gross rates of return (i.e., investment income and capital gains 53 A and losses, realized or unrealized) for the Funds equal to annual rates of 0%, 6%, and 12%, Insureds in the rate class illustrated, and based on current and guaranteed Policy charges. The additional information contained in the registration statement may be obtained at the SEC's main office in Washington, D.C., upon payment of the prescribed fees. Financial Statements - -------------------- You should consider the consolidated financial statements of USAA Life only as bearing on the ability of USAA Life to meet its contractual obligations under the Policies. They do not bear on the investment performance of the Separate Account. The financial statements of the Separate Account and USAA Life, and the accompanying Independent Auditors' Reports, appear on the pages that follow. 54 A Independent Auditors' Report ---------------------------- To the Board of Directors of USAA Life Insurance Company and Policyowners of the Life Insurance Separate Account of USAA Life Insurance Company: We have audited the accompanying statements of assets and liabilities as of December 31, 2001, the related statements of operations, the statements of changes in net assets, and financial highlights presented in note 6 for each of the years or periods presented, for the 18 variable fund accounts available within the Life Insurance Separate Account of USAA Life Insurance Company: USAA Life Growth and Income, USAA Life Aggressive Growth, USAA Life World Growth, USAA Life Diversified Assets, USAA Life Income, Vanguard Diversified Value Portfolio, Vanguard Equity Index Portfolio, Vanguard Mid-Cap Index Portfolio, Vanguard Small Company Growth Portfolio, Vanguard International Portfolio, Vanguard REIT Index Portfolio, Vanguard High Yield Bond Portfolio, Vanguard Money Market Portfolio, Fidelity VIP II Contrafund(R) Portfolio, Fidelity VIP Equity-Income Portfolio, Vanguard VIP III Dynamic Cap Appreciation Portfolio, Scudder Capital Growth Portfolio, and Alger American Growth Portfolio. These financial statements and financial highlights are the responsibility of the Life Insurance Separate Account's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Investments owned at December 31, 2001 were verified by examination of the underlying portfolios of the USAA Life Investment Trust or through confirmation with the transfer agents of the other portfolios. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the aforementioned fund accounts available within the Life Insurance Separate Account of USAA Life Insurance Company as of December 31, 2001, and the results of their operations, the changes in their net assets, and the financial highlights for each of the years or periods presented, in conformity with accounting principles generally accepted in the United States of America. /s/KPMG LLP San Antonio, Texas February 20, 2002 55 A LIFE INSURANCE SEPARATE ACCOUNT OF USAA LIFE INSURANCE COMPANY STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 2001 (In Thousands, Except Per Unit Data) Fund Accounts Investing In: ===============================================================================
USAA VVIF USAA Life Life USAA Life USAA Life Diversified Growth and Aggressive World Diversified USAA Life Value Income Fund Growth Fund Growth Fund Assets Fund Income Fund Portfolio ------------- ------------- ------------- ------------- ------------- ------------- Assets: Investments at market value $581 $968 $228 $537 $277 $60 ------------- ------------- ------------- ------------- ------------- ------------- Net assets $581 $968 $228 $537 $277 $60 ============= ============= ============= ============= ============= ============= Net assets: Net assets attributable to policyowners' reserves $581 $968 $228 $537 $277 $60 ============= ============= ============= ============= ============= ============= Units outstanding (accumulation) 26 56 13 24 17 6 ============= ============= ============= ============= ============= ============= Unit value (accumulation) $22.397368 $17.214778 $16.988356 $22.295041 $15.969161 $9.336800 ============= ============= ============= ============= ============= ============= VVIF VVIF Small VVIF Equity Mid-Cap Company Index Index Growth Portfolio Portfolio Portfolio ------------- ----------- ------------ Assets: Investments at market value $1,291 $91 $379 ------------- ----------- ------------ Net assets $1,291 $91 $379 ============= =========== ============ Net assets: Net assets attributable to policyowners' reserves $1,291 $91 $379 ============= =========== ============ Units outstanding (accumulation) 125 9 35 ============= =========== ============ Unit value (accumulation) $10.341906 $9.912441 $10.696387 ============= =========== ============
See accompanying Notes to Financial Statements. 56 A LIFE INSURANCE SEPARATE ACCOUNT OF USAA LIFE INSURANCE COMPANY STATEMENTS OF ASSETS AND LIABILITIES DECEMBER 31, 2001 (In Thousands, Except Per Unit Data) Fund Accounts Investing In: ===============================================================================
FVIP III SVS I Capital FVIP II FVIP Equity- Dynamic Cap Growth Alger VVIF VVIF REIT VVIF High VVIF Money Contrafund(R) Income Appreciation Portfolio, American International Index Yield Bond Market Portfolio, Portfolio, Portfolio, Class A Growth Portfolio Portfolio Portfolio Portfolio Initial Class Initial Class Initial Class Shares Portfolio - ------------- ----------- ---------- ------------ -------------- -------------- --------------- ------------ ------------ $193 $109 $103 $1,360 $42 $96 $7 $636 $1,193 - ------------- ----------- ---------- ------------ -------------- -------------- --------------- ------------ ------------ $193 $109 $103 $1,360 $42 $96 $7 $636 $1,193 ============= =========== ========== ============ ============== ============== =============== ============ ============ $193 $109 $103 $1,360 $42 $96 $7 $636 $1,193 ============= =========== ========== ============ ============== ============== =============== ============ ============ 22 10 10 1,016 4 10 1 27 45 ============= =========== ========== ============ ============== ============== =============== ============ ============ $8.670638 $10.950003 $9.869512 $1.338044 $9.515065 $9.427762 $8.464990 $23.487941 $26.344044 ============= =========== ========== ============ ============== ============== =============== ============ ============ Total ---------- $8,151 ---------- $8,151 ========== $8,151 ==========
57 A LIFE INSURANCE SEPARATE ACCOUNT OF USAA LIFE INSURANCE COMPANY STATEMENTS OF OPERATIONS Years or Periods Ended December 31, 2001, 2000, and 1999 (In Thousands) Fund Accounts Investing In: - -------------------------------------------------------------------------------
USAA Life Growth USAA Life Aggressive and Income Fund Growth Fund ---------------------------------- ---------------------------------- 2001 2000 1999 2001 2000 1999 ---------- ---------- ---------- ---------- ---------- ---------- Net investment income (loss): Income Dividends from investments $ 9 $ - $ 4 $ - $ - $ - ---------- ---------- ---------- ---------- ---------- ---------- Expenses Mortality and expense risk charge 4 2 1 6 6 1 ---------- ---------- ---------- ---------- ---------- ---------- Net investment income (loss) 5 (2) 3 (6) (6) (1) ---------- ---------- ---------- ---------- ---------- ---------- Net realized and unrealized gain (loss) on investments: Net realized gain (loss) on sale of investments (18) (19) 5 (23) 67 7 Capital gains distributions 33 - 23 - 19 29 ---------- ---------- ---------- ---------- ---------- ---------- Net realized gain (loss) 15 (19) 28 (23) 86 36 Change in net unrealized appreciation/ depreciation (50) 26 (20) (201) (291) 107 ---------- ---------- ---------- ---------- ---------- ---------- Net realized and unrealized gain (loss) on investments (35) 7 8 (224) (205) 143 ---------- ---------- ---------- ---------- ---------- ---------- Increase (decrease) in net assets resulting from operations $ (30) $ 5 $ 11 $ (230) $ (211) $ 142 ========== ========== ========== ========== ========== ========== *VVIF Mid-Cap Index **VVIF Small Company Portfolio Growth Portfolio ---------------------------------- ---------------------------------- 2001 2001 2000 1999 ---------- ---------- ---------- ---------- Net investment income (loss): Income Dividends from investments $ - $ - $ - $ - ---------- ---------- ---------- ---------- Expenses Mortality and expense risk charge - 2 1 - ---------- ---------- ---------- ---------- Net investment income (loss) - (2) (1) - ---------- ---------- ---------- ---------- Net realized and unrealized gain (loss) on investments: Net realized gain (loss) on sale of investments (6) (5) 1 1 Capital gains distributions - - 1 - ---------- ---------- ---------- ---------- Net realized gain (loss) (6) (5) 2 1 Change in net unrealized appreciation/ depreciation 1 36 (10) 3 ---------- ---------- ---------- ---------- Net realized and unrealized gain (loss) on investments (5) 31 (8) 4 ---------- ---------- ---------- ---------- Increase (decrease) in net assets resulting from operations $ (5) $ 29 $ (9) $ 4 ========== ========== ========== ========== USAA Life World Growth Fund ---------------------------------- 2001 2000 1999 ---------- ---------- ---------- Net investment income (loss): Income Dividends from investments $ 3 $ 1 $ - ---------- ---------- ---------- Expenses Mortality and expense risk charge 2 1 1 ---------- ---------- ---------- Net investment income (loss) 1 - (1) ---------- ---------- ---------- Net realized and unrealized gain (loss) on investments: Net realized gain (loss) on sale of investments (10) 1 1 Capital gains distributions - 8 7 ---------- ---------- ---------- Net realized gain (loss) (10) 9 8 Change in net unrealized appreciation/ depreciation (25) (27) 1 ---------- ---------- ---------- Net realized and unrealized gain (loss) on investments (35) (18) 9 ---------- ---------- ---------- Increase (decrease) in net assets resulting from operations $ (34) $ (18) $ 8 ========== ========== ========== **VVIF International Portfolio ---------------------------------- 2001 2000 1999 ---------- ---------- ---------- Net investment income (loss): Income Dividends from investments $ - $ - $ - ---------- ---------- ---------- Expenses Mortality and expense risk charge 1 - - ---------- ---------- ---------- Net investment income (loss) (1) - - ---------- ---------- ---------- Net realized and unrealized gain (loss) on investments: Net realized gain (loss) on sale of investments (24) - 1 Capital gains distributions - 1 - ---------- ---------- ---------- Net realized gain (loss) (24) 1 1 Change in net unrealized appreciation/ depreciation (2) (13) 1 ---------- ---------- ---------- Net realized and unrealized gain (loss) on investments (26) (12) 2 ---------- ---------- ---------- Increase (decrease) in net assets resulting from operations $ (27) $ (12) $ 2 ========== ========== ==========
*Variable fund accounts commenced operations May 1, 2001. **See accompanying Notes to Financial Statements for information on May 1, 2001 fund substitution. 58 A LIFE INSURANCE SEPARATE ACCOUNT OF USAA LIFE INSURANCE COMPANY STATEMENTS OF OPERATIONS Years or Periods Ended December 31, 2001, 2000, and 1999 (In Thousands) Fund Accounts Investing In: - -------------------------------------------------------------------------------
USAA Life Diversified USAA Life *VVIF Diversified Value **VVIF Equity Index Assets Fund Income Fund Portfolio Portfolio - --------------------------------- ------------------------------------ ------------------------ ---------------------------------- 2001 2000 1999 2001 2000 1999 2001 2001 2000 1999 - --------- ---------- ---------- ----------- ---------- ----------- ---------- ---------- ---------- ---------- $ 8 $ - $ 5 $ 10 $ - $ 11 $ - $ - $ - $ 4 - --------- ---------- ---------- ----------- ---------- ----------- ---------- ---------- ---------- ---------- 2 1 - 2 1 - - 9 7 2 - --------- ---------- ---------- ----------- ---------- ----------- ---------- ---------- ---------- ---------- 6 (1) 5 8 (1) 11 - (9) (7) 2 - --------- ---------- ---------- ----------- ---------- ----------- ---------- ---------- ---------- ---------- (12) (6) (1) (10) (5) - - (158) 5 8 20 - 26 - - 3 - - 1 2 - --------- ---------- ---------- ----------- ---------- ----------- ---------- ---------- ---------- ---------- 8 (6) 25 (10) (5) 3 - (158) 6 10 24 13 (27) 16 29 (15) - 3 (116) 46 - --------- ---------- ---------- ----------- ---------- ----------- ---------- ---------- ---------- ---------- 32 7 (2) 6 24 (12) - (155) (110) 56 - --------- ---------- ---------- ----------- ---------- ----------- ---------- ---------- ---------- ---------- $ 38 $ 6 $ 3 $ 14 $ 23 $ (1) $ - $ (164) $ (117) $ 58 ========= ========== ========== =========== ========== =========== ========== ========== ========== ========== **USAA Life *VVIF REIT Index *VVIF High Yield Bond **VVIF Money Market International Fund Portfolio Portfolio Portfolio - --------------------------------- ------------------------------------ ------------------------ ---------------------------------- ***2001 2000 1999 2001 2001 2001 2000 1999 - --------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- $ - $ - $ - $ - $ - $ 54 $ 30 $ 9 - --------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- - - - - - 10 4 1 - --------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- - - - - - 44 26 8 - --------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- (5) 1 - - (1) - - - - - - - - - - - - --------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- (5) 1 - - (1) - - - 2 (4) 1 4 2 - - - - --------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- (3) (3) 1 4 1 - - - - --------- ---------- ---------- ----------- ---------- ---------- ---------- ---------- $ (3) $ (3) $ 1 $ 4 $ 1 $ 44 $ 26 $ 8 ========= ========== ========== =========== ========== ========== ========== ==========
* Variable fund accounts commenced operations May 1, 2001. **See accompanying Notes to Financial Statements for information on May 1, 2001 fund substitution. ***USAA Life International Fund reflects operations from 01/01/01 to 04/30/01. 59 A This Page is left blank intentionally 60 A LIFE INSURANCE SEPARATE ACCOUNT OF USAA LIFE INSURANCE COMPANY STATEMENTS OF OPERATIONS Years or Periods Ended December 31, 2001, 2000, and 1999 (In Thousands) Fund Accounts Investing In: - -------------------------------------------------------------------------------
*FVIP III Dynamic Cap *FVIP II Contrafund(R) *FVIP Equity-Income Appreciation Portfolio, Portfolio, Initial Class Portfolio, Initial Class Initial Class ------------------------------- ------------------------------ ------------------------ 2001 2001 2001 --------- -------- -------- Net investment income (loss): Income Dividends from investments $ - $ - $ - --------- -------- -------- Expenses Mortality and expense risk charge - - - --------- -------- -------- Net investment income (loss) - - - --------- -------- -------- Net realized and unrealized gain (loss) on investments: Net realized gain (loss) on sale of investments - - - Capital gains distributions - - - --------- -------- -------- Net realized gain (loss) - - - Change in net unrealized appreciation/ depreciation 1 2 - --------- -------- -------- Net realized and unrealized gain (loss) on investments 1 2 - --------- -------- -------- Increase (decrease) in net assets resulting from operations $ 1 $ 2 $ - ========= ======== ========
SVS I Capital Growth Alger American Growth Portfolio, Class A shares Portfolio --------------------------- ------------------------- 2001 2000 1999 2001 2000 1999 ------- -------- ------- ------- ------ ------- Net investment income (loss): Income Dividends from investments $ 2 $ 1 $ - $ 3 $ - $ - ------- -------- ------- ------- ------ ------- Expenses Mortality and expense risk charge 5 4 1 9 7 1 ------- -------- ------- ------- ------ ------- Net investment income (loss) (3) (3) (1) (6) (7) (1) ------- -------- ------- ------- ------ ------- Net realized and unrealized gain (loss) on investments: Net realized gain (loss) on sale of investments (106) 14 - (90) 23 (3) Capital gains distributions 76 56 9 144 113 7 ------- -------- ------- ------- ------ ------- Net realized gain (loss) (30) 70 9 54 136 4 Change in net unrealized appreciation/ depreciation (128) (144) 38 (206) (320) 53 ------- -------- ------- ------- ------ ------- Net realized and unrealized gain (loss) on investments (158) (74) 47 (152) (184) 57 ------- -------- ------- ------- ------ ------- Increase (decrease) in net assets resulting from operations $ (161) $ (77) $ 46 $ (158) $ (191) $ 56 ======= ======== ======= ======= ====== =======
* Variable fund accounts commenced operations May 1, 2001. See accompanying Notes to Financial Statements. 61 A LIFE INSURANCE SEPARATE ACCOUNT OF USAA LIFE INSURANCE COMPANY STATEMENTS OF CHANGES IN NET ASSETS Years or Periods Ended December 31, 2001, 2000, and 1999 (In Thousands) Fund Accounts Investing In: - -------------------------------------------------------------------------------
USAA Life Growth and USAA Life Aggressive USAA Life World Income Fund Growth Fund Growth Fund ------------------------ ----------------------- ------------------------- 2001 2000 1999 2001 2000 1999 2001 2000 1999 ------- ------- ------- ------- ------- ------- ------- ------- ------- From operations Net investment income (loss) $ 5 $ (2) $ 3 $ (6) $ (6) $ (1) $ 1 $ - $ (1) Net realized gain (loss) 15 (19) 28 (23) 86 36 (10) 9 8 Change in net unrealized appreciation/depreciation (50) 26 (20) (201) (291) 107 (25) (27) 1 ------- ------- ------- ------- ------- ------- ------- ------- ------- Increase (decrease) in net assets resulting from operations (30) 5 11 (230) (211) 142 (34) (18) 8 ------- ------- ------- ------- ------- ------- ------- ------- ------- From policy transactions: Purchases and transfers in 404 232 325 461 802 365 135 141 47 Monthly deduction charges (27) (15) (6) (48) (33) (5) (10) (5) (1) Other redemptions (146) (118) (57) (83) (145) (47) (16) (16) (3) ------- ------- ------- ------- ------- ------- ------- ------- ------- Increase (decrease) in net assets from policy transactions 231 99 262 330 624 313 109 120 43 ------- ------- ------- ------- ------- ------- ------- ------- ------- Net increase (decrease) in net assets 201 104 273 100 413 455 75 102 51 Net assets: Beginning of period 380 276 3 868 455 - 153 51 - ------- ------- ------- ------- ------- ------- ------- ------- ------- End of period $ 581 $ 380 $ 276 $ 968 $ 868 $ 455 $ 228 $ 153 $ 51 ======= ======= ======= ======= ======= ======= ======= ======= ======= Units issued and redeemed: Beginning balance 16 12 1 38 17 - 7 2 - Units issued 19 14 14 29 31 20 8 7 2 Units redeemed (9) (10) (3) (11) (10) (3) (2) (2) - ------- ------- ------- ------- ------- ------- ------- ------- ------- Ending balance 26 16 12 56 38 17 13 7 2 ======= ======= ======= ======= ======= ======= ======= ======= =======
*VVIF Mid-Cap Index **VVIF Small Company **VVIF International Portfolio Growth Portfolio Portfolio ------------------------ ----------------------- ------------------------- 2001 2001 2000 1999 2001 2000 1999 ------- ------- ------- ------- ------- ------- ------- From operations: Net investment income (loss) $ - $ (2) $ (1) $ - $ (1) $ - $ - Net realized gain (loss) (6) (5) 2 1 (24) 1 1 Change in net unrealized appreciation/depreciation 1 36 (10) 3 (2) (13) 1 ------- ------- ------- ------- ------- ------- ------- Increase (decrease) in net assets resulting from operations (5) 29 (9) 4 (27) (12) 2 ------- ------- ------- ------- ------- ------- ------- From policy transactions: Purchases and transfers in 123 179 119 84 150 100 14 Monthly deduction charges (2) (11) (5) - (9) (3) (1) Other redemptions (25) 4 (5) (10) (19) 1 (5) ------- ------- ------- ------- ------- ------- ------- Increase (decrease) in net assets from policy transactions 96 172 109 74 122 98 8 ------- ------- ------- ------- ------- ------- ------- Net increase (decrease) in net assets 91 201 100 78 95 86 10 Net assets: Beginning of period - 178 78 - 98 12 2 ------- ------- ------- ------- ------- ------- ------- End of period $ 91 $ 379 $ 178 $ 78 $ 193 $ 98 $ 12 ======= ======= ======= ======= ======= ======= ======= Units issued and redeemed: Beginning balance - 18 7 - 9 1 1 Units issued 13 19 12 8 17 8 1 Units redeemed (4) (2) (1) (1) (4) - (1) ------- ------- ------- ------- ------- ------- ------- Ending balance 9 35 18 7 22 9 1 ======= ======= ======= ======= ======= ======= =======
* Variable fund accounts commenced operations May 1, 2001. **See accompanying Notes to Financial Statements for information on May 1, 2001 fund substitution. 62 A LIFE INSURANCE SEPARATE ACCOUNT OF USAA LIFE INSURANCE COMPANY STATEMENTS OF CHANGES IN NET ASSETS Years or Periods Ended December 31, 2001,2000, and 1999 (In Thousands)
Fund Accounts Investing In: - ------------------------------------------------------------------------------- USAA Life Diversified USAA Life *VVIF Diversified Value **VVIF Equity Index Assets Fund Income Fund Portfolio Portfolio - ------------------------ ------------------------- ------------------------------ ------------------------------ 2001 2000 1999 2001 2000 1999 2001 2001 2000 1999 - ------- ------- -------- ------- -------- -------- --------- ----------- ----------- ------ $ 6 $ (1) $ 5 $ 8 $ (1) $ 11 $ - $ (9) $ (7) $ 2 8 (6) 25 (10) (5) 3 - (158) 6 10 24 13 (27) 16 29 (15) - 3 (116) 46 - ------- ------- -------- ------- -------- -------- --------- ----------- ----------- ------ 38 6 3 14 23 (1) - (164) (117) 58 - ------- ------- -------- ------- -------- -------- --------- ----------- ----------- ------ 401 75 125 161 105 122 60 638 662 851 (13) (7) (3) (10) (5) (1) - (45) (30) (10) (75) (30) (21) (111) (19) (1) - (285) (83) (187) - ------- ------- ------- ------- -------- ------- --------- ---------- ---------- ------ 313 38 101 40 81 120 60 308 549 654 - ------- ------- -------- ------- -------- -------- --------- ----------- ----------- ------ 351 44 104 54 104 119 60 144 432 712 186 142 38 223 119 - - 1,147 715 3 - ------- ------- -------- ------- -------- -------- --------- ----------- ----------- ------ $ 537 $ 186 $ 142 $ 277 $ 223 $ 119 $ 60 $ 1,291 $ 1,147 $ 715 ======= ======= ======== ======= ======== ======== ========= =========== =========== ====== 9 7 2 15 9 - - 97 54 1 19 5 7 10 8 9 6 67 59 73 (4) (3) (2) (8) (2) - - (39) (16) (20) - ------- ------- -------- ------- -------- -------- --------- ----------- ----------- ------ 24 9 7 17 15 9 6 125 97 54 ======= ======= ======== ======= ======== ======== ========= =========== =========== ======
**USAA Life *VVIF REIT Index *VVIF High Yield **VVIF Money Market International Fund Portfolio Bond Portfolio Portfolio - ------------------------------- ------------------------ -------------------------- ---------------------------------- ***2001 2000 1999 2001 2001 2001 2000 1999 - ------------ --------- --------- ---------- ---------- ---------- ----------- ---------- $ - $ - $ - $ - $ - $ 44 $ 26 $ 8 (5) 1 - - (1) - - - 2 (4) 1 4 2 - - - - ------------ --------- --------- ---------- ---------- ---------- ----------- ---------- (3) (3) 1 4 1 44 26 8 - ------------ --------- --------- ---------- ---------- ---------- ----------- ---------- 10 50 6 107 115 1,983 2,673 2,623 (1) (2) - (2) (1) (30) (24) (13) (53) (5) - - (12) (1,650) (2,001) (2,280) - ------------ --------- --------- ---------- ---------- ---------- ----------- ---------- (44) 43 6 105 102 303 648 330 - ------------ --------- --------- ---------- ---------- ---------- ----------- ---------- (47) 40 7 109 103 347 674 338 47 7 - - - 1,013 339 1 - ------------ --------- --------- ---------- ---------- ---------- ----------- ---------- $ - $ 47 $ 7 $ 109 $ 103 $ 1,360 $ 1,013 $ 339 ============ ========= ========= ========== ========== ========== =========== ========== 4 1 - - - 782 276 1 1 4 1 10 12 1,735 2,621 3,043 (5) (1) - - (2) (1,501) (2,115) (2,768) - ------------ --------- --------- ---------- ---------- ---------- ----------- ---------- - 4 1 10 10 1,016 782 276 ============ ========= ========= ========== ========== ========== =========== ==========
*Variable fund accounts commenced operations May 1, 2001. **See accompanying Notes to Financial Statements for information on May 1, 2001 fund substitution. ***USAA Life International reflects operations from 1/01/01 to 04/30/01. 63 A LIFE INSURANCE SEPARATE ACCOUNT OF USAA LIFE INSURANCE COMPANY STATEMENTS OF CHANGES IN NET ASSETS Years or Periods Ended December 31, 2001, 2000, and 1999 (In Thousands) Fund Accounts Investing In: - -------------------------------------------------------------------------------
*FVIP III Dynamic Cap *FVIP II Contrafund(R) *FVIP Equity-Income Appreciation Portfolio, Portfolio, Initial Class Portfolio, Initial Class Initial Class ------------------------------- ------------------------------ --------------------------- 2001 2001 2001 ------------- ------------ ----------- From operations: Net investment income (loss) $ - $ - $ - Net realized gain (loss) - - - Change in net unrealized appreciation/depreciation 1 2 - ------------- ------------ ----------- Increase in net assets resulting from operations 1 2 - ------------- ------------ ----------- From policy transactions: Purchases and transfers in 54 95 7 Monthly deduction charges (1) (1) - Other redemptions (12) - - ------------- ------------ ----------- Increase in net assets from policy transactions 41 94 7 ------------- ------------ ----------- Net increase in net assets 42 96 7 Net assets: - Beginning of period - - - ------------- ------------ ----------- End of period $ 42 $ 96 $ 7 ============= ============ =========== Units issued and redeemed: Beginning balance - - - Units issued 6 10 1 Units redeemed (2) - - ------------- ------------- ------------ Ending balance 4 10 1 ============= ============= ============
SVS I Capital Growth Alger American Portfolio, Class A shares Growth Portfolio --------------------------- ---------------------------- 2001 2000 1999 2001 2000 1999 --------- ------- ------- -------- --------- ------- From operations: Net investment income (loss) $ (3) $ (3) $ (1) $ (6) $ (7) $ (1) Net realized gain (loss) (30) 70 9 54 136 4 Change in net unrealized appreciation/depreciation (128) (144) 38 (206) (320) 53 --------- ------- ------- -------- --------- ------- Increase (decrease) in net assets resulting from operations (161) (77) 46 (158) (191) 56 --------- ------- ------- -------- --------- ------- From policy transactions: Purchases and transfers in 313 458 379 480 837 578 Monthly deduction charges (31) (21) (5) (55) (37) (6) Other redemptions (134) (95) (39) (81) (148) (82) --------- ------- ------- -------- --------- ------- Increase in net assets from policy transactions 148 342 335 344 652 490 --------- ------- ------- -------- --------- ------- Net increase (decrease) in net assets (13) 265 381 186 461 546 Net assets: Beginning of period 649 384 3 1,007 546 - --------- ------- ------- -------- --------- ------- End of period $ 636 $ 649 $ 384 $ 1,193 $ 1,007 $ 546 ========= ======= ======= ======== ========= ======= Units issued and redeemed: Beginning balance 22 12 1 33 15 - Units issued 13 16 13 19 26 18 Units redeemed (8) (6) (2) (7) (8) (3) --------- ------- ------- -------- --------- ------- Ending balance 27 22 12 45 33 15 ========= ======= ======= ======== ========= =======
*Variable fund accounts commenced operations May 1, 2001. See accompanying Notes to Financial Statements. 64 A LIFE INSURANCE SEPARATE ACCOUNT OF USAA LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS December 31, 2001 1) Organization The Life Insurance Separate Account of USAA Life Insurance Company (Life Insurance Separate Account) is registered under the Investment Company Act of 1940, as amended, as a segregated unit investment account of USAA Life Insurance Company (USAA Life), a wholly owned subsidiary of the United Services Automobile Association (USAA). Units of the Life Insurance Separate Account are sold only in connection with the Variable Universal Life Policy. Under applicable insurance law, the assets and liabilities of the Life Insurance Separate Account are clearly identified and distinguished from USAA Life. The Life Insurance Separate Account cannot be charged with liabilities arising out of any other business of USAA Life. The Life Insurance Separate Account is divided into 18 variable fund accounts which are invested in shares of a designated portfolio of the USAA Life Investment Trust, Vanguard(R) Variable Insurance Fund (VVIF), Fidelity(R) Variable Insurance Products Fund (FVIP), Fidelity(R) Variable Insurance Products Fund II (FVIP II), Fidelity(R) Variable Insurance Products Fund III (FVIP III), Scudder Variable Series I (SVS I), or the Alger American Fund as follows:
Fund Account Mutual Fund Investment - ---------------------------------------------------------------------------------------------------------------------------- USAA Life Growth and Income USAA Life Growth and Income Fund USAA Life Aggressive Growth USAA Life Aggressive Growth Fund USAA Life World Growth USAA Life World Growth Fund USAA Life Diversified Assets USAA Life Diversified Assets Fund USAA Life Income USAA Life Income Fund Vanguard Diversified Value Portfolio VVIF Diversified Value Portfolio Vanguard Equity Index Portfolio VVIF Equity Index Portfolio Vanguard Mid-Cap Index Portfolio VVIF Mid-Cap Index Portfolio Vanguard Small Company Growth Portfolio VVIF Small Company Growth Portfolio Vanguard International Portfolio VVIF International Portfolio Vanguard REIT Index Portfolio VVIF REIT Index Portfolio Vanguard High Yield Bond Portfolio VVIF High Yield Bond Portfolio Vanguard Money Market Portfolio VVIF Money Market Portfolio Fidelity VIP II Contrafund(R) Portfolio FVIP II Contrafund(R) Portfolio, Initial Class Fidelity VIP Equity-Income Portfolio FVIP Equity-Income Portfolio, Initial Class Fidelity VIP III Dynamic Cap Appreciation Portfolio FVIP III Dynamic Cap Appreciation Portfolio, Initial Class Scudder Capital Growth Portfolio SVS I Capital Growth Portfolio, Class A shares Alger American Growth Portfolio Alger American Growth Portfolio
On May 1, 2001, USAA Life substituted shares of the VVIF Equity Index Portfolio for shares of the Deutsche VIT Equity 500 Index Fund, shares of the VVIF Small Company Growth Portfolio for shares of the Deutsche VIT Small Cap Index Fund, shares of the VVIF International Portfolio for shares of the Deutsche VIT EAFE(R) Equity Index Fund and the USAA Life International Fund, and shares of the VVIF Money Market Fund Portfolio for shares of the USAA Life Money Market Fund. The operations of the predecessor funds prior to May 1, 2001 are included in the accompanying financial statements. Each fund substitution was a non-taxable event for policyholders and did not affect total assets. The policyholders' accumulated value did not change as a result of the substitution. For the Vanguard International Portfolio fund account, which replaced two fund accounts, the accumulation unit value (AUV) of the Deutsche EAFE(R) Equity Index fund account was used as the starting AUV. The AUVs remained the same immediately before and after the substitution for the other fund substitutions. 65 A 2) Summary of Significant Accounting Policies Security Valuation Investments in mutual fund securities are carried in the Statements of Assets and Liabilities at net asset value as reported by the fund. Gains or losses on securities transactions are determined on the basis of the first-in first-out (FIFO) cost method. Security transactions are recorded on the trade date. Dividend income, if any, is recorded on ex-dividend date. Distributions The net investment income (loss) and realized capital gains of the Life Insurance Separate Account are not distributed, but instead are retained and reinvested for the benefit of unit owners. Federal Income Tax Operations of the Life Insurance Separate Account are included in the federal income tax return of USAA Life, which is taxed as a "Life Insurance Company" under the Internal Revenue Code. Under current federal income tax law, no income taxes are payable with respect to operation of the Life Insurance Separate Account. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that may affect the reported amounts in the financial statements. 3) Related Party Transactions During the year ended December 31, 2001, advisory and administrative fees of approximately $861,000 were paid or payable to USAA Investment Management Company (USAA IMCO) by the funds of the USAA Life Investment Trust (the Trust). USAA IMCO is indirectly wholly owned by USAA. The funds' advisory fees are computed on an annualized rate of 0.20% of the monthly average net assets for each calendar month of each fund of the Trust except for the USAA Life Aggressive Growth Fund, which accrues at an annualized rate of 0.50%. The USAA Life International Fund accrued at an annualized rate of 0.65% through fund closure on May 1, 2001. The funds are an investment option for both the Variable Universal Life Policy and the Flexible Premium Deferred Combination Fixed and Variable Annuity Contract. Administrative fees are based on USAA IMCO's estimated time incurred to provide such services. 4) Expenses A mortality and expense risk charge is deducted by USAA Life from the Life Insurance Separate Account on a daily basis which is equal, on an annual basis, to 0.75% of the daily net assets of each variable fund account. The mortality risk assumed is that insureds may live for a shorter period of time than estimated. Thus, a greater amount of death benefits than expected will be payable. The expense risk assumed by USAA Life is that the costs of administering the policies and the Life Insurance Separate Account may exceed the amount recovered from the policy maintenance and administration expense charges. The mortality and expense risk charge is guaranteed by USAA Life and cannot be increased. The following expenses are charged to reimburse USAA Life for the expenses it incurs in the establishment and maintenance of the Policies and each variable fund account. On the policy's effective date, and each monthly anniversary thereafter, certain monthly charges will be deducted by USAA Life through a redemption of units from the cash value of the policy. The monthly deduction will include cost of insurance charges, which includes charges for any optional insurance benefits provided by rider, an administrative charge of $10 during the first twelve policy months, and a recurring maintenance charge of $5, which were approximately $228,000, $29,000 and $39,000, respectively, for the current year. A transfer charge of $25 will be deducted for each value transfer between Variable Fund Accounts in excess of six per Policy Year. For each partial surrender of cash value, a charge equal to the lesser of $25 or 2% of the amount withdrawn will be deducted. This charge is also referred to as an "administrative processing fee." For full surrenders, the amount of the surrender charge will equal a percentage of the Annual Target Premium Payment specified in the policy. The number of years the policy has been in force at the time of surrender determines the applicable percentage. A 3% premium charge is deducted from the policyholder's premium to compensate USAA Life for sales charges and taxes. The charge will be deducted from the policyholder's premium payments until the policyholder's gross amount of premium payments received exceeds the sum of the policyholder's Annual Target Premium payments payable over 10 years. 66 A LIFE INSURANCE SEPARATE ACCOUNT OF USAA LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 2001 5) Investments The following table shows the number of shares owned, aggregate cost and net asset value per share of each fund at December 31, 2001:
Net Asset Number of Aggregate Value Per Shares Cost Share (000) ------------- ------------- -------------- USAA Life Growth and Income Fund 34 $ 625 $ 17.09 USAA Life Aggressive Growth Fund 61 1,353 15.82 USAA Life World Growth Fund 21 279 10.98 USAA Life Diversified Assets Fund 41 528 12.96 USAA Life Income Fund 26 247 10.61 VVIF Diversified Value Portfolio 6 60 10.66 VVIF Equity Index Portfolio 43 1,358 29.91 VVIF Mid-Cap Index Portfolio 7 90 13.23 VVIF Small Company Growth Portfolio 23 350 16.43 VVIF International Portfolio 16 207 12.37 VVIF REIT Index Portfolio 8 105 13.03 VVIF High Yield Bond Portfolio 12 101 8.59 VVIF Money Market Portfolio 1,360 1,360 1.00 FVIP II Contrafund(R) Portfolio, Initial Class 2 41 20.13 FVIP Equity-Income Portfolio, Initial Class 4 94 22.75 FVIP III Dynamic Cap Appreciation Portfolio, Intial Class 1 7 6.10 SVS I Capital Growth Portfolio, Class A shares 39 869 16.36 Alger American Growth Portfolio 32 1,666 36.77
67 A LIFE INSURANCE SEPARATE ACCOUNT OF USAA LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 2001 6) Financial Highlights A summary of unit values and units outstanding for variable universal life policies and the expense ratios, excluding expenses of the underlying funds, and total returns for each period is as follows:
USAA Life Growth and Income Fund Account ------------------------------------------------------------ Year Ended December 31, 2001 2000 1999 1998(a) ------------- ------------- ------------- --------------- At end of period: Accumulation units (000) 26 16 12 1 Accumulation unit value $ 22.397368 $ 23.978970 $ 23.296591 $ 20.468785 Net assets (000) $ 581 $ 380 $ 276 $ 3 Ratio of expenses to average net assets (d) 0.75% 0.75% 0.75% 0.75% (e) Total return (g) -6.96% 2.32% 12.52% NA USAA Life Aggressive Growth Fund Account ----------------------------------------------------------- Year Ended December 31, 2001 2000 1999 1998(a) ------------ ------------- ------------- --------------- At end of period: Accumulation units (000) 56 38 17 - Accumulation unit value $ 17.214778 $ 22.654870 $ 26.991318 $ 13.993064 Net assets (000) $ 968 $ 868 $ 455 $ - Ratio of expenses to average net assets (d) 0.75% 0.75% 0.75% 0.75% (e) Total return (g) -24.22% -16.30% 91.33% NA
USAA Life Income Fund Account ------------------------------------------------------------ Year Ended December 31, 2001 2000 1999 1998(a) ------------- ------------- ------------- --------------- At end of period: Accumulation units (000) 17 15 9 - Accumulation unit value $ 15.969161 $ 15.007467 $ 13.262741 $ 14.089499 Net assets (000) $ 277 $ 223 $ 119 $ - Ratio of expenses to average net assets (d) 0.75% 0.75% 0.75% 0.75% (e) Total return (g) 5.92% 12.24% -7.29% NA Vanguard Diversified Value Portfolio Fund Account ----------------------------------------------------------- Year Ended December 31, 2001 (b) ------------- At end of period: Accumulation units (000) 6 Accumulation unit value $ 9.336800 Net assets (000) $ 60 Ratio of expenses to average net assets (d) 0.75% (e) Total return (g) -6.98% (f)
Vanguard Small Company Growth Portfolio Fund Account ------------------------------------------------------------ Year Ended December 31, 2001(c) 2000 1999 1998(a) ------------- ------------- ------------- --------------- At end of period: Accumulation units (000) 35 18 7 - Accumulation unit value $ 10.696387 $ 10.043462 $ 10.526480 $ 8.825971 Net assets (000) $ 379 $ 178 $ 78 $ - Ratio of expenses to average net assets (d) 0.75% 0.75% 0.75% 0.75% (e) Total return (g) 6.11% -5.09% 17.88% NA Vanguard International Portfolio Fund Account ----------------------------------------------------------- Year Ended December 31, 2001(c) 2000 1999 1998 (a) ------------ ------------- ------------- --------------- At end of period: Accumulation units (000) 22 9 1 1 Accumulation unit value $ 8.670638 $ 10.881890 $ 13.154856 $ 10.386978 Net assets (000) $ 193 $ 98 $ 12 $ 2 Ratio of expenses to average net assets (d) 0.75% 0.75% 0.75% 0.75% (e) Total return (g) -20.73% -17.77% 25.12% NA
(a) Variable fund accounts commenced operations August 31, 1998 with the following initial unit values per unit: USAA Life Growth and Income $ 16.937712 USAA Life Aggressive Growth $ 9.446371 USAA Life World Growth $ 14.981795 USAA Life Diversified Assets $ 16.007256 USAA Life Income $ 13.766435 Vanguard Equity Index Portfolio $ 8.561922 Vanguard Small Company Growth Portfolio $ 7.048653 Vanguard International Portfolio $ 8.920584 Vanguard Money Market Fund Portfolio $ 1.162018 Scudder Capital Growth Portfolio $ 18.614844 Alger American Growth Portfolio $ 19.521151 (b) Variable fund accounts commenced operations May 1, 2001 with an initial accumulation unit value of $10.00 per unit. (c) See accompanying Notes to Financial Statements for information on May 1, 2001 fund substitution. (d) The information for 2001 is based on actual expenses to the policyowner for the period, excluding the expenses of the underlying fund, and charges made directly to policyowner accounts through the redemption of units. Prior years have been restated to exclude the expenses of the underlying fund, and charges made directly to the policyowner accounts through the redemption of units. (e) Annualized. The ratio is not necessarily indicative of 12 months of operations. (f) Not annualized for periods less than one year. (g) The AUV total return figures are computed in accordance with a formula prescribed by the Securities and Exchange Commission, which includes deduction of policy charges. 68 A LIFE INSURANCE SEPARATE ACCOUNT OF USAA LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 2001
USAA Life World Growth Fund Account USAA Life Diversified Assets Fund Account - ------------------------------------------------------- --------------------------------------------------------- Year Ended December 31, Year Ended December 31, 2001 2000 1999 1998(a) 2001 2000 1999 1998(a) - ------------- ------------- ------------ ------------ -------------- ------------- ------------ ------------ 13 7 2 - 24 9 7 2 $ 16.988356 $ 20.654406 $ 23.209674 $ 17.860722 $ 22.295041 $ 19.815589 $ 19.192009 $ 17.974654 $ 228 $ 153 $ 51 $ - $ 537 $ 186 $ 142 $ 38 0.75% 0.75% 0.75% 0.75% (e) 0.75% 0.75% 0.75% 0.75% (e) -18.11% -11.48% 28.46% NA 12.08% 2.55% 5.41% NA
Vanguard Equity Index Portfolio Fund Account Vanguard Mid-Cap Index Portfolio Fund Account - -------------------------------------------------------- --------------------------------------------------------- Year Ended December 31, Year Ended December 31, 2001(c) 2000 1999 1998 (a) 2001(b) - ------------- ------------- ------------ ------------- -------------- 125 97 54 1 9 $ 10.341906 $ 11.844646 $ 13.147788 $ 11.003536 $ 9.912441 $ 1,291 $ 1,147 $ 715 $ 3 $ 91 0.75% 0.75% 0.75% 0.75% (e) 0.75% (e) -13.05% -10.40% 18.20% NA -1.25% (f)
Vanguard REIT Index Portfolio Fund Account Vanguard High Yield Bond Portfolio Fund Account - -------------------------------------------------------- --------------------------------------------------------- Year Ended December 31, Year Ended December 31, 2001 (b) 2001 (b) - -------------- --------------- 10 10 $ 10.950003 $ 9.869512 $ 109 $ 103 0.75% (e) 0.75% (e) 9.13% (f) -1.67% (f)
(a) Variable fund accounts commenced operations August 31, 1998 with the following initial unit values per unit: USAA Life Growth and Income $ 16.937712 USAA Life Aggressive Growth $ 9.446371 USAA Life World Growth $ 14.981795 USAA Life Diversified Assets $ 16.007256 USAA Life Income $ 13.766435 Vanguard Equity Index Portfolio $ 8.561922 Vanguard Small Company Growth Portfolio $ 7.048653 Vanguard International Portfolio $ 8.920584 Vanguard Money Market Fund Portfolio $ 1.162018 Scudder Capital Growth Portfolio $ 18.614844 Alger American Growth Portfolio $ 19.521151 (b) Variable fund accounts commenced operations May 1, 2001 with an initial accumulation unit value of $10.00 per unit. (c) See accompanying Notes to Financial Statements for information on May 1, 2001 fund substitution. (d) The information for 2001 is based on actual expenses to the policyowner for the period, excluding the expenses of the underlying fund, and charges made directly to policyowner accounts through the redemption of units. Prior years have been restated to exclude the expenses of the underlying fund, and charges made directly to the policyowner accounts through the redemption of units. (e) Annualized. The ratio is not necessarily indicative of 12 months of operations. (f) Not annualized for periods less than one year. (g) The AUV total return figures are computed in accordance with a formula prescribed by the Securities and Exchange Commission, which includes deduction of policy charges. 69 A LIFE INSURANCE SEPARATE ACCOUNT OF USAA LIFE INSURANCE COMPANY NOTES TO FINANCIAL STATEMENTS - CONTINUED DECEMBER 31, 2001
Vanguard Money Market Fund Portfolio Fund Account --------------------------------------------------------- Year Ended December 31, 2001(c) 2000 1999 1998(a) ------------- ------------- ------------ ------------- At end of period: Accumulation units (000) 1,016 782 276 1 Accumulation unit value $ 1.338044 $ 1.293846 $ 1.227534 $ 1.178565 Net assets (000) $ 1,360 $ 1,013 $ 339 $ 1 Ratio of expenses to average net assets (d) 0.75% 0.75% 0.75% 0.75% (e) Total return (g) 2.94% 4.61% 2.65% NA Fidelity VIP II Contrafund(R) Portfolio Fund Account -------------------------------------------------------- Year Ended December 31, 2001 (b) -------------- At end of period: Accumulation units (000) 4 Accumulation unit value $ 9.515065 Net assets (000) $ 42 Ratio of expenses to average net assets (d) 0.75% (e) Total return (g) -5.21% (f)
Fidelity VIP Equity-Income Portfolio Fund Account --------------------------------------------------------- Year Ended December 31, 2001 (b) -------------- At end of period: Accumulation units (000) 10 Accumulation unit value $ 9.427762 Net assets (000) $ 96 Ratio of expenses to average net assets (d) 0.75% (e) Total return (g) -6.09% (f) Fidelity VIP III Dynamic Cap Appreciation Portfolio Fund Account -------------------------------------------------------- Year Ended December 31, 2001 (b) -------------- At end of period: Accumulation units (000) 1 Accumulation unit value $ 8.464990 Net assets (000) $ 7 Ratio of expenses to average net assets (d) 0.75% (e) Total return (g) -15.71% (f)
Scudder Capital Growth Portfolio Fund Account --------------------------------------------------------- Year Ended December 31, 2001 2000 1999 1998(a) ------------- ------------- ------------ ------------- At end of period: Accumulation units (000) 27 22 12 1 Accumulation unit value $ 23.487941 $ 29.346175 $ 32.816021 $ 24.448446 Net assets (000) $ 636 $ 649 $ 384 $ 3 Ratio of expenses to average net assets (d) 0.75% 0.75% 0.75% 0.75% (e) Total return (g) -20.28% -10.99% 32.82% NA Alger American Growth Portfolio Fund Account ---------------------------------------------------------- Year Ended December 31, 2001 2000 1999 1998(a) -------------- ------------- ------------ ------------- At end of period: Accumulation units (000) 45 33 15 - Accumulation unit value $ 26.344044 $ 30.100055 $ 35.583778 $ 26.806157 Net assets (000) $ 1,193 $ 1,007 $ 546 $ - Ratio of expenses to average net assets (d) 0.75% 0.75% 0.75% 0.75% (e) Total return (g) -12.81% -15.78% 31.46% NA
(a) Variable fund accounts commenced operations August 31, 1998 with the following initial unit values per unit: USAA Life Growth and Income $ 16.937712 USAA Life Aggressive Growth $ 9.446371 USAA Life World Growth $ 14.981795 USAA Life Diversified Assets $ 16.007256 USAA Life Income $ 13.766435 Vanguard Equity Index Portfolio $ 8.561922 Vanguard Small Company Growth Portfolio $ 7.048653 Vanguard International Portfolio $ 8.920584 Vanguard Money Market Fund Portfolio $ 1.162018 Scudder Capital Growth Portfolio $ 18.614844 Alger American Growth Portfolio $ 19.521151 (b) Variable fund accounts commenced operations May 1, 2001 with an initial accumulation unit value of $10.00 per unit. (c) See accompanying Notes to Financial Statements for information on May 1, 2001 fund substitution. (d) The information for 2001 is based on actual expenses to the policyowner for the period, excluding the expenses of the underlying fund, and charges made directly to policyowner accounts through the redemption of units. Prior years have been restated to exclude the expenses of the underlying fund, and charges made directly to the policyowner accounts through the redemption of units. (e) Annualized. The ratio is not necessarily indicative of 12 months of operations. (f) Not annualized for periods less than one year. (g) The AUV total return figures are computed in accordance with a formula prescribed by the Securities and Exchange Commission, which includes deduction of policy charges. 70 A 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, 2001 and 2000, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2001. 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 auditing standards generally accepted in the United States of America. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. /s/KPMG LLP March 8, 2002 71 A USAA LIFE INSURANCE COMPANY Consolidated Balance Sheets December 31, 2001 and 2000 (Dollars in Thousands, Except Share Data)
Assets 2001 2000 - ------- ----- ---- Investments: Debt securities, at fair value $ 6,587,295 6,087,772 Equity securities, at fair value 226,797 240,685 Mortgage loans 2,379 3,087 Policy loans 139,997 138,336 ---------- ---------- Total investments 6,956,468 6,469,880 Cash and cash equivalents 116,927 95,588 Premium balances receivable 4,903 5,186 Accounts receivable - affiliates 37 99 Furniture and equipment 2,840 6,361 Collateral for securities loaned at fair value 506,409 718,677 Accrued investment income 114,890 105,406 Deferred policy acquisition costs 313,537 282,938 Deferred tax 61,023 79,348 Reinsurance recoverable 576,141 489,086 Other assets 50,268 17,299 Separate account assets 378,098 409,431 ----------- ---------- Total assets $ 9,081,541 8,679,299 =========== ========== Liabilities - ----------- Insurance reserves $ 1,480,882 1,239,462 Funds on deposit 5,779,484 5,466,912 Accounts payable and accrued expenses 86,151 83,219 Accounts payable - affiliates 19,815 7,973 Payable upon return of securities loaned 506,409 718,677 Other liabilities 57,007 53,356 Separate account liabilities 378,098 409,431 ----------- ---------- Total liabilities 8,307,846 7,979,030 ----------- ---------- Stockholders' Equity - -------------------- Preferred capital stock, $100 par value; 1,200,000 shares authorized; 700,000 shares and 600,000 shares issued and outstanding at December 31, 2001 and 2000, respectively 70,000 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 61,408 51,408 Accumulated other changes in equity from nonowner sources 13,169 (15,618) Retained earnings 626,618 601,979 ----------- ---------- Total stockholders' equity 773,695 700,269 ----------- ---------- Total liabilities and stockholders' equity $ 9,081,541 8,679,299 =========== ==========
72 A USAA LIFE INSURANCE COMPANY Consolidated Statements of Income Years ended December 31, 2001, 2000, and 1999 (Dollars in Thousands)
2001 2000 1999 ---- ---- ---- Revenues - -------- Premiums $ 478,265 428,191 398,792 Investment income, net 487,715 484,984 484,375 Fees, sales, and loan income 17,648 16,324 14,303 Net realized investment gains (losses) (34,299) (65,989) 413 Other revenues 15,406 14,955 13,125 --------- --------- --------- Total revenues 964,735 878,465 911,008 --------- --------- --------- Benefits and expenses - --------------------- Losses, benefits, and settlement expenses 655,869 582,999 560,060 Deferred policy acquisition costs 22,857 24,508 17,463 Dividends to policyholders 56,081 55,012 54,981 Other operating expenses 128,068 127,707 139,269 --------- --------- --------- Total benefits and expenses 862,875 790,226 771,773 --------- --------- --------- Income before income taxes 101,860 88,239 139,235 --------- --------- --------- Federal income tax expense (benefit): Current 32,355 35,156 52,623 Deferred 2,863 (3,165) (6,812) --------- --------- --------- Total Federal income tax expense 35,218 31,991 45,811 --------- --------- --------- Net income $ 66,642 56,248 93,424 ========= ========= =========
73 A USAA LIFE INSURANCE COMPANY Consolidated Statements of Stockholders' Equity Years Ended December 31, 2001, 2000, and 1999 (Dollars in Thousands)
2001 2000 1999 ---- ---- ---- Capital - ------- Preferred capital stock $ 70,000 60,000 60,000 Common capital stock 2,500 2,500 2,500 Additional paid-in capital 61,408 51,408 51,408 --------- --------- --------- End of year 133,908 113,908 113,908 --------- --------- --------- Accumulated other changes in equity from nonowner - -------------------------------------------------- sources, net of tax ------------------- Beginning of year (15,618) (77,137) 18,315 Unrealized gains (losses) on securities during year, net of income taxes and reclassification adjustments 28,787 61,519 (95,452) --------- --------- --------- End of year 13,169 (15,618) (77,137) --------- --------- --------- Retained earnings - ----------------- Beginning of year 601,979 563,260 557,829 Net income 66,642 56,248 93,424 Dividends to stockholders (42,003) (17,529) (87,993) --------- --------- --------- End of year 626,618 601,979 563,260 --------- --------- --------- Total stockholders' equity $ 773,695 700,269 600,031 ========= ========= ========= Summary of changes in equity from nonowner sources - -------------------------------------------------- Net income $ 66,642 56,248 93,424 Other changes in equity from nonowner sources, net of tax 28,787 61,519 (95,452) --------- --------- --------- Total changes in equity from nonowner sources $ 95,429 117,767 (2,028) ========= ========= =========
74 A USAA LIFE INSURANCE COMPANY Consolidated Statements of Cash Flows Years ended December 31, 2001, 2000, and 1999 (Dollars in Thousands)
2001 2000 1999 ---- ---- ---- Cash flows from operating activities: Net income $ 66,642 56,248 93,424 Adjustments to reconcile net income to net cash provided by operating activities: Net realized investment (gains) losses 34,299 65,989 (413) Non-cash investment income - - (5,147) Interest credited on policyholder deposits 300,416 292,963 292,226 Increase in deferred policy acquisition costs (31,196) (23,459) (24,885) Depreciation and amortization (4,558) (8,473) (9,536) Deferred income tax expense (benefit) 2,863 (3,165) (6,812) (Increase) decrease in premium balances receivable 283 (2,326) 109 (Increase) decrease in accounts receivable-affiliate 62 (22) 587 Increase in accrued investment income (9,484) (8,976) (14,388) Increase in reinsurance recoverable and other assets (120,024) (87,034) (98,808) Increase in insurance reserves 174,936 147,534 108,702 Increase (decrease) in accounts payable and accrued expense 2,932 24,493 (1,020) Increase (decrease) in accounts payable-affiliates 11,842 (6,253) 3,633 Increase (decrease) in other liabilities 3,651 616 (1,326) Other (3,596) (2,223) 2,400 ---------- ---------- ---------- Net cash provided by operating activities 429,068 445,912 338,746 ---------- ---------- ---------- Cash flows from investing activities: Proceeds from sales and maturities of available-for-sale securities 1,594,188 1,137,153 1,227,752 Proceeds from maturities of held-to-maturity securities - 46,039 218,585 Proceeds from principal collections on investments 397,397 95,891 319,027 Other investments sold 1,213 1,186 688 Securities purchased - available-for-sale (2,353,779) (1,218,635) (1,789,489) Other investments purchased (730) (5,774) (2,636) ---------- ---------- ---------- Net cash provided by (used in) investing activities (361,711) 55,860 (26,073) ---------- ---------- ---------- Cash flows from financing activities: Deposits to funds on deposit 394,599 270,294 344,772 Proceeds from short-term borrowings 2,600 - - Issuance of preferred stock 20,000 - - Withdrawals from funds on deposit (421,240) (714,873) (575,731) Dividends to stockholders (41,977) (17,529) (87,993) ---------- ---------- ---------- Net cash used in financing activities (46,018) (462,108) (318,952) ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents 21,339 39,664 (6,279) Cash and cash equivalents at beginning of year 95,588 55,924 62,203 ---------- ---------- ---------- Cash and cash equivalents at end of year $ 116,927 95,588 55,924 ========== ========== ==========
75 A USAA LIFE INSURANCE COMPANY Notes to Consolidated Financial Statements December 31, 2001 and 2000 (Dollars in Thousands) (1) Summary of significant accounting policies ------------------------------------------ (a) Organization ------------ USAA LIFE INSURANCE COMPANY (Life Company) is a wholly owned subsidiary of UNITED SERVICES AUTOMOBILE ASSOCIATION (USAA). Life Company markets individual life insurance policies, annuity contracts, group credit life and accident and health policies, and individual and group accident and health policies primarily to individuals eligible for membership in USAA. Life Company is licensed to do business in all states including the District of Columbia but excluding New York. Life Company has a subsidiary company, USAA Life Insurance Company of New York (Life of New York), licensed to sell life and annuity contracts in that state. Life Company's other subsidiary business, USAA Life General Agency (LGA), offers additional products of other insurance companies requested by USAA membership, which are not sold by Life Company. The consolidated financial statements include the accounts of Life Company and its subsidiaries, (collectively, the Company). All significant intercompany balances and transactions have been eliminated in consolidation. (b) Accounting standards adopted ---------------------------- Effective January 1, 2001, the Company adopted the provisions of Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS Nos. 137 and 138. The standard requires, companies to record derivatives on their balance sheet at fair value. Changes in the fair value of those derivatives would be reported in income or other changes in equity from nonowner sources depending on the use of the derivative and whether it qualifies for hedge accounting. The key criterion for hedge accounting is that the hedging relationship must be highly effective in offsetting changes in fair value of assets or liabilities or cash flows from such transactions. The implementation of SFAS No. 133 did not have a material effect on the Company's financial position or results of operations. Effective April 1, 2001, the Company adopted Emerging Issues Task Force (EITF) Issue 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interest in Securitized Financial Assets". Under the consensus, investors in certain asset-backed securities are required to record changes in their estimated yield on a prospective basis and to evaluate these securities for an other than temporary decline in value. If the fair value of the asset-backed security has declined below its carrying amount and the decline is determined to be other than temporary, the security is written down to fair value. The adoption of EITF Issue 99-20 did not have an impact on the Company's financial position or results of operations. In September 2000, the FASB issued SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities". SFAS No. 140 replaces SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities", and rescinds SFAS No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125". This statement, which is required to be applied prospectively with certain exceptions, is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. Additionally, this statement is effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The adoption of this statement did not have a material impact on the Company's consolidated financial statements. (Continued) 76 A USAA LIFE INSURANCE COMPANY Notes to Consolidated Financial Statements (Dollars in Thousands) (c) Investments ----------- On May 1, 2000, the Company reclassified all of the debt securities in its held-to-maturity portfolio to the available-for-sale portfolio. Securities with an amortized cost of $618,938 and a net unrealized loss of $24,915 were transferred from the held to maturity portfolio to the available-for-sale portfolio. This action was taken because the Company determined it no longer had the positive intent and ability to hold the securities to maturity due to changes in the Company's investment policy. Debt securities, including bonds, mortgage-backed securities, and redeemable preferred stocks 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 $171,940, and $171,131 were on deposit with various state governmental agencies at December 31, 2001, and 2000, respectively. Mortgage-backed securities held at December 31, 2001 and 2000 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. Real estate mortgages and policy loans are carried at their unpaid principal balances with interest rates ranging from 4.80% to 9.75% at December 31, 2001. Short-term securities, included in cash and cash equivalents, are carried at amortized cost, which approximates fair value. 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 write down to estimated net realizable value is recorded. Net realized capital gains of $25,943, $1,455, and $33,813 for 2001, 2000 and 1999 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 date at purchase of three months or less and money market mutual funds are considered to be cash equivalents. At December 31, 2001 and 2000, cash and cash equivalents include $41 and $409, respectively, of separate account purchases awaiting reinvestment. These funds are restricted from the Company's use. (Continued) 77 A USAA LIFE INSURANCE COMPANY Notes to Consolidated Financial Statements (Dollars in Thousands) (e) Federal income taxes -------------------- Life 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 from 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 were made at a point in time, based on relevant market information and 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 accounting principles generally accepted in the United States of America (GAAP), 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. The period for amortization is 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. The period for amortization for universal life is 20 years. The period for amortization for annuities is either 20 or 30 years. Deferred policy acquisition costs are reviewed by line of business to determine that the unamortized portion does not exceed the present value of anticipated gross profits or the sum of the present value of expected gross premiums and the reserves held, less the present value of expected future benefits. (Continued) 78 A 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. 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. Payout annuity reserves are computed by discounting future payments at rates based on assumed or guaranteed investment yields and mortality. 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) Funds on deposit ---------------- Funds on deposit are liabilities for universal life, payout annuities without life contingencies and deferred annuities. These liabilities are determined following the "retrospective deposit" method and consist principally of policy account balances before applicable surrender charges. (k) Insurance revenues and expenses ------------------------------- Premiums on traditional life insurance products and accident and health contracts are recognized as revenues as they become due. Benefits and expenses are matched with premiums in determining net income through the holding of reserves that provide for policy benefits and amortization of acquisition costs over the lives of the policies. 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, investment, mortality, and expense margins. (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 5% of the total life insurance in force at December 31, 2001, and 6% of the total life insurance in force at December 31, 2000. Participating policies accounted for 16% of the premium income in 2001 and 18% of the premium income in 2000. The provision for policyholders' dividends is based on benefit reserves and a future dividend liability based on the 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 $20,534 in 2002. Income attributable to participating policies in excess of policyholder dividends is restricted by several states for the benefit of 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) 79 A USAA LIFE INSURANCE COMPANY Notes to Consolidated Financial Statements (Dollars in Thousands) (2) Basis of accounting ------------------- The Company prepares separate statutory financial statements in accordance with accounting practices prescribed or permitted by the insurance departments of the states of Texas and New York. Prior to the adoption of Codification of Statutory Accounting Principles (SAP) by the insurance departments of the states of Texas and New York on January 1, 2001, prescribed statutory accounting practices included a variety of publications of the National Association of Insurance Commissioners (NAIC) as well as state laws, regulations, and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. The NAIC adopted SAP in March 1998. The Texas Department of Insurance and New York State Insurance Department adopted SAP in its entirety, except as provided in Title 28 Part 1 Chapter 7 Subchapter A Rule 7.18, "NAIC Accounting Practices and Procedures Manual" (Rule 7.18), of the Texas Administrative Code and in Regulation 172, "Financial Statement Filings and Accounting Practices and Procedures" (Reg. 172), respectively. The adoption of SAP resulted in an increase in statutory surplus of approximately $33,495. These consolidated financial statements have been prepared on the basis of GAAP, which differs from the statutory basis of accounting followed in reporting to insurance regulatory authorities. Reconciliation 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:
2001 2000 1999 ---- ---- ---- Statutory net income $ 47,809 72,901 83,918 Loss on sale of investments (22,135) (34,800) (29,089) Deferred policy acquisitions costs 31,526 23,809 25,115 Tax adjustments (2,863) 3,176 13,981 Participating policyholder earnings (73) (2,032) (696) Insurance reserves and other 12,378 (6,806) 195 -------- ------- -------- GAAP net income $ 66,642 56,248 93,424 ======== ======= ======== Statutory capital and surplus $ 584,857 528,830 500,514 Increases (decreases): Deferred policy acquisition costs 313,537 282,938 267,114 Federal income taxes 34,787 79,348 108,214 Asset valuation reserve 26,365 51,877 76,969 Participating policyholder liability (7,223) (7,111) (3,985) Policyholder reserve and funds (99,166) (95,792) (97,434) Deferred and uncollected premiums (103,741) (87,993) (89,335) Investment unrealized gain (loss) adjustments: Investment valuation difference 161,458 (6,579) (193,266) Policyholder accounts and other assets (110,618) (29,437) 22,659 Other adjustments (26,561) (15,812) 8,581 -------- ------- -------- GAAP capital and surplus $ 773,695 700,269 600,031 ======== ======= ========
(Continued) 80 A 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 classified as available for sale as of December 31, 2001 were as follows:
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 $ 3,529 369 - 3,898 3,898 Obligations of states and political subdivisions 37,192 946 - 38,138 38,138 Debt securities issued by foreign governments and corporations 309,153 9,494 (1,492) 317,155 317,155 Mortgage-backed securities 991,016 26,139 (2,898) 1,014,257 1,014,257 Corporate securities 5,086,498 166,894 (39,545) 5,213,847 5,213,847 --------- ------- ------- --------- --------- Total debt securities $ 6,427,388 203,842 (43,935) 6,587,295 6,587,295 ========= ======= ======= ========= ========= Equity securities - ----------------- Common stock $ 251,130 - (30,149) 220,981 220,981 Non-redeemable preferred stock 5,970 - (154) 5,816 5,816 --------- ------- ------- --------- --------- Total equity securities $ 257,100 - (30,303) 226,797 226,797 ========= ======= ======= ========= =========
(Continued) 81 A 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 classified as available for sale as of December 31, 2000 were as follows:
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 $ 21,468 586 (31) 22,023 22,023 Obligations of states and political subdivisions 34,950 107 (22) 35,035 35,035 Debt securities issued by foreign governments and corporations 465,297 5,888 (9,791) 461,394 461,394 Mortgage-backed securities 1,077,318 20,119 (4,417) 1,093,020 1,093,020 Corporate securities 4,496,095 70,686 (90,481) 4,476,300 4,476,300 --------- ------- -------- --------- --------- Total debt securities $ 6,095,128 97,386 (104,742) 6,087,772 6,087,772 ========= ======= ======== ========= ========= Equity securities - ----------------- Common stock $ 179,745 22,048 (11,180) 190,613 190,613 Non-redeemable preferred stock 50,045 1,192 (1,165) 50,072 50,072 --------- ------- -------- --------- --------- Total equity securities $ 229,790 23,240 (12,345) 240,685 240,685 ========= ======= ======== ========= =========
The amortized cost and estimated fair values of debt securities classified as available-for-sale at December 31, 2001, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to prepay obligations.
Available-for-Sale ----------------------------- Estimated Amortized Fair Cost Value ------------- --------------- Due in one year or less $ 525,215 537,095 Due after one year through five years 1,880,762 1,954,167 Due after five years through ten years 1,907,887 1,950,634 Due after ten years 1,122,508 1,131,142 ----------- ---------- Mortgage-backed securities 991,016 1,014,257 ----------- ---------- $ 6,427,388 6,587,295 =========== ==========
Proceeds from sales of available-for-sale debt securities during 2001, 2000, and 1999 were $1,381,444, $995,947, and $1,065,071, respectively. Gross gains and losses of $25,832 and $21,651, respectively, for 2001, $10,472 and $65,470, respectively, for 2000, and $12,010 and $4,911, respectively, for 1999, were realized on those sales. For 2000, net realized investment gains (losses) on the consolidated statement of income also included a realized loss of $10,033 due to an other than temporary write-down of a debt security. There were no such writedowns in 2001. (Continued) 82 A USAA LIFE INSURANCE COMPANY Notes to Consolidated Financial Statements (Dollars in Thousands) Proceeds from sales of equity securities during 2001, 2000, and 1999 were $64,640, $573, and $96,857, respectively. Gross gains and losses of $11,068 and $0 respectively, for 2001, $67 and $70, respectively, for 2000 and $25,494, and $34, respectively, for 1999 were realized on those sales. Gross investment income during 2001, 2000, and 1999 was $494,179, $490,890, and $489,709, respectively, and consists primarily of interest income on fixed maturity securities. Investment expenses were $6,464, $5,906, and $5,334 for 2001, 2000, and 1999, respectively. Life Company engages in securities lending whereby certain securities from its portfolio are loaned to other institutions for short periods of time. Initial cash collateral 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 or used for operations. 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. The estimated fair value of loaned securities is $484,382 at December 31, 2001. At December 31, 2001 and 2000, net unrealized gains of $110,618 and $29,437 were allocated to insurance reserves for participating life insurance policies and interest sensitive contracts. In addition net unrealized losses of $146 and $743 were allocated against deferred policy acquisition costs in 2001 and 2000, respectively. (4) Federal income tax ------------------ The expected statutory Federal income tax amounts for the years ended December 31, 2001, 2000, and 1999 differ from the effective tax amounts as follows:
2001 2000 1999 ---- ---- ---- Income before income taxes $ 101,860 88,239 139,235 ======= ====== ======= Federal income tax expense at 35% statutory rate 35,651 30,884 48,732 Increase (decrease) in tax resulting from Dividends received deductions (540) (189) (391) Tax credits (112) (556) (791) Other, net 219 1,852 (1,739) ------- ------ ------- Federal income tax expense $ 35,218 31,991 45,811 ======= ====== =======
Deferred income tax expense or benefit for the years ended December 31, 2001, 2000, and 1999 was primarily attributable to differences between the valuation of assets and insurance liabilities for financial reporting and tax purposes. (Continued) 83 A 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:
2001 2000 ---- ---- Deferred tax assets Insurance reserves $ 124,969 118,511 Accounts payable and accrued expenses 8,924 3,337 Policyholder dividends 4,909 5,866 Other, net 2,972 4,778 ------- ------- Total gross deferred tax assets 141,774 132,492 ------- ------- Deferred tax liabilities Investments 7,276 3,295 Depreciable assets 729 714 Deferred policy acquisition costs 51,539 45,513 Other, net 14,510 12,426 ------- ------- Total gross deferred tax liabilities 74,054 61,948 ------- ------- Deferred tax asset (liability) on net unrealized gain (loss) on investments (6,697) 8,804 ------- ------- Net deferred tax asset $ 61,023 79,348 ======= =======
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, 2001, and 2000, other assets included Federal income tax receivable of $7,523 and $3,320, respectively. Aggregate cash payments to USAA for income taxes were $35,004, $32,988, and $51,993 for Life Company and $1,554, $956, and $2,780 for its subsidiaries during the years ended December 31, 2001, 2000, and 1999, respectively. (Continued) 84 A USAA LIFE INSURANCE COMPANY Notes to Consolidated Financial Statements (Dollars in Thousands) Detailed tax amounts for items of total nonowner changes in equity are as follows:
Before- Tax Tax (Expense) Net-of-Tax Amount or Benefit Amount ------------ ----------- ------------ For the year ending December 31, 1999 Unrealized (losses) on securities: Unrealized holding (losses) arising during year $ (72,569) 25,399 (47,170) Less: reclassification adjustment for gains realized in income (74,280) 25,998 (48,282) ------- ------ ------ Net unrealized (losses) from securities (146,849) 51,397 (95,452) ------- ------ ------ Other changes in equity from nonowner sources $ (146,849) 51,397 (95,452) ======= ====== ====== For the year ending December 31, 2000 Unrealized gains on securities: Unrealized holding gains arising during year $ 69,788 (24,426) 45,362 Less: reclassification adjustment for losses realized in income 24,857 (8,700) 16,157 ------- ------ ------ Net unrealized gains from securities 94,645 (33,126) 61,519 ------- ------ ------ Other changes in equity from non-owner sources $ 94,645 (33,126) 61,519 ======= ====== ====== For the year ending December 31, 2001 Unrealized gains on securities: Unrealized holding gains arising during year $ 28,759 (10,066) 18,693 Less: reclassification adjustment for losses realized in income 15,529 (5,435) 10,094 ------- ------ ------ Net unrealized gains from securities 44,288 (15,501) 28,787 ------- ------ ------ Other changes in equity from non-owner sources $ 44,288 (15,501) 28,787 ======= ====== ======
(Continued) 85 A USAA LIFE INSURANCE COMPANY Notes to Consolidated Financial Statements (Dollars in Thousands) (5) Fair value of financial instruments ----------------------------------- The following tables present the carrying values 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.
2001 2000 ------------------------ ------------------------- Carrying Fair Carrying Fair Value Value Value Value ------------------------ ------------------------- Financial assets: Cash and cash equivalents $ 116,927 116,927 95,588 95,588 Debt securities 6,587,295 6,587,295 6,087,772 6,087,772 Equity securities 226,797 226,797 240,685 240,685 Mortgage loans 2,379 2,226 3,087 2,962 Policy loans 139,997 139,997 138,336 138,336 Premium balances receivable 4,903 4,903 5,186 5,186 Accounts receivable -- affiliates 37 37 99 99 Collateral for securities loaned 506,409 506,409 718,677 718,677 Accrued investment income 114,890 114,890 105,406 105,406 Separate account 378,098 378,098 409,431 409,431 Financial liabilities: Deferred annuities and annuities without life contingencies 3,725,116 3,725,116 3,535,617 3,535,617 Policyholder dividend accumulations 34,309 34,309 33,119 33,119 Policy dividends declared but unpaid 30,993 30,993 32,494 32,494 Accounts payable and accrued expenses 86,151 86,151 83,219 83,219 Accounts payable -- affiliates 19,815 19,815 7,973 7,973 Payable upon return of securities loaned 506,409 506,409 718,677 718,677 Separate account 378,098 378,098 409,431 409,431
All carrying values 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: The carrying value of cash and cash equivalents approximates fair value because of the short maturity. Debt and equity securities: The 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. (Continued) 86 A USAA LIFE INSURANCE COMPANY Notes to Consolidated Financial Statements (Dollars in Thousands) 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 the aggregate unpaid balance, and carry interest rates ranging from 4.8% to 7.4% in advance. Premiums receivable: The recorded amount for premiums receivable approximates fair value because only a slight percentage of total policies issued by the Company lapse. Accounts receivable and payable - affiliates: The carrying value of the accounts receivable and accounts payable for affiliates approximates its fair value because of the short-term nature of the obligations. Collateral for securities loaned and payable upon return of securities loaned: The carrying value of collateral for securities loaned and payable upon return of securities loaned approximates fair value because of the short maturity of the collateral. 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 equal to the current accumulated value without anticipation of any applicable surrender charges, 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 policy holder 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 material. 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 material. 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, 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." (Continued) 87 A USAA LIFE INSURANCE COMPANY Notes to Consolidated Financial Statements (Dollars in Thousands) (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. USAA allocates these and other expenses to affiliates for administrative services performed by them. 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 for Life Company and its affiliates was $115,389, $164,572, and $173,082 for 2001, 2000, and 1999, 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 $6,171, $5,639 and $4,895 for 2001, 2000, and 1999, respectively. Life Company also received premium and annuity considerations from USAA of $6,415, $5,780, and $4,945 in 2001, 2000, and 1999, respectively, representing amounts received for structured settlements issued to claimants of USAA and for group insurance on USAA employees. Life Company provides credit life and disability insurance to members of the USAA Federal Savings Bank (USAA FSB) through an insurance arrangement with USAA FSB. Total credit life and disability premiums were $6,468 and $5,732 in 2001 and 2000, respectively. Life Company has intercompany funding agreements with USAA Capital Corporation (CAPCO) and USAA Funding Company (FUNDCO) for unsecured borrowings up to $50,000 outstanding at any one time, for a short-term (less than 270 days) period for liquidity purposes, at an interest rate based upon CAPCO's or FUNDCO's cost of funding. As of December 31, 2001, 2000, and 1999, Life Company had $2,600, $0 and $0 liability for borrowed money. Life Company had short-term borrowings totaling $53,918, $0, and $274,619 in 2001, 2000, and 1999, respectively, through the use of these funding agreements. The interest associated with these intercompany funding agreements was $10, $0, and $50 in 2001, 2000, and 1999, respectively. The Company purchased securitized notes created by USAA FSB. The notes were purchased on the open market through a third-party broker. The Company had $68,618 and $37,200 of securitized notes created by USAA FSB at December 31, 2001 and 2000, respectively. Life of New York has an intercompany funding agreement with CAPCO that shall not exceed, in the aggregate, an amount equal to 5 percent of prior year admitted assets, outstanding at any one time. As of December 31, 2001, 2000, and 1999, Life of New York had no liability for borrowed money. Life of New York had short-term borrowings totaling $0, $0, and $5,122 in 2001, 2000, and 1999, respectively, through the use of these funding agreements. The interest associated with these intercompany funding agreements was $0, $0, and $50 in 2001, 2000, and 1999, respectively. (Continued) 88 A USAA LIFE INSURANCE COMPANY Notes to Consolidated Financial Statements (Dollars in Thousands) (8) Reinsurance ----------- The Company is party to several reinsurance treaties. Life 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 Life Company entered into certain reinsurance treaties that are based on a first dollar quota share pool. Life 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 that is placed with a number of reinsurers on a quota share basis. Once Life Company's retention has been reached, the quota share pool reinsures all of the risk above Life Company's retention. Life of New York's general policy is the same except that they reinsure that portion of any risk in excess of $200 on the life of any one individual. Life Company cedes 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 Life Company retaining 50% of the business under the coinsurance arrangement. Assets backing the coinsurance reserves held by the reinsurer are held in a trust by the reinsurer. This trust arrangement should reduce the credit risk associated with the high reserve liability held by the reinsurer for Life Company. Although the ceding of reinsurance does not discharge the Company from its primary legal liability to a policyholder, the reinsuring company assumes responsibility to reimburse the Company for the related liability. Life insurance in force in the amounts of $5,051,994, $5,161,519 and $5,447,155 is ceded on a yearly renewable term basis and $49,794,678, $37,080,679 and $23,535,919 is ceded on a coinsurance basis at December 31, 2001, 2000, and 1999, respectively. Reinsurance amounts recoverable related to insurance reserves, funds on deposit, and paid losses totaled $576,141 and $489,086 at December 31, 2001, and 2000, respectively. Premium revenues and interest credited to policyholders were reduced by $113,853, $104,622 and $106,323 for reinsurance premiums ceded during the years ended December 31, 2001, 2000, and 1999, respectively. Losses, benefits and settlement expenses were reduced by $99,914, $91,618 and $102,735 for reinsurance recoverables during the years ended December 31, 2001, 2000, and 1999, respectively. A ten year stop loss reinsurance agreement was signed in 1991. The reinsurance agreement terminated effective December 31, 2000. Life Company assumes business through various assumption agreements, with most of the business assumed on a yearly renewable term basis. Such premium amounts were not significant in 2001, 2000, and 1999. (Continued) 89 A 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:
Accident Life Annuity and Health Total ----------- ----------- ------------- --------- Balance at December 31, 1998 $ 173,225 35,205 18,556 226,986 ------- ------ -------- ------- Additions 24,444 12,167 5,737 42,348 Amortization (13,721) (2,149) (1,593) (17,463) Fair value adjustment 5,091 10,152 - 15,243 ------- ------ -------- ------- Net changes 15,814 20,170 4,144 40,128 ------- ------ -------- ------- Balance at December 31, 1999 189,039 55,375 22,700 267,114 ------- ------ -------- ------- Additions 31,925 9,279 6,763 47,967 Amortization (16,272) (4,375) (3,861) (24,508) Fair value adjustment 652 (8,287) - (7,635) ------- ------ -------- ------- Net change 16,305 (3,383) 2,902 15,824 ------- ------ --------- ------- Balance at December 31, 2000 $ 205,344 51,992 25,602 282,938 ------- ------ -------- ------- Additions 36,970 11,460 5,623 54,053 Amortization (13,721) (2,466) (6,670) (22,857) Fair value adjustment (607) 10 - (597) ------- ------ -------- ------- Net change 22,642 9,004 (1,047) 30,599 ------- ------ -------- ------- Balance at December 31, 2001 $ 227,986 60,996 24,555 313,537 ======= ====== ======= ======= 1999 Premiums $ 297,445 11,499 89,848 398,792 ======= ====== ======= ======= 2000 Premiums $ 296,640 10,626 120,925 428,191 ======= ====== ======= ======= 2001 Premiums $ 312,972 16,830 148,463 478,265 ======= ====== ======= =======
(Continued) 90 A 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, 2001 and 2000 are summarized below:
Future Policy Benefits ------------------------- 2001 2000 ---- ---- Life and annuity: Individual $ 1,401,140 1,164,128 Group 5,523 4,873 --------- --------- Total life and annuity $ 1,406,663 1,169,001 ========= ========= Accident and health $ 74,219 70,461 ========= ========= Insurance in Force ------------------------- 2001 2000 ---- ---- Life and annuity: Individual $ 64,934,370 65,563,303 Credit life 716,520 614,038 Group 2,618,975 2,563,335 ---------- ---------- Total life and annuity $ 68,269,865 68,740,676 ========== ==========
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% Non - Participating permanent 6.09% to 7.09% 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 the health policies are calculated using a level interest rate of 6%. Morbidity for Income Replacement policies for active lives is based on a modified 1985 CIDA and for disabled lives is based on the 1985 CIDA. Morbidity for In Hospital Cash policies is based on the 1966-67 Intercompany Experience table. The Active Life Reserves for Issue Age Standardized Medicare Supplement Plans, Attained Age Standardized Medicare Supplement Plans, and TRICARE Supplement Plans are valued on a net level basis using 6% interest, and each uses different modifications of 1994 Tillinghast claim costs. Termination assumptions are based on Life Company and industry experience. (Continued) 91 A 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 issued at $100 (not in thousands) par value. During 2001, the Company issued 100,000 shares of Series G Annually Adjustable Noncumulative Perpetual Preferred Stock at $100 (not in thousands) par value plus $10,000 of additional paid-in capital. All of the preferred stock is owned by FUNDCO. No other stock ranks Senior to the Series A-G preferred stock. The dividend rate for the series A-F preferred stock is equal to 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 dividend rate for the series G preferred stock is 6.16% through December 15, 2006 when the rate will reset using the five-year treasury rate plus 1.75%. The preferred stock has a liquidation value of $100 (not in thousands) 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, Series F, and Series G at par value plus accrued and unpaid dividends. Preferred stock dividends of $1,977, $2,529, and $1,993 were paid in 2001, 2000, and 1999, respectively and $114, $113, and $98 were accrued for each year after the last payments on December 15, 2001, 2000, and 1999, respectively. The Company has authorized 30,000 shares of common capital stock, $100 (not in thousands) par value, of which 25,000 shares were issued and outstanding at December 31, 2001, 2000, and 1999. Dividends of $40,000, $15,000, and $86,000 were paid in cash on the common stock during 2001, 2000, and 1999, respectively, as well as a $25 non-cash dividend during 2001. (11) Unassigned surplus and dividend restrictions -------------------------------------------- Texas law limits the payment of ordinary dividends to shareholders. The maximum ordinary 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, less any dividends made within the preceding 12 months. As a result, ordinary dividend payments to shareholders are limited to approximately $54,614 in 2002. Dividends are paid as determined by the Board of Directors and at its discretion. Extraordinary dividends approved by the Texas Department of Insurance, totaling $0, $0, and $87,993 and were paid in 2001, 2000, and 1999, respectively. The Texas Department of Insurance imposes minimum risk-based capital (RBC) requirements on insurance companies that were developed by the NAIC. The formulas for determining the amount of 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. Life Company's and its subsidiaries' current statutory capital and surplus are 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 that 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 supplement accident and health policies. (Continued) 92 A 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, 2001, 2000, and 1999:
2001 2000 1999 ---- ---- ---- Revenues: - --------- Premiums Life $ 312,972 296,640 297,445 Annuity 16,830 10,626 11,499 Health 148,463 120,925 89,848 --------- --------- --------- 478,265 428,191 398,792 --------- --------- --------- Investment income, net: Life $ 201,270 198,093 191,850 Annuity 282,037 282,882 288,574 Health 4,408 4,009 3,951 --------- --------- --------- 487,715 484,984 484,375 --------- --------- --------- Realized capital gains (losses), net: Life $ (10,190) (16,067) (668) Annuity (24,109) (49,922) 1,081 Health - - - --------- --------- --------- (34,299) (65,989) 413 --------- --------- --------- Fees, sales, loan income and other revenues: Life $ 311 (2,490) (1,092) Annuity 15,947 17,231 14,600 Health 16,796 16,538 13,920 --------- --------- --------- 33,054 31,279 27,428 --------- --------- --------- Total revenues: $ 964,735 878,465 911,008 ========= ========= ========= Income before income taxes: - --------------------------- Life $ 94,809 107,483 100,787 Annuity 18,139 (1,664) 49,844 Health (11,088) (17,580) (11,396) --------- --------- --------- $ 101,860 88,239 139,235 ========= ========= ========= Income tax expense (benefit): - ----------------------------- Life $ 32,777 43,330 33,265 Annuity 6,267 (4,414) 16,338 Health (3,826) (6,925) (3,792) --------- --------- --------- $ 35,218 31,991 45,811 ========= ========= ========= Total assets: - ------------- Life $ 3,909,310 3,663,174 3,572,155 Annuity 5,081,762 4,932,744 4,980,063 Health 90,469 83,381 57,196 --------- --------- --------- $ 9,081,541 8,679,299 8,609,414 ========= ========= =========
(Continued) 93 A USAA LIFE INSURANCE COMPANY Notes to Consolidated Financial Statements (Dollars in Thousands) Effective March 6, 2002, the Company discontinued selling TRICARE supplement health insurance. The Company recognized the Department of Defense's reforms to the TRICARE program substantially improved health coverage for all military beneficiaries and reduced the Company's members' need for this supplemental health insurance. This event is not expected to have a material impact on the operations of the Company. (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 final average pay, as defined in the plan, at the date of retirement. The total net pension cost allocated to the Company on the basis of salary expense was $3,572, $3,922 and $3,877 in 2001, 2000, and 1999, respectively. At December 31, 2001 and 2000 a liability of $134 and $2,157, 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 $1,358, $1,555, and $1,052 in 2001, 2000, and 1999, respectively. At December 31, 2001 and 2000, a liability of $6,500, and $5,142, 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 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 2001, 2000, and 1999, the Company's contributions to the plan totaled $3,080, $2,584 and $2,577, respectively. (14) Separate accounts ----------------- The Separate Account and the Life Insurance Separate Account (Separate Accounts) are segregated asset accounts established under Texas law through which Life Company invests the premium payments received from contract owners and policy owners, respectively. The assets of the Separate Accounts are the property of Life 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 Life Company may conduct. In accordance with the contracts and policies, income, gains and losses, whether or not realized, are credited to, or charged against the Separate Accounts and excluded from Life Company. Life Company's obligations arising under the contracts and policies are general corporate obligations. (Continued) 94 A USAA LIFE INSURANCE COMPANY Notes to Consolidated Financial Statements (Dollars in Thousands) Each Separate Account currently is divided into eighteen variable fund accounts, each of which invests in a corresponding fund. The funds that are available under this contract or policy include five funds of the USAA Life Investment Trust, the Capital Growth Portfolio of the Scudder Variable Life Investment Funds, the Growth Portfolio of the Alger American Funds, three funds of the Fidelity VIP portfolio, and eight funds of the Vanguard Variable Insurance Fund. The accumulated unit value of the contract or policy in a variable fund account will vary, primarily based on the investment experience of the Fund in whose shares the variable funds account invest. The value of the funds' securities is carried at market value. Life Company incurs mortality expenses on behalf of the Separate Accounts' contract holders and policy owners. Life Company also incurs administrative expenses on behalf of contract and policy owners. Life Company collects fees for these expenses from both contract holders and policy owners at set amounts. In addition, Life 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 agreements. Life 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 2001, 2000, and 1999. (15) 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 policy holders of impaired or insolvent insurance companies, by assessing all other companies involved in similar lines of business. There are currently several insurance companies which have substantial amounts of life, annuity and health business in the process of liquidation or rehabilitation. The Company received net refunds of $336 and paid $62 and $323 to various state guaranty associations during the years ended December 31, 2001, 2000, and 1999, respectively. The Company accrues its best estimate for known insolvencies. At December 31, 2001 and 2000, other liabilities include $7,148 and $5,194 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. 95 A We have not authorized anyone to give any information or make any representations other than those contained in this Prospectus (or any sales literature we approve) in connection with the offer of the Policies described herein. You may not rely on any such information or representations, if made. This Prospectus does not constitute an offer in any jurisdiction to any person to whom such offer would be unlawful. This Prospectus is valid only when accompanied or preceded by the current prospectuses for the Funds described herein. 96 A This page left blank intentionally ================================================================================ USAA LIFE INSURANCE COMPANY 9800 Fredericksburg Road San Antonio, Texas 78288 - -------------------------------------------------------------------------------- To check policy details, view fund account summaries, or receive a prospectus, annual or semiannual report electronically, visit your online resource center usaa.com ------------------------------------- To discuss your Variable Universal Life Policy, call a USAA Life Account Representative toll free 1-800-531-2923 (282-3460 in San Antonio) ------------------------------------- If you wish to discuss your particular policy, transfer money from one fund account to another or select a payout option call a USAA Life Service Representative toll free 1-800-531-4265 (456-9061 in San Antonio) ------------------------------------- You may also call our toll-free Touchline(R) 24 hours a day, 7 days a week for information about the value of your policy 1-800-531-5433 ================================================================================ We know what it means to serve.(R) USAA [LOGO] --------------------------------------------------- INSURANCE o BANKING o INVESTMENTS o MEMBER SERVICES Copyright (C) 2002, USAA. All rights reserved. 31836-0502 ---------- PART II INFORMATION NOT REQUIRED TO BE FILED IN A PROSPECTUS UNDERTAKING TO FILE REPORTS Subject to the terms and conditions of Section 15(d) of the Securities Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with the Securities and Exchange Commission such supplementary and periodic information, documents, and reports as may be prescribed by any rule or regulation of the Commission heretofore or hereafter duly adopted pursuant to authority conferred in that section. UNDERTAKING PURSUANT TO RULE 484(b)(1) UNDER THE SECURITIES ACT OF 1933 Rule 484(b)(1) under the Securities Act of 1933 requires a description of "[a]ny provision or arrangement . . . whereby the registrant may indemnify a director, officer or controlling person of the registrant against liabilities arising under the [Securities] Act." Registrant, the Life Insurance Separate Account of USAA Life Insurance Company, does not, as a technical matter, have any directors or officers. Nevertheless, Registrant, pursuant to Section 13 of the Amended and Restated Distribution and Administration Agreement, may indemnify, albeit indirectly, directors and/or officers of its depositor, USAA Life Insurance Company ("USAA Life"), as follows. Section 13 of such Agreement provides that Registrant shall indemnify the employees of USAA Investment Management Company ("IMCO"), Registrant's principal underwriter. To whatever extent any director or officer of USAA Life may be deemed to be an "employee" of IMCO, Registrant may be deemed to be permitted to indemnify such person pursuant to such Agreement, which is filed as Exhibit 1.(3)(a) to this Registration Statement and is herein incorporated by reference. Additionally, there are certain other provisions or arrangements whereby USAA Life, and/or certain of its affiliated persons, may be indemnified by parties or entities other than Registrant. Such provisions or arrangements are incorporated herein by reference, as follows: to Article IX of the By-Laws of USAA Life, filed as Exhibit 1.6(b) to this Registration Statement; to Section 9 of the Amended and Restated Underwriting and Administrative Services Agreement, filed as Exhibit 1.(8)(a) to this Registration Statement; to Section 12 of the Transfer Agent Agreement, as amended, filed as Exhibit 1.(8)(c) to this Registration Statement; to Section 5(b) of the Amended Participation Agreement, filed as Exhibit 1.8(d)(i) of this Registration Statement; to Section 6(b) of the Amended Reimbursement Agreement, filed as Exhibit 1.8(d)(iii) to this Registration Statement; to Section 12.2 of the Amended Participation Agreement, filed as Exhibit 1.8(e)(i) to this Registration Statement; to the Amended Expense Allocation Agreement, filed as Exhibit 1.8(e)(ii) to this Registration Statement; to Section 7 of the Participation Agreement, filed as Exhibit 1.8(f) to this Registration Statement; and to Section 8 of the Participation Agreement filed as Exhibit 1.8(g) to this Registration Statement. Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of Registrant pursuant to the foregoing provisions, or otherwise, Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by Registrant of expenses incurred or paid by a director, officer or controlling person of Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. S-1 REPRESENTATION REGARDING THE REASONABLENESS OF AGGREGATE FEES AND CHARGES DEDUCTED UNDER THE POLICIES PURSUANT TO SECTION 26(e)(2)(A) OF THE INVESTMENT COMPANY ACT OF 1940 USAA Life Insurance Company ("USAA Life") represents that the fees and charges deducted under the Policies, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred, and the risks assumed by the Company under the Policies. USAA Life bases its representation on its assessment of all of the facts and circumstances, including such relevant factors as: the nature and extent of such services, expenses and risks; the need for USAA Life to earn a profit; the degree to which the Policies include innovative features; and the regulatory standards for exemptive relief under the Investment Company Act of 1940 used prior to October 1996, including the range of industry practice. This representation applies to all Policies sold pursuant to this Registration Statement, including those sold on the terms specifically described in the prospectus contained herein, or any variations therein, based on supplements, endorsements, or riders to any Policies or prospectus, or otherwise. S-2 CONTENTS OF REGISTRATION STATEMENT This Registration Statement contains the following papers and documents: The facing sheet. Reconciliation and tie between items in Form N-8B-2 and the Prospectus. Prospectus consisting of 96 pages. Undertaking, pursuant to Section 15(d) of the Securities Exchange Act of 1934 to file reports. Undertaking pursuant to Rule 484(b)(1) under the Securities Act of 1933, regarding indemnification. Representation regarding the reasonableness of aggregate fees and charges. The signatures. Written consents of the following persons: Cynthia A. Toles, Esq., Vice President and Assistant Secretary, USAA Life Insurance Company (filed as Exhibit 2).(9) KPMG LLP, Independent Auditors (filed as Exhibit 6). James C. Hackard, ASA, MAAA, Associate Actuary, USAA Life Insurance Company (filed as Exhibit 9).(4) The following exhibits: 1. Exhibits required by Article IX, paragraph A, of Form N-8B-2: (1) Resolution of Board of Directors of USAA Life Insurance Company establishing Life Insurance Separate Account of USAA Life Insurance Company. (The resolution is filed in lieu of a trust or indenture creating a unit investment trust.)(1) (2) Not applicable. (3)(a) Amended and Restated Distribution and Administration Agreement by and between USAA Life Insurance Company and USAA Investment Management Company, dated December 16, 1994, and amended and restated, to encompass variable universal life insurance, March 30, 1998.(4) (3)(b) Not applicable. (3)(c) Not applicable. (4) Not applicable. (5) Revised Form of Variable Universal Life Insurance Policy (Policy Form No. VUL 31891TX), including riders.(4) (6)(a) Articles of Incorporation of USAA Life Insurance Company, as amended.(8) (6)(b) Bylaws of USAA Life Insurance Company, as amended, April 20, 2000.(11) S-3 (7) Not applicable. (8)(a)(i) Amended and Restated Underwriting and Administrative Services Agreement by and between USAA Life Insurance Company, USAA Life Investment Trust and USAA Investment Management Company, dated December 16, 1994, amended February 7, 1997, amended and restated, to encompass variable universal life insurance, February 26, 1998, amended and restated, November 18, 1998, amended and restated, December 31, 1999.(7) (8)(a)(ii) First Amendment to the Amended and Restated Underwriting and Administrative Services Agreement, dated May 23, 2001.(10) (8)(b)(i) Investment Advisory Agreement by and between USAA Life Investment Trust and USAA Investment Management Company, dated December 16, 1994.(3) (8)(b)(ii) Amendment to Investment Advisory Agreement by and between USAA Life Investment Trust and USAA Investment Management Company, with respect to Funds added to Trust, dated February 7, 1997.(2) (8)(b)(iii) Second Amendment to Investment Advisory Agreement by and between USAA Life Investment Trust and USAA Investment Management Company, to encompass variable life insurance, dated February 18, 1998.(3) (8)(c)(i) Transfer Agent Agreement by and between USAA Life Investment Trust and USAA Life Insurance Company, dated December 15, 1994.(3) (8)(c)(ii) Letter Agreement by and between USAA Life Investment Trust and USAA Life Insurance Company, appointing USAA Life as the Transfer Agent and Dividend Disbursing Agent for Funds added to Trust, dated February 7, 1997.(3) (8)(c)(iii) Amendment to Transfer Agent Agreement by and between USAA Life Investment Trust and USAA Life Insurance Company, to encompass variable universal life insurance, dated February 18, 1998.(3) (8)(d)(i) Amended Participation Agreement by and between Scudder Variable Life Investment Fund and USAA Life Insurance Company, dated February 3, 1995, as amended May 21, 1998.(6) (8)(d)(ii) Amended Participating Contract and Policy Agreement by and between Scudder Investor Services, Inc. and USAA Investment Management Company, dated February 3, 1995, as amended April 29, 1998.(6) (8)(d)(iii) Amended Reimbursement Agreement by and between Scudder Kemper Investments, Inc. and USAA life Insurance Company, dated February 3, 1995, as amended May 21, 1998.(6) (8)(d)(iv) Amended Letter Agreement by and between Scudder Kemper Investments, Inc., Scudder Investor Services, Inc., Scudder Variable Life Investment Fund, USAA Life Insurance Company and USAA Investment Management Company, dated February 3, 1995, as amended March 16, 1998.(6) S-4 (8)(e)(i) Amended Participation Agreement by and between The Alger American Fund, Fred Alger Management, Inc., Fred Alger & Company, Incorporated, and USAA Life Insurance Company, dated December 16, 1994, as amended March 16, 1998.(4) (8)(e)(ii) Amended Expense Allocation Agreement by and between Fred Alger Management, Inc., Fred Alger & Company, Incorporated, and USAA Life Insurance Company, dated December 16, 1994 as amended March 16, 1998.(4) 8(f) Participation Agreement by and between Vanguard Variable Insurance Funds, The Vanguard Group, Inc., Vanguard Marketing Corporation, and USAA Life Insurance Company, dated March 12, 2001.(9) 8(g) Participation Agreement by and between Variable Insurance Products Funds, Fidelity Distributors Corporation, and USAA Life Insurance Company, dated April 20, 2001.(9) (10)(a)(i) Revised Form of Application for the Variable Universal Life Insurance Policy filed as Exhibit 1.(5).(4) (10)(a)(ii) Form of Application for Variable Universal Life Insurance Policy Change.(4) (10)(b) Section 1035 Exchange Form.(4) Other Exhibits 2. Opinion and Consent of Cynthia A. Toles, Esq., Vice President and Assistant Secretary, USAA Life Insurance Company, as to the legality of the Policy interests being registered.(9) 3. Not applicable. 4. Not applicable. 5. Financial Data Schedule. (See Exhibit 27 below.) 6. Consent of KPMG LLP, Independent Auditors. (Filed herewith.) 7.(a) Power of Attorney for Robert G. Davis.(1) (b) Powers of Attorney for James M. Middleton, Bradford W. Rich, and Josue Robles, Jr.(8) (c) Powers of Attorney for Russell A. Evenson and Larkin W. Fields.(11) (d) Power of Attorney for Edward R. Dinstel. (Filed herewith.) 8. Revised form of illustration showing cash values, cash surrender values, and death benefits, based on annualized rates of return of 0%, 6%, and 12%, and based on current and guaranteed Policy charges. (Filed herewith.) S-5 9. Opinion and Consent of James C. Hackard, ASA, MAAA, Associate Actuary, USAA Life Insurance Company, as to the methodology for computing cash values, cash surrender values, and death benefits as described in the form of illustration filed as Exhibit 8.(4) 27. Financial Data Schedule. (Inapplicable, because, notwithstanding Instruction 5 as to Exhibits, the Commission staff has advised that no such Schedule is required.) - ------------------ (1) Previously filed on January 30, 1998, with the initial filing of this Registration Statement. (2) Incorporated herein by reference to Post-Effective Amendment No. 3, filed on February 14, 1997, to Form N-1A Registration Statement (File No. 33-82270) of USAA Life Investment Trust. (3) Incorporated herein by reference to Post-Effective Amendment No. 6, filed on March 2, 1998, to the Form N-1A Registration Statement (File No. 33-82270) of USAA Life Investment Trust. (4) Previously filed on May 15, 1998, with the Pre-Effective Amendment to Registrant's Form S-6 Registration Statement. (5) Incorporated herein by reference to Post-Effective Amendment No. 7, filed on February 26, 1999, to the Form N-1A Registration Statement (File No. 33-82270) of USAA Life Investment Trust. (6) Previously filed on February 26, 1999, with the Post-Effective Amendment No. 1 to Registrant's Form S-6 Registration Statement. (7) Incorporated herein by reference to Post-Effective Amendment No. 8, filed on April 28, 2000, to the Form N-1A Registration Statement (File No. 33-82270) of USAA Life Investment Trust. (8) Previously filed on April 27, 2000, with the Post-Effective Amendment No. 3 to Registrant's Form S-6 Registration Statement. (9) Previously filed on April 27, 2001, with the Post-Effective Amendment No. 4 to Registrant's Form S-6 Registration Statement. (10) Incorporated herein by reference to Post-Effective Amendment No. 10, filed on April 30, 2002, to the Form N-1A Registration Statement (File No. 33-82270) of USAA Life Investment Trust. (11) Previously filed on March 1, 2002, with the Post-Effective Amendment No. 5 to Registrant's Form S-6 Registration Statement. S-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant, Life Insurance Separate Account of USAA Life Insurance Company, has duly caused this amended Registration Statement to be signed on its behalf by the undersigned thereunto duly authorized, and its seal to be hereunto fixed and attested, all in the City of San Antonio, and State of Texas, on this 25th day of April, 2002. Signature: Life Insurance Separate Account of USAA Life Insurance Company (Registrant) By: USAA Life Insurance Company (On behalf of Registrant and itself) By: /s/ James M. Middleton -------------------------- James M. Middleton President and Chief Executive Officer Attest: /s/ Cynthia A. Toles --------------------------------------- Cynthia A. Toles Vice President and Assistant Secretary Pursuant to the requirements of the Securities Act of 1933, this amended Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
(NAME) (TITLE) (DATE) Robert G. Davis Chairman James M. Middleton Vice Chairman, President and April 25, 2002 Chief Executive Officer Edward R. Dinstel Director April 25, 2002 Russell A. Evenson Director April 25, 2002 Larkin W. Fields Director April 25, 2002 Larkin W. Fields Treasurer April 25, 2002 Bradford W. Rich Director April 22, 2002 *Josue Robles, Jr. Director April 23, 2002
S-7 EXHIBIT INDEX
Exhibits Page No. - --------- -------- 6. Consent of KPMG LLP, Independent Auditors. 115 7(d) Power of Attorney for Edward R. Dinstel. 116 8. Revised form of illustration showing cash values, cash surrender values, 117 and death benefits 117based on an annualized rates of return of 0%, 6%, and 12%, and based on current and guaranteed Policy charges.
S-8 EX-6 3 exhibit_6.txt KPMG CONSENT EXHIBIT 6 [LOGO] KPMG 112 East Pecan, Suite 2400 San Antonio, TX 78205-1585 Consent of Independent Auditors ------------------------------- The Board of Directors of USAA Life Insurance Company and Policyowners of the Life Insurance Separate Account of USAA Life Insurance Company: We consent to the use of our reports included herein and to the reference to our firm under the heading "Independent Auditors" in the Registration Statement. /s/KPMG LLP San Antonio, Texas April 18, 2002 EX-7.D 4 exhibit_7d.txt POWER OF ATTORNEY EXHIBIT 7(d) POWER OF ATTORNEY STATE OF : TEXAS COUNTY OF: BEXAR Know all men by these presents that the undersigned Director of USAA Life Insurance Company, a Texas corporation ("Corporation"), constitutes and appoints Michael D. Wagner, Cynthia A. Toles, and W. James Nabholz, each of them, as his true and lawful attorney-in-fact and agent, with full power of substitution, for him and in his name, place and stead, in any and all capacities to sign registration statements on any form or forms filed under the Securities Act of 1933 and the Investment Company Act of 1940 and any and all amendments thereto, with all exhibits, instruments, and other documents necessary or appropriate in connection therewith and to file them with the Securities and Exchange Commission or any other regulatory authority as may be necessary or desirable, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitute, may lawfully do or cause to be done by virtue hereof. /s/ Edward R. Dinstel 04/18/02 - --------------------- ----------------------------- Edward R. Dinstel Date Director On this 18 day of April, 2002, before me, Edward R. Dinstel, the undersigned ---- ------------------ Notary Public, personally appeared Edward R. Dinstel, known to me to be the person whose name is subscribed to the above Power of Attorney, and acknowledged that he executed it. WITNESS my hand and official seal /s/ M.L. Vera Cruz My Commission Expires: -------------------------- Notary Public 11-17-2002 State of Texas - -------------- 95147 [notary seal] EX-8 5 exhibit_8.txt FORM OF ILLUSTRATION Exhibit 8 - Form of Illustration USAA(R)[LOGO] USAA LIFE INSURANCE COMPANY Form of Variable Universal PROVIDED VIA DIRECT MAIL BY: Life Insurance Employee Number - XXX Illustration 9800 Fredericksburg Rd., San Antonio, TX 78288 800-292-8444 / Local: 210/456-9050 PREPARED ON: 05/18/02 Initial Death Benefit: $100,000.00 REQUESTED BY: INSURED: John Doe John Doe Option: B USAA #XXXX USAA #XXXX ================================================================================ The purpose of this illustration is to show how the performance of the underlying investment accounts could affect the policy values and death benefit. The illustration is hypothetical and is not intended to be used to project or predict investment results. - -------------------------------------------------------------------------------- Variable Universal Life Insurance - -------------------------------------------------------------------------------- Variable Universal Life insurance is a life insurance plan designed to provide lifetime protection along with the opportunity to invest your premium dollars in tax-deferred investment choices. With this product, you can make transfers among accounts with no immediate tax liability. This policy gives you control of the investment/cash value portion of your policy. At the same time, you assume the associated investment risk. Product Features: Important features include flexible benefits, flexible premiums, permanent death benefit, cash value accumulation, and investment options. You can borrow or withdraw cash value from your Variable Universal Life insurance policy without surrendering your policy. Both loans and withdrawals can adversely affect future cash value accumulations, premium payments, and death benefits. Optional Benefit Riders: Depending on your needs, you may purchase optional riders: Waiver of Monthly Deduction, Child Rider, and Accidental Death Benefit. Riders provide additional benefits and might contain conditions and exclusions that are different from those in your policy. You also receive riders that are included at no additional cost: Extended Maturity Rider and Accelerated Benefit for Terminal Illness Rider. Availability of optional benefit riders are subject to state approval. More complete information about USAA Life's Variable Universal Life, including charges and expenses, can be found in the prospectus which preceded or accompanied this information. Another copy can be obtained from USAA Life at the above address. Please read the prospectus carefully before sending money. USAA Life's Variable Universal Life is distributed by USAA Investment Management Company, a registered broker dealer and NASD member. - -------------------------------------------------------------------------------- Important Terms in this Illustration - -------------------------------------------------------------------------------- Guaranteed Expenses: Your policy's values based on the maximum cost of insurance and expenses and the assumed hypothetical return on your cash value. The maximum cost of insurance and expenses are guaranteed; however, the hypothetical values are not guaranteed as they assume a rate of return that may or may not be achieved. Non-Guaranteed Expenses: Your policy's values based on the current cost of insurance and expenses and the assumed hypothetical return on your cash value. The current cost of insurance and expenses are not guaranteed, as the cost of insurance and expenses could increase and the hypothetical return might not be achieved. Hypothetical Gross Rate of Return: The assumed annual rate of return shown to illustrate how your policy would perform if it achieved the assumed hypothetical rate. This rate is before any expenses. This policy does not guarantee any rate of return. You assume all investment risk for this policy. Net Rate of Return: The Hypothetical Gross Rate of Return illustrated less 0.50000% which represents an average of the management fee and other expenses for each of the 18 Funds corresponding to the 18 variable fund accounts under the policy and 0.75000% which represents the mortality and expense charge under the policy. If there were no expense reimbursement, the reduction to the Hypothetical Gross Rate of return for management fee and other expenses would be 0.54000% instead of .50000%. (See prospectus for details.) Total Annual Premium: The annualized amount of money you contribute plus any lump-sum premium payments. Cash Value: The total value of your variable fund accounts, including the effects of any outstanding loan. Cash Surrender Value: The maximum amount you would receive if you surrendered your policy. This is also the amount you may borrow against or withdraw from your policy. It reflects the deduction of the Surrender Charge and any outstanding loans. Cumulative Premium: The total of premium paid into the policy through the number of policy year ends shown. Guaranteed Death Benefit: The guarantee that the policy will not lapse during the first five years and that the death benefit will be paid if a sufficient amount of target premium has been paid. (See prospectus for details.) Surrender Charge: The charge based on the Annual Target Premium. The Surrender Charge declines each policy year Page 1 of 7 until it is eliminated after policy year 10. - -------------------------------------------------------------------------------- Payments and Expenses - -------------------------------------------------------------------------------- Payments include the dollar amounts you pay into your policy. Expenses are the fees you pay to administer and maintain your policy. (See the prospectus for details.) Annual Target Premium: An annual amount of premium payment that we establish when the policy is issued and that is shown on the Policy Information Page. It is used to determine whether a Premium Charge will be deducted from premium payments, whether a surrender charge is imposed on a full surrender and whether the Guaranteed Death Benefit applies. Tax Guideline Payments: The maximum amounts you may pay into your policy to comply with Internal Revenue Service limitations. These payments include Guideline Single, Guideline Annual, and Modified Endowment Contract ("MEC") Guideline payments. Expenses: The fees charged against your policy, including: Premium Charge: A premium charge of 3% is deducted from all premium payments until the total amount of premium paid exceeds the Annual Target Premium amount multiplied by ten. For example: if your Annual Target Premium was $1,000, you are charged a 3% premium charge until you have paid $10,000 in total premiums. You would not be charged any premium charge for subsequent payments, assuming you made no changes in coverage. Maintenance Charge: A $5 monthly charge deducted from the policy's cash value to cover recurring administrative expenses related to maintaining the policy. This charge applies for the life of the policy. Administrative Charge: A $10 charge deducted each month in the first year of the contract to cover start-up expenses incurred in issuing this policy. This charge stops after the first 12 months of the policy. Cost of Insurance: The monthly charges for life insurance protection including any Extra Risk Charges for rated policies and any additional cost for optional benefit riders. Two cost of insurance rates are used in this illustration: guaranteed cost and projected cost. Whenever Guaranteed Expenses are shown, the guaranteed cost of insurance is assumed to determine policy values. Whenever Non-Guaranteed Expenses are shown, the current cost of insurance is assumed to determine policy values. The guaranteed cost of insurance is the guaranteed maximum expense that can be deducted from the policy to cover insurance protection. The current cost of insurance is the cost currently deducted to cover insurance protection. The current cost of insurance could increase or decrease based on the company's experience, but it will never be more than the guaranteed cost of insurance. - -------------------------------------------------------------------------------- Rate Classes - -------------------------------------------------------------------------------- This illustration is based on assumed rate classes. Rate classes are groupings of insured individuals who present a substantially similar insurance risk grouped as such for the purpose of setting premium rates. Your actual rate will be determined after we have reviewed your application and any medical examination results. There are five rate classes offered in this product. Standard, Standard Plus, Preferred, Preferred Plus, and Preferred Ultra. - -------------------------------------------------------------------------------- Accessing Your Cash Value - -------------------------------------------------------------------------------- You can borrow or withdraw the cash surrender value from your Variable Universal Life insurance policy without surrendering your policy. Both loans and withdrawals will affect future cash value accumulations, premium payments, and death benefits. (See the prospectus for details.) Policy Loans: You may borrow part of your policy's cash value at a 6% interest rate, paid in advance. Any loan remaining when the insured dies will be deducted from the death benefit before the beneficiary is paid. The amount of cash value you borrow will accumulate interest at the guaranteed rate of 4% and will not participate in the performance of your selected variable fund accounts. Your policy also offers Preferred Loans; see the prospectus for details. Policy Withdrawals: You have the option to withdraw from the cash value. Withdrawals will reduce your cash value and reduce your death benefit. A partial surrender charge equal to the amount of $25 or 2% of the amount withdrawn is assessed for each withdrawal. Any gain included in a withdrawal is taxable. If the total of all withdrawals is more than the total premiums paid to date, USAA Life must report the amount that exceeds your premiums paid as gross income to the IRS, making the amount subject to federal (and possibly state and local) tax. Withdrawals or reductions in coverage made in the first 15 years of policy issue are subject to special tax rules. (See the prospectus for more information and consult your tax advisor.) Policy Loans and/or withdrawals may adversely affect your policy and subject it to premature termination. This is especially true if insufficient premium has been paid. - -------------------------------------------------------------------------------- Important Notices - -------------------------------------------------------------------------------- Underwriting Criteria: USAA Life, at its discretion, may require a medical examination and answers to medical, avocational, financial, and other questions to evaluate insurability and rate classification. Income Tax: Tax consequences may result from the limits and conditions of the Internal Revenue Code and IRS regulations. USAA Life does not offer tax advice. Please consult your tax advisor. Suicide Clause: If death is caused by suicide within the first two years of the contract, the total death benefit is equal to the premium paid less any indebtedness or any prior partial surrenders. This clause also applies to optional death benefit riders. Contracts Advertised: This illustration and other enclosed forms are valid only for the state of [Name], where the assumed policyowner resides. Form numbers: [VUL 31747 ST 2-98, VUL 31837 ST 2-98, VUL 31838 ST 2-98, VUL 31839 ST 2-98, VUL 31851 ST 2-98, VUL 31852 ST 2-98.] (may vary by state). Page 2 of 7 Form of Variable Universal Life Insurance Illustration INSURED: POLICY INFORMATION: BENEFIT RIDERS SELECTED: John Doe Option: B NONE USAA # Initial Death Benefit: $100,000.00 Male: Age 42 Annual Premium Outlay: $1,000.00 Quote Effective Date: 05/18/02 Prepared On: 05/18/02
- ------------------------------------------------------------------------------- This notice applies to all hypothetical values for each Hypothetical Gross Rate of Return shown in this illustration. The policy year-end values shown assume that planned premium payments are made on the first day of each payment period. The values for the columns are hypothetical and are not guaranteed. The performance of your selected variable fund accounts may produce actual values other than those shown in this illustration. Actual results may be more or less favorable than those shown. Refer to the introductory information on this illustration for an explanation of terms used throughout. The hypothetical values illustrated are based on the Net Rate of Return and reflect the deduction of the Cost of Insurance, Administrative, Maintenance and Premium Charges. See the prospectus for further details. - ------------------------------------------------------------------------------------------------------------------------------------ GUARANTEED EXPENSES NON-GUARANTEED EXPENSES 8.00000% Hypothetical Gross Rate of Return 8.00000% Hypothetical Gross Rate of Return (6.75000% Net Rate of Return) (6.75000% Net Rate of Return) - ------------------------------------------------------------------------------------------------------------------------------------ Total Cash Cash Policy Annual Cash Surrender Death Cash Surrender Death Year Age Premium $ Value $ Value $ Benefit $ Value $ Value $ Benefit $ - ------------------------------------------------------------------------------------------------------------------------------------ 1 43 1,000.00 565.29 0.00 100,565 720.08 0.00 100,720 2 44 1,000.00 1,272.06 58.41 101,272 1,585.17 371.52 101,585 3 45 1,000.00 2,002.62 923.82 102,003 2,485.15 1,406.35 102,485 4 46 1,000.00 2,755.54 1,811.59 102,756 3,425.67 2,481.72 103,426 5 47 1,000.00 3,530.69 2,721.59 103,531 4,410.67 3,601.57 104,411 6 48 1,000.00 4,327.69 3,653.44 104,328 5,447.59 4,773.34 105,448 7 49 1,000.00 5,142.71 4,603.31 105,143 6,503.05 5,963.65 106,503 8 50 1,000.00 5,976.32 5,571.77 105,976 7,581.53 7,176.98 107,582 9 51 1,000.00 6,824.03 6,554.33 106,824 8,689.65 8,419.95 108,690 10 52 1,000.00 7,681.45 7,546.60 107,681 9,834.26 9,699.41 109,834 11 53 1,000.00 8,539.22 8,539.22 108,539 11,021.18 11,021.18 111,021 12 54 1,000.00 9,391.47 9,391.47 109,391 12,260.78 12,260.78 112,261 13 55 1,000.00 10,229.39 10,229.39 110,229 13,554.94 13,554.94 113,555 14 56 1,000.00 11,045.92 11,045.92 111,046 14,906.31 14,906.31 114,906 15 57 1,000.00 11,828.28 11,828.28 111,828 16,300.98 16,300.98 116,301 16 58 1,000.00 12,573.10 12,573.10 112,573 17,658.74 17,658.74 117,659 17 59 1,000.00 13,265.49 13,265.49 113,265 19,073.70 19,073.70 119,074 18 60 1,000.00 13,890.93 13,890.93 113,891 20,504.30 20,504.30 120,504 19 61 1,000.00 14,427.78 14,427.78 114,428 21,941.99 21,941.99 121,942 20 62 1,000.00 14,860.19 14,860.19 114,860 23,362.13 23,362.13 123,362 25 67 1,000.00 14,354.57 14,354.57 114,355 29,361.83 29,361.83 129,362 30 72 1,000.00 6,060.58 6,060.58 106,061 31,897.10 31,897.10 131,897 31 73 1,000.00 2,817.05 2,817.05 102,817 31,549.97 31,549.97 131,550 35 77 1,000.00 0.00 0.00 0 25,275.04 25,275.04 125,275 40 82 1,000.00 0.00 0.00 0 1,738.36 1,738.36 101,738 This illustration continues to policy year 32 This illustration continues to policy year 41 - ------------------------------------------------------------------------------------------------------------------------------------ TAX GUIDELINE PAYMENTS EXPENSES (included in all figures) RATE CLASS: Guideline Single: $ 19,540.21 First-Year Admin.: $10/month Preferred Guideline Annual: $ 5,334.12 Maintenance: $5/month each year MEC Guideline: $ 4,804.44 Premium Charge: 3% of all premiums up to 10 annual target premiums Commissions: NONE ANNUAL TARGET PREMIUM $ 2,697.00
Page 3 of 7 Form of Variable Universal Life Insurance Illustration INSURED: POLICY INFORMATION: BENEFIT RIDERS SELECTED: John Doe Option: B NONE USAA # Initial Death Benefit: $100,000.00 Male, Age 42 Annual Premium Outlay: $1,000.00 Quote Effective Date: 05/18/02 Prepared On: 05/18/02
================================================================================ - ------------------------------------------------------------------------------------------------------------------------------------ GUARANTEED EXPENSES NON-GUARANTEED EXPENSES 12.00000% Hypothetical Gross Rate of Return 12.00000% Hypothetical Gross Rate of Return (10.75000% Net Rate of Return) (10.7500% Net Rate of Return) - ------------------------------------------------------------------------------------------------------------------------------------ Total Cash Cash Policy Annual Cash Surrender Death Cash Surrender Death Year Age Premium $ Value $ Value $ Benefit $ Value $ Value $ Benefit $ - ------------------------------------------------------------------------------------------------------------------------------------ 1 43 1,000.00 594.55 0.00 100,595 752.47 0.00 100,752 2 44 1,000.00 1,358.52 144.87 101,359 1,684.32 470.67 101,684 3 45 1,000.00 2,179.99 1,101.19 102,180 2,692.06 1,613.26 102,692 4 46 1,000.00 3,062.40 2,118.45 103,062 3,787.69 2,843.74 103,788 5 47 1,000.00 4,010.63 3,201.53 104,011 4,981.70 4,172.60 104,982 6 48 1,000.00 5,029.97 4,355.72 105,030 6,289.70 5,615.45 106,290 7 49 1,000.00 6,121.61 5,582.21 106,122 7,684.69 7,145.29 107,685 8 50 1,000.00 7,293.79 6,889.24 107,294 9,181.19 8,776.64 109,181 9 51 1,000.00 8,548.96 8,279.26 108,549 10,794.41 10,524.71 110,794 10 52 1,000.00 9,891.60 9,756.75 109,892 12,543.06 12,408.21 112,543 11 53 1,000.00 11,317.95 11,317.95 111, 318 14,441.80 14,441.80 114,442 12 54 1,000.00 12,833.99 12,833.99 112,834 16,517.93 16,517.93 116,518 13 55 1,000.00 14,439.68 14,439.68 114,440 18,787.54 18,787.54 118,788 14 56 1,000.00 16,140.03 16,140.03 116,140 21,272.40 21,272.40 121,272 15 57 1,000.00 17,928.66 17,928.66 117,929 23,971.12 23,971.12 123,971 16 58 1,000.00 19,819.34 19,819.34 119,819 26,828.73 26,828.73 126,829 17 59 1,000.00 21,808.50 21,808.50 121,809 29,958.39 29,958.39 129,958 18 60 1,000.00 23,898.28 23,898.28 123,898 33,346.61 33,346.61 133,347 19 61 1,000.00 26,073.76 26,073.76 126,074 37,000.33 37,000.33 137,000 20 62 1,000.00 28,342.64 28,342.64 128,343 40,934.08 40,934.08 140,934 25 67 1,000.00 40,540.47 40,540.47 140,540 65.063.91 65.063.91 165,064 30 72 1,000.00 52,554.04 52,554.04 152,554 98,947.72 98,947.72 198,948 35 77 1,000.00 58,008.51 58,008.51 158,009 144,307.77 144,307.77 244,308 40 82 1,000.00 44,894.40 44,894.40 144,894 204,243.07 204,243.07 304,243 44 86 1,000.00 5,172.62 5,172.62 105,173 263,394.22 263,394.22 363,394 45 87 1,000.00 0.00 0.00 0 278,078.09 278,078.09 378,078 50 92 1,000.00 0.00 0.00 0 342,445.75 342,445.75 442,446 55 97 1,000.00 0.00 0.00 0 398,384.80 398,384.80 498,385 58 100 1,000.00 0.00 0.00 0 430,076.58 430,076.58 530,077 This illustration continues to policy year 45 This illustration continues to policy year 59. - ------------------------------------------------------------------------------------------------------------------------------------
Page 4 of 7 Form of Variable Universal Life Insurance Illustration INSURED: POLICY INFORMATION: BENEFIT RIDERS SELECTED: John Doe Option: B NONE USAA # Initial Death Benefit: $100,000.00 Male, Age 42 Annual Premium Outlay: $1,000.00 Quote Effective Date: 05/18/02 Prepared On: 05/18/02
================================================================================ - ------------------------------------------------------------------------------------------------------------------------------------ GUARANTEED EXPENSES NON-GUARANTEED EXPENSES 0.00000% Hypothetical Gross Rate of Return 0.00000% Hypothetical Gross Rate of Return (-1.25000% Net Rate of Return) (-1.25000% Net Rate of Return) - ------------------------------------------------------------------------------------------------------------------------------------ Total Cash Cash Policy Annual Cash Surrender Death Cash Surrender Death Year Age Premium $ Value $ Value $ Benefit $ Value $ Value $ Benefit $ - ------------------------------------------------------------------------------------------------------------------------------------ 1 43 1,000.00 507.11 0.00 100,507 655.50 0.00 100,656 2 44 1,000.00 1,106.78 0.00 101,107 1,395.02 181.37 101,395 3 45 1,000.00 1,676.49 597.69 101,676 2,103.32 1,024.52 102,103 4 46 1,000.00 2,212.93 1,268.98 102,213 2,783.06 1,839.11 102,783 5 47 1,000.00 2,715.25 1,906.15 102,715 3,436.06 2,626.96 103,436 6 48 1,000.00 3,181.56 2,507.31 103,182 4,066.28 3,392.03 104,066 7 49 1,000.00 3,608.92 3,069.52 103,609 4,640.77 4,101.37 104,641 8 50 1,000.00 3,995.22 3,590.57 103,995 5,160.99 4,756.44 105,161 9 51 1,000.00 4,336.40 4,066.70 104,336 5,622.23 5,363.53 105,633 10 52 1,000.00 4,626.86 4,492.01 104,627 6,061.80 5,926.95 106,062 11 53 1,000.00 4,860.49 4,860.49 104,860 6,454.07 6,454.07 106,454 12 54 1,000.00 5,029.24 5,029.24 105,029 6,813.74 6,813.74 106,814 13 55 1,000.00 5,127.00 5,127.00 105,127 7,140.91 7,140.91 107,141 14 56 1,000.00 5,147.49 5,147.49 105,147 7,433.32 7,433.32 107,433 15 57 1,000.00 5,084.77 5,084.77 105,085 7,679.76 7,679.76 107,680 16 58 1,000.00 4,934.84 4,934.84 104,935 7,795.50 7,795.50 107,796 17 59 1,000.00 4,688.14 4,688.14 104,688 7,876.79 7,876.79 107,877 18 60 1,000.00 4,333.98 4,333.98 104,334 7,878.09 7,878.09 107,878 19 61 1,000.00 3,862.10 3,862.10 103,862 7,798.45 7,798.45 107,798 20 62 1,000.00 3,259.38 3,259.38 103,259 7,607.23 7,607.23 107,607 23 65 1,000.00 472.80 472.80 100,473 6,159.13 6,159.13 106,159 25 67 1,000.00 0.00 0.00 0 4,365.39 4,365.39 104,365 28 70 1,000.00 0.00 0.00 0 378.61 378.61 100,379 This illustration continues to policy year 24 This illustration continues to policy year 29 - ------------------------------------------------------------------------------------------------------------------------------------
Page 5 of 7 Form of Variable Universal Life Insurance Illustration INSURED: POLICY INFORMATION: BENEFIT RIDERS SELECTED: John Doe Option: B None USAA # Initial Death Benefit: $100,000.00 Male, Age 42 Annual Premium Payment: $1,000.00 Quote Effective Date: 05/18/02 Prepared On: 05/18/02
================================================================================ Summary Page This summary gives the cumulative premium projected through the ages requested and compares three hypothetical gross rates of return for guaranteed (maximum) and non-guaranteed (current) expenses. The values shown with a 0.00000% hypothetical gross rate of return are based on guaranteed expenses. The values for a 8.00000% and 12.00000% hypothetical gross rate of return are based on current expenses only. - -------------------------------------------------------------------------------------------- GUARANTEED EXPENSES 0.00000% Hypothetical Gross Rate of Return (-1.25000% Net Rate of Return ) - -------------------------------------------------------------------------------------------- Cash Cumulative Cash Surrender Death Year Age Premium $ Value $ Value $ Benefit $ - -------------------------------------------------------------------------------------------- 5 47 5,000.00 2,715.25 1,906.15 102,715.25 10 52 10,000.00 4,626.86 4,492.01 104,626.86 20 62 20,000.00 3,259.38 3,259.38 103,259.38 28 70 0.00 0.00 0.00 0.00 - -------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------- NON-GUARANTEED EXPENSES 8.00000% Hypothetical Gross Rate of Return (6.75000% Net Rate of Return) - -------------------------------------------------------------------------------------------- Cash Cumulative Cash Surrender Death Year Age Premium $ Value $ Value $ Benefit $ - -------------------------------------------------------------------------------------------- 5 47 5,000.00 4,410.67 3,601.57 104,410.67 10 52 10,000.00 9,699.41 9,699.41 109,834.26 20 62 20,000.00 23,362.13 23,362.13 123,362.13 28 70 28,000.00 31,559.93 31,559.93 131,559.93 - -------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------- NON-GUARANTEED EXPENSES 12.00000% Hypothetical Gross Rate of Return (10.75000% Net Rate of Return) - -------------------------------------------------------------------------------------------- Cash Cumulative Cash Surrender Death Year Age Premium $ Value $ Value $ Benefit $ - -------------------------------------------------------------------------------------------- 5 47 5,000.00 4,981.70 4,172.60 104,981.70 10 52 10,000.00 12,543.06 12,408.21 112,543.06 20 62 20,000.00 40,934.08 40,934.08 140,934.08 28 70 28,000.00 84,062.20 84,062.20 184,062.20 - --------------------------------------------------------------------------------------------
Page 6 of 7 USAA Life Insurance Company certifies that this illustration has been presented to the applicant and that the applicant has been informed that any non-guaranteed elements illustrated are subject to change. No statements that are inconsistent with the illustration have been made by the authorized representative of USAA Life Insurance Company. This illustration is based on the options you requested. Because the policy you purchase may differ from that which has been illustrated, you will be provided with an illustration that conforms to your policy at the time it is issued. You will be asked to sign and return the conforming illustration to acknowledge that, when applying for insurance, you were told and understood that any non-guaranteed elements illustrated are subject to change and actual results may be more or less favorable. _______________________________________ ___________ Ted E. Johnson, Jr., FLMI, ASC, HIA Date Vice President, Life/AnnuityMember Acquisition Page 7 of 7 -----END PRIVACY-ENHANCED MESSAGE-----