-----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, BfEDbhETQn1XRilSFVmPkN9AZBivwLacSsbsGBkZ/LV30cqPR4MjnNTy9aF2VL2Z tFuiuMWfrRu6bTx02izVdw== 0000950124-97-002466.txt : 19970429 0000950124-97-002466.hdr.sgml : 19970429 ACCESSION NUMBER: 0000950124-97-002466 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19970428 EFFECTIVENESS DATE: 19970428 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KILICO VARIABLE SEPARATE ACCOUNT/IL CENTRAL INDEX KEY: 0000810369 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 36305975 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 033-11803 FILM NUMBER: 97588032 BUSINESS ADDRESS: STREET 1: 1 KEMPER DRIVE CITY: LONG GROVE STATE: IL ZIP: 60049-0001 BUSINESS PHONE: 7083204982 MAIL ADDRESS: STREET 1: C/O KEMPER LIFE INSURANCE COMPANIES STREET 2: 1 KEMPER DRIVE CITY: LONG GROVE STATE: IL ZIP: 60049-0001 485BPOS 1 POST EFFECTIVE AMEND #10 TO FORM S-6 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 1997 REGISTRATION STATEMENT 33-11803 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------ POST-EFFECTIVE AMENDMENT NO. 10 To FORM S-6 FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM N-8B-2 ------------------ A. Exact name of trust: KILICO VARIABLE SEPARATE ACCOUNT B. Name of depositor: KEMPER INVESTORS LIFE INSURANCE COMPANY C. Complete address of depositor's principal executive offices: 1 Kemper Drive Long Grove, Illinois 60049 D. Name and complete address of agent for service: DEBRA P. REZABEK, ESQ. Kemper Investors Life Insurance Company 1 Kemper Drive Long Grove, Illinois 60049 COPIES TO: FRANK JULIAN, ESQ. JOAN E. BOROS, ESQ. Kemper Investors Life Insurance Company Katten Muchin & Zavis 1 Kemper Drive 1025 Thomas Jefferson Street, N.W. Long Grove, Illinois 60049 Washington, D.C. 20007
It is proposed that this filing will become effective (check appropriate box) [ ] Immediately upon filing pursuant to [X] on May 1, 1997 pursuant to paragraph (b), paragraph (b), or or [ ] 60 days after filing pursuant to [ ] on (date) pursuant to paragraph (a)(1) of paragraph (a)(1), or Rule 485.
If appropriate, check the following box: [ ] this post effective amendment designates a new effective date for a previously filed post-effective amendment. E. Title and amount of securities being registered: Units of Interests in the Separate Account under Flexible Premium Variable Life Insurance Policies. F. Proposed maximum aggregate offering price to the public of the securities being registered. Registration of Indefinite Amount of Securities filed February 6, 1987 (File No. 33-11803) pursuant to Rule 24f-2 under the Investment Company Act of 1940. The Rule 24f-2 Notice for the Registrant's most recent fiscal year was filed on February 27, 1997. G. Amount of filing Fee: None. H. Approximate date of proposed public offering: Continuous. [ ] Check box if it is proposed that this filing will become effective on (date) at (time) pursuant to Rule 487. ================================================================================ REGISTRANT ELECTS TO BE GOVERNED BY THE PROVISIONS OF RULE 6E-3(T)(B)(13)(I)(B) 2 PROSPECTUS--MAY 1, 1997 - -------------------------------------------------------------------------------- VARIABLE LIFE INSURANCE POLICY - -------------------------------------------------------------------------------- ISSUED BY KEMPER INVESTORS LIFE INSURANCE COMPANY THROUGH ITS KILICO VARIABLE SEPARATE ACCOUNT HOME OFFICE: 1 KEMPER DRIVE, LONG GROVE, ILLINOIS 60049 (847) 550-5500 This Prospectus describes a variable life insurance policy (the "Policy") issued by Kemper Investors Life Insurance Company ("KILICO"). The Policy provides for life insurance and for the accumulation of Cash Value on a variable basis. The Death Benefit and Cash Value of the Policy may vary to reflect the investment experience of the KILICO Variable Separate Account (the "Separate Account"). The Policy is designed to permit the payment of a large initial premium and, subject to certain restrictions, additional premiums. As designed, the Policy operates substantially as a single premium policy, providing for an initial premium payment of at least eighty percent of guideline single premiums, as defined under Section 7702 of the Internal Revenue Code. This Policy, as currently offered, is classified as a modified endowment contract for tax purposes and, as such, distributions during the life of the Insured would be taxed in a manner similar to an annuity. The minimum initial premium KILICO will accept is $5,000. An Owner may allocate premiums and Separate Account Value under a Policy to one or more of the Subaccounts of the Separate Account. Each Subaccount invests in one of the following portfolios of the Investors Fund Series (formerly Kemper Investors Fund) (the "Fund"): Money Market, Total Return, High Yield, Growth (formerly "Equity") and Government Securities. The other portfolios of the Fund are not currently available for investment under the Policy. Zurich Kemper Investments, Inc. (formerly named Kemper Financial Services, Inc.) ("ZKI"), is the investment manager of the Money Market, Total Return, High Yield, Growth, and Government Securities Portfolios. ZKI uses the services of Zurich Investment Management Limited ("ZIML"), an affiliate of ZKI, as sub-adviser for the Total Return, High Yield and Growth Portfolios. The accompanying prospectus for the Fund describes the investment objectives and the attendant risks of the portfolios of the Fund. Until the Trade Date, the initial premium is held in KILICO's General Account. The initial premium will be credited with interest equivalent to the investment experience, less additional applicable charges, of the Money Market Subaccount, from the later of the day following the date of receipt or the Policy Date. On the Trade Date, the initial premium and any credited investment return will be allocated to the Money Market Subaccount, and 15 days after the Trade Date, to one or more of the Subaccounts as specified in the Owner's application. KILICO guarantees that the Death Benefit payable for a Policy will never be less than the Death Benefit stated on the Policy Schedule page, less Debt, as long as the Policy is in force. There is no guaranteed Cash Value. If the Surrender Value is insufficient to cover the charges under the Policy, the Policy will lapse. See "Federal Tax Matters", page 17 for a discussion of laws that affect the tax treatment of the Policy. The Owner may examine the Policy and return it to KILICO for a refund during the Free-Look Period. It may not be advantageous to purchase a Policy as a replacement for another type of life insurance policy, or to obtain additional insurance protection if a flexible premium variable life insurance policy is already owned. THIS PROSPECTUS IS VALID ONLY IF ACCOMPANIED OR PRECEDED BY A CURRENT PROSPECTUS FOR THE INVESTORS FUND SERIES. ALL PROSPECTUSES SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE. THE POLICIES ARE NOT INSURED BY THE FDIC. THEY ARE OBLIGATIONS OF THE ISSUING INSURANCE COMPANY AND ARE NOT A DEPOSIT OF, OR GUARANTEED BY, ANY BANK OR SAVINGS INSTITUTION AND ARE SUBJECT TO RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL. ------------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. 3 TABLE OF CONTENTS ================================================================================
Page ---- DEFINITIONS................................................. 1 SUMMARY..................................................... 2 KILICO AND THE SEPARATE ACCOUNT............................. 4 THE FUND.................................................... 5 THE POLICY.................................................. 7 POLICY BENEFITS AND RIGHTS.................................. 9 CHARGES AND DEDUCTIONS...................................... 13 GENERAL PROVISIONS.......................................... 14 DISTRIBUTION OF POLICIES.................................... 16 FEDERAL TAX MATTERS......................................... 17 LEGAL CONSIDERATIONS........................................ 18 SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS................ 18 VOTING RIGHTS............................................... 19 STATE REGULATION OF KILICO.................................. 19 DIRECTORS AND OFFICERS OF KILICO............................ 20 LEGAL MATTERS............................................... 23 LEGAL PROCEEDINGS........................................... 23 EXPERTS..................................................... 23 REGISTRATION STATEMENT...................................... 23 FINANCIAL STATEMENTS........................................ 23 APPENDIX.................................................... 53
4 DEFINITIONS ACCUMULATION UNIT--An accounting unit of measure used to calculate the value of each Subaccount. AGE--The Insured's age on his or her last birthday. BENEFICIARY--The person to whom the proceeds due on the Insured's death are paid. CASH VALUE--The sum of the value of Policy assets in the Separate Account and any associated value in the General Account. DATE OF RECEIPT--Date of receipt means the valuation date during which a request, form or payment is received at KILICO's Home Office. KILICO is deemed to have received any request, form or payment on the date it is actually received at the Home Office, provided that it is received before the close of the New York Stock Exchange (which is normally 3:00 p.m. Long Grove time) on any date when the New York Stock Exchange is open. Otherwise, it will be deemed to be received on the next such day. DEBT--Debt means (1) the principal of any outstanding loan, plus (2) any loan interest due or accrued to KILICO. FREE-LOOK PERIOD--The period of time in which an Owner may cancel the Policy and receive a refund. In most states, an Owner may cancel the Policy within 10 days of the date it is received by the Owner. The applicable period of time will depend on the state in which the Policy is issued; however, it will be at least 10 days from the date the Policy is received by the Owner. FUND--Investors Fund Series (formerly Kemper Investors Fund), an open-end investment company in which the Subaccounts of the Separate Account invest. GENERAL ACCOUNT--The assets of KILICO other than those allocated to the Separate Account or any other separate account. GUIDELINE SINGLE PREMIUM--Guideline Single Premium is the maximum initial amount of premium that can be paid while retaining qualification as a life insurance policy under the Internal Revenue Code. INSURANCE AGE--The Insurance Age is the Age of the Insured on the first day of any Policy Year. If the first day of a Policy Year falls on the Insured's birthday, the Age attained on such date is the Insurance Age. INSURED--The person whose life is covered by the Policy and who is named on the Policy Schedule. MATURITY DATE--The Policy Date anniversary coinciding with or next following the Insured's 95th birthday. MONTHLY PROCESSING DATE--The same day in each month as the Policy Date. MORTALITY AND EXPENSE RISK CHARGE--The mortality and expense risk charge is a charge deducted in the calculation of the Accumulation Unit Value for the assumption of mortality risks and expense guarantees. POLICY DATE--The date shown in the Policy Schedule. The Policy Date is the date used to determine Policy Years and Monthly Processing Dates. The Policy Date will be the date following receipt of the application, except that if such date is the 29th, 30th, or 31st of a month, the Policy Date will be the first of the following month. POLICY YEAR--Each year commencing with the Policy Date and each Policy Date anniversary thereafter. SEPARATE ACCOUNT VALUE--The portion of the Cash Value in the Subaccount(s) of the Separate Account. SUBACCOUNT--The subdivisions of the Separate Account. SURRENDER VALUE--The surrender value of a Policy is (1) the Cash Value minus (2) any applicable Surrender Charge; minus (3) any Debt. TRADE DATE--The Trade Date is stated in the Policy Schedule. It is the date on which the initial premium and any credited investment experience, less additional applicable charges, are allocated to the KILICO Money Market Subaccount. The Trade Date is the date when KILICO accepts the risk of providing insurance coverage to the Insured. VALUATION DATE--Each business day on which valuation of the assets of the Separate Account is required by applicable law, which currently is each day that the New York Stock Exchange is open for trading. VALUATION PERIOD--The period that starts at the close of a Valuation Date and ends at the close of the next succeeding Valuation Date. 1 5 SUMMARY The following summary should be read in conjunction with the detailed information in this Prospectus. You should refer to the heading "Definitions" for the meaning of certain terms. A Policy entered into on or after June 21, 1988 is considered a modified endowment contract. Further, a Policy entered into before June 21, 1988 may, in certain circumstances, be considered a modified endowment contract. For a Policy treated as a modified endowment contract, certain assignments, loans and surrenders will be considered received by the Owner and are included in the Owner's Federal gross income to the extent that the Cash Value exceeds the Owner's investment in the Policy. Subject to specified exceptions, the portion of any amount considered received by the Owner that is includible in gross income is subject to an additional 10 percent tax. (See "Federal Tax Matters," at page 17.) Variations from the information appearing in this prospectus due to individual state requirements are described in supplements which are attached to this Prospectus, or in endorsements to the Policy, as appropriate. Unless otherwise indicated the description of the Policy contained in this Prospectus assumes that the Policy is in force, that there is no indebtedness, that the current Death Benefit is required to be adjusted through multiplication of the Cash Value by the Death Benefit Factor, and that current Federal tax laws apply. The Owner of a Policy pays a premium for life insurance coverage on the person insured. The Policy provides for a Surrender Value which is payable if the Policy is terminated during an Insured's lifetime. The Death Benefit and Cash Value of the Policy may increase or decrease to reflect the investment experience of the Subaccounts of the Separate Account to which premiums are allocated. There is no guaranteed Cash Value. If the Surrender Value is insufficient to pay charges under the Policy, the Policy will lapse unless an additional premium payment or loan repayment is made. (See "The Policy--Premiums and Allocation of Premiums and Separate Account Value," pages 7 and 8, "Charges and Deductions," page 13, and "Policy Benefits and Rights," page 9.) The purpose of the Policy is to provide insurance protection for the beneficiary named therein. No claim is made that the Policy is in any way similar or comparable to a systematic investment plan of a mutual fund. POLICY BENEFITS CASH VALUE. The Policy provides for a Cash Value. The Cash Value will reflect the amount and frequency of premium payments, the investment experience of the selected Subaccounts of the Separate Account, any values in the General Account, and charges imposed in connection with the Policy. The entire investment risk is borne by the Owner. KILICO does not guarantee a minimum Separate Account Value. (See "Policy Benefits and Rights--Cash Value," page 10.) The Owner may surrender a Policy at any time and receive the Surrender Value, which equals the Cash Value less any applicable surrender charge and outstanding Debt. (See "Policy Benefits and Rights--Surrender Privilege," page 12.) POLICY LOANS. The Owner may borrow up to 90% of the Policy's Cash Value minus applicable surrender charges, subject to the requirements of the Internal Revenue Code. The minimum amount of a loan is $500. Interest at an effective annual rate of 6.00% will be charged on outstanding loan amounts. (See "Federal Tax Matters," page 17.) When a loan is made, a portion of the Policy's Cash Value equal to the amount of the loan will be transferred from the Separate Account (proportionately from the Subaccounts, unless the Owner requests otherwise) to KILICO's General Account. Cash Values within the General Account attributable to premium will earn no less than 4.00% annual interest. That portion of the Cash Values within the General Account attributable to amounts in excess of premium will earn 6.00% annual interest. Such earnings will be allocated to the General Account. (See "Policy Benefits and Rights--Policy Loans," page 12.) DEATH BENEFITS. As long as the Policy remains in force, the Policy provides a death benefit payment upon the death of the Insured. The death benefit is the greater of the Death Benefit stated on the Policy Schedule, or a specified multiple of the Cash Value. The Death Benefit stated on the Policy Schedule may not be increased unless Cash Value times the Death Benefit Factor is at least equal to the Death Benefit stated on the Policy Schedule. The death benefit payable will be reduced by any Debt. (See "Policy Benefits and Rights--Death Benefits," page 9.) PREMIUMS The minimum initial premium that may be paid under the Policy is $5,000. The application for the Policy must accompany or precede the full minimum initial premium. Subject to premium guidelines established under Federal tax law, additional premiums may be paid while the Policy is in force, including when necessary to prevent lapse. (See "The Policy--Premiums," page 7 and "Federal Tax Matters," page 17.) 2 6 THE SEPARATE ACCOUNT ALLOCATION OF PREMIUMS. The portion of the premium available for allocation equals the premium paid. An Owner indicates in the application for the Policy the percentages of premium to be allocated among the Subaccounts of the Separate Account. The Separate Account currently consists of five Subaccounts, each of which invests in shares of a designated portfolio of the Fund. The investment manager of the portfolios is Zurich Kemper Investments, Inc., an affiliate of KILICO. On the day following the date of receipt, the initial premium will be allocated to the KILICO General Account. It will be credited with interest equivalent to the investment experience of the Money Market Subaccount from the later of the day following the date of receipt or the Policy Date. On the Trade Date, such amount in the KILICO General Account will be allocated to the Money Market Subaccount. Additional applicable charges which are currently the charge for the cost of insurance will be deducted as of the Policy Date. On the Trade Date, the Policy's Cash Value will thus be the same as if the initial premium had been allocated to the Money Market Subaccount on the Policy Date. Fifteen days from the Trade Date, the Separate Account Value in the Money Market Subaccount will be allocated among the Subaccounts in accordance with the Owner's instructions in the application. (See "Policy Issue," page 7.) TRANSFERS. An Owner may transfer Separate Account Value among the Subaccounts. One transfer of all or part of the Separate Account Value may be made within a fifteen day period. (See "Allocation of Premiums and Separate Account Value--Transfers," page 8.) THE FUND The following portfolios of the Investors Fund Series (formerly Kemper Investors Fund) are currently available for investment under this Policy are summarized below: MONEY MARKET PORTFOLIO seeks to provide maximum current income to the extent consistent with stability of principal from a portfolio of high quality money market instruments that mature in 12 months or less. TOTAL RETURN PORTFOLIO seeks a high total return, a combination of income and capital appreciation, by investing in a combination of debt securities and common stocks. HIGH YIELD PORTFOLIO seeks to provide a high level of current income by investing in fixed-income securities. GROWTH PORTFOLIO seeks maximum appreciation of capital through diversification of investment securities having potential for capital appreciation. GOVERNMENT SECURITIES PORTFOLIO seeks high current return consistent with preservation of capital from a portfolio composed primarily of U.S. Government securities. For a more detailed description of the Fund, see "KILICO and the Separate Account--the Fund," page 5, the Fund prospectus, and Statement of Additional Information available upon request. CHARGES Deductions will be made from the Policy's value in each Subaccount on the Policy Date and on each Monthly Processing Date for the cost of insurance charge. In addition, deductions will be imposed on the Policy's value in each Subaccount on a daily basis for the assumption by KILICO of certain mortality and expense risks incurred in connection with the Policy, at an annual rate of .90%. (See "Charges and Deductions--Mortality and Expense Risk Charge," page 14.) No sales charge is deducted from any premium payment. However, if the Policy is surrendered or if the Cash Value is applied under a Settlement Option, a Surrender Charge on the lesser of premium paid in the first Policy Year or Cash Value under the Policy will be deducted from the amount payable. The Surrender Charge starts at 9% in the first Policy Year and reduces by 1% each Policy Year so that there is no charge in the tenth and later Policy Years. Subject to other considerations, the Owner may decide to reduce the potential Surrender Charge by paying less initial premium. (See "Policy Benefits and Rights--Surrender Privilege," page 12.) No charges are currently made from the Separate Account for Federal, state or other taxes. Should KILICO determine that such taxes may be imposed, it may make deductions from the Separate Account to pay those taxes. (See "Federal Tax Matters," page 17.) In addition, the Subaccounts of the Separate Account purchase shares of the Fund. For fees and expenses of the Fund, see the prospectus for the Fund. 3 7 TAX TREATMENT UNDER CURRENT FEDERAL TAX LAW The Cash Value, while it remains in the Policy, and the Death Benefit should be subject to the same Federal income tax treatment as the cash value under a conventional fixed benefit life insurance policy. Under existing tax law, the Owner is generally not deemed to be in constructive receipt of the Cash Value under a Policy until a distribution occurs through a loan or surrender. A change of Owners, an assignment, a loan or a surrender of the Policy generally will have tax consequences. Death Benefits payable under the Policy should be completely excludable from the gross income of the Beneficiary. As a result, the Beneficiary generally will not be subject to income tax on the Death Benefit. (See "Federal Tax Matters," page 17.) FREE-LOOK PERIOD AND EXCHANGE RIGHTS The Owner is granted a period of time to examine a Policy and return it for a refund. The applicable period of time will depend on the state in which the Policy is issued; however, it will be at least 10 days from the date the Policy is received by the Owner. (See "Policy Benefits and Rights--Free-Look Period and Exchange Rights," page 13.) The Owner may, while the Policy is in force, exchange it at any time after its issue, for a non-variable permanent fixed benefit life insurance policy then currently being offered by KILICO on the life of the Insured. Such policy would be treated and taxed as a modified endowment contract. No evidence of insurability will be required. During the first two years after the Policy Trade Date, the amount of the new policy may be, at the election of the Owner, either the initial Death Benefit or the same net amount at risk as the Policy on the exchange date. After two years from the Policy Trade Date, the amount of the new policy will be for the same net amount at risk as the Policy on the exchange data. All Debt under the Policy must be repaid and the surrender of the Policy is required before the exchange is made. The policy date and issue age will be the same as existed under the Policy. ILLUSTRATIONS OF SEPARATE ACCOUNT VALUES SURRENDER VALUES AND DEATH BENEFITS Tables in the Appendix illustrate the Separate Account Values, Surrender Values and Death Benefits based upon certain hypothetical assumed rates of return for the Separate Account and the charges deducted under the Policy. KILICO AND THE SEPARATE ACCOUNT KEMPER INVESTORS LIFE INSURANCE COMPANY Kemper Investors Life Insurance Company ("KILICO"), 1 Kemper Drive, Long Grove, Illinois 60049, was organized in 1947 and is a stock life insurance company organized under the laws of the State of Illinois. KILICO offers annuity and life insurance products and is admitted to do business in the District of Columbia and all states except New York. KILICO is a wholly-owned subsidiary of Kemper Corporation, a nonoperating holding company. Zurich Insurance Company ("Zurich"), Insurance Partners, L.P. ("IP") and Insurance Partners Offshore (Bermuda), L.P. (together with IP, "Insurance Partners") indirectly and directly own 80 percent and 20 percent, respectively, of Kemper Corporation. KILICO Variable Separate Account (the "Separate Account") was established by KILICO as a separate investment account on January 22, 1987. The Separate Account will receive and invest the premiums under the Policy. In addition, the Separate Account may receive and invest premiums for other variable life insurance policies issued by KILICO. The Separate Account is administered and accounted for as part of the general business of KILICO, but the income, capital gains or capital losses of the Separate Account are credited to or charged against the assets held in the Separate Account, without regard to any other income, capital gains or capital losses of any other separate account or arising out of any other business which KILICO may conduct. The benefits provided under the Policy are obligations of KILICO. The Separate Account is currently divided into five Subaccounts. Each Subaccount invests exclusively in shares of one of the portfolios of the Fund currently available for investment through the Separate Account. Income and both realized and unrealized gains or losses from the assets of each Subaccount generally are credited 4 8 to or charged against that Subaccount without regard to income, gains or losses from any other Subaccount of the Separate Account or arising out of any business KILICO may conduct. The Separate Account has been registered with the Securities and Exchange Commission ("Commission") as a unit investment trust under the Investment Company Act of 1940 (the "1940 Act"). Such registration does not involve supervision by the Commission of the management, investment practices or policies of the Separate Account or KILICO. THE FUND The Separate Account invests in shares of the Investors Fund Series (formerly Kemper Investors Fund), a series type mutual fund registered with the Commission as an open-end, management investment company. Registration of the Fund does not involve supervision of its management, investment practices or policies by the Commission. The Fund is designed to provide an investment vehicle for variable life insurance and variable annuity contracts. Shares of the Fund are sold only to insurance company separate accounts. In addition to the Separate Account, shares of the Fund may be sold to variable life insurance and variable annuity separate accounts of insurance companies not affiliated with KILICO. It is conceivable that in the future it may be disadvantageous for variable life insurance separate accounts of companies unaffiliated with KILICO, or for both variable life insurance separate accounts and variable annuity separate accounts, to invest simultaneously in the Fund. Currently neither KILICO nor the Fund foresees any such disadvantages to either variable life insurance or variable annuity owners. Management of the Fund has an obligation to monitor events to identify material conflicts between such owners and determine what action, if any, should be taken. In addition, if KILICO believes that the Fund's response to any of those events or conflicts insufficiently protects the Owners, it will take appropriate action on its own. The Separate Account invests in the following Portfolios of the Fund: Money Market Portfolio, Total Return Portfolio, High Yield Portfolio, Growth Portfolio and Government Securities Portfolio. The other portfolios of the Fund are not currently available for investment under the Policy. The assets of each Portfolio are held separate from the assets of the other Portfolios, and each Portfolio has its own distinct investment objective and policies. Each Portfolio operates as a separate investment fund, and the income or losses of one Portfolio generally have no effect on the investment performance of any other Portfolio. The five portfolios of the Fund in which the Separate Account invests are summarized below: MONEY MARKET PORTFOLIO seeks maximum current income to the extent consistent with stability of principal from a portfolio of high quality money market instruments that mature in twelve months or less. TOTAL RETURN PORTFOLIO seeks a high total return, a combination of income and capital appreciation, by investing in a combination of debt securities and common stocks. HIGH YIELD PORTFOLIO seeks to provide a high level of current income by investing in fixed-income securities. GROWTH PORTFOLIO seeks maximum appreciation of capital through diversification of investment securities having potential for capital appreciation. GOVERNMENT SECURITIES PORTFOLIO seeks high current return consistent with preservation of capital from a portfolio composed primarily of U.S. Government securities. There is no assurance that any of the Portfolios of the Fund will achieve its objective as stated in the prospectus for the Fund. More detailed information, including a description of risks involved in investing in each of the Portfolios, may be found in the prospectus for the Fund, which must accompany or precede this Prospectus, and the Fund's Statement of Additional Information available upon request from Kemper Investors Life Insurance Company, 1 Kemper Drive, Long Grove, Illinois 60049. Zurich Kemper Investments, Inc., ("ZKI") (formerly Kemper Financial Services, Inc.) an affiliate of KILICO, is the investment manager of the Money Market, Total Return, High Yield, Growth and Government Securities Portfolios. For its services to the Portfolios, ZKI receives compensation monthly at annual rates equal to .50 of 1%, .55 of 1%, .60 of 1%, .60 of 1% and .55 of 1% of the average daily net asset values of the Money Market Portfolio, the Total Return Portfolio, the High Yield Portfolio, the Growth Portfolio, and the Government Securities Portfolio, respectively. ZKI uses the services of Zurich Investment Management Limited ("ZIML"), an affiliate of ZKI, as sub-adviser for the Total Return, High Yield and Growth Portfolios. ZKI pays ZIML for its services a sub-advisory fee, payable monthly at the following annual rates applied to the portion of the average daily net assets of the applicable Portfolio allocated by ZKI to ZIML for management: .35 of 1% for the Total Return and Growth Portfolios and .30 of 1% for the High Yield Portfolio. 5 9 CHANGE OF INVESTMENTS KILICO reserves the right, subject to applicable law, to make additions to, deletions from, or substitutions for the shares held by the Separate Account or that the Separate Account may purchase. KILICO reserves the right to eliminate the shares of any of the portfolios of the Fund and to substitute shares of another portfolio of the Fund or of another investment company, if the shares of a portfolio are no longer available for investment, or if in its judgment further investment in any portfolio becomes inappropriate in view of the purposes of the Separate Account. KILICO will not substitute any shares attributable to an Owner's interest in a Subaccount of the Separate Account without notice to the Owner and prior approval of the Commission, to the extent required by the 1940 Act or other applicable law. Nothing contained in this Prospectus shall prevent the Separate Account from purchasing other securities for other series or classes of policies, or from permitting a conversion between series or classes of policies on the basis of requests made by Owners. KILICO also reserves the right to establish additional subaccounts of the Separate Account, each of which would invest in a new portfolio of the Fund, or in shares of another investment company, with a specified investment objective. New subaccounts may be established when, in the sole discretion of KILICO, marketing needs or investment conditions warrant, and any new subaccounts may be made available to existing Owners as determined by KILICO. KILICO may also eliminate or combine one or more subaccounts, transfer assets, or it may substitute one subaccount for another subaccount, if, in its sole discretion, marketing, tax or investment conditions warrant. KILICO will notify all Owners of any such changes. If deemed by KILICO to be in the best interests of persons having voting rights under the Policy, the Separate Account may be: (a) operated as a management company under the 1940 Act; (b) deregistered under that Act in the event such registration is no longer required; or (c) combined with other KILICO separate accounts. To the extent permitted by law, KILICO may also transfer the assets of the Separate Account associated with the Policy to another separate account, or to the General Account. 6 10 THE POLICY POLICY ISSUE Before KILICO will issue a Policy, it must receive a completed application and a full initial premium at its Home Office. A Policy ordinarily will be issued only for Insureds Age 0 through 75 who supply satisfactory evidence of insurability to KILICO. Acceptance of an application is subject to underwriting by KILICO. KILICO reserves the right to decline an application for any reason. After underwriting is complete and the Policy is delivered to the Owner, insurance coverage under the Policy will be deemed to have begun as of the day following the date of receipt of a completed application and the full initial premium. (See "Premiums," below.) This date is the Policy Date. PREMIUMS Premiums are to be paid to KILICO at its Home Office. (See "Distribution of Policies.") Checks ordinarily must be made payable to KILICO. INITIAL PREMIUM. The minimum initial premium that KILICO will accept under a Policy is $5,000. KILICO reserves the right to increase or decrease this amount for a class of Policies issued after some future date. For a given initial premium, the minimum death benefit will depend upon the Insurance Age, sex, and rate class of the Insured. The minimum death benefit for a given initial premium will be consistent with the assumptions for the Guideline Single Premium calculated under section 7702 of the Internal Revenue Code (the "Code"). (See "Federal Tax Matters.") The initial premium will be allocated to the KILICO General Account. It will be credited with interest equivalent to the investment experience of the Money Market Subaccount. This premium will remain in the KILICO General Account until the Trade Date. On the Trade Date, the initial premium, plus interest, will be allocated to the Money Market Subaccount. Additional applicable charges, including the charge for the cost of insurance, will be deducted as of the Policy Date. On the Trade Date, the Policy Cash Value will thus be the same as if the initial premium had been allocated to the Money Market Subaccount on the Policy Date. The Separate Account Value will remain in the Money Market Subaccount until 15 days from the Trade Date of the Policy. At the end of the 15 day period, the Separate Account Value in the Money Market Subaccount will be allocated to the Subaccounts elected by the Owner in the application for the Policy. The Policy Date is the date used to determine Policy Years and Monthly Processing Dates. The Policy Date will be the date following receipt of the application, except that if such date is the 29th, 30th, or 31st of a month, the Policy Date will be the first of the following month. Acceptance is subject to KILICO's underwriting rules, and KILICO reserves the right to reject an application for any reason. The contestability period and suicide exclusion period are measured from the Policy Date. The Trade Date is the date when KILICO accepts the risk of providing insurance coverage to the Insured. Insurance coverage will be limited to a maximum of $200,000 net amount at risk by the temporary insurance provisions of the application until the Trade Date. Monthly deductions and the crediting of investment experience begin as of the Policy Date, even if the Trade Date of the Policy is delayed due to underwriting requirements. In the event an application is declined by KILICO, the initial premium will be refunded, together with the earnings credited based on the investment experience of the KILICO Money Market Subaccount. The full initial premium is the only premium required to be paid under a Policy. However, additional premiums may be necessary to keep the Policy in force. (See "The Policy--Policy Lapse and Reinstatement.") ADDITIONAL PREMIUMS. Subject to the premium guidelines established under Federal tax law, additional premiums may be contributed while this Policy is in force, including when necessary to prevent lapse. Upon request, KILICO will tell the Owner whether an additional premium payment can be made and what its maximum amount is. These premium payments will not increase the maximum possible Surrender Charge. Except to prevent lapse, such an additional premium payment must be at least $1,000. KILICO reserves the right to limit the ability to make more than one additional premium payment in each Policy Year. Evidence of insurability may be required if an additional premium payment would result in an increase in the Death Benefit. Several factors affect when additional premium payments may be made. For example, assuming the maximum initial premium payment, the Policy Years in which an Owner issue age 45 may make additional payments depend upon investment experience. Based upon a hypothetical gross annual rate of return of 6% in the selected Kemper Investors Fund Portfolio(s), an additional payment may first be made in year 13, and additional payments may be made each year thereafter subject to any applicable underwriting requirements. A higher annual rate of return may cause the Death Benefit to exceed the minimum guaranteed death benefit. (See "Policy Rights and Benefits.") When this occurs additional payments are subject to underwriting requirements. 7 11 EFFECT OF ADDITIONAL PREMIUMS ON DEATH BENEFIT. Any additional premiums paid under a Policy may cause the Death Benefit to increase. (See "Policy Benefits and Rights--Death Benefits.") An increase in the Death Benefit may cause the cost of insurance charge to increase. (See "Charges and Deductions--Cost of Insurance.") ALLOCATION OF PREMIUMS AND SEPARATE ACCOUNT VALUE ALLOCATION OF PREMIUMS. The Owner allocates premiums to Subaccounts of the Separate Account. The Owner must indicate the initial allocation in the Policy application. Fifteen days after the Trade Date (see "Policy Benefits and Rights--Free-Look Period."), the Policy's Separate Account Value in the Money Market Subaccount will be allocated to the Subaccounts of the Separate Account in accordance with the Owner's allocation instructions in the application. Additional premiums received will continue to be allocated in accordance with the Owner's instructions in the application unless contrary written instructions are received. Once a change in allocation is made, all future premiums will be allocated in accordance with the new allocation, unless contrary written instructions are received. The Separate Account Value will vary with the investment experience of the chosen Subaccounts. The Owner bears the entire investment risk. TRANSFERS. Separate Account Value may be transferred among the Subaccounts of the Separate Account. One transfer of all or a part of the Separate Account Value may be made within a fifteen day period. All transfers made during a business day will be treated as one request. Transfer requests must be in writing in a form acceptable to KILICO, or by telephone authorization under forms authorized by KILICO. (See "General Provisions--Written Notices and Requests.") The minimum transfer amount is $500. No partial transfer may be made if the value of the Owner's remaining interest in a Subaccount, from which amounts are to be transferred, would be less than $500 after such transfer. Transfers will be based on the Accumulation Unit Values next determined following receipt of valid, complete transfer instructions by KILICO. The transfer provision may be suspended, modified or terminated at any time by KILICO. KILICO disclaims all liability for acting in good faith in following instructions which are given in accordance with procedures established by KILICO, including requests for personal identifying information, that are designed to limit unauthorized use of the privilege. Therefore, the Owner would bear the risk of loss in the event of a fraudulent telephone transfer. POLICY LAPSE AND REINSTATEMENT LAPSE. Lapse will occur when the Surrender Value of a Policy is insufficient to cover the monthly deduction for the cost of insurance, and a grace period expires without a sufficient payment being made. (See "Charges and Deductions.") A grace period of 61 days will be given to the Owner. It begins when notice is sent that the Surrender Value of the Policy is insufficient to cover the monthly deduction for the cost of insurance. Failure to make a premium payment or loan repayment during the grace period sufficient to keep the Policy in force for three months will cause the Policy to lapse and terminate without value. If payment is received within the grace period, the premium or loan repayment will be allocated to the Subaccounts in accordance with the most current allocation instructions, unless otherwise requested. Amounts over and above the amounts necessary to prevent lapse may be paid as additional premiums, however, to the extent otherwise permitted. (See "The Policy--Additional Premiums.") KILICO will not accept any payment that would cause the total premium payment to exceed the maximum payment permitted by the Code for life insurance under the guideline premium limits. However, the Owner may voluntarily repay a portion of Debt to avoid lapse. (See "Federal Tax Matters.") If premium payments have not exceeded the maximum payment permitted by the Code, the Owner may choose to make a larger payment than the minimum required payment to avoid the recurrence of the potential lapse of coverage. The Owner may also combine premium payments with Debt repayments. The death benefit payable during the grace period will be the Death Benefit in effect immediately prior to the grace period, less any Debt. 8 12 REINSTATEMENT. If a Policy lapses because of insufficient Cash Value to cover the monthly cost of insurance deduction, and it has not been surrendered for its Surrender Value, it may be reinstated at any time within five years after the date of lapse. Tax consequences may affect the decision to reinstate. Reinstatement is subject to: (1) receipt of evidence of insurability satisfactory to KILICO; (2) payment of a minimum premium sufficient to keep the Policy in force three months; and (3) payment or reinstatement of any Debt against the Policy which existed at the date of termination of coverage. The effective date of reinstatement of a Policy will be the Monthly Processing Date that coincides with or next follows the date the application for reinstatement is approved by KILICO. Suicide and incontestability provisions will apply from the effective date of reinstatement. If the Policy has been in force for two years during the lifetime of the Insured, it will be contestable only as to statements made in the reinstatement application. POLICY BENEFITS AND RIGHTS DEATH BENEFITS While the Policy is in force (see "Policy Lapse and Reinstatement--Lapse," above), the Death Benefit can never be less than the Death Benefit stated on the Policy Schedule page ("guaranteed minimum death benefit"). The Death Benefit may vary with the Cash Value of the Policy, which depends on the investment experience of the Separate Account Subaccounts to which a Policy's Separate Account Value is allocated. An increase in the Cash Value may increase the Death Benefit. However, while the Policy is in force, because the Death Benefit will never be less than the guaranteed minimum death benefit, a decrease in Cash Value may decrease the Death Benefit but never below the guaranteed minimum death benefit. The Death Benefit will be the greater of the guaranteed minimum death benefit or the applicable multiple of the Cash Value. If investment experience is sufficiently favorable, the Death Benefit may increase. Increases in the Death Benefit are calculated by KILICO by multiplying the Cash Value by the Death Benefit Factor. If the Cash Value were to drop because of unfavorable investment experience, the Death Benefit would drop, but not below the Death Benefit stated on the Policy Schedule page. The guaranteed minimum death benefit is based on the 1980 Commissioner's Standard Ordinary Smoker and Non-Smoker Mortality Tables [age last birthday] (called the "1980 CSO Tables"), the Insured's sex, rate class and insurance age at issue, and an assumed interest rate of 5.10 percent. The guaranteed minimum death benefit is calculated by KILICO based on the applicable 1980 CSO Table and the initial premium paid. Representative guaranteed minimum death benefits are shown below:
GUARANTEED MINIMUM DEATH BENEFIT PER $1 SINGLE PREMIUM ------------------------------------------------------ MALE FEMALE ------------------------ ------------------------ INSURANCE AGE NON-SMOKER SMOKER NON-SMOKER SMOKER ------------- ---------- ------ ---------- ------ 5 .......................................... 18.196 N/A 21.735 N/A 15 .......................................... 12.510 N/A 14.975 N/A 25 .......................................... 8.852 6.854 10.186 8.652 35 .......................................... 5.915 4.614 6.785 5.783 45 .......................................... 3.929 3.138 4.537 3.939 55 .......................................... 2.671 2.236 3.098 2.787 65 .......................................... 1.905 1.696 2.164 2.203 75 .......................................... 1.461 1.379 1.582 1.530
9 13 Representative multiples, each of which is referred to as a Death Benefit Factor, are shown in the table below:
DEATH BENEFIT IS NO LESS THAN THE CASH VALUE TIMES THE FOLLOWING MULTIPLE (DEATH BENEFIT FACTOR) ASSUMING NO DEBT INSURANCE AGE ---------------------------------- ------------- MALE FEMALE 5 ..................................... 2.50 2.50 15 ..................................... 2.50 2.50 25 ..................................... 2.50 2.50 35 ..................................... 2.50 2.50 45 ..................................... 2.15 2.15 55 ..................................... 1.50 1.50 65 ..................................... 1.20 1.20 75 ..................................... 1.05 1.05 85 ..................................... 1.05 1.05 95 ..................................... 1.00 1.00
EXAMPLES:
A B -------- -------- Initial Premium: $25,000 $25,000 Death Benefit on Policy Schedule (guaranteed minimum death benefit): 98,225 98,225 Insurance Age at Issue: 45 45 Insurance Age at Death: 55 55 Cash Value on Date of Death: 75,000 50,000 Death Benefit Factor: 1.5 1.5
In Example A, the Death Benefit equals $112,500, i.e., the greater of $98,225 or $112,500 (the Cash Value at the date of death of $75,000, multiplied by the Death Benefit Factor of 1.5). This amount less any outstanding Debt constitutes the Death Benefit which we would pay to the Beneficiary. In Example B, the Death Benefit is $98,225, i.e., the greater of $98,225 or $75,000 (the Cash Value of $50,000 multiplied by the Death Benefit Factor of 1.5). The difference in the Cash Value assumed is based upon different assumed investment experience. For a Policy, male age 45, non-smoker, under the above assumptions the Death Benefit payable would exceed the guaranteed minimum death benefit in the tenth Policy Year, assuming a 12% gross annual investment rate of return. (See Appendix at pages 56 and 57.) With a lesser gross annual investment rate of return, the Death Benefit would not exceed the guaranteed minimum death benefit until a later Policy Year. All or part of the Death Benefit may be paid in cash or applied under a settlement option. (See "General Provisions--Settlement Options.") EFFECT ON COST OF INSURANCE CHARGE. Any change in the Death Benefit will affect the net amount at risk, which would, in turn, affect the Owner's cost of insurance charge. (See "Charges and Deductions--Cost of Insurance Charge".) PAYMENT OF DEATH BENEFIT. Death Benefits under the Policy will ordinarily be paid within seven days after KILICO receives all documentation required for such a payment. Payments may be postponed in certain circumstances. (See "General Provisions--Postponement of Payments.") BENEFITS AT MATURITY If the Insured is living on the Policy anniversary following the Insured's Age 95, KILICO will pay the Owner the Surrender Value of the Policy, on surrender of the Policy to KILICO. On the Maturity Date, the Policy will terminate and KILICO will have no further obligations under the Policy. CASH VALUE The Policy's Cash Value will reflect the investment experience of the selected Subaccounts of the Separate Account, the frequency and amount of premiums paid, transfers between Subaccounts, any General Account values, and any charges assessed in connection with the Policy. An Owner may at any time surrender the Policy and receive the Policy's Surrender Value, which equals the Cash Value less surrender charges and Debt. (See "Surrender Privilege.") There is no minimum guaranteed Cash Value. 10 14 CALCULATION OF CASH VALUE. The Cash Value of the Policy is the total of the Policy's Separate Account Value and the Cash Value in the General Account. The Cash Value is determined on each Valuation Date. It will first be calculated on the Policy Date. On that date, the Cash Value equals the initial premium, less the cost of insurance charge for the first Policy Month. (See "Charges and Deductions.") On any Valuation Date during the Policy Year, the Policy's Separate Account Value in any Subaccount will equal: (1) The Policy's Separate Account Value in the Subaccount at the end of the preceding Valuation Period, multiplied by the Investment Experience Factor (defined below) for the current Valuation Period; plus (2) Any premium payments received during the current Valuation Period which are allocated to the Subaccount; plus (3) All amounts transferred to the Subaccount, either from another Subaccount or from the General Account in connection with the repayment of a Policy loan (see "Policy Benefits and Rights--Policy Loans," page 12) during the current Valuation Period; minus (4) All amounts transferred from the Subaccount during the current Valuation Period; minus (5) The pro rata portion of the monthly cost of insurance charge attributable to the Subaccount if a Policy Month began during the Valuation Period. (See "Charges and Deductions--Cost of Insurance Charge.") There will also be Cash Value in the General Account if there is a Policy loan outstanding. The General Account is credited with amounts transferred from Subaccounts in connection with Policy loans. The General Account balance accrues daily interest at an effective annual rate of 4.00% for values attributable to premium and 6.00% for values attributable to amounts in excess of premium. (See "Policy Benefits and Rights--Policy Loans.") ACCUMULATION UNIT VALUE. Each Subaccount has a distinct Accumulation Unit Value. When premiums or other amounts are allocated to a Subaccount, a number of units are purchased based on the Accumulation Unit Value of the Subaccount at the end of the Valuation Period during which the allocation is made. When amounts are transferred out of, or deducted from, a Subaccount, units are redeemed in a similar manner. For each Subaccount, the Accumulation Unit Value was initially set at $1.00. The Accumulation Unit Value for each subsequent Valuation Period is the Investment Experience Factor for that Valuation Period multiplied by the Accumulation Unit Value for the immediately preceding period. Each Valuation Period has a single Accumulation Unit Value which applies for each day in the period. The number of Accumulation Units will not change as a result of investment experience. The Investment Experience Factor may be greater or less than one; therefore, the Accumulation Unit Value may increase or decrease. INVESTMENT EXPERIENCE FACTOR. The investment experience of the Separate Account is calculated by applying the Investment Experience Factor to the Separate Account Value in each Subaccount during a Valuation Period. Each Subaccount has its own distinct Investment Experience Factor. The Investment Experience Factor of a Subaccount for any Valuation Period is determined by dividing (1) by (2) and subtracting (3) from the result, where: (1) is the net result of: a. The net asset value per share of the investment held in the Subaccount determined at the end of the current Valuation Period; plus b. the per share amount of any dividend or capital gain distributions made by the investment held in the Subaccount division, if the "ex-dividend" date occurs during the current Valuation Period; plus or minus c. a charge or credit for any taxes reserved for the current valuation period which we determine to have resulted from the investment operations of the Subaccount; (2) is the net asset value per share of the investment held in the Subaccount, determined at the end of the last prior Valuation Period; (3) is the factor representing the Mortality and Expense Risk Charge at an annual rate of 0.90% of the assets of the Subaccount and compensates KILICO for certain mortality and expense risks assumed. (See "Charges and Deductions--Mortality and Expense Risk Charge.") 11 15 POLICY LOANS On and after the first Monthly Processing Date after the Policy Date of the Policy, the Owner may by written request to KILICO borrow all or part of the Maximum Loan Amount of the Policy. The Maximum Loan Amount is 90% of the Policy's Cash Value minus applicable surrender charges, subject to the requirements of the Internal Revenue Code. The amount of any new loan may not exceed the Maximum Loan Amount less Debt on the date a loan is granted. The minimum amount of a loan is $500. Any amount due an Owner under a Policy Loan ordinarily will be paid within 7 days after KILICO receives a loan request at its Home Office, although payments may be postponed under certain circumstances. (See "Postponement of Payments," and "Federal Tax Matters.") If the Policy is treated as a modified endowment contract, the loan will be treated as a distribution for federal income tax purposes and may be subject to tax, withholding and penalties. On the date a loan is made, Separate Account Value equal to the loan amount will be transferred from the Separate Account to the loan account in the General Account. Unless the Owner directs otherwise, the loaned amount will be deducted from the Subaccounts in proportion to the values that each Subaccount bears to the Separate Account Value of the Policy in all of the Subaccounts at the end of the Valuation Period during which the request is received. The loan interest will be assessed at an effective annual rate of 6.00%. Interest not paid when due will be added to the loan amount due and bear interest at the same rate. Cash Value in the loan account within the General Account attributable to the premium will earn no less than 4.00% annual interest. Cash Value in the loan account within the General Account attributable to amounts in excess of premium will earn no less than 6.00% annual interest. Such earnings will be allocated to the General Account. LOAN REPAYMENT. While the Policy is in force, policy loans may be repaid at any time, in whole or in part. Payments will be treated as payment of outstanding Debt unless the Owner indicates that the payments should be treated otherwise. If otherwise permitted by the guideline premium limits of the Code where there is no indication made, the portion of a payment that exceeds the amount of any Debt will be treated as a premium payment. If not permitted by the Code, the amount that exceeds any Debt will be refunded to the Owner. At the time of repayment, Cash Value in the loan account of the General Account equal to the amount of the repayment which exceeds the difference between interest due and interest earned will be allocated to the Subaccounts according to the Owner's current allocation instructions, unless otherwise requested by the Owner. Loan repayments will be applied first to reduce that portion of the loan account attributable to interest due on loaned premium; second, to that portion of the loan account attributable to premium; third, to that portion of the loan account attributable to interest due on loaned amounts in excess of premium; and fourth to that portion of the loan account attributable to loaned amounts in excess of premium. Transfers from the General Account to the Separate Account as a result of the repayment of Debt will be allocated at the end of the Valuation Period during which the repayment is received. Such transfers will not be counted in determining the transfers made within a 15 day period. EFFECTS OF POLICY LOAN. Policy loans decrease Surrender Value and, therefore, the amount available to pay the charges necessary to keep the Policy in force. If Surrender Value on the day immediately preceding a Monthly Processing Date is less than the monthly cost of insurance deduction for the next month, KILICO will notify the Owner and any assignee of record. (See "General Provisions--Written Notices and Requests.") This Policy will lapse and terminate without value, unless a sufficient payment is made to KILICO within 61 days of the date such notice is sent to the Owner. (See "The Policy--Policy Lapse and Reinstatement".) EFFECT ON INVESTMENT EXPERIENCE. A Policy Loan will have an effect on the Cash Value of a Policy. The collateral for the loan (the amount held in the General Account) does not participate in the experience of the Subaccounts while the loan is outstanding. If the amount credited to the General Account is more than the amount that would have been earned in the Subaccounts, the Cash Value will, and the Death Benefit may, be higher as a result of the loan. Conversely, if the amount credited to the General Account is less than would have been earned in the Subaccounts, the Cash Value, as well as the Death Benefit, may be less. SURRENDER PRIVILEGE While the Insured is living and the Policy is in force, the Owner may surrender the Policy for its Surrender Value. To surrender the Policy, the Owner must make written request to KILICO at its Home Office and return the Policy to KILICO. The Surrender Value is equal to the Cash Value less any applicable Surrender Charge and any Debt. (See "Surrender Charge," below.) Partial surrenders are not permitted. 12 16 SURRENDER CHARGE. No sales charge is deducted from any premium payment. However, a contingent deferred sales charge ("Surrender Charge") will be used to cover expenses relating to the sale of the Policy including commissions paid to sales personnel, and other promotion and acquisition expenses. If this Policy is surrendered or if the Cash Value is applied under a Settlement Option (see "General Provisions--Settlement Options"), the amount payable may reflect a deduction for applicable Surrender Charges. A Surrender Charge will not be assessed against Cash Values applied under a Settlement Option if the Policy has been in force for five or more years and the Settlement Option elected provides for benefit payments of at least five years. The amount of the Surrender Charge will be calculated as a percentage of the lesser of premium paid in the first Policy Year or Cash Value under the Policy. The charge decreases from 9% to 0% depending on the length of time between the Policy Date and the date of surrender or application under a Settlement Option, provided, however, that the Surrender Charge will never exceed $60 per $1,000 of initial Death Benefit. During the period from the Policy Date to the first Policy Anniversary, the rate is 9%; on the first Policy Anniversary, the rate decreases to 8%, and on each of the next eight Policy Anniversaries it will decrease an additional 1%. Thus, there will be no Surrender Charge with respect to the premium paid in the first Policy Year beginning on the ninth Policy Anniversary. The applicable Surrender Charge will be determined based upon the date of receipt of the written request for surrender. FREE-LOOK PERIOD AND EXCHANGE RIGHTS The Owner may, until the end of the period of time specified in the Policy, examine the Policy and return it for a refund. The applicable period of time will depend on the state in which the Policy is issued; however, it will be at least 10 days from the date the Policy is received by the Owner. The amount of the refund will be the premium paid. An Owner seeking a refund should return the Policy to KILICO at its Home Office or to the agent who sold the Policy. The Owner may, while the Policy is in force, exchange it at any time after its issue, for a non-variable permanent fixed benefit life insurance policy then currently being offered by KILICO on the life of the Insured. Such policy would be treated and taxed as a modified endowment contract. No evidence of insurability will be required. During the first two years after the Policy Trade Date, the amount of the new policy may be, at the election of the Owner, either the initial Death Benefit or the same net amount at risk as the Policy on the exchange date. After two years from the Policy Trade Date, the amount of the new policy will be for the same net amount at risk as the Policy on the exchange date. All Debt under the Policy must be repaid and the surrender of the Policy is required before the exchange is made. The Policy Date and issue age will be the same as existed under the Policy. CHARGES AND DEDUCTIONS COST OF INSURANCE CHARGE A monthly deduction is made from the Subaccounts for the cost of insurance to cover KILICO's anticipated mortality costs. The cost of insurance charge is deducted monthly in advance and is allocated among the Subaccounts in proportion to the value of each Subaccount to the Separate Account Value. The cost of insurance will be deducted on the Policy Date and on each Monthly Processing Date thereafter. If the Monthly Processing Date falls on a day other than a Valuation Date, the charge will be determined on the next Valuation Date. The cost of insurance charge is determined by multiplying the applicable cost of insurance rate (see below) by the "net amount at risk" for each policy month. The net amount at risk is equal to the Death Benefit minus the Cash Value on the Monthly Processing Date. COST OF INSURANCE RATE. The monthly cost of insurance rates are based on the sex, Insurance Age and rate class of the Insured. The monthly cost of insurance rates will be determined by KILICO based on its expectations as to future mortality experience. Any change in the schedule of rates will apply to all individuals of the same class as the Insured. The cost of insurance rate may never exceed those shown in the table of guaranteed maximum cost of insurance rates in the Policy. The guaranteed maximum cost of insurance rates are based on the 1980 Commissioner's Standard Ordinary Smoker and Non-Smoker Mortality Tables, published by the National Association of Insurance Commissioners. RATE CLASS. The rate class of an Insured will affect the cost of insurance rate. KILICO currently places Insureds in standard rate classes and rate classes involving a higher mortality risk. The cost of insurance rates for rate classes involving a higher mortality risk are multiples of the standard rates. (See "Charges and Deductions--Cost of Insurance Rate," above.) 13 17 MORTALITY AND EXPENSE RISK CHARGE A daily charge is deducted from the Subaccounts of the Separate Account for mortality and expense risks assumed by KILICO. This charge will be at an annual rate of 0.90%. This rate is guaranteed not to increase for the duration of the Policy. The mortality and expense risk assumed is that KILICO's estimates of longevity and of the expenses incurred over the lengthy period the Policy may be in effect--which estimates are the basis for the level of other charges KILICO makes under the Policy--will not be correct. OTHER CHARGES SURRENDER CHARGE. If the Policy is surrendered or if the Cash Value is applied under a Settlement Option, a Surrender Charge on the lesser of the premium paid in the first Policy Year or the Cash Value under the Policy will be deducted from the amount payable. The charge starts at 9% in the first Policy Year and reduces to 0%, depending on the length of time between the payment and the date of surrender or application under a Settlement Option. Subject to other considerations, the Owner may decide to reduce the potential Surrender Charge by paying less initial premium. The Surrender Charges are intended to compensate KILICO for expenses in connection with the distribution of the Policy. Surrender Charges are described in more detail under "Policy Benefits--Surrender Privilege." TAXES. Currently, no charges are made against the Separate Account for Federal, state or other taxes that may be attributable to the Separate Account. KILICO may, however, in the future impose charges for Federal income taxes attributable to the Separate Account. Charges for other taxes, if any, attributable to the Policy may also be made. (See "Federal Tax Matters.") CHARGES AGAINST THE FUND. Under the investment advisory agreement between the Fund, on behalf of the Portfolios, and ZKI, ZKI provides investment advisory services for the Portfolios. The Fund is responsible for the advisory fee and all its other expenses. The investment advisory fee differs with respect to each of the Portfolios of the Fund and is described beginning on page 5 of this Prospectus. For more information concerning the investment advisory fee and other charges against the Portfolios of the Fund, see the prospectus for the Fund and the Statement of Additional Information available upon request. REDUCTION OF CHARGES. KILICO may reduce certain charges and the minimum initial premium in special circumstances that result in lower sales, administrative, or mortality expenses. For example, special circumstances may exist in connection with group or sponsored arrangements, sales to KILICO policyowners, or sales to employees or clients of members of the Kemper group of companies. The amounts of any reductions will reflect the reduced sales effort and administrative costs resulting from, or the different mortality experience expected as a result of, the special circumstances. Reductions will not be unfairly discriminatory against any person, including the affected Owners and owners of all other policies funded by the Separate Account. GENERAL PROVISIONS SETTLEMENT OPTIONS The Owner, or Beneficiary at the death of the Insured, may elect to have all of the Death Benefit or Surrender Value of this Policy paid in a lump sum or have the amount applied to one of the Settlement Options. The minimum amount that may be placed under a Settlement Option is $4,000 unless KILICO consents to a lesser amount. Payments under these options will not be affected by the investment experience of the Separate Account after proceeds are applied under a Settlement Option. Payment will be made as elected by the payee on a monthly, quarterly, semi-annual or annual basis. If the amount of any payment under a Settlement Option is less than $100, KILICO may increase the interval between payments to a quarterly, semi-annual or annual payment to make the payment at least $100. The Cash Value on the day immediately preceding the date on which the first benefit payment is due shall first be reduced by any applicable Surrender Charge and Debt. The Surrender Value shall be used to determine the benefit payment. For Settlement Options 1 through 5, the payment shall be based upon the Settlement Option elected in accordance with the appropriate Settlement Option table. OPTION 1--INCOME FOR SPECIFIED PERIOD. KILICO will pay income for the period and payment mode elected but not less than 3 years nor more than 30 years. OPTION 2--LIFE INCOME. KILICO will pay a monthly income to the payee during the payee's lifetime. If this Option is elected, annuity payments terminate automatically and immediately on the death of the annuitant 14 18 without regard to the number or total amount of payments made. Thus, it is possible for an individual to receive only one payment if death occurred prior to the date the second payment was due. OPTION 3--LIFE INCOME WITH INSTALLMENTS GUARANTEED. KILICO will pay a monthly income for the guaranteed period elected and thereafter for the remaining lifetime of the payee. The period elected may only be 5, 10, 15 or 20 years. OPTION 4--JOINT AND SURVIVOR ANNUITY. KILICO will pay the full monthly income while both payees are living. Upon the death of either payee, the income will continue during the lifetime of the surviving payee. The surviving payee's income shall be the percentage of such full amount chosen at the time of election of this option. Annuity payments terminate automatically and immediately upon the death of the surviving payee without regard to the number or total amount of payments received. OPTION 5--PENSION AND SURVIVOR ANNUITY. KILICO will pay the full monthly income during the lifetime of the primary payee. Such payments will continue whether or not the secondary payee is living. If the primary payee dies before the secondary payee dies, the benefits will continue during the lifetime of the secondary payee. However, such benefits will be for the percentage chosen for such continuation at the time this option is elected. Annuity payments terminate automatically and immediately upon the death of the surviving payee without regard to the number or total amount of payments received. OPTION 6--INCOME OF SPECIFIED AMOUNT. KILICO will pay the amount elected for as long as the amount applied and interest will last. The minimum income which may be elected is $10.00 per month for each $1,000 applied. OPTION 7--PROCEEDS LEFT AT INTEREST. KILICO will hold the amount applied on deposit, subject to any withdrawal limits stated in the supplementary contract. Interest will be paid on the amount deposited. KILICO consent is necessary for any other payment methods. Interest on funds held by KILICO under Settlement Options 1, 6 and 7 shall be at the rate of 4% per year. The sums payable under Settlement Options 2, 3, 4 and 5 are based on the 1971 Individual Annuity Mortality Tables, male and female, at 4% interest per year, unless otherwise required by law. Interest shall be compounded annually. Additional interest, if any, will be paid as determined by KILICO, in its sole discretion. POSTPONEMENT OF PAYMENTS GENERAL. Payment of any amount due upon: (a) Policy termination at the Maturity Date, (b) surrender of the Policy, (c) payment of any Policy loan, or (d) death of the Insured, may be postponed whenever: (1) The New York Stock Exchange is closed other than customary weekend and holiday closings, or trading on the New York Stock Exchange is restricted as determined by the Commission; (2) The Commission by order permits postponement for the protection of Owners; or (3) An emergency exists, as determined by the Commission, as a result of which disposal of securities of the Fund is not reasonably practicable or it is not reasonably practicable to determine the value of the net assets of the Separate Account. Transfers may also be postponed under these circumstances. PAYMENT NOT HONORED BY BANK. The portion of any payment due under the Policy which is derived from any amount paid to KILICO by check or draft may be postponed until such time as KILICO determines that such instrument has been honored by the bank upon which it was drawn. THE CONTRACT The Policy, any endorsements, and the application constitute the entire contract between KILICO and the Owner. All statements made by the Insured or contained in the application will, in the absence of fraud or misrepresentation, be deemed representations and not warranties. Only the President, the Secretary, or an Assistant Secretary of KILICO is authorized to change or waive the terms of a Policy. Any change or waiver must be in writing and signed by one of those persons. MISSTATEMENT OF AGE OR SEX If the age or sex of the Insured is misstated, the Cash Value and Death Benefit will be recalculated from the Policy Date based on the correct sex and age. 15 19 SUICIDE Suicide by the Insured, while sane or insane, within two years from the Policy Date of the Policy is a risk not assumed under the Policy. KILICO's liability for such suicide is limited to the Cash Value less any Debt. When the laws of the state in which a Policy is delivered require less than a two year period, or return of premium paid, the period or amount paid will be as stated in such laws. ASSIGNMENT No assignment of a Policy is binding on KILICO until it is received by KILICO at its Home Office. KILICO assumes no responsibility for the validity of the assignment. Any claim under an assignment is subject to proof of the extent of the interest of the assignee. If this Policy is assigned, the rights of the Owner and Beneficiary are subject to the rights of the assignee of record. NONPARTICIPATING This Policy will not pay dividends. It will not participate in any of KILICO's surplus or earnings. OWNER AND BENEFICIARY The Owner may, at any time during the life of the Insured and while the Policy is in force, designate a new Owner. Primary and secondary Beneficiaries may be designated by the Owner in the application. If changed, the primary or secondary Beneficiary is as shown in the latest change filed with KILICO. If no Beneficiary survives the Insured, the Insured's estate will be the Beneficiary. The interest of any Beneficiary may be subject to that of an assignee. Any change of Owner or Beneficiary must be made in writing in a form acceptable to KILICO. The change will take effect as of the date the request is signed. KILICO will not be liable for any payment made or other action taken before the notice has been received at KILICO's Home Office. RECORDS AND REPORTS KILICO will maintain all records relating to the Separate Account. KILICO will send Owners, at their last known address of record, an annual report stating the Death Benefit, the Accumulation Unit Value, the Cash Value and Surrender Value under the Policy, and indicating any additional premium payments, transfers, Policy loans and repayments and charges made during the Policy Year. Owners will also be sent annual and semi-annual reports for the Fund to the extent required by the 1940 Act. WRITTEN NOTICES AND REQUESTS Any written notice or request to be sent to KILICO should be sent to its Home Office, 1 Kemper Drive, Long Grove, Illinois 60049. The notice or request should include the Policy number and the Insured's full name. Any notice sent by KILICO to an Owner will be sent to the address shown in the application unless an address change has been filed with KILICO. DISTRIBUTION OF POLICIES The Policy is sold by licensed insurance representatives who represent KILICO and who are registered representatives of broker-dealers which are registered under the Securities Exchange Act of 1934 and are members of the National Association of Securities Dealers, Inc. The Policy is distributed through the principal underwriter, Investors Brokerage Services, Inc. ("IBS"), a wholly owned subsidiary of KILICO. Gross commissions paid by KILICO on the sale of the Policy plus fees for marketing services provided by affiliates of KILICO are not more than 6.75%. In lieu of part of the 6.75%, a service fee at an annual rate of .25 of 1% on assets which have been maintained and serviced may also be paid to the principal underwriter or the licensed broker-dealers. Firms to which service fees and commissions may be paid include affiliated broker-dealers. In addition to the commissions described above, KILICO may, from time to time, pay or allow additional promotional incentives, in the form of cash or other compensation, to licensed broker-dealers that sell the Policies. In some instances, such other incentives may be offered only to certain licensed broker-dealers that sell or are expected to sell during specified time periods certain minimum amounts of the Policy or other contracts issued by KILICO. The aggregate amount of gross commissions paid by KILICO on the sale of the Policy was $2,415, $2,231 and $25,764 in 1996, 1995 and 1994, respectively. 16 20 FEDERAL TAX MATTERS The ultimate effect of Federal income taxes on the Policy, on Settlement Options and on the economic benefit to the Owner, Beneficiary or payee depends on KILICO's tax status, and upon the tax status of the individual concerned. KILICO'S TAX STATUS Under current interpretations of Federal income tax law, KILICO is taxed as a life insurance company and the operations of the Separate Account are treated as part of the total operations of KILICO. The operations of the Separate Account do not materially affect KILICO's Federal income tax liability because KILICO is allowed a deduction to the extent that net investment income of the Separate Account is applied to increase Owners' equity. KILICO may incur state and local taxes attributable to the Separate Account. At present, these taxes are not significant. Accordingly, KILICO does not charge or credit the Separate Account for Federal, state or local taxes. Thus, the Separate Account may realize net investment income, such as interest, dividends or capital gains, and reinvest such income all without tax consequences to the Separate Account. If there is a material change in applicable Federal, state or local law, however, charges or credits may be made to the Separate Account for Federal, state or local taxes, or reserves for such taxes, if any, attributable to the Separate Account. Such charges or credits will be determined independent of the taxes actually paid by KILICO. TAX STATUS OF THE POLICY The Technical and Miscellaneous Revenue Act of 1988 altered the Federal income tax treatment of loans and predeath distributions under life insurance policies classified as "modified endowment contracts." A Policy entered into on or after June 21, 1988 is considered a modified endowment contract. Further, a Policy entered into before June 21, 1988 is considered a modified endowment contract if the Death Benefit payable under the Policy is increased on or after June 21, 1988 as a result of the payment of additional premium and the Owner did not have a unilateral right before June 21, 1988 to obtain such increase without providing additional evidence of insurability. Finally, a Policy is considered a modified endowment contract if the Death Benefit increases by more than $150,000 over the Death Benefit on October 20, 1988 and, on or after the date of such increase, there is a "material change" to the Policy. A material change does not include an increase in the Death Benefit, if the increase is attributable to (1) premiums necessary to fund the Death Benefit as of October 20, 1988 increased by $150,000, or (2) the crediting of earnings with respect to such premiums. An exchange of a policy entered into before June 21, 1988 under section 1035 of the Internal Revenue Code is considered a material change, but does not cause the new policy to be treated as a modified endowment contract so long as no additional premiums are paid. A Policy treated as a modified endowment contract is subject to the following rules: First, the amount of a Policy loan (or, if a Policy is assigned or pledged, the amount of Cash Value assigned or pledged) is considered received by the Owner and is included in the Owner's Federal gross income to the extent that the Cash Value exceeds the Owner's investment in the Policy. The Owner's investment in the Policy is the initial premium (or, if a Policy is issued in exchange for another policy under section 1035 of the Internal Revenue Code, the Owner's investment in the other policy), increased by additional premiums and by amounts included in the Owner's gross income. Second, all modified endowment contracts issued by KILICO (or an affiliate) to the same Owner during a calendar year are to be aggregated and considered a single contract for purposes of determining the amount includible in gross income. Under this rule, amounts received by the Owner are includible in gross income to the extent that total cash value exceeds total investment in such aggregated contracts. Third, the portion of any amount considered received by the Owner that is includible in gross income is subject to an additional 10-percent tax. The additional tax does not apply to any amount that is (1) received on or after the date the Owner attains age 59 1/2; (2) distributed as a result of the Owner becoming disabled; or (3) one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (of life expectancy) of the Owner or the joint lives (or life expectancies) of the Owner and the Owner's beneficiary. The United States Congress may in the future consider additional legislation that, if enacted, could adversely affect the tax treatment of life insurance policies, including loans and other distributions and undistributed appreciation. There is no way of predicting whether, when or in what form Congress will enact any such proposal or any other legislation affecting life insurance policies. Any such legislation could have retroactive effect regardless of the date of enactment. 17 21 The Policy is a life insurance contract for Federal income tax purposes under current Section 7702 of the Internal Revenue Code. As such, the Death Benefit is excludable from the gross income of the Beneficiary. Also, the Owner is not deemed to be in constructive receipt of the Cash Value, including increments thereon, until a distribution occurs through a loan or actual surrender. Interest paid on a loan under the Policy is not deductible by the individual Owner. Section 7702 of the Internal Revenue Code imposes certain conditions with respect to premiums received under the Policy. KILICO intends to monitor the premiums to assure compliance. If there is a surrender or exchange of a Policy, KILICO may be required to withhold Federal income tax from the portion of the money received that is includable in the Owner's Federal gross income. An Owner may, however, make an election not to have such tax withheld but the election must be made before KILICO makes payment. Federal estate and state and local estate, inheritance and other tax consequences of ownership or receipt of Policy proceeds depend on the circumstances of each Owner and Beneficiary. The Secretary of the Treasury has issued final regulations establishing diversification provisions for variable life insurance contracts. Failure to meet the diversification requirements could result in taxation of KILICO and immediate taxation of the Owner of the Policy to the extent of appreciation on the Owner's investment. KILICO will monitor compliance with these tests. A special test exists for variable life insurance contracts that invest in United States Treasury obligations. A separate account that issues variable life insurance contracts need not meet the diversification test to the extent that it invests in securities issued by the United States Treasury. OTHER CONSIDERATIONS Because of the complexity of the law in its application to a specific individual, tax advice may be needed by a person contemplating purchase of a Policy or the exercise of elections under a Policy. The above comments concerning the Federal income tax consequences are not exhaustive and are not intended as tax advice. Counsel and other competent advisers should be consulted for more complete information. This discussion is based on KILICO's understanding of Federal income tax laws as they are currently interpreted by the Internal Revenue Service. No representation is made as to the likelihood of continuation of these current laws and interpretations. KILICO also believes the Policy meets other requirements concerning Owner control over investments. However, the Secretary of the Treasury has not issued regulations on this subject. Such regulations, if adopted, could include requirements not included in the Policy. Because the guidance has not been published, there can be no assurance as to content or even whether application will be prospective only. KILICO will make modifications to the Policy to comply with such regulations. LEGAL CONSIDERATIONS On July 6, 1983, the Supreme Court held in ARIZONA GOVERNING COMMITTEE V. NORRIS that certain annuity benefits provided by employers' retirement and fringe benefit programs may not vary between men and women on the basis of sex. The Policy described in this Prospectus contains cost of insurance rates that distinguish between men and women. Accordingly, employers and employee organizations should consider, in consultation with legal counsel, the impact of Federal, state and local laws, including Title VII of the Civil Rights Act, the Equal Pay Act, and NORRIS and subsequent cases on any employment-related insurance or fringe benefit program before purchasing this Policy. SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS KILICO holds the assets of the Separate Account. The assets are kept segregated and held separate and apart from the general funds of KILICO. KILICO maintains records of all purchases and redemptions of the shares of each Portfolio of the Fund by each of the Subaccounts. VOTING RIGHTS To the extent required by law, KILICO will vote the Fund's shares held in the Separate Account at regular and special shareholder meetings of the Fund in accordance with instructions received from persons having voting interests in the corresponding Subaccounts of the Separate Account. If, however, the 1940 Act or any regulation thereunder should be amended or if the present interpretation thereof should change, and as a result KILICO determines that it is permitted to vote the Fund's shares in its own right, it may elect to do so. Owners of all Policies participating in each Subaccount shall have voting rights with respect to that Subaccount, based upon each Owner's proportionate interest in that Subaccount as measured by units. 18 22 Each person having a voting interest in a Subaccount will receive proxy material, reports, and other materials relating to the appropriate Portfolio of the Fund. KILICO will vote shares of the Fund for which it has not received timely instructions in proportion to the voting instructions that KILICO has received with respect to all variable policies participating in a Portfolio. KILICO will also vote any Fund shares attributed to amounts it has accumulated in the Subaccounts in the same proportions that Owners vote. KILICO may, when required by state insurance regulatory authorities, disregard voting instructions if the instructions require that the shares be voted so as to cause a change in the subclassification or investment objective of the Fund or of one or more of its Portfolios or to approve or disapprove an investment advisory contract for a Portfolio of the Fund. In addition, KILICO itself may disregard voting instructions in favor of changes initiated by an Owner in the investment policy or the investment adviser of a Portfolio of the Fund if KILICO reasonably disapproves of such changes. A proposed change would be disapproved only if the change is contrary to state law or prohibited by state regulatory authorities, or if KILICO determines that the change would have an adverse effect on its General Account in that the proposed investment policy for a Portfolio may result in overly speculative or unsound investments. In the event KILICO does disregard voting instructions, a summary of that action and the reasons for such action will be included in the next annual report to Owners. STATE REGULATION OF KILICO KILICO, a stock life insurance company organized under the laws of Illinois, is subject to regulation by the Illinois Department of Insurance. An annual statement is filed with the Director of Insurance on or before March 1st of each year covering the operations and reporting on the financial condition of KILICO as of December 31st of the preceding year. Periodically, the Director of Insurance examines the liabilities and reserves of KILICO and the Separate Account and certifies to their adequacy, and a full examination of KILICO's operations is conducted by the National Association of Insurance Commissioners at least once every three years. In addition, KILICO is subject to the insurance laws and regulations of other states within which it is licensed to operate. Generally, the insurance department of any other state applies the laws of the state of domicile in determining permissible investments. 19 23 DIRECTORS AND OFFICERS OF KILICO The directors and principal officers of KILICO are listed below together with their current positions and their other business experience during the past five years. The address of each officer and director is 1 Kemper Drive, Long Grove, Illinois 60049.
NAME AND AGE POSITION WITH KILICO YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE -------------------- ----------------------------------------------------- John B. Scott (52) Chief Executive Officer, President and Director of Federal Chief Executive Officer since Kemper Life Assurance Company (FKLA) and Fidelity Life February 1992. President since Association (FLA) since 1988. Chief Executive Officer, November 1993. Director since President and Director of Zurich Life Insurance Company of 1992. America (ZLICA) and Zurich Direct, Inc. (ZD) since March 1996. Chairman of the Board and Director of Investors Brokerage Services, Inc. (IBS) and Investors Brokerage Services Insurance Agency, Inc. (IBSIA) since 1993. Chairman of the Board of FKLA and FLA from April 1988 to January 1996. Chairman of the Board of KILICO from February 1992 to January 1996. Executive Vice President and Director of Kemper Corporation (K-Corp.) from January 1994 and March 1996, respectively. Executive Vice President of Kemper Financial Companies, Inc. from January 1994 to January 1996 and Director from 1992 to January 1996. Eliane C. Frye (49) Executive Vice President of FKLA and FLA since 1995. Executive Vice President since Executive Vice President of ZLICA and ZD since March 1996. 1995. Director of IBS and IBSIA since 1995. Senior Vice President of KILICO, FKLA and FLA from 1993 to 1995. Vice President of FKLA and FLA from 1988 to 1993. Frederick L. Blackmon (45) Senior Vice President and Chief Financial Officer of FKLA Senior Vice President and Chief since December 1995. Senior Vice President and Chief Financial Officer since December Financial Officer of FLA since January 1996. Senior Vice 1995. President and Chief Financial Officer of ZLICA since March 1996. Senior Vice President, Chief Financial Officer and Director of ZD since March 1996. Treasurer and Chief Financial Officer of K-Corp. since January 1996. Chief Financial Officer of Alexander Hamilton Life Insurance Company from April 1989 to November 1995. James C. Harkensee (38) Senior Vice President of FKLA and FLA since January 1996. Senior Vice President since Senior Vice President of ZLICA since 1995. Senior Vice January 1996. President of ZD since 1995. Vice President of ZLICA from 1992 to 1995. Chief Actuary of ZLICA from 1991 to 1994. Assistant Vice President of ZLICA from 1990 to 1992. Vice President of ZD from 1994 to 1995. James E. Hohmann (41) Senior Vice President and Chief Actuary of FKLA since Senior Vice President and Chief December 1995. Senior Vice President and Chief Actuary of Actuary since December 1995. FLA since January 1996. Senior Vice President and Chief Actuary of ZLICA since March 1996. Senior Vice President, Chief Actuary and Director of ZD since March 1996. Managing Principal (Partner) of Tillinghast-Towers Perrin from January 1991 to December 1995. Consultant/Principal (Partner) of Tillinghast-Towers Perrin from November 1986 to January 1991. Edward K. Loughridge (42) Senior Vice President and Corporate Development Officer of Senior Vice President and FKLA and FLA since January 1996. Senior Vice President and Corporate Development Officer Corporate Development Officer for ZLICA and ZD since March since January 1996. 1996. Senior Vice President of Human Resources of Zurich-American Insurance Group from February 1992 to March 1996.
20 24
NAME AND AGE POSITION WITH KILICO YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE -------------------- ----------------------------------------------------- Debra P. Rezabek (41) Senior Vice President of FKLA and FLA since March 1996. Senior Vice President since 1996. Corporate Secretary of FKLA and FLA since January 1996. Vice General Counsel since 1992. President of KILICO, FKLA and FLA since 1995. General Corporate Secretary since January Counsel and Director of Government Affairs of FKLA and FLA 1996. since 1992 and of KILICO since 1993. Senior Vice President, General Counsel and Corporate Secretary of ZLICA since March 1996. Senior Vice President, General Counsel, Corporate Secretary and Director of ZD since March 1996. Secretary of IBS and IBSIA since 1993. Director of IBS and IBSIA from 1993 to 1996. Assistant General Counsel of FKLA and FLA from 1988 to 1992. General Counsel and Assistant Secretary of KILICO, FKLA and FLA from 1992 to 1996. Assistant Secretary of K-Corp. since January 1996. George Vlaisavljevich (54) Senior Vice President of FKLA, FLA and ZLICA since October Senior Vice President since 1996. Director of IBS and IBSIA since October 1996. October 1996. Executive Vice President of The Copeland Companies from April 1983 to September 1996. Loren J. Alter (58) Director of FKLA, FLA and Zurich Kemper Investments, Inc. Director since January 1996. (ZKI) since January 1996. Director of ZLICA since May 1979. Executive Vice President of Zurich Insurance Company since 1979. President, Chief Executive Officer and Director of K-Corp. since January 1996. William H. Bolinder (53) Chairman of the Board and Director of FKLA and FLA since Chairman of the Board and Director January 1996. Chairman of the Board of ZLICA and ZD since since January 1996. March 1995. Chairman of the Board of K-Corp. since January 1996. Vice Chairman and Director of ZKI since January 1996. Member of the Corporate Executive Board of Zurich Insurance Group since October 1994. Chairman of the Board of American Guarantee and Liability Insurance Company, Zurich American Insurance Company of Illinois, American Zurich Insurance Company and Steadfast Insurance Company since 1995. Chief Executive Officer of American Guarantee and Liability Insurance Company, Zurich American Insurance Company of Illinois, American Zurich Insurance Company and Steadfast Insurance Company from 1986 to June 1995. President of Zurich Holding Company of America since 1986. Manager of Zurich Insurance Company, U.S. Branch since 1986. Underwriter for Zurich American Lloyds since 1986. Daniel L. Doctoroff (38) Director of FKLA, FLA and K-Corp. since January 1996. Director since January 1996. Director of ZLICA since March 1996. Managing Partner of Insurance Partners Advisors, L.P. since February 1994. Vice President of Keystone, Inc. since October 1992. Managing Director of Rosecliff Inc./Oak Hill Partners, Inc. since August 1987. Director of Bell & Howell Company since 1989; Specialty Foods Corporation since 1993; and Capstar Hotel Company since 1995. Steven M. Gluckstern (45) Director of FKLA, FLA and K-Corp. since January 1996. Vice Chairman and Director since Director of ZLICA since March 1996. Vice Chairman of FKLA January 1996. and FLA since January 1996. Member of the Corporate Executive Board of Zurich Insurance Group since March 1997. Chairman of the Board and Director of ZKI since January 1996. Chairman of the Board and Chief Executive Officer of Zurich Reinsurance Centre, Inc. since May 1993. President of Centre Re, Bermuda from December 1986 to May 1993.
21 25
NAME AND AGE POSITION WITH KILICO YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE -------------------- ----------------------------------------------------- Markus Rohrbasser (42) Director of FKLA, FLA and ZLICA since May 1997. Chief Director since May 1997. Financial Officer and Member of the Corporate Executive Board of Zurich Insurance Company since January 1997. Member of Enlarged Corporate Executive Board and Chief Executive Officer of Union Bank of Switzerland (North America) from 1992 to 1997. Michael P. Stramaglia (37) Director of FKLA and FLA since January 1996. Director of Director since January 1996. ZLICA since March 1996. President of Zurich Life Insurance Company of Canada (ZLICC) since June 1994. Chief Operating Officer of ZLICC since March 1997. President of KEZMO, L.L.C. and President of KEZLI, L.L.C. since 1995. Chief Executive Officer of ZLICC from June 1994 to March 1997. Executive Vice President and Chief Operating Officer of ZLICC from June 1993 to June 1994. Senior Vice President of the Corporate Division of ZLICC from January 1990 to June 1993. Director of ZLICC, Zurich Life of Canada Holdings Limited, Zurich Indemnity Company of Canada, Zurich Canadian Holdings Limited, and Zurmex Canada Holdings Limited. Paul H. Warren (41) Director of FKLA, FLA and K-Corp. since January 1996. Director since January 1996. Director of ZLICA since March 1996. Partner of Insurance Partners Advisors, L.P. since March 1994. Managing Director of International Insurance Advisors since March 1992. Vice President of J.P. Morgan from June 1986 to March 1992. Director of Unionamerica Holdings plc since June 1993; Unionamerica Insurance Company since September 1993; Tarquin plc since November 1994; Charman Underwriting Agencies Ltd. since November 1994; and Corporate Health Dimensions since March 1997.
22 26 LEGAL MATTERS All matters of Illinois law pertaining to the Policy, including the validity of the Policy and KILICO's right to issue the Policy under Illinois Insurance Law, have been passed upon by Debra P. Rezabek, Senior Vice President, General Counsel, and Corporate Secretary of KILICO. Katten Muchin & Zavis, Washington, D.C., has advised KILICO on certain legal matters concerning Federal securities laws applicable to the issue and sale of Policies. LEGAL PROCEEDINGS There are no legal proceedings to which the Separate Account is a party or to which the assets of the Separate Account are subject. KILICO is not a party in any litigation that is of material importance in relation to its total assets or that relates to the Separate Account. EXPERTS The consolidated balance sheets of KILICO as of December 31, 1996 and January 4, 1996 and the related consolidated statements of operations, stockholder's equity, and cash flows for the periods from January 4, 1996 to December 31, 1996 and for each of the years in the two year period ended December 31, 1995 and the statements of assets and liabilities and policy owners' equity of the Separate Account as of December 31, 1996 and the related statements of operations for the year then ended, and the statements of changes in policy owners' equity for the years ended December 31, 1996 and 1995 have been included herein and in the registration statement in reliance upon the report of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The report of KPMG Peat Marwick LLP covering KILICO's financial statements contains an explanatory paragraph that states as a result of the acquisition of its parent, Kemper Corporation, the consolidated financial information for the periods after the acquisition is presented on a different cost basis than that for the periods before the acquisition and, therefore, is not comparable. Actuarial matters included in this prospectus have been examined by Steven D. Powell, FSA as stated in the opinion filed as an exhibit to the Registration Statement. REGISTRATION STATEMENT A registration statement has been filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, with respect to the Policies. For further information concerning the Separate Account, KILICO and the Policy, reference is made to the Registration Statement as amended with exhibits. Copies of the Registration Statement are available from the Commission. FINANCIAL STATEMENTS The financial statements of KILICO that are included should be considered only as bearing upon KILICO's ability to meet its contractual obligations under the Policy. KILICO's financial statements do not bear on the investment experience of the assets held in the Separate Account. 23 27 [THIS PAGE IS INTENTIONALLY LEFT BLANK] 24 28 INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS KEMPER INVESTORS LIFE INSURANCE COMPANY: We have audited the accompanying statements of assets and liabilities and policy owners' equity of the Money Market Subaccount, Total Return Subaccount, High Yield Subaccount, Growth Subaccount, and Government Securities Subaccount of KILICO Variable Separate Account (the Account) as of December 31, 1996 and the related statements of operations for the year then ended, and the statements of changes in policy owners' equity for each of the years in the two-year period then ended. These financial statements are the responsibility of the Account's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of investments owned at December 31, 1996 by correspondence with the transfer agent. 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 referred to above present fairly, in all material respects, the financial position of the Money Market Subaccount, Total Return Subaccount, High Yield Subaccount, Growth Subaccount, and Government Securities Subaccount at December 31, 1996 and the results of their operations, and changes in their policy owners' equity for the periods stated in the first paragraph above, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Chicago, Illinois March 26, 1997 25 29 KILICO VARIABLE SEPARATE ACCOUNT STATEMENTS OF ASSETS AND LIABILITIES AND POLICY OWNERS' EQUITY DECEMBER 31, 1996 (IN THOUSANDS)
MONEY TOTAL GOVERNMENT MARKET RETURN HIGH YIELD GROWTH SECURITIES SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ---------- ---------- ---------- ---------- ---------- ASSETS Investments in underlying portfolio funds, at current value..................................... $1,038 3,097 1,507 2,362 3,990 Dividends and other receivables..................... 3 -- 3 -- 2 ------ ----- ----- ----- ----- Total assets.................................. 1,041 3,097 1,510 2,362 3,992 LIABILITIES AND POLICY OWNERS' EQUITY Liabilities: Mortality and expense risk charges................ 4 6 -- 2 6 Other............................................. -- -- 2 -- 1 ------ ----- ----- ----- ----- Total liabilities............................. 4 6 2 2 7 ------ ----- ----- ----- ----- Policy owners' equity............................... $1,037 3,091 1,508 2,360 3,985 ====== ===== ===== ===== ===== ANALYSIS OF POLICY OWNERS' EQUITY Excess of proceeds from units sold over payments for units redeemed.................................... $ 519 1,316 669 1,077 2,052 Accumulated net investment income................... 518 819 745 479 1,352 Accumulated net realized gain on sales of investments....................................... -- 457 12 617 275 Unrealized appreciation of investments.............. -- 499 82 187 306 ------ ----- ----- ----- ----- Policy owners' equity............................... $1,037 3,091 1,508 2,360 3,985 ====== ===== ===== ===== =====
See accompanying notes to financial statements. 26 30 KILICO VARIABLE SEPARATE ACCOUNT STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
MONEY GOVERNMENT MARKET TOTAL RETURN HIGH YIELD GROWTH SECURITIES SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ---------- ------------ ---------- ---------- ---------- Dividends and capital gains distributions.......... $58 166 170 280 287 Mortality and expense risk charges................. 12 24 16 19 36 --- --- --- ---- ---- Net investment income.............................. 46 142 154 261 251 --- --- --- ---- ---- Net realized and unrealized gain on investments: Net realized gain on sales of investments........ -- 128 9 397 17 Change in unrealized appreciation (depreciation) of investments................................. -- 117 34 (228) (203) --- --- --- ---- ---- Net realized and unrealized gain (loss) on investments...................................... -- 245 43 169 (186) --- --- --- ---- ---- Net increase in policy owners' equity resulting from operations.................................. $46 387 197 430 65 === === === ==== ====
See accompanying notes to financial statements. 27 31 KILICO VARIABLE SEPARATE ACCOUNT STATEMENTS OF CHANGES IN POLICY OWNERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (IN THOUSANDS)
MONEY MARKET SUBACCOUNT -------------------- 1996 1995 ---- ---- Operations: Net investment income..................................... $ 46 68 Net realized gain on sales of investments................. -- -- Change in unrealized appreciation (depreciation) of investments.......................................... -- -- ------ ----- Net increase in policy owners' equity resulting from operations............................. 46 68 ------ ----- Account unit transactions: Proceeds from units sold.................................. 270 76 Net transfers (to) from subaccounts....................... 55 (348) Payments for units redeemed............................... (336) (104) ------ ----- Net increase (decrease) in policy owners' equity from account unit transactions........................ (11) (376) ------ ----- Total increase (decrease) in policy owners' equity.......... 35 (308) Policy owners' equity: Beginning of year......................................... 1,002 1,310 ------ ----- End of year............................................... $1,037 1,002 ====== =====
See accompanying notes to financial statements. 28 32
GOVERNMENT TOTAL RETURN HIGH YIELD GROWTH SECURITIES SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT - ------------- ------------- ------------- ------------- 1996 1995 1996 1995 1996 1995 1996 1995 - ---- ---- ---- ---- ---- ---- ---- ---- 142 47 154 75 261 102 251 214 128 14 9 54 397 31 17 45 117 442 34 106 (228) 301 (203) 404 - ----- ----- ----- ----- ----- ----- ----- ----- 387 503 197 235 430 434 65 663 - ----- ----- ----- ----- ----- ----- ----- ----- 43 -- 6 17 121 3 22 12 484 72 (567) 270 65 508 (37) (502) (376) (146) (217) (147) (179) (143) (162) (251) - ----- ----- ----- ----- ----- ----- ----- ----- 151 (74) (778) 140 7 368 (177) (741) - ----- ----- ----- ----- ----- ----- ----- ----- 538 429 (581) 375 437 802 (112) (78) 2,553 2,124 2,089 1,714 1,923 1,121 4,097 4,175 - ----- ----- ----- ----- ----- ----- ----- ----- 3,091 2,553 1,508 2,089 2,360 1,923 3,985 4,097 ===== ===== ===== ===== ===== ===== ===== =====
29 33 KILICO VARIABLE SEPARATE ACCOUNT NOTES TO FINANCIAL STATEMENTS (1) GENERAL INFORMATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION KILICO Variable Separate Account (the "Separate Account") is a unit investment trust registered under the Investment Company Act of 1940, as amended, established by Kemper Investors Life Insurance Company ("KILICO"). KILICO, a wholly-owned subsidiary of Kemper Corporation, was acquired by an investor group led by Zurich Insurance Company ("Zurich") on January 4, 1996. The Separate Account receives and invests premiums under certain variable life insurance policies ("Policy"). The Separate Account is divided into five Subaccounts and each Subaccount invests exclusively in a corresponding Portfolio of the Investors Fund Series (The "Fund"), an open-end diversified management investment company. The Fund has added additional Subaccounts, which are not available investment vehicles to certain policy owners of the Separate Account. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that could affect the reported amounts of assets and liabilities as well as the disclosure of contingent amounts at the date of the financial statements. As a result, actual results reported as income and expenses could differ from the estimates reported in the accompanying financial statements. SECURITY VALUATION The investments are stated at current value which is based on the closing bid price, net asset value, at December 31, 1996. SECURITY TRANSACTIONS AND INVESTMENT INCOME Security transactions are accounted for on the trade date (date when KILICO accepts risks of providing insurance coverage to the insured). Dividends and capital gains distributions are recorded as income on the ex-dividend date. Realized gains and losses from security transactions are reported on an identified cost basis. ACCOUNT UNIT TRANSACTIONS Proceeds from a Policy are automatically allocated to the Money Market Subaccount on the trade date for a 15 day period. At the end of this period, the Separate Account value (cash value) may be allocated to other Subaccounts as designated by the owner of the Policy. ACCUMULATION UNIT VALUATION On each day the New York Stock Exchange (the "Exchange") is open for trading, the accumulation unit value is determined as of the earlier of 3:00 p.m. (Chicago time) or the close of the Exchange by dividing the total value of each Subaccount's investments and other assets, less liabilities, by the number of accumulation units outstanding in the respective Subaccount. FEDERAL INCOME TAXES The operations of the Separate Account are included in the Federal income tax return of KILICO. Under existing Federal income tax law, investment income and realized capital gains and losses of the Separate Account increase liabilities under the policy and are, therefore, not taxed. Thus the Separate Account may realize net investment income and capital gains and losses without Federal income tax consequences. 30 34 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (2) SUMMARY OF INVESTMENTS Investments, at cost, at December 31, 1996, are as follows (in thousands):
SHARES OWNED COST ------ ------- INVESTMENT PORTFOLIO Kemper Investors Fund Money Market Portfolio.............. 1,038 $ 1,038 Kemper Investors Fund Total Return Portfolio.............. 1,100 2,598 Kemper Investors Fund High Yield Portfolio................ 1,177 1,425 Kemper Investors Fund Growth Portfolio.................... 700 2,175 Kemper Investors Fund Government Securities Portfolio..... 3,304 3,684 ------- TOTAL INVESTMENTS.................................... $10,920 =======
The underlying investments are summarized below. MONEY MARKET PORTFOLIO: This Portfolio invests primarily in short-term obligations of major banks and corporations. TOTAL RETURN PORTFOLIO: This Portfolio's investments will normally consist of fixed-income and equity securities. Fixed-income securities will include bonds and other debt securities and preferred stocks. Equity investments normally will consist of common stocks and securities convertible into or exchangeable for common stocks, however, the Portfolio may also make private placement investments (which are normally restricted securities). HIGH YIELD PORTFOLIO: This Portfolio invests in fixed-income securities, a substantial portion of which are high yielding fixed-income securities. These securities ordinarily will be in the lower rating categories of recognized rating agencies or will be non-rated, and generally will involve more risk than securities in the higher rating categories. GROWTH PORTFOLIO: This Portfolio's investments normally will consist of common stocks and securities convertible into or exchangeable for common stocks, however, it may also make private placement investments (which are normally restricted securities). GOVERNMENT SECURITIES PORTFOLIO: This Portfolio invests primarily in U.S. Government Securities. The Portfolio may also invest in fixed-income securities other than U.S. Government securities and may engage in options and financial futures transactions. (3) TRANSACTIONS WITH AFFILIATES KILICO assesses a monthly charge to the Subaccounts for the cost of insurance. The cost of insurance charge is allocated among the Subaccounts in the proportion of each Subaccount to the Separate Account value. Cost of insurance charges totaled approximately $131,500 and $1,900 for the Select and Power V Variable Universal Life products, respectively for the year ended December 31, 1996. Additionally, KILICO assesses a daily charge to the Subaccounts for mortality and expense risk assumed by KILICO at an annual rate of .90% of assets. Proceeds payable on the surrender of a Policy are reduced by the amount of any applicable contingent deferred sales charge. During the year ended December 31, 1996, KILICO received contingent deferred sales charges of approximately $27,800 and $0 for the Select and Power V Variable Universal Life products, respectively. Zurich Kemper Investments, Inc. ("ZKI"), formerly Kemper Financial Services, Inc., an affiliated company, is the investment manager of the Portfolios of the Fund which serve as the underlying investments of the Separate Account. In connection with the acquisition of Kemper Corporation on January 4, 1996, Zurich also acquired 100% of ZKI. 31 35 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) (4) POLICY OWNERS' EQUITY Policy owners' equity at December 31, 1996 is as follows (in thousands, except unit value; differences are due to rounding):
NUMBER POLICY OF UNIT OWNERS' UNITS VALUE EQUITY ------ ----- ------- SELECT SUBACCOUNT Money Market Subaccount..................................... 627 $1.567 $ 982 Total Return Subaccount..................................... 1,477 2.093 3,091 High Yield Subaccount....................................... 682 2.211 1,508 Growth Subaccount........................................... 846 2.789 2,360 Government Securities Subaccount............................ 2,137 1.864 3,985 ------- TOTAL SELECT POLICY OWNERS' EQUITY.......................... $11,926 =======
NUMBER POLICY OF UNIT OWNERS' UNITS VALUE EQUITY ------ ----- ------- POWER V SUBACCOUNT Money Market Subaccount..................................... 55 $1.010 $ 55 Total Return Subaccount..................................... -- 1.205 -- High Yield Subaccount....................................... -- 2.809 -- Growth Subaccount........................................... -- 3.364 -- Government Securities Subaccount............................ -- 1.278 -- TOTAL POWER V POLICY OWNERS' EQUITY......................... $ 55 =======
32 36 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors and Stockholder Kemper Investors Life Insurance Company: We have audited the accompanying consolidated balance sheets of Kemper Investors Life Insurance Company and subsidiaries as of December 31, 1996 and as of January 4, 1996, and the related consolidated statements of operations, stockholder's equity, and cash flows for the periods from January 4, 1996 to December 31, 1996 (post-acquisition), and for each of the years in the two-year period ended December 31, 1995 (pre-acquisition). These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the aforementioned post-acquisition consolidated financial statements present fairly, in all material respects, the financial position of Kemper Investors Life Insurance Company and subsidiaries as of December 31, 1996 and as of January 4, 1996, and the results of their operations and their cash flows for the post-acquisition period, in conformity with generally accepted accounting principles. Further, in our opinion, the aforementioned pre-acquisition consolidated financial statements present fairly, in all material respects, the financial position of Kemper Investors Life Insurance Company and subsidiaries and the results of their operations and their cash flows for the pre-acquisition periods, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, effective January 4, 1996, an investor group as described in Note 1, acquired all of the outstanding stock of Kemper Investors Life Insurance Company in a business combination accounted for as a purchase. As a result of the acquisition, the consolidated financial information for the periods after the acquisition is presented on a different cost basis than that for the periods before the acquisition and, therefore, is not comparable. KPMG PEAT MARWICK LLP Chicago, Illinois March 21, 1997 33 37 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
DECEMBER 31 JANUARY 4 1996 1996 ----------- ---------- ASSETS Fixed maturities, available for sale, at fair value (cost: December 31, 1996, $3,929,650; January 4, 1996, $3,749,323)............................................... $3,866,431 $3,749,323 Short-term investments...................................... 71,696 372,515 Joint venture mortgage loans................................ 110,971 110,194 Third-party mortgage loans.................................. 106,585 144,450 Other real estate-related investments....................... 50,157 34,296 Policy loans................................................ 288,302 289,390 Other invested assets....................................... 23,507 19,215 ---------- ---------- Total investments................................. 4,517,649 4,719,383 Cash........................................................ 2,776 25,811 Accrued investment income................................... 115,199 104,402 Goodwill.................................................... 244,688 254,883 Value of business acquired.................................. 189,639 190,222 Deferred insurance acquisition costs........................ 26,811 -- Federal income tax receivable............................... 3,840 112,646 Reinsurance recoverable..................................... 427,165 502,836 Receivable on sales of securities........................... 32,569 902 Other assets and receivables................................ 30,277 10,540 Assets held in separate accounts............................ 2,127,247 1,761,110 ---------- ---------- Total assets...................................... $7,717,860 $7,682,735 ========== ========== LIABILITIES Future policy benefits...................................... $4,256,521 $4,585,148 Ceded future policy benefits................................ 427,165 502,836 Benefits and claims payable to policyholders................ 36,142 4,535 Other accounts payable and liabilities...................... 59,462 30,030 Deferred income taxes....................................... 60,362 53,472 Liabilities related to separate accounts.................... 2,127,247 1,761,110 ---------- ---------- Total liabilities................................. 6,966,899 6,937,131 ---------- ---------- Commitments and contingent liabilities STOCKHOLDER'S EQUITY Capital stock--$10 par value, authorized 300,000 shares; outstanding 250,000 shares..... 2,500 2,500 Additional paid-in capital.................................. 761,538 743,104 Unrealized loss on investments.............................. (47,498) -- Retained earnings........................................... 34,421 -- ---------- ---------- Total stockholder's equity........................ 750,961 745,604 ---------- ---------- Total liabilities and stockholder's equity........ $7,717,860 $7,682,735 ========== ==========
See accompanying notes to consolidated financial statements. 34 38 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands)
YEAR ENDED DECEMBER 31 ----------------------------------- PREACQUISITION ---------------------- 1996 1995 1994 -------- --------- -------- REVENUE Net investment income....................................... $299,688 $ 348,448 $353,084 Realized investment gains (losses).......................... 13,602 (318,700) (54,557) Premium income.............................................. 7,822 236 -- Fees and other income....................................... 35,095 38,101 31,950 -------- --------- -------- Total revenue..................................... 356,207 68,085 330,477 -------- --------- -------- BENEFITS AND EXPENSES Benefits and interest credited to policyholders............. 237,349 245,615 248,494 Commissions, taxes, licenses and fees....................... 28,135 31,793 26,910 Operating expenses.......................................... 24,678 20,837 25,324 Deferral of insurance acquisition costs..................... (27,820) (36,870) (31,852) Amortization of insurance acquisition costs................. 2,316 14,423 20,809 Amortization of value of business acquired.................. 21,530 -- -- Amortization of goodwill.................................... 10,195 -- -- -------- --------- -------- Total benefits and expenses....................... 296,383 275,798 289,685 -------- --------- -------- Income (loss) before income tax expense (benefit)........... 59,824 (207,713) 40,792 Income tax expense (benefit)................................ 25,403 (74,664) 14,431 -------- --------- -------- Net income (loss)................................. $ 34,421 $(133,049) $ 26,361 ======== ========= ========
See accompanying notes to consolidated financial statements. 35 39 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (in thousands)
PREACQUISITION ------------------------- DECEMBER 31 JANUARY 4 DECEMBER 31 DECEMBER 31 1996 1996 1995 1994 ----------- --------- ----------- ----------- CAPITAL STOCK, beginning and end of period.... $ 2,500 $ 2,500 $ 2,500 $ 2,500 -------- -------- --------- --------- ADDITIONAL PAID-IN CAPITAL, beginning of period...................................... 743,104 491,994 491,994 409,423 Capital contributions from parent............. 18,434 -- -- 82,500 Adjustment to reflect purchase accounting method...................................... -- 251,110 -- -- Transfer of limited partnership interest to parent...................................... -- -- -- 71 -------- -------- --------- --------- End of period....................... 761,538 743,104 491,994 491,994 -------- -------- --------- --------- UNREALIZED GAIN (LOSS) ON INVESTMENTS, beginning of period......................... -- 68,502 (236,443) 93,096 Unrealized gain (loss) on revaluation of investments, net............................ (47,498) -- 304,945 (329,539) Adjustment to reflect purchase accounting method...................................... -- (68,502) -- -- -------- -------- --------- --------- End of period....................... (47,498) -- 68,502 (236,443) -------- -------- --------- --------- RETAINED EARNINGS, beginning of period........ -- 42,880 175,929 149,568 Net income (loss)............................. 34,421 -- (133,049) 26,361 Adjustment to reflect purchase accounting method...................................... -- (42,880) -- -- -------- -------- --------- --------- End of period....................... 34,421 -- 42,880 175,929 -------- -------- --------- --------- Total stockholder's equity.......... $750,961 $745,604 $ 605,876 $ 433,980 ======== ======== ========= =========
See accompanying notes to consolidated financial statements. 36 40 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
YEAR ENDED DECEMBER 31 ----------------------------------------- PREACQUISITION ------------------------- 1996 1995 1994 ----------- --------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)................................... $ 34,421 $(133,049) $ 26,361 Reconcilement of net income (loss) to net cash provided: Realized investment losses (gains)............... (13,602) 318,700 54,557 Interest credited and other charges.............. 230,298 237,984 242,591 Deferred insurance acquisition costs............. (25,504) (22,447) (11,043) Amortization of value of business acquired....... 21,530 -- -- Amortization of goodwill......................... 10,195 -- -- Amortization of discount and premium on investments.................................... 25,743 4,586 (1,383) Deferred income taxes............................ (897) 38,423 20,809 Net change in Federal income tax receivable...... 108,806 (86,990) 809 Other, net....................................... (22,283) (29,905) (14,161) ----------- --------- ----------- Net cash provided from operating activities................................ 368,707 327,302 318,540 ----------- --------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Cash from investments sold or matured: Fixed maturities held to maturity................ 264,383 320,143 144,717 Fixed maturities sold prior to maturity.......... 891,995 297,637 910,913 Mortgage loans, policy loans and other invested assets......................................... 168,727 450,573 536,668 Cost of investments purchased or loans originated: Fixed maturities................................. (1,369,091) (549,867) (1,447,393) Mortgage loans, policy loans and other invested assets......................................... (119,044) (131,966) (281,059) Short-term investments, net......................... 300,819 (168,351) 198,299 Net change in receivable and payable for securities transactions..................................... (31,667) (1,397) (16,553) Net reductions in other assets...................... 105 1,996 2,678 ----------- --------- ----------- Net cash provided by investing activities... 106,237 218,768 48,270 ----------- --------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Policyholder account balances: Deposits......................................... 141,159 247,778 215,034 Withdrawals...................................... (700,084) (755,917) (652,513) Capital contributions from parent................... 18,434 -- 82,500 Other............................................... 42,512 (35,309) 3,871 ----------- --------- ----------- Net cash used in financing activities....... (497,979) (543,448) (351,108) ----------- --------- ----------- Net increase (decrease) in cash........ (23,035) 2,622 15,702 CASH, beginning of period............................. 25,811 23,189 7,487 ----------- --------- ----------- CASH, end of period................................... $ 2,776 $ 25,811 $ 23,189 =========== ========= ===========
See accompanying notes to consolidated financial statements. 37 41 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION Kemper Investors Life Insurance Company and subsidiaries (the "Company") issues fixed and variable annuity products, variable life, term life and interest-sensitive life insurance products marketed primarily through a network of financial institutions, securities brokerage firms, insurance agents and financial planners. The Company is licensed in the District of Columbia and all states except New York. The Company is a wholly-owned subsidiary of Kemper Corporation ("Kemper"). On January 4, 1996, an investor group comprised of Zurich Insurance Company ("Zurich"), Insurance Partners, L.P. ("IP") and Insurance Partners Offshore (Bermuda), L.P. (together with IP, "Insurance Partners") acquired all of the issued and outstanding common stock of Kemper. As a result of the change in control, Zurich and Insurance Partners own 80 percent and 20 percent, respectively, of Kemper and therefore the Company. The financial statements include the accounts of the Company on a consolidated basis. All significant intercompany balances and transactions have been eliminated. PURCHASE ACCOUNTING METHOD The acquisition of the Company on January 4, 1996, was accounted for using the purchase method of accounting. The consolidated financial statements of the Company prior to January 4, 1996, were prepared on a historical cost basis in accordance with generally accepted accounting principles. The accompanying financial statements and notes thereto prepared prior to January 4, 1996 have been labeled "preacquisition". The accompanying consolidated financial statements of the Company as of January 4, 1996 (the acquisition date) and as of and for the year ended December 31, 1996, have been prepared in conformity with the purchase method of accounting. The Company has presented January 4, 1996 (the acquisition date), as the opening purchase accounting balance sheet for comparative purposes throughout the accompanying financial statements and notes thereto. Under purchase accounting, the Company's assets and liabilities have been marked to their relative fair market values as of the acquisition date. The difference between the cost of acquiring the Company and the net fair market values of the Company's assets and liabilities as of the acquisition date has been recorded as goodwill. The Company is amortizing goodwill on a straight-line basis over twenty-five years. The allocated cost of acquiring the Company was $745.6 million and the acquisition resulted in goodwill of $254.9 million as of January 4, 1996. The Company reviews goodwill to determine if events or changes in circumstances may have affected the recoverability of the outstanding goodwill as of each reporting period. In the event that the Company determines that goodwill is not recoverable, it would amortize such amounts as additional goodwill expense in the accompanying financial statements. As of December 31, 1996, the Company believes that no such adjustment is necessary. Purchase accounting adjustments primarily affected the recorded historical values of fixed maturities, mortgage loans, other invested assets, deferred insurance acquisition costs, future policy benefits and deferred income taxes. Deferred insurance acquisition costs, and the related amortization thereof, for policies sold prior to January 4, 1996, have been replaced by the value of business acquired. The value of business acquired reflects the estimated fair value of the Company's life insurance business in force and represents the portion of the cost to acquire the Company that is allocated to the value of the right to receive future cash flows from insurance contracts existing at the date of acquisition. Such value is the present value of the actuarially determined projected cash flows for the acquired policies. A 15 percent discount rate was used to determine such value and represents the rate of return required by Zurich and Insurance Partners to invest in the business being acquired. In selecting the rate of return used to value the policies purchased, the Company considered the magnitude of the risks associated with each of the actuarial assumptions used in determining expected future cash flows, the cost of capital available to fund the acquisition, the perceived likelihood of changes in insurance regulations and tax laws, the complexity of the Company's business, and the prices paid (i.e., discount rates used in determining other life insurance company valuations) on similar blocks of business sold in recent periods. 38 42 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The value of the business acquired is amortized over the estimated contract life of the business acquired in relation to the present value of estimated gross profits using current assumptions based on an interest rate equal to the liability or contract rate on the value of business acquired. The estimated amortization and accretion of interest for the value of business acquired for each of the years through December 31, 2001 are as follows:
PROJECTED (IN THOUSANDS) BEGINNING ACCRETION OF ENDING YEAR ENDED DECEMBER 31 BALANCE AMORTIZATION INTEREST BALANCE - ----------------------------------------------- --------- ------------ ------------ --------- 1996........................................... $190,222 $(31,427) $ 9,897 $168,692 1997........................................... 168,692 (26,330) 10,152 152,514 1998........................................... 152,514 (26,769) 9,085 134,830 1999........................................... 134,830 (26,045) 8,000 116,785 2000........................................... 116,785 (24,288) 6,834 99,331 2001........................................... 99,331 (21,538) 5,867 83,660
The projected ending balance of the value of business acquired will be further adjusted to reflect the impact of unrealized gains or losses on fixed maturities held as available for sale in the investment portfolio. Such adjustments are not recorded in the Company's net income but rather are recorded as a credit or charge to stockholder's equity, net of income tax. As of December 31, 1996, this adjustment increased the value of business acquired and stockholder's equity by approximately $20.9 million and $13.6 million, respectively. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that could affect the reported amounts of assets and liabilities as well as the disclosure of contingent assets or liabilities at the date of the financial statements. As a result, actual results reported as revenue and expenses could differ from the estimates reported in the accompanying financial statements. As further discussed in the accompanying notes to the consolidated financial statements, significant estimates and assumptions affect deferred insurance acquisition costs, the value of business acquired, provisions for real estate-related losses and reserves, other-than-temporary declines in values for fixed maturities, the valuation allowance for deferred income taxes and the calculation of fair value disclosures for certain financial instruments. LIFE INSURANCE REVENUE AND EXPENSES Revenue for annuities and interest-sensitive life insurance products consists of investment income, and policy charges such as mortality, expense and surrender charges. Expenses consist of benefits and interest credited to contracts, policy maintenance costs and amortization of deferred insurance acquisition costs. Also reflected in fees and other income is a ceding commission experience adjustment received in 1995 as a result of certain reinsurance transactions entered into by the Company during 1992. (See note captioned "Reinsurance".) Premiums for term life policies are reported as earned when due. Profits for such policies are recognized over the duration of the insurance policies by matching benefits and expenses to premium income. DEFERRED INSURANCE ACQUISITION COSTS The costs of acquiring new business after January 4, 1996, principally commission expense and certain policy issuance and underwriting expenses, have been deferred to the extent they are recoverable from estimated future gross profits on the related contracts and policies. The deferred insurance acquisition costs for annuities, separate account business and interest-sensitive life insurance products are being amortized over the estimated contract life in relation to the present value of estimated gross profits. Deferred insurance acquisition costs related to such interest-sensitive products also reflect the estimated impact of unrealized gains or losses on fixed maturities held as available for sale in the investment portfolio, through a credit or charge to stockholder's equity, net of income tax. The deferred insurance acquisition costs for term-life insurance products are being amortized over the premium paying period of the policies. 39 43 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FUTURE POLICY BENEFITS Liabilities for future policy benefits related to annuities and interest-sensitive life contracts reflect net premiums received plus interest credited during the contract accumulation period and the present value of future payments for contracts that have annuitized. Current interest rates credited during the contract accumulation period range from 4.0 percent to 7.5 percent. Future minimum guaranteed interest rates vary from 3.0 percent to 4.5 percent. For contracts that have annuitized, interest rates used in determining the present value of future payments range principally from 3.0 percent to 12.0 percent. Liabilities for future term life policy benefits have been computed principally by a net level premium method. Anticipated rates of mortality are based on the 1975-1980 Select and Ultimate Table modified by Company experience, including withdrawals. Estimated future investment yields are a level 7 percent for reinsurance assumed and for direct business, 8 percent for three years; 7 percent for year four; and 6 percent thereafter. INVESTED ASSETS AND RELATED INCOME Investments in fixed maturities are carried at fair value. Short-term investments are carried at cost, which approximates fair value. (See note captioned "Fair Value of Financial Instruments".) The amortized cost of fixed maturities is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-backed and asset-backed securities, over the estimated life of the security. Such amortization is included in net investment income. Amortization of the discount or premium from mortgage-backed and asset-backed securities is recognized using a level effective yield method which considers the estimated timing and amount of prepayments of the underlying loans and is adjusted to reflect differences which arise between the prepayments originally anticipated and the actual prepayments received and currently anticipated. To the extent that the estimated lives of such securities change as a result of changes in prepayment rates, the adjustment is also included in net investment income. The Company does not accrue interest income on fixed maturities deemed to be impaired on an other-than-temporary basis, or on mortgage loans, real estate- related bonds and other real estate loans where the likelihood of collection of interest is doubtful. Mortgage loans are carried at their unpaid balance, net of unamortized discount and any applicable reserves or write-downs. Other real estate-related investments net of any applicable reserve and write-downs include notes receivable from real estate ventures; investments in real estate ventures, adjusted for the equity in the operating income or loss of such ventures; common stock carried at fair value and real estate owned carried at fair value. Real estate reserves are established when declines in collateral values, estimated in light of current economic conditions and calculated in conformity with Statement of Financial Accounting Standards ("SFAS") 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN, indicate a likelihood of loss. At year-end 1995, reflecting the Company's change in strategy with respect to its real estate portfolio, and the disposition thereof, and on January 4, 1996, reflecting the acquisition of the Company, real estate-related investments were valued using an estimate of the investments observable market price, net of estimated costs to sell. Prior to year-end 1995, the Company evaluated its real estate-related assets (including accrued interest) by estimating the probabilities of loss utilizing various projections that included several factors relating to the borrower, property, term of the loan, tenant composition, rental rates, other supply and demand factors and overall economic conditions. Generally, at that time, the reserve was based upon the excess of the loan amount over the estimated future cash flows from the loan, discounted at the loan's contractual rate of interest taking into consideration the effects of recourse to, and subordination of loans held by, affiliated non-life realty companies. Under purchase accounting, the market value of the Company's policy loans and other invested assets consisting primarily of venture capital investments and a leveraged lease, became the Company's new cost basis in such investments. Investments in policy loans and other invested assets after January 4, 1996 are carried at cost. Other invested assets also include equity securities, not related to real estate-related investments, which are carried at fair value. Realized gains or losses on sales of investments, determined on the basis of identifiable cost on the disposition of the respective investment, recognition of other-than-temporary declines in value and changes in real estate-related reserves and write-downs are included in revenue. Net unrealized gains or losses on revaluation of 40 44 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) investments are credited or charged to stockholder's equity. Such unrealized gains are recorded net of deferred income tax expense, while unrealized losses are not tax benefitted. SEPARATE ACCOUNT BUSINESS The assets and liabilities of the separate accounts represent segregated funds administered and invested by the Company for purposes of funding variable annuity and variable life insurance contracts for the exclusive benefit of variable annuity and variable life insurance contract holders. The Company receives administrative fees from the separate account and retains varying amounts of withdrawal charges to cover expenses in the event of early withdrawals by contract holders. The assets and liabilities of the separate accounts are carried at fair value. INCOME TAX The operations of the Company prior to January 4, 1996 have been included in the consolidated Federal income tax return of Kemper. Income taxes receivable or payable have been determined on a separate return basis, and payments have been received from or remitted to Kemper pursuant to a tax allocation arrangement between Kemper and its subsidiaries, including the Company. The Company generally had received a tax benefit for losses to the extent such losses can be utilized in Kemper's consolidated Federal tax return. Subsequent to January 4, 1996, the Company and its subsidiaries will file separate Federal income tax returns. Deferred taxes are provided on the temporary differences between the tax and financial statement basis of assets and liabilities. (2) CASH FLOW INFORMATION The Company defines cash as cash in banks and money market accounts. Federal income tax refunded by Kemper under the tax allocation arrangement for the period from January 1, 1996 to January 4, 1996 and for the years ended December 31, 1995 and 1994 amounted to $108.8 million, $25.2 million and $10.7 million, respectively. The Company paid $28.1 million of Federal income taxes directly to the United States Treasury Department during 1996. Not reflected in the statement of cash flows are rollovers of mortgage loans, other loans and investments totaling approximately $57.0 million in 1994. 41 45 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (3) INVESTED ASSETS AND RELATED INCOME The Company is carrying its fixed maturity investment portfolio at estimated fair value as fixed maturities are considered available for sale. The carrying value (estimated fair value) of fixed maturities compared with amortized cost, adjusted for other-than-temporary declines in value, were as follows:
ESTIMATED UNREALIZED CARRYING AMORTIZED --------------------- VALUE COST GAINS LOSSES (in thousands) -------- --------- ----- ------ DECEMBER 31, 1996 U.S. treasury securities and obligations of U.S. government agencies and authorities.................. $ 92,238 $ 93,202 $ -- $ (964) Obligations of states and political subdivisions, special revenue and nonguaranteed.................... 30,853 31,519 -- (666) Debt securities issued by foreign governments.......... 105,394 108,456 504 (3,566) Corporate securities................................... 1,896,615 1,935,511 5,918 (44,814) Mortgage and asset-backed securities................... 1,741,331 1,760,962 1,990 (21,621) ---------- ---------- ------ -------- Total fixed maturities.......................... $3,866,431 $3,929,650 $8,412 $(71,631) ========== ========== ====== ======== JANUARY 4, 1996 U.S. treasury securities and obligations of U.S. government agencies and authorities.................. $ 215,637 $ 215,637 $ -- $ -- Obligations of states and political subdivisions, special revenue and nonguaranteed.................... 24,241 24,241 -- -- Debt securities issued by foreign governments.......... 139,361 139,361 -- -- Corporate securities................................... 1,695,268 1,695,268 -- -- Mortgage and asset-backed securities................... 1,674,816 1,674,816 -- -- ---------- ---------- ------ -------- Total fixed maturities.......................... $3,749,323 $3,749,323 $ -- $ -- ========== ========== ====== ========
Upon default or indication of potential default by an issuer of fixed maturity securities, the Company-owned issue(s) of such issuer would be placed on nonaccrual status and, since declines in fair value would no longer be considered by the Company to be temporary, would be analyzed for possible write-down. Any such issue would be written down to its net realizable value during the fiscal quarter in which the impairment was determined to have become other than temporary. Thereafter, each issue on nonaccrual status is regularly reviewed, and additional write-downs may be taken in light of later developments. The Company's computation of net realizable value involves judgments and estimates, so such value should be used with care. Such value determination considers such factors as the existence and value of any collateral security; the capital structure of the issuer; the level of actual and expected market interest rates; where the issue ranks in comparison with other debt of the issuer; the economic and competitive environment of the issuer and its business; the Company's view on the likelihood of success of any proposed issuer restructuring plan; and the timing, type and amount of any restructured securities that the Company anticipates it will receive. The Company's $267.7 million real estate portfolio at December 31, 1996 consists of joint venture and third-party mortgage loans and other real estate-related investments. At December 31, 1996 and January 4, 1996, total impaired loans were as follows:
DECEMBER 31 JANUARY 4 1996 1996 (in millions) ----------- --------- Impaired loans without reserves--gross...................... $39.8 $-- Impaired loans with reserves--gross......................... 7.6 21.9 ----- ----- Total gross impaired loans........................... 47.4 21.9 Reserves related to impaired loans.......................... (4.4) (6.5) ----- ----- Net impaired loans................................... $43.0 $15.4 ===== =====
42 46 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (3) INVESTED ASSETS AND RELATED INCOME (CONTINUED) Impaired loans without reserves include loans in which the deficit in equity investments in real estate-related investments is considered in determining reserves and write-downs. At December 31, 1996, the Company's deficit in equity investments considered in determining reserves and write-downs amounted to $5.9 million. The Company had an average balance of $30.8 million and $124.2 million in impaired loans for 1996 and 1995, respectively. Cash payments received on impaired loans are generally applied to reduce the outstanding loan balance. At December 31, 1996 and January 4, 1996, loans on nonaccrual status amounted to $43.5 million and $3.5 million, respectively. The Company's nonaccrual loans are generally included in impaired loans. At December 31, 1996, securities carried at approximately $6.1 million were on deposit with governmental agencies as required by law. At December 31, 1996, the Company had six separate asset-backed securities included in fixed maturity investments from trusts formed to securitize assets underwritten by Green Tree Financial Corporation, which in aggregate amounted to $90.7 million. No other investments exceeded ten percent of the Company's stockholder's equity at December 31, 1996. Proceeds from sales of investments in fixed maturities prior to maturity were $892.0 million, $297.6 million and $910.9 million during 1996, 1995 and 1994, respectively. Gross gains of $9.9 million, $21.2 million and $6.0 million and gross losses of $16.2 million, $11.9 million and $55.9 million were realized on sales of fixed maturities in 1996, 1995 and 1994, respectively. The following table sets forth the maturity aging schedule of fixed maturity investments at December 31, 1996:
CARRYING AMORTIZED VALUE COST VALUE (in thousands) -------- ---------- One year or less............................................ $ 36,814 $ 36,862 Over one year through five.................................. 643,741 648,811 Over five years through ten................................. 1,170,034 1,200,620 Over ten years.............................................. 274,511 282,395 Securities not due at a single maturity date(1)............. 1,741,331 1,760,962 ---------- ---------- Total fixed maturities............................... $3,866,431 $3,929,650 ========== ==========
- --------------- (1) Weighted average maturity of 4.6 years. The sources of net investment income were as follows:
PREACQUISITION ----------------------- 1996 1995 1994 (in thousands) -------- -------- -------- Interest and dividends on fixed maturities.................. $250,683 $269,934 $274,231 Dividends on equity securities.............................. 646 681 1,751 Income from short-term investments.......................... 9,130 13,159 10,668 Income from mortgage loans.................................. 20,257 40,494 41,713 Income from policy loans.................................... 20,700 19,658 18,517 Income from other real estate-related investments........... 4,917 15,565 21,239 Income from other loans and investments..................... 2,480 1,555 3,533 -------- -------- -------- Total investment income.............................. 308,813 361,046 371,652 Investment expense.......................................... (9,125) (12,598) (18,568) -------- -------- -------- Net investment income................................ $299,688 $348,448 $353,084 ======== ======== ========
43 47 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (3) INVESTED ASSETS AND RELATED INCOME (CONTINUED) Realized gains (losses) for the years ended December 31, 1996, 1995 and 1994, were as follows:
REALIZED GAINS (LOSSES) ------------------------------------------ PREACQUISITION -------------------------- 1996 1995 1994 (in thousands) ------- --------- -------- Real estate-related......................................... $17,462 $(325,611) $(41,720) Fixed maturities............................................ (6,344) 9,336 (49,857) Equity securities........................................... -- (346) 28,243 Other....................................................... 2,484 (2,079) 8,777 ------- --------- -------- Realized investment gains (losses) before income tax expense (benefit)...................................... 13,602 (318,700) (54,557) Income tax expense (benefit)................................ 4,761 (111,545) (19,095) ------- --------- -------- Net realized investment gains (losses).................... $ 8,841 $(207,155) $(35,462) ======= ========= ========
Unrealized gains (losses) are computed below as follows: fixed maturities--the difference between fair value and amortized cost, adjusted for other-than-temporary declines in value; equity securities and other--the difference between fair value and cost. The change in unrealized investment gains (losses) by class of investment for the years ended December 31, 1996, 1995 and 1994 were as follows:
CHANGE IN UNREALIZED GAINS (LOSSES) ------------------------------------------------ PREACQUISITION -------------------- DECEMBER 31 DECEMBER 31 JANUARY 4 -------------------- 1996 1996 1995 1994 (in thousands) ------------ ---------- -------- --------- Fixed maturities................................... $(63,219) $-- $351,964 $(351,646) Equity securities.................................. 1,256 -- 180 (32,710) Adjustment to deferred insurance acquisition costs............................................ 1,307 -- (14,277) 11,325 Adjustment to value of business acquired........... 20,947 -- -- -- -------- --- -------- --------- Unrealized gain (loss) before income tax expense (benefit)..................................... (39,709) -- 337,867 (373,031) Income tax expense (benefit)....................... 7,789 -- 32,922 (43,492) -------- --- -------- --------- Net unrealized gain (loss) on investments... $(47,498) $-- $304,945 $(329,539) ======== === ======== =========
(4) UNCONSOLIDATED INVESTEES At December 31, 1996, the Company, along with other Kemper subsidiaries, directly held partnership interests in a number of real estate joint ventures. The Company's direct and indirect real estate joint venture investments are accounted for utilizing the equity method, with the Company recording its share of the operating results of the respective partnerships. The Company, as an equity owner, has the ability to fund, and historically has elected to fund, operating requirements of certain of the joint ventures. Consolidation accounting methods are not utilized as the Company, in most instances, does not own more than 50 percent in the aggregate, and in any event, major decisions of the partnership must be made jointly by all partners. As of December 31, 1996 and January 4, 1996, the Company's net equity investment in unconsolidated investees amounted to $11.7 million and $11.4 million, respectively. The Company's share of net income related to such unconsolidated investees amounted to $223 thousand for the year ended December 31, 1996, compared with net losses of $453 thousand, and $6.3 million for the years ended December 31, 1995 and 1994, respectively. Also at January 4, 1996, the Company had joint venture-related loans totaling $21.8 million before reserves to partnerships in which Lumbermens Mutual Casualty Company, an affiliate until August 1993 ("Lumbermens"), had equity interests. These joint venture-related loans were sold during 1996. 44 48 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (5) CONCENTRATION OF CREDIT AND INTEREST RATE RISK The Company generally strives to maintain a diversified invested asset portfolio; however, certain concentrations of risk exist in the Company's ownership of mortgage-backed and asset-backed securities and real estate. Approximately 36.4 percent of the Company's investment-grade fixed maturities at December 31, 1996 were mortgage-backed securities, down from 45.7 percent at January 4, 1996, due to sales and paydowns during 1996. These investments had an average yield of 6.83 percent during 1996 and consisted primarily of marketable mortgage pass-through securities issued by the Government National Mortgage Association, the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation and other investment-grade securities collateralized by mortgage pass-through securities issued by these entities. The Company has not made any investments in interest-only or other similarly volatile tranches of mortgage-backed securities. The Company's mortgage-backed investments are generally of AAA credit quality, and the markets for these investments have been and are expected to remain liquid. The Company plans to continue to reduce its holding of such investments over time. As a result of purchases during 1996, approximately 8.8 percent of the Company's investment-grade fixed maturities at December 31, 1996 consisted of corporate asset-backed securities. The majority of the Company's investments in asset-backed securities were backed by manufactured housing loans, auto loans and home equity loans. Investment income was lower in 1996, compared with both 1995 and 1994, primarily reflecting purchase accounting adjustments related to the amortization of premiums on fixed maturity investments. Under purchase accounting, the market value of the Company's fixed maturity investments as of January 4, 1996 became the Company's new cost basis in such investments. The difference between the new cost basis and original par is then amortized against investment income over the remaining effective lives of the fixed maturity investments. As a result of the interest rate environment as of January 4, 1996, the market value of the Company's fixed maturity investments was approximately $133.9 million greater than original par. The amortization of such premiums reduced investment income by approximately $22.7 million in 1996, compared with 1995 and 1994. Future investment income from mortgage-backed securities and other asset-backed securities may be affected by the timing of principal payments and the yields on reinvestment alternatives available at the time of such payments. As a result of purchase accounting adjustments to fixed maturities, most of the Company's mortgage-backed securities are carried at a premium over par. Prepayment activity resulting from a decline in interest rates on such securities purchased at a premium would accelerate the amortization of the premiums which would result in reductions of investment income related to such securities. At December 31, 1996, the Company had unamortized premiums and discounts of $24.7 million and $5.7 million, respectively, related to mortgage-backed and asset-backed securities. The Company believes that as a result of the purchase accounting adjustments and the current interest rate environment, anticipated prepayment activity is expected to result in reductions to future investment income similar to those reductions experienced by the Company in 1996. The Company's real estate portfolio is distributed by geographic location and property type, as shown in the following two tables: GEOGRAPHIC DISTRIBUTION AS OF DECEMBER 31, 1996 California........................... 35.2% Illinois............................. 13.5 Hawaii............................... 11.0 Colorado............................. 7.9 Oregon............................... 7.6 Washington........................... 7.4 Florida.............................. 5.4 Texas................................ 4.2 Ohio................................. 2.7 Other states......................... 5.1 ----- Total...................... 100.0% =====
DISTRIBUTION BY PROPERTY TYPE AS OF DECEMBER 31, 1996 Hotel................................ 38.8% Land................................. 24.4 Office............................... 14.1 Residential.......................... 9.1 Retail............................... 2.6 Industrial........................... 1.0 Other................................ 10.0 ----- Total...................... 100.0% =====
45 49 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Real estate markets have been depressed in recent periods in areas where most of the Company's real estate portfolio is located. Portions of California's and Hawaii's real estate market conditions have continued to be worse than in many other areas of the country. Real estate markets in northern California and Illinois continue to show some stabilization and improvement. Undeveloped land represented approximately 24.4 percent of the Company's real estate portfolio at December 31, 1996. To maximize the value of certain land and other projects, additional development has been proceeding or has been planned. Such development of existing projects would continue to require funding, either from the Company or third parties. In the present real estate markets, third-party financing can require credit enhancing arrangements (e.g., standby financing arrangements and loan commitments) from the Company. The values of development projects are dependent on a number of factors, including Kemper's and the Company's plans with respect thereto, obtaining necessary construction and zoning permits and market demand for the permitted use of the property. The values of certain development projects have been written down as of December 31, 1995, reflecting changes in plans in connection with the Zurich-led acquisition of Kemper. There can be no assurance that such permits will be obtained as planned or at all, nor that such expenditures will occur as scheduled, nor that Kemper's and the Company's plans with respect to such projects may not change substantially. Approximately half of the Company's real estate loans are on properties or projects where the Company, Kemper, or their affiliates have taken ownership positions in joint ventures with a small number of partners. (See note captioned "Unconsolidated Investees".) At December 31, 1996, loans to and investments in joint ventures in which Patrick M. Nesbitt or his affiliates ("Nesbitt"), have interests constituted approximately $101.3 million, or 37.8 percent, of the Company's real estate portfolio. The Nesbitt ventures primarily consist of eleven hotel properties. At December 31, 1996, the Company did not have any Nesbitt-related off-balance-sheet legal funding commitments outstanding. At December 31, 1996, loans to and investments in a master limited partnership (the "MLP") between subsidiaries of Kemper and subsidiaries of Lumbermens, constituted approximately $53.0 million, or 19.8 percent, of the Company's real estate portfolio. The Company's interest in the MLP is a less than one percent limited partnership interest and Kemper's interest is 75 percent at December 31, 1996. At December 31, 1996, MLP-related commitments accounted for approximately $9.4 million of the Company's off-balance-sheet legal commitments, which the Company expects to fund. At December 31, 1996, the Company's loans to and investments in projects with the Prime Group, Inc. or its affiliates totaled approximately $(5.3) million. Negative amounts represent the Company's share of project related operating losses in excess of the Company's investment. Prime Group-related commitments, however, accounted for $145.2 million of the off-balance-sheet legal commitments at December 31, 1996, of which the Company expects to fund $15.9 million. (6) INCOME TAXES Income tax expense (benefit) was as follows for the years ended December 31, 1996, 1995 and 1994:
PREACQUISITION ---------------------- 1996 1995 1994 (in thousands) ------- --------- ------- Current.................................................... $26,300 $(113,087) $(6,898) Deferred................................................... (897) 38,423 21,329 ------- --------- ------- Total............................................ $25,403 $ (74,664) $14,431 ======= ========= =======
Included in the 1995 current tax benefit is the recognition of a net operating loss carryover at December 31, 1995 which was utilized against taxable income on Kemper's consolidated short-period Federal income tax return for the January 1 through January 4, 1996 tax year. Beginning January 5, 1996, the Company and its subsidiaries will each file a stand alone Federal income tax return. Previously, the Company had filed a consolidated Federal income tax return with Kemper. In 1996, the Company and Kemper settled all outstanding balances under the tax allocation agreement. 46 50 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (6) INCOME TAXES (CONTINUED) The actual income tax expense (benefit) for 1996, 1995 and 1994 differed from the "expected" tax expense (benefit) for those years as displayed below. "Expected" tax expense (benefit) was computed by applying the U.S. Federal corporate tax rate of 35 percent in 1996, 1995, and 1994 to income (loss) before income tax expense (benefit).
PREACQUISITION --------------------- 1996 1995 1994 (in thousands) ------- -------- ------- Computed expected tax expense (benefit)..................... $20,938 $(72,700) $14,277 Difference between "expected" and actual tax expense (benefit): State taxes............................................... 913 (1,370) 645 Amortization of goodwill.................................. 3,568 -- -- Foreign tax credit........................................ -- (183) (155) Other, net................................................ (16) (411) (336) ------- -------- ------- Total actual tax expense (benefit)................ $25,403 $(74,664) $14,431 ======= ======== =======
Deferred tax assets and liabilities are generally determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company only records deferred tax assets if future realization of the tax benefit is more likely than not, with a valuation allowance recorded for the portion that is not likely to be realized. The Company has established a valuation allowance to reduce the deferred Federal tax asset related to real estate and other investments to the amount that, based upon available evidence, is, in management's judgment, more likely than not to be realized. Any reversals of the valuation allowance are contingent upon the recognition of future capital gains in the Company's Federal income tax return or a change in circumstances which causes the recognition of the benefits to become more likely than not. The change in the valuation allowance is related solely to the change in the net deferred Federal tax asset or liability from unrealized gains or losses on investments. 47 51 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (6) INCOME TAXES (CONTINUED) The tax effects of temporary differences that give rise to significant portions of the Company's net deferred Federal tax liability were as follows:
PREACQUISITION --------------------- DECEMBER 31 DECEMBER 31 JANUARY 4 --------------------- 1996 1996 1995 1994 (in thousands) ----------- --------- --------- -------- Deferred Federal tax assets: Unrealized losses on investments............. $ 16,624 $ -- $ -- $ 85,331 Life policy reserves......................... 46,452 46,654 42,512 51,519 Real estate-related.......................... 20,642 27,736 21,920 39,360 Other investment-related..................... 5,409 1,773 1,725 7,435 Other........................................ 8,159 9,750 6,864 6,415 -------- -------- --------- -------- Total deferred Federal tax assets......... 97,286 85,913 73,021 190,060 Valuation allowance.......................... (31,825) (15,201) (15,201) (100,532) -------- -------- --------- -------- Total deferred Federal tax assets after valuation allowance..................... 65,461 70,712 57,820 89,528 -------- -------- --------- -------- Deferred Federal tax liabilities: Deferred insurance acquisition costs......... 9,384 -- 111,523 108,663 Value of business acquired................... 66,373 66,578 -- -- Other investment-related..................... 28,855 37,919 -- -- Unrealized gains on investments.............. -- -- 37,919 -- Depreciation and amortization................ 15,473 15,490 18,767 18,878 Other........................................ 5,738 4,197 2,320 3,351 -------- -------- --------- -------- Total deferred Federal tax liabilities.... 125,823 124,184 170,529 130,892 -------- -------- --------- -------- Net deferred Federal tax liabilities........... $(60,362) $(53,472) $(112,709) $(41,364) ======== ======== ========= ========
The valuation allowance is subject to future adjustments based on, among other items, the Company's estimates of future operating earnings and capital gains. The tax returns through the year 1986 have been examined by the Internal Revenue Service ("IRS"). Changes proposed are not material to the Company's financial position. The tax returns for the years 1987 through 1993 are currently under examination by the IRS. (7) RELATED-PARTY TRANSACTIONS The Company received cash capital contributions of $18.4 million and $82.5 million during 1996 and 1994, respectively. The Company has loans to joint ventures, consisting primarily of mortgage loans on real estate, in which the Company and/or one of its affiliates has an ownership interest. At December 31, 1996 and January 4, 1996, joint venture mortgage loans totaled $111.0 million and $110.2 million, respectively, and during 1996, 1995 and 1994, the Company earned interest income on these joint venture loans of $9.5 million, $19.6 million and $22.0 million, respectively. All of the Company's personnel are employees of Federal Kemper Life Assurance Company ("FKLA"), an affiliated company. The Company is allocated expenses for the utilization of FKLA employees and facilities, the investment management services of Zurich Kemper Investments, Inc. ("ZKI"), an affiliated company, and the information systems of Kemper Service Company ("KSvC"), a ZKI subsidiary, based on the Company's share of administrative, legal, marketing, investment management, information systems and operation and support services. During 1996, 1995 and 1994, expenses allocated to the Company from ZKI and KSvC amounted to $1.7 million, $4.4 million and $6.5 million, respectively. The Company also paid to ZKI investment management fees of $3.6 million, $3.4 million and $6.0 million during 1996, 1995 and 1994, respectively. In addition, expenses 48 52 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (7) RELATED-PARTY TRANSACTIONS (CONTINUED) allocated to the Company from FKLA during 1996, 1995 and 1994 amounted to $10.5 million, $14.3 million and $11.1 million, respectively. During 1995 and 1994, the Company sold certain mortgages and real estate-related investments, net of reserves, amounting to approximately $3.5 million and $154.0 million, respectively, to an affiliated non-life realty company, in exchange for cash. No gain or loss was recognized on these sales. During 1996, the Company purchased approximately $24.5 million of real estate-related investments from such affiliated non-life realty subsidiaries for cash. The Company also paid to Kemper real estate subsidiaries $1.8 million in both 1996 and 1995, related to the management of the Company's real estate portfolio. (8) REINSURANCE In the ordinary course of business, the Company enters into reinsurance agreements to diversify risk and limit its overall financial exposure to certain blocks of fixed-rate annuities and to individual death claims. The Company generally cedes 100 percent of the related annuity liabilities under the terms of the reinsurance agreements. Although these reinsurance agreements contractually obligate the reinsurers to reimburse the Company, they do not discharge the Company from its primary liabilities and obligations to policyholders. As such, these amounts paid or deemed to have been paid are recorded on the Company's consolidated balance sheet as reinsurance recoverables and ceded future policy benefits. In 1992 and 1991, the Company entered into 100 percent indemnity reinsurance agreements ceding $515.7 million and $416.3 million, respectively, of its fixed-rate annuity liabilities to FLA. FLA is a mutual insurance company that shares common management and common board members with the Company, FKLA and Kemper. As of December 31, 1996 and January 4, 1996, the reinsurance recoverable related to the fixed-rate annuity liabilities ceded to FLA amounted to $427.0 million and $502.8 million, respectively. During 1995, the Company recorded income of $4.4 million related to a ceding commission experience adjustment from the 1992 reinsurance agreement. In December 1996, the Company assumed on a yearly renewable term basis approximately $14.4 billion (face amount) of term life insurance from FKLA. As a result of this transaction, the Company recorded premiums and reserves of approximately $7.3 million. The difference between the cash transferred, which represents the statutory reserves of the business assumed, and the reserves recorded under generally accepted accounting principles, of approximately $18.4 million, was deemed to be a capital contribution from Kemper and was recorded as additional paid-in-capital during 1996. The Company's retention limit on term life insurance is $300 thousand (face amount) on the life of any one individual with the excess amounts ceded to outside reinsurers. The term life insurance business assumed from FKLA during 1996 did not have any individual contracts greater than $300 thousand in face amount. Reserves ceded to outside reinsurers on the Company's direct business amounted to approximately $94 thousand as of December 31, 1996. (9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS FKLA sponsors a welfare plan that provides medical and life insurance benefits to its retired and active employees and the Company is allocated a portion of the costs of providing such benefits. The Company is self insured with respect to medical benefits, and the plan is not funded except with respect to certain disability-related medical claims. The medical plan provides for medical insurance benefits at retirement, with eligibility based upon age and the participant's number of years of participation attained at retirement. The plan is contributory for pre-Medicare retirees, and will be contributory for all retiree coverage for most current employees, with contributions generally adjusted annually. Postretirement life insurance benefits are noncontributory and are limited to $10,000 per participant. The allocated accumulated postretirement benefit obligation accrued by the Company amounted to $1.7 million and $687 thousand at December 31, 1996 and January 4, 1996, respectively. The discount rate used in determining the allocated postretirement benefit obligation was 7.75 percent and 7.25 percent for 1996 and 1995, respectively. The assumed health care trend rate used was based on projected 49 53 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED) experience for 1996 and 1997, 10 percent in 1998, gradually declining to 5.0 percent by the year 2001 and remaining at that level thereafter. A one percentage point increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement benefit obligation as of December 31, 1996 and January 4, 1996 by $56 thousand and $146 thousand, respectively. During 1995, the Company adopted certain severance-related policies to provide benefits, generally limited in time, to former or inactive employees after employment but before retirement. The effect of adopting these policies was immaterial. (10) COMMITMENTS AND CONTINGENT LIABILITIES The Company is involved in various legal actions for which it establishes liabilities where appropriate. In the opinion of the Company's management, based upon the advice of legal counsel, the resolution of such litigation is not expected to have a material adverse effect on the consolidated financial statements. Although none of the Company or its joint venture projects have been identified as a "potentially responsible party" under Federal environmental guidelines, inherent in the ownership of or lending to real estate projects is the possibility that environmental pollution conditions may exist on or near or relate to properties owned or previously owned on properties securing loans. Where the Company has presently identified remediation costs, they have been taken into account in determining the cash flows and resulting valuations of the related real estate assets. Based on the Company's receipt and review of environmental reports on most of the projects in which it is involved, the Company believes its environmental exposure would be immaterial to its consolidated results of operations. However, the Company may be required in the future to take actions to remedy environmental exposures, and there can be no assurance that material environmental exposures will not develop or be identified in the future. The amount of future environmental costs is impossible to estimate due to, among other factors, the unknown magnitude of possible exposures, the unknown timing and extent of corrective actions that may be required, the determination of the Company's liability in proportion to others and the extent such costs may be covered by insurance or various environmental indemnification agreements. See the note captioned "Financial Instruments--Off-Balance-Sheet Risk" below for the discussion regarding the Company's loan commitments and standby financing agreements. The Company is liable for guaranty fund assessments related to certain unaffiliated insurance companies that have become insolvent during the years 1996 and prior. The Company's financial statements include provisions for all known assessments that are expected to be levied against the Company as well as an estimate of amounts (net of estimated future premium tax recoveries) that the Company believes it will be assessed in the future for which the life insurance industry has estimated the cost to cover losses to policyholders. The Company is also contingently liable for any future guaranty fund assessments related to insolvencies of unaffiliated insurance companies, for which the life insurance industry has been unable to estimate the cost to cover losses to policyholders. No specific amount can be reasonably estimated for such insolvencies as of December 31, 1996. (11) FINANCIAL INSTRUMENTS--OFF-BALANCE-SHEET RISK At December 31, 1996, the Company had future legal loan commitments and stand-by financing agreements totaling $197.4 million to support the financing needs of various real estate investments. To the extent these arrangements are called upon, amounts loaned would be secured by assets of the joint ventures, including first mortgage liens on the real estate. The Company's criteria in making these arrangements are the same as for its mortgage loans and other real estate investments. The Company presently expects to fund approximately $39.6 million of these arrangements. These commitments are included in the Company's analysis of real estate-related reserves and write-downs. The fair values of loan commitments and standby financing agreements are estimated in conjunction with and using the same methodology as the fair value estimates of mortgage loans and other real estate-related investments. 50 54 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (12) DERIVATIVE FINANCIAL INSTRUMENTS The Company was party to derivative financial instruments in the normal course of business for other than trading purposes to hedge exposures in foreign currency fluctuations related to certain foreign fixed maturity securities held by the Company. The Company sold its interest in such securities during 1996. The following table summarizes various information regarding these derivative financial instruments as of January 4, 1996:
WEIGHTED (IN THOUSANDS) WEIGHTED AVERAGE AVERAGE REPRICING NOTIONAL CARRYING ESTIMATED YEARS TO FREQUENCY JANUARY 4, 1996 AMOUNT VALUE FAIR VALUE EXPIRATION (DAYS) --------------- -------- -------- ---------- ---------- --------- Non-trading foreign exchange forward options................ $43,754 $112 $112 .32 30
The Company's hedges relating to foreign currency exposure were implemented using forward contracts on foreign currencies. These are generally short-duration contracts with U.S. money-center banks. The Company records realized and unrealized gains and losses on such investments in net income on a current basis. The amounts of gain (loss) included in net income during 1996, 1995 and 1994 totaled $227 thousand, $(1.0) million and $6.4 million, respectively. (13) FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value estimates are made at specific points in time, based on relevant market information and information about the 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 holdings of a particular financial instrument. A significant portion of the Company's financial instruments are carried at fair value. (See note captioned "Invested Assets and Related Income".) Fair value estimates for financial instruments not carried at fair value are generally determined using discounted cash flow models and assumptions that are based on judgments regarding current and future economic conditions and the risk characteristics of the investments. Although fair value estimates are calculated using assumptions that management believes are appropriate, changes in assumptions could significantly affect the estimates and such estimates should be used with care. Fair value estimates are determined for existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and certain liabilities that are not considered financial instruments. Accordingly, the aggregate fair value estimates presented do not represent the underlying value of the Company. For example, the Company's subsidiaries are not considered financial instruments, and their value has not been incorporated into the fair value estimates. In addition, tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates. The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments: Fixed maturities and equity securities: Fair values for fixed maturity securities and for equity securities were determined by using market quotations, or independent pricing services that use prices provided by market makers or estimates of fair values obtained from yield data relating to instruments or securities with similar characteristics, or fair value as determined in good faith by the Company's portfolio manager, ZKI. Cash and short-term investments: The carrying amounts reported in the consolidated balance sheet for these instruments approximate fair values. Mortgage loans and other real estate-related investments: Fair values for mortgage loans and other real estate-related investments were estimated based upon the investments observable market price, net of estimated costs to sell. The estimates of fair value should be used with care given the inherent difficulty of estimating the fair value of real estate due to the lack of a liquid quotable market. Other loans and investments: The carrying amounts reported in the consolidated balance sheet for these instruments approximate fair values. The fair values of policy loans were estimated by discounting the expected future cash flows using an interest rate charged on policy loans for similar policies currently being issued. Life policy benefits: Fair values of the life policy benefits regarding investment contracts (primarily deferred annuities) and universal life contracts were estimated by discounting gross benefit payments, net of contractual premiums, using the average crediting rate currently being offered in the marketplace for similar contracts with 51 55 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (13) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) maturities consistent with those remaining for the contracts being valued. The Company had projected its future average crediting rate in 1996 to be 4.75 percent, while the assumed average market crediting rate was 5.8 percent in 1996. The carrying values and estimated fair values of the Company's financial instruments at December 31, 1996 and January 4, 1996 were as follows:
DECEMBER 31, 1996 JANUARY 4, 1996 ------------------------ ------------------------ CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE (in thousands) ---------- ---------- ---------- ---------- Financial instruments recorded as assets: Fixed maturities(1)........................... $3,866,431 $3,866,431 $3,749,323 $3,749,323 Cash and short-term investments............... 74,472 74,472 398,326 398,326 Mortgage loans and other real estate-related assets..................................... 267,713 267,713 288,940 288,940 Policy loans.................................. 288,302 288,302 289,390 289,390 Other invested assets......................... 23,507 23,507 19,215 19,215 Financial instruments recorded as liabilities: Life policy benefits.......................... 4,249,264 4,101,588 4,585,148 4,585,148
- --------------- (1) Includes $112 thousand carrying value and fair value for January 4, 1996, of derivative securities used to hedge the foreign currency exposure on certain specific foreign fixed maturity investments. (14) STOCKHOLDER'S EQUITY--RETAINED EARNINGS The maximum amount of dividends which can be paid by insurance companies domiciled in the State of Illinois to shareholders without prior approval of regulatory authorities is restricted. The maximum amount of dividends which can be paid by the Company without prior approval in 1997 is $40.9 million. The Company paid no cash dividends in 1996, 1995 or 1994. The Company's net income (loss) and stockholder's equity as determined in accordance with statutory accounting principles were as follows:
1996 1995 1994 (in thousands) -------- -------- -------- Net income (loss)........................................... $ 37,287 $(64,707) $ 44,491 ======== ======== ======== Statutory surplus........................................... $411,837 $383,374 $416,243 ======== ======== ========
52 56 APPENDIX ILLUSTRATIONS OF CASH VALUES, CASH SURRENDER VALUES, DEATH BENEFITS The tables in this Prospectus have been prepared to help show how values under a Policy change with investment experience. The tables illustrate how Cash Values, Surrender Values (reflecting the deduction of Surrender Charges, if any) and Death Benefits under a Policy issued on an Insured of a given age would vary over time if the hypothetical gross investment rates of return were a uniform, after tax, annual rate of 0%, 6%, and 12%. If the hypothetical gross investment rate of return averages 0%, 6%, or 12%, but fluctuates over or under those averages throughout the years, the Cash Values, Surrender Values and Death Benefits may be different. The amounts shown for the Cash Value, Surrender Value and Death Benefit as of each Policy Anniversary reflect the fact that the net investment return on the assets held in the Subaccounts is lower than the gross return. This is because of a daily charge to the Subaccounts for assuming mortality and expense risks, which is equivalent to an effective annual charge of 0.90%. In addition, the net investment returns also reflect the deduction of the Fund investment advisory fees and other Fund expenses, approximated at 0.65%. The tables also reflect the fact that KILICO makes monthly charges for providing insurance protection. For each hypothetical gross investment rate of return, tables are provided reflecting current and guaranteed cost of insurance charges. Hypothetical gross average investment rates of return of 0%, 6% and 12% correspond to the following approximate net annual investment rate of return of - -1.55%, 4.45% and 10.45%, respectively. Cost of insurance rates vary by age, sex and rating class and, therefore, are not reflected in the approximate net annual investment rate of return above. The values shown are for Policies which are issued as standard. Values for Policies issued on a substandard basis would result in lower Cash Values, Surrender Values and Death Benefits than those illustrated. The tables also reflect the fact that no charges for Federal, state or other income taxes are currently made against the Separate Account. If such a charge is made in the future, it will take a higher gross rate of return than illustrated to produce the net after-tax returns shown in the tables. Upon request, KILICO will furnish an illustration based on the proposed Insured's age, sex and premium payment requested. 53 57 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE NON-SMOKER $10,000 INITIAL PREMIUM ISSUE AGE 25 $88,520 INITIAL DEATH BENEFIT: VALUES--CURRENT COST OF INSURANCE
0% HYPOTHETICAL 6% HYPOTHETICAL PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN PAID PLUS ------------------------------- ------------------------------- POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT ------ --------- -------- --------- -------- -------- --------- -------- 1..................... $10,500 $9,733 $8,857 $88,520 $10,329 $ 9,429 $88,520 2..................... 11,025 9,469 8,712 88,520 10,674 9,874 88,520 3..................... 11,576 9,209 8,565 88,520 11,035 10,335 88,520 4..................... 12,155 8,953 8,416 88,520 11,412 10,812 88,520 5..................... 12,763 8,701 8,266 88,520 11,806 11,306 88,520 6..................... 13,401 8,452 8,114 88,520 12,218 11,818 88,520 7..................... 14,071 8,206 7,960 88,520 12,650 12,350 88,520 8..................... 14,775 7,964 7,805 88,520 13,101 12,901 88,520 9..................... 15,513 7,726 7,648 88,520 13,573 13,473 88,520 10..................... 16,289 7,481 7,481 88,520 14,058 14,058 88,520 15..................... 20,789 6,191 6,191 88,520 16,726 16,726 88,520 20..................... 26,533 4,649 4,649 88,520 19,744 19,744 88,520 25..................... 33,864 2,661 2,661 88,520 23,051 23,051 88,520 30..................... 43,219 0 0 0 26,499 26,499 88,520 12% HYPOTHETICAL GROSS INVESTMENT RETURN ------------------------------- POLICY CASH SURRENDER DEATH YEAR VALUE VALUE BENEFIT ------ -------- --------- -------- 1..................... $ 10,926 $ 10,026 $ 88,520 2..................... 11,951 11,151 88,520 3..................... 13,084 12,384 88,520 4..................... 14,337 13,737 88,520 5..................... 15,724 15,224 88,520 6..................... 17,257 16,857 88,520 7..................... 18,953 18,653 88,520 8..................... 20,830 20,630 88,520 9..................... 22,905 22,805 88,520 10..................... 25,192 25,192 88,520 15..................... 40,721 40,721 101,804 20..................... 65,732 65,732 145,924 25..................... 105,857 105,857 202,188 30..................... 170,337 170,337 267,429
ASSUMPTIONS: (1) NO ADDITIONAL PREMIUMS PAID AND NO POLICY LOANS HAVE BEEN MADE. (2) VALUES REFLECT CURRENT COST OF INSURANCE CHARGES. (3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS SHOWN IN THE PROSPECTUS APPENDIX. (4) DEATH BENEFIT REFLECTS CURRENT INTERNAL REVENUE CODE REQUIREMENTS. (5) ZERO VALUES INDICATE POLICY LAPSE IN ABSENCE OF AN ADDITIONAL PREMIUM PAYMENT. THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER AND ACTUAL EXPENSES. THE DEATH BENEFIT, CASH VALUE AND SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS CAN BE MADE BY KEMPER INVESTORS LIFE INSURANCE COMPANY THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. 54 58 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE NON-SMOKER $10,000 INITIAL PREMIUM ISSUE AGE 25 $88,520 INITIAL DEATH BENEFIT: VALUES--GUARANTEED COST OF INSURANCE
0% HYPOTHETICAL 6% HYPOTHETICAL PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN PAID PLUS ------------------------------- ------------------------------- POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT ------ --------- -------- --------- -------- -------- --------- -------- 1..................... $10,500 $9,728 $8,852 $88,520 $10,325 $ 9,425 $88,520 2..................... 11,025 9,462 8,705 88,520 10,667 9,867 88,520 3..................... 11,576 9,202 8,557 88,520 11,026 10,326 88,520 4..................... 12,155 8,946 8,408 88,520 11,403 10,803 88,520 5..................... 12,763 8,693 8,258 88,520 11,796 11,296 88,520 6..................... 13,401 8,443 8,105 88,520 12,208 11,808 88,520 7..................... 14,071 8,195 7,949 88,520 12,636 12,336 88,520 8..................... 14,775 7,947 7,787 88,520 13,080 12,880 88,520 9..................... 15,513 7,697 7,620 88,520 13,540 13,440 88,520 10..................... 16,289 7,445 7,445 88,520 14,017 14,017 88,520 15..................... 20,789 6,116 6,116 88,520 16,629 16,629 88,520 20..................... 26,533 4,547 4,547 88,520 19,589 19,589 88,520 25..................... 33,864 2,543 2,543 88,520 22,834 22,834 88,520 30..................... 43,219 0 0 0 26,179 26,179 88,520 12% HYPOTHETICAL GROSS INVESTMENT RETURN ------------------------------- POLICY CASH SURRENDER DEATH YEAR VALUE VALUE BENEFIT ------ -------- --------- -------- 1..................... $ 10,921 $ 10,021 $ 88,520 2..................... 11,943 11,143 88,520 3..................... 13,074 12,374 88,520 4..................... 14,327 13,727 88,520 5..................... 15,712 15,212 88,520 6..................... 17,243 16,843 88,520 7..................... 18,935 18,635 88,520 8..................... 20,804 20,604 88,520 9..................... 22,866 22,766 88,520 10..................... 25,143 25,143 88,520 15..................... 40,597 40,597 101,493 20..................... 65,495 65,495 145,399 25..................... 105,448 105,448 201,405 30..................... 169,610 169,610 266,288
ASSUMPTIONS: (1) NO ADDITIONAL PREMIUMS PAID AND NO POLICY LOANS HAVE BEEN MADE. (2) VALUES REFLECT GUARANTEED COST OF INSURANCE CHARGES. (3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS SHOWN IN THE PROSPECTUS APPENDIX. (4) DEATH BENEFIT REFLECTS CURRENT INTERNAL REVENUE CODE REQUIREMENTS. (5) ZERO VALUES INDICATE POLICY LAPSE IN ABSENCE OF AN ADDITIONAL PREMIUM PAYMENT. THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER AND ACTUAL EXPENSES. THE DEATH BENEFIT, CASH VALUE AND SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS CAN BE MADE BY KEMPER INVESTORS LIFE INSURANCE COMPANY THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. 55 59 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE NON-SMOKER $10,000 INITIAL PREMIUM ISSUE AGE 45 $39,290 INITIAL DEATH BENEFIT: VALUES--CURRENT COST OF INSURANCE
0% HYPOTHETICAL 6% HYPOTHETICAL PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN PAID PLUS ------------------------------- ------------------------------- POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT ------ --------- -------- --------- -------- -------- --------- -------- 1..................... $10,500 $9,747 $8,870 $39,290 $10,345 $ 9,445 $39,290 2..................... 11,325 9,487 8,728 39,290 10,695 9,895 39,290 3..................... 11,576 9,222 8,576 39,290 11,056 10,356 39,290 4..................... 12,155 8,950 8,413 39,290 11,424 10,824 39,290 5..................... 12,763 8,670 8,236 39,290 11,800 11,300 39,290 6..................... 13,401 8,382 8,046 39,290 12,184 11,784 39,290 7..................... 14,071 8,082 7,839 39,290 12,574 12,274 39,290 8..................... 14,775 7,766 7,611 39,290 12,967 12,767 39,290 9..................... 15,513 7,435 7,360 39,290 13,364 13,264 39,290 10..................... 16,289 7,095 7,095 39,290 13,772 13,772 39,290 15..................... 20,789 5,125 5,125 39,290 15,903 15,903 39,290 20..................... 26,533 2,294 2,294 39,290 18,008 18,008 39,290 25..................... 33,864 0 0 0 19,735 19,735 39,290 30..................... 43,219 0 0 0 20,624 20,624 39,290 12% HYPOTHETICAL GROSS INVESTMENT RETURN ------------------------------- POLICY CASH SURRENDER DEATH YEAR VALUE VALUE BENEFIT ------ -------- --------- -------- 1..................... $ 10,943 $ 10,043 $ 39,290 2..................... 11,977 11,177 39,290 3..................... 13,116 12,416 39,290 4..................... 14,370 13,770 39,290 5..................... 15,751 15,251 39,290 6..................... 17,276 16,876 39,290 7..................... 18,957 18,657 39,290 8..................... 20,812 20,612 39,290 9..................... 22,862 22,762 39,290 10..................... 25,136 25,136 39,463 15..................... 40,553 40,553 54,340 20..................... 65,452 65,452 79,851 25..................... 105,357 105,357 122,214 30..................... 169,799 169,799 181,685
ASSUMPTIONS: (1) NO ADDITIONAL PREMIUMS AND NO POLICY LOANS HAVE BEEN MADE. (2) VALUES REFLECT CURRENT COST OF INSURANCE CHARGES. (3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS SHOWN IN THE PROSPECTUS APPENDIX. (4) DEATH BENEFIT REFLECTS CURRENT INTERNAL REVENUE CODE REQUIREMENTS. (5) ZERO VALUES INDICATE POLICY LAPSE IN ABSENCE OF AN ADDITIONAL PREMIUM PAYMENT. THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER AND ACTUAL EXPENSES. THE DEATH BENEFIT, CASH VALUE AND SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS CAN BE MADE BY KEMPER INVESTORS LIFE INSURANCE COMPANY THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. 56 60 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE NON-SMOKER $10,000 INITIAL PREMIUM ISSUE AGE 45 $39,209 INITIAL DEATH BENEFIT: VALUES--GUARANTEED COST OF INSURANCE
0% HYPOTHETICAL 6% HYPOTHETICAL PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN PAID PLUS ------------------------------- ------------------------------- POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT ------ --------- -------- --------- -------- -------- --------- -------- 1..................... $10,500 $9,744 $8,867 $39,290 $10,342 $ 9,442 $39,290 2..................... 11,325 9,484 8,725 39,290 10,692 9,892 39,290 3..................... 11,576 9,217 8,571 39,290 11,051 10,351 39,290 4..................... 12,155 8,932 8,406 39,290 11,417 10,817 39,290 5..................... 12,763 8,662 8,229 39,290 11,791 11,291 39,290 6..................... 13,401 8,371 8,036 39,290 12,172 11,772 39,290 7..................... 14,071 8,069 7,827 39,290 12,559 12,259 39,290 8..................... 14,775 7,753 7,598 39,290 12,951 12,751 39,290 9..................... 15,513 7,420 7,346 39,290 13,346 13,246 39,290 10..................... 16,289 7,068 7,068 39,290 13,744 13,744 39,290 15..................... 20,789 4,923 4,923 39,290 15,718 15,718 39,290 20..................... 26,533 1,693 1,693 39,290 17,472 17,462 39,290 25..................... 33,864 0 0 0 18,490 18,490 39,290 30..................... 43,219 0 0 0 17,668 17,668 39,290 12% HYPOTHETICAL GROSS INVESTMENT RETURN ------------------------------- POLICY CASH SURRENDER DEATH YEAR VALUE VALUE BENEFIT ------ -------- --------- -------- 1..................... $ 10,940 $ 10,040 $ 39,290 2..................... 11,973 11,173 39,290 3..................... 13,110 12,410 39,290 4..................... 14,362 13,762 39,290 5..................... 15,742 15,242 39,290 6..................... 17,263 16,863 39,290 7..................... 18,941 18,641 39,290 8..................... 20,794 20,594 39,290 9..................... 22,841 22,741 39,290 10..................... 25,106 25,106 39,417 15..................... 40,415 40,415 54,156 20..................... 65,045 65,045 79,355 25..................... 104,335 104,335 121,028 30..................... 167,401 167,401 179,120
ASSUMPTIONS: (1) NO ADDITIONAL PREMIUMS AND NO POLICY LOANS HAVE BEEN MADE. (2) VALUES REFLECT GUARANTEED COST OF INSURANCE CHARGES. (3) NET INVESTMENT RETURNS ARE CALCULATED AS THE HYPOTHETICAL GROSS INVESTMENT RETURN LESS ALL CHARGES AND DEDUCTIONS SHOWN IN THE PROSPECTUS APPENDIX. (4) DEATH BENEFIT REFLECTS CURRENT INTERNAL REVENUE CODE REQUIREMENTS. (5) ZERO VALUES INDICATE POLICY LAPSE IN ABSENCE OF AN ADDITIONAL PREMIUM PAYMENT. THE HYPOTHETICAL INVESTMENT RATES OF RETURN SHOWN ABOVE AND ELSEWHERE IN THIS PROSPECTUS ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE DEEMED A REPRESENTATION OF PAST OR FUTURE INVESTMENT RATES OF RETURN. ACTUAL RATES OF RETURN MAY BE MORE OR LESS THAN THOSE SHOWN AND WILL DEPEND ON A NUMBER OF FACTORS, INCLUDING THE INVESTMENT ALLOCATIONS MADE BY AN OWNER AND ACTUAL EXPENSES. THE DEATH BENEFIT, CASH VALUE AND SURRENDER VALUE FOR A POLICY WOULD BE DIFFERENT FROM THOSE SHOWN IF THE ACTUAL RATES OF RETURN AVERAGED 0%, 6% AND 12% OVER A PERIOD OF YEARS BUT ALSO FLUCTUATED ABOVE OR BELOW THOSE AVERAGES FOR INDIVIDUAL POLICY YEARS. NO REPRESENTATIONS CAN BE MADE BY KEMPER INVESTORS LIFE INSURANCE COMPANY THAT THESE HYPOTHETICAL RATES OF RETURN CAN BE ACHIEVED FOR ANY ONE YEAR OR SUSTAINED OVER ANY PERIOD OF TIME. 57 61 PART II UNDERTAKING TO FILE REPORTS Subject to the terms and conditions of Section 15(d) of the Securities and 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 Pursuant to the Distribution Agreement filed as Exhibit 1-A(3)(a) to this Registration Statement, Kemper Investors Life Insurance Company (KILICO) and the Separate Account have agreed to indemnify Investors Brokerage Services, Inc. (IBS) against any claims, liabilities and expenses which IBS may incur under the Securities Act of 1933, common law or otherwise, arising out of or based upon any alleged untrue statements of material fact contained in any registration statement or prospectus of the Separate Account, or any omission to state a material fact therein, the omission of which makes any statement contained therein misleading. IBS agrees to indemnify KILICO and the Separate Account against any and all claims, demands, liabilities and expenses which KILICO or the Separate Account may incur, arising out of or based upon any act or deed of IBS or of any registered representative of an NASD member investment dealer which has an agreement with IBS and is acting in accordance with KILICO's instructions. Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of KILICO or the Separate Account (by virtue of the fact that they may also be agents, employees or controlling persons of IBS) pursuant to the foregoing provisions, or otherwise KILICO and the Separate Account have been advised that in the opinion of the Securities and Exchange Commission such indemnification may be against public policy as expressed in the Act and may be, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by KILICO or the Separate Account of expenses incurred or paid by a director, officer or controlling person of KILICO or the Separate Account 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, KILICO and the Separate Account 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. REPRESENTATION REGARDING FEES AND CHARGES PURSUANT TO SECTION 26 OF THE INVESTMENT COMPANY ACT OF 1940 Kemper Investors Life Insurance Company (KILICO) represents that the fees and charges deducted under the Policy, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred, and the risks assumed by KILICO. II-1 62 CONTENTS OF REGISTRATION STATEMENT This Registration Statement comprises the following Papers and Documents: The Facing sheet. Reconciliation and tie between items in N-8B-2 and Prospectus. The prospectus consisting of 57 pages. The undertaking to file reports. Undertaking pursuant to Rule 484(b)(1) under the Securities Act of 1933. Representation Regarding Fees and Charges Pursuant to Section 26 of the Investment Company Act of 1940. The signatures. Written consents of the following persons: A. David F. Dierenfeldt, Esq. (included in Opinion filed as Exhibit 3(a)). B. KPMG Peat Marwick LLP, independent auditors (filed as Exhibit 6(a)). C. Steven D. Powell, FSA (included in Opinion filed as Exhibit 3(b)). The following exhibits: (2) 1-A(1) KILICO Resolution establishing the Separate Account (3) 1-A(3)(a) Distribution Agreement between KILICO and Investors Brokerage Services, Inc. (IBS) 1-A(3)(b)(i) Specimen Selling Group Agreement of Kemper Financial Services, Inc. and KILICO Distribution Organization Agreement (1) 1-A(3)(b)(ii) Addendum to Selling Group Agreement of Kemper Financial Services, Inc. (4) 1-A(3)(b)(iii) Specimen Selling Group Agreement of IBS (4) 1-A(3)(b)(iv) General Agent Agreement 1-A(3)(c) Schedules of commissions 1-A(5) Specimen Policy (2) 1-A(6)(a) KILICO Articles of Incorporation (4) 1-A(6)(b) By-Laws of KILICO 1-A(8) Subscription Agreement between KILICO and Kemper Investors Fund on behalf of Variable Separate Account 1-A(10) Application for Policy 3(a) Opinion and consent of legal officer of KILICO as to legality of policies being registered 3(b) Opinion and consent of actuarial officer of KILICO regarding prospectus illustrations and actuarial matters 6(a) Consent of independent auditors 8 Procedures Memorandum, pursuant to Rule 6e-3(T)(b)(12)(ii) (2) 11 Representation, description and undertakings regarding mortality and expense risk charge, pursuant to Rule 6e-3(T)(b)(13)(iii)(F)
- --------------- (1) Filed with the Post-Effective Amendment No. 8 of the Registrant on Form S-6 filed on April 27, 1995. (2) Filed with the Registration Statement of the Registrant on Form S-6 filed on December 26, 1995 (File No. 33-65399). (3) Filed with the Registration Statement on Form S-1 filed on April 12, 1996 (File No. 333-02491). (4) Filed with Amendment No. 2 to the Registration Statement on Form S-1 on April 23, 1997 (File No. 333-02491). II-2 63 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant, KILICO Variable Separate Account, certifies that it meets the requirements for effectiveness of this Amendment to the Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Amendment to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Long Grove and State of Illinois on the 24th day of April, 1997. KILICO VARIABLE SEPARATE ACCOUNT ----------------------------------------- (Registrant) By: Kemper Investors Life Insurance Company (Depositor) By: /s/ JOHN B. SCOTT* ----------------------------------------- John B. Scott, Chief Executive Officer and President Pursuant to the requirements of the Securities Act of 1933, this Amendment to the Registration Statement has been signed below by the following directors and principal officers of Kemper Investors Life Insurance Company in the capacities indicated on the 24th day of April, 1997.
SIGNATURE TITLE --------- ----- /s/ JOHN B. SCOTT* Chief Executive Officer, President and - ---------------------------------------------- Director (Principal Executive Officer) John B. Scott /s/ W.H. BOLINDER* Chairman of the Board and Director - ---------------------------------------------- William H. Bolinder /s/ FREDERICK L. BLACKMON* Senior Vice President and Chief Financial - ---------------------------------------------- Officer (Principal Financial Officer and Frederick L. Blackmon Principal Accounting Officer) /s/ LOREN J. ALTER* Director - ---------------------------------------------- Loren J. Alter /s/ DANIEL L. DOCTOROFF* Director - ---------------------------------------------- Daniel L. Doctoroff /s/ STEVEN M. GLUCKSTERN* Director - ---------------------------------------------- Steven M. Gluckstern /s/ MICHAEL P. STRAMAGLIA* Director - ---------------------------------------------- Michael P. Stramaglia /s/ PAUL H. WARREN* Director - ---------------------------------------------- Paul H. Warren *By: /s/ FRANK J. JULIAN - ---------------------------------------------- Frank J. Julian Attorney-in-Fact** April 24, 1997
** Pursuant to Power of Attorney forms filed as Exhibit 24 to Amendment No. 2 to the Registration Statement of Kemper Investors Life Insurance Company on Form S-1 filed on April 23, 1997 (File No. 333-02491), which are hereby incorporated herein by reference. 64 EXHIBIT INDEX
EXHIBIT NUMBER TITLE ------- ----- 1-A(3)(b)(i) Specimen Selling Group Agreement of Kemper Financial Services, Inc. and KILICO Distribution Organization Agreement. 1-A(3)(c) Schedules of Commissions. 1-A(5) Specimen Policy. 1-A(8) Subscription Agreement between KILICO and Kemper Investors Fund on behalf of Variable Separate Account. 1-A(10) Application for Policy. 3(a) Opinion and consent of legal officer of KILICO as to legality of policies being registered. 3(b) Opinion and consent of actuarial officer of KILICO regarding prospectus illustrations and actuarial matters. 6(a) Consent of Independent Auditors. 8 Procedures Memorandum, pursuant to Rule 6e-3(T)(b)(12)(ii).
- --------------- *In manually signed original only. EX-99.1A.(3)(B)(I) 2 SPECIMAN SELLING GROUP AGREEMENT 1 EXHIBIT 1-a(3)(b)(i) SELLING GROUP AGREEMENT KEMPER FINANCIAL SERVICES, INC. 120 South LaSalle Street, Chicago, Illinois 60603 Dear Sirs: Dated____________________ As principal underwriter, we invite you to join a Selling Group for the distribution of shares of the Kemper Mutual Funds named in the Addendum hereto, (herein called "Funds") but only in those states in which the shares of the respective Funds may legally be offered for sale. As exclusive agent of each of the Funds, we offer to sell to you shares of the Funds on the following terms: 1. In all sales of these shares to the public you shall act as dealer for your own account, and in no transaction shall you have any authority to act as agent for the issuer, for us or for any other member of the Selling Group. 2. Orders received from you will be accepted by us only at the public offering price applicable to each order, as established by the then current Prospectus of Each Fund, subject to the discount, if any, hereinafter provided. Upon receipt from you of any order to purchase shares of a Fund, we shall confirm to you in writing or by wire to be followed by a confirmation in writing. Additional instructions may be forwarded to you from time to time. All orders are subject to acceptance or rejection by us in our sole discretion. 3. (a) You may offer and sell shares to your customers only at the public offering price determined in the manner described in the current Prospectus of each Fund. The public offering price is the net asset value per share plus a sales charge from which you shall receive a discount equal to a percentage of the applicable offering price as set forth on the Addendum. (b) The scale shown on the Addendum is applicable to purchases made at one time by "any person," which term shall include an individual, or an individual, his spouse and children under the age of 21, or a trustee, guardian or other fiduciary of a single trust estate or single fiduciary account including a pension, profit sharing or other employee benefit trust created pursuant to a plan qualified under Section 401 of the Internal Revenue Code. (c) The scale is also applicable to the concurrent purchase of shares of two or more of the Funds (for which there is a sales charge), and to the aggregate amount of purchases of shares of such Funds made by any of the persons enumerated above within a thirteen month period pursuant to a Letter of intent in the form provided by us, which includes provision for a price adjustment, depending upon the actual amount purchased within such period. (d) The sales charges and dealer discounts set forth on the Addendum are computed on a cumulative basis at the rate applicable to the amount being purchased plus the value (at the maximum offering price) of all shares of the Funds (for which there is a sales charge) then held by the investor and are subject to other discounts as set forth in the then current Prospectus of each Fund. We must be notified by the investor or by you each time a purchase qualifies for a reduced sales charge as a result of the investor's existing holdings. (e) Shares of certain Funds may be sold at net asset value to organizations exempt from federal income tax under Section 501 (c)(3) or (13) of the Internal Revenue Code or a pension, profit sharing or other employee benefit plan qualified under Section 401 of the Internal Revenue Code, provided that five million dollars or more (one million dollars or more for Kemper International Fund) is invested in the Fund by such organization as provided in the Prospectus for such Fund (the foregoing is not applicable for Kemper Municipal Bond Fund, Kemper California Tax-Free Income Fund or Funds for which there is no sales charge). Shares owned or purchased in other Kemper Mutual Funds by such organizations are not counted for this purpose or towards completion of a Letter of Intent. We may pay you up to .15% of the net asset value of shares sold by you to such organizations at net asset value in accordance with the foregoing. 4. By accepting this agreement, you agree: (a) To purchase shares only from us or from your customers. (b) That you will purchase shares from us only to cover purchase orders already received from your customers, or for your own bona fide investment. (c) That you will not purchase shares from your customers at a price lower than the bid price then quoted by or for the Fund involved. You may, however, sell shares for the account of your customer to the Fund, or to us as agent for the Fund, at the bid price currently quoted by or for the Fund and charge your customer a fair commission for handling the transaction. (d) that you will not withhold placing with us orders received from your customers so as to profit yourself as a result of such withholding. 5. We will not accept from you any conditional orders for shares. 6. If any shares confirmed to you under the terms of this agreement are repurchased by the issuing Fund or by us as agent for the Fund; or are tendered for repurchase, within seven business days after the date of our confirmation of the original purchase order, you shall forthwith refund to us the full discount allowed to you on such shares. We agree to pay to the Fund our share of the sales charge on such shares, and upon receipt from you of your discount, to pay the same forthwith to the Fund. We will notify you of any such repurchase within ten business days of such repurchase. In case of any such repurchase from an organization purchasing shares at net asset value under paragraph 3(e) above, you shall return any payment made by us to you under such paragraph 3(e) with respect to such shares. 7. Payment for shares ordered from us shall be in New York clearing house funds and must be received by the Funds' agent, DST Systems, Inc., 301 West 11th Street, Kansas City, Missouri 64105 within seven days after our acceptance of your order. If such payment is not received, we reserve the right, without notice, forthwith to cancel the sale or, at our option, to sell the shares ordered back to the Fund, in which case we may hold you responsible for any loss, including loss of profit, suffered by us as a result of your failure to make such payment. 8. Shares sold to you hereunder shall be available in negotiable form for delivery at DST Systems, Inc., 301 West 11th Street, Kansas City, Missouri 64015, against payment, unless other instructions have been given. 9. No person is authorized to make any representations concerning shares of any Fund except those contained in the current Prospectus of such Fund and in printed information subsequently issued by the Fund or by us as information supplemental to such Prospectus. 10. All sales will be made subject to our receipt of shares from the Fund. We reserve the right, in our discretion, without notice, to suspend sales or withdraw the offering of shares entirely, to change the price, or to modify, cancel or change the terms of this agreement. This agreement shall be in substitution for any prior agreement between us regarding these shares the Addendum hereto may be modified or supplemented from time to time by us by notice to you. 11. Your acceptance of this agreement constitutes a representation (i) that you are a registered security dealer and a member in good standing of the National Association of Securities Dealers, Inc. and that you agree to comply with all applicable state and federal laws, rules and regulations applicable to transactions hereunder and to the Rules of Fair Practice of the National Association of Securities Dealers, Inc., including specifically Section 26, Article III thereof, or (ii) if you are offering and selling shares of the Funds only in jurisdictions outside of the several states, territories and possessions of the United States and are not otherwise required to be a member of the National Association of Securities Dealers, Inc., that you nevertheless agree to conduct your business in accordance with the spirit of the Rules of Fair Practice of the National Association of Securities Dealers, Inc., and to observe the laws and regulations of the applicable jurisdiction. You likewise agree that you will not offer or sell shares of any Fund in any state or other jurisdiction in which they may not lawfully be offered for sale. 12. All communications to us should be sent to the address in the heading above. Any notice to you shall be duly given if mailed or telegraphed to you at the address specified by you below. This agreement shall be construed in accordance with the laws of Illinois. - ------------------------------------------------------------------------------ VARIABLE CONTRACTS This Selling Group Agreement in effect between us provides for the offering of variable contracts ("Contracts") issued by Kemper Investors Life Insurance Company: "KILICO" for which Kemper Financial Services, Inc., ("KFS") serves as distributor. You may offer and sell Contracts to your customers only through your registered representatives who are variable contract licensed pursuant to applicable state law and who have been specifically appointed by KILICO to solicit Contracts in the applicable jurisdiction. You may offer and sell the Contracts only in accordance with the terms and conditions of the currently effective Prospectus or offering brochures applicable to the Contracts and to any Fund which may serve as a funding vehicle for the Contracts. You may not make any representation, including any representation regarding the tax status of the Contracts, not included in such Prospectuses, offering brochures or in any written, authorized advertising or sales material supplied by KILICO and you shall further be liable for any claim against KILICO or KFS arising from your failure to comply with the provision. Any proposed advertising, printed material or presentation script relating to the Contracts must be approved in writing by KILICO prior to its use. In no event shall you forward to KILCO less than any payment collected by your registered representative, without deduction for compensation or commission. KEMPER FINANCIAL SERVICES, INC. By_______________________________ Authorized Signature We have read the foregoing agreement and accept and agree to the terms and conditions thereof. Firm ____________________________ Witness:_____________________________ By_______________________________ Authorized Signature Address:_________________________ The above agreement should be executed in duplicate and one copy returned to us. (Dealer Copy) 2 KILICO DISTRIBUTION ORGANIZATION AGREEMENT 3 KEMPER INVESTORS LIFE INSURANCE COMPANY 120 South LaSalle Street, Chicago, Illinois 60603 DISTRIBUTION ORGANIZATION AGREEMENT Kemper Investors Life Company, herein called the "Company, and ____________ ___________________________________________________________________________ (a Corporation organized under the laws of the State of___________________), (a partnership organized under the laws of the State of___________________), (an individual proprietorship situated in the State of ___________________), with offices at __________________________, City of_______________________, State of _____________________________, Zip Code _______, herein called the "Distribution Organization", hereby agree as follows: 1. The Company hereby appoints the Distribution Organization to represent the Company subject to the limitations of this Agreement in the following Territory: 2. The Distribution Organization agrees that no exclusive rights are granted in such Territory, and accepts such non-exclusive appointment subject to all of the terms and conditions of this Agreement, as such may be amended from time to time. The Distribution Organization agrees to be diligently devoted to the business of this appointment, and use its best efforts. A. DUTIES OF THE DISTRIBUTION ORGANIZATION The Distribution Organization shall, in accordance with the Company's rules and practices and governmental statues, regulations and rulings: 1. Actively seek and obtain qualified individuals or agencies experienced in life insurance and annuities for appointment as General Agents of the Company. For purposes of this Distribution Organization Appointment, an Appointed General Agent shall be an insurance agent or agency which has become licensed with the Company, has entered into a General Agent Agreement with the Company at the request of the Distribution Organization and has been accepted by the Company and designated by the Company's records. Each appointed General Agent and Agent shall be an independent contractor with the Company. Nothing herein contained shall be construed to create the relationship of employer and employee between Company and an appointed General Agent or Agent. The Distribution Organization shall use, without 4 alteration, the printed forms of General Agent's or Agent's Agreements, furnished by the Company for the appointment of a General Agent or Agent. No such Agreement shall be in force until approved in writing by a duly authorized officer of the Company. The Distribution Organization shall not modify the terms of such Agreement by means of any other Agreement with the General Agent or Agent without the Company's approval. The Company reserves the right to refuse to license any such proposed General Agent or Agent. 2. Provide training, supervision and administrative services to appointed General Agents and their Agents in connection with the sale of the Company's insurance products in accordance with the Company's rules and practices; 3. Maintain and distribute to its appointed General Agents adequate supplies of Company authorized training, advertising and such other material as the Company may prescribe; 4. At the Company's request, conduct preliminary underwriting activities including arranging medical examinations and other authorized requirements in respect of applications for the Company's life insurance policies which are solicited by appointed General Agents and Agents in accordance with written instructions provided by the Company; 5. Conduct its activities in respect of the Company's business only in those locations approved by the Company in writing. The Company shall have the option at its sole discretion, to terminate any such agreement in accordance with the terms of the Agreement. 6. Maintain accurate records of appointed General Agent's and Agent's activities and promptly notify the Company of any infractions of insurance laws or regulations or Company rules by an appointed General Agent or Agent. 7. Pay all licensing fees (first time, renewal and otherwise) for all General Agents and Agents. 8. Provide all ledgers and replacement forms. This includes obtaining the Company's Silent Partner System and responsibility for expenses incurred in training licensed General Agents, and Agents operating under supervision of the Distribution Organization. 9. Provide sales/seminar support services, acting as first line of contact for General Agents and Agents operating under supervision of the Distribution Organization. B. SOLICITATION/PREMIUM COLLECTION 1. The Distribution Organization is authorized, both personally, and through General Agents and Agents jointly appointed by the Company and the Distribution Organization (and operating under the supervision of the Distribution Organization) to: (a) solicit and procure applications of a kind and character satisfactory to the Company for life insurance policies and annuity contracts specified in the attached Schedule of Commissions and Allowances, but only to the extent such policies and contracts have been approved for sale in the Territory, or parts of the Territory, which Schedule 5 is by this reference made a part of this Agreement, as such may be amended from time to time, and to transmit such applications to the Company; and (b) collect the first premium on such policies and contracts issued by the Company, all in accordance with the Company's detailed requirements with respect thereto as such may be issued, amended or supplemented from time to time. a. All applications for such policies and contracts shall be made on application forms supplied by the Company, and all such completed applications and supporting documents shall be the property of the Company and promptly delivered to it. b. All applications are subject to acceptance by the Company at its sole discretion. c. The Distribution Organization shall have no authority to alter, modify, waive or change any of the terms, rates or conditions of the Company's applications, policies or contracts or any other Company form. The Distribution Organization shall have no authority except that which is expressly set forth in this Agreement, and no other authority may be implied from the authority expressly granted. d. the premiums collected by the Distribution Organization shall be remitted promptly in full, together with such application and other documentation required by the Company, directly to the Company at the address indicated on the signature page of this Agreement, or to such address as the Company may designate from time to time. Checks or money orders for the Premium shall be drawn to the order of the Company. All moneys received by the Distribution Organization as full or partial payment of the first premium on such policies or contracts shall be held by the Distribution Organization in a fiduciary capacity until remittance to the Company, in accordance with the current requirements of the Company in this regard. e. The full amount of the first premium must be collected by the Distribution Organization on or before delivery of any life insurance policy or any annuity contract. f. Notwithstanding the foregoing, the Distribution Organization, with the written permission of the Company and upon such conditions as it may impose in such permission, may, in lieu of remitting the entire premium collected, deduct and retain the applicable commission, and remit the balance of the first premium to the Company. Any such deduction and retention of the first year commission shall be in trust for the Company until the Company notifies the Distribution Organization in writing that the policy, to which such commission relates, is approved or disapproved. If approved, issued and delivered according to the rules of the Company, such commission shall then become the property of the Distribution Organization unless otherwise subject to lien or offset in favor of the Company. If the application for the policy is approved, such commission will be subject to disposition as directed by the Company. Nothing contained herein shall permit commingling of the funds of the Company with the funds of the Distribution Organization to any extent. g. All premiums due after the first shall be collected by the Company. 6 h. The distribution Organization shall not solicit or procure applications outside the Territory, nor in any jurisdiction in which the Distribution Organization is not licensed as a life insurance agent or the Company is not authorized to solicit or sell its policies and contracts. The Distribution Organization shall not transmit any policy or certificate where the health of the insured named thereon is other than stated in the application or health questionnaire. 2. The Distribution Organization agrees to take all reasonable action to prevent policies and contracts, issued pursuant to applications procured under the terms of this Agreement, from lapsing. 3. The Distribution Organization shall not, at any time, either during or after termination of this Agreement, induce any policyholder of the Company to relinquish, surrender or lapse any policy issued by the Company without prior written approval of the Company. 4. The Distribution Organization shall keep customary and accurate accounts of receipts and disbursements and shall, at the Company's request and in accordance with its instructions, account for all policies, receipts, premiums and other moneys received, and all property and supplies received from the Company. The Company may at any time during regular business hours review and/or make copies of the records of such accounts which copies shall become the property of the Company. The Company will furnish the Distribution Organization a copy of the Distribution Organization's ledger account with the Company within a reasonable time after receipt of a written request thereof. C. DISTRIBUTION ORGANIZATION SCHEDULE OF COMMISSION AND ALLOWANCES 1. In consideration of the duties and responsibilities of the Distribution Organization, the compensation set forth in the Schedule of Commissions and Allowances, as amended from time to time, will be paid to the Distribution Organization, except as provided below, on premiums paid and accepted by the Company for the designated life insurance policies and annuity contracts listed in the Schedule of Commissions and Allowances, which are applied for by the appointed General Agents and Agents under the supervision of the Distribution Organization and which are issued on and after the effective date of this Distribution Organization Agreement. The Company may, at any time, amend the Schedule of Commissions and Allowances and change the rates of commissions and the period during which they shall be payable for any policies applied for on or after the effective date of such change, and such Amended Schedule shall supercede all other Commission Schedules without necessity of signatures, and will become effective on the date stated on the amended Schedule. a. No premium shall be considered paid in cash to the Company until it shall have been actually collected and received by the Company. b. The commissions and allowances payable under this Agreement to the Distribution Organization except in those circumstances where payments are made to the General Agent in accordance with a General Agent's Agreement shall be compensation in full for: (a) all services performed by the 7 Distribution Organization and the licensed General Agents and Agents operating under the Distribution Organization's supervision under this Agreement, and (b) all expenses incurred by the Distribution Organization and such licensed General Agents and Agents in connection with this Agreement. In those cases where a General Agent Agreement exists between the Distribution Organization and the Company, commissions to the Distribution Organization will be reduced accordingly on such business produced. c. The Distribution Organization shall be obligated to return to the Company commissions paid under the circumstances and conditions set forth in the Schedule of Commissions and Allowances. d. No further commissions shall be paid with respect to premiums received on reinstated policies which previously had been in lapsed condition for three months or more, unless the reinstatement was accomplished solely through the efforts of the Distribution Organization or licensed General Agents or Agents acting under the Distribution Organization's supervision and while this Agreement remains in force. e. If a new policy is issued within twelve months before or after the date of surrender of, or date of discontinuance of premium payments on, a then or formerly existing policy issued by the Company on the same life, the Distribution Organization shall not be entitled to a commission on such new policy. f. Monies paid to the Company to be held by the Company and to be applied by it in payment of premiums due in the future ("premiums paid in advance") shall not be considered premiums upon which commissions, if any, are due and payable until such monies are actually applied in payment of premiums at the time such are due. g. Commissions will not be paid on premiums waived or commuted by reason of death, disability or exercise of policy options. h. The Company shall have the right to refuse to pay commissions on policies or contracts issued on applications submitted by licensed General Agents or Agents operating under the Distribution Organizations's supervision, on applicants whose permanent residence is outside the Distribution Organization's Territory. 2. The Company may offset against any claim for commissions and any other compensation, payable by the Company to the Distribution Organization under this Agreement or under any other agreement with the Company now or hereafter existing, any existing or future indebtedness of the Distribution Organization to the Company and any advances heretofore or hereafter made by the Company to the Distribution Organization. Such indebtedness and advances shall be a first lien against any such compensation. The Distribution Organization may not offset against such indebtedness any compensation accrued or to accrue under this Agreement or under any other agreement with the Company now or hereafter existing. All indebtedness of the Distribution Organization to the Company shall be debited to the Distribution Organization's account. In the event the company is required to pursue formal collection procedures in order to collect any indebtedness under the 8 terms of this Agreement, the Distribution Organization agrees to be responsible for any expense incurred by the Company, be it the fee of a collection agent, attorney, or other costs, including court costs. D. ADVERTISING/SALES LITERATURE 1. All sales literature, sales materials and advertising, relating to policies and contracts to be marketed under this Agreement, prepared by the Distribution Organization must be first submitted to the Company for its approval, and shall not be used with the prior written approval of an authorized officer of the Company, and such use shall be subject to such terms, conditions and limitations as may be imposed by the Company in such approval. a. Such approval may abe withdrawn by the Company in whole or in part upon notice to the Distribution Organization, shall, upon receipt of such notice, immediately discontinue the use of such sales literature, sales material and advertising. b. The Distribution Organization shall maintain a complete file of all such sales literature, sales material and advertising, including specimen copies thereof, which has been printed, published or otherwise used, with a notation indicating the manner and extent of distribution or other use of such sales literature, sales material and advertising (including, without limitation of the foregoing, the dates of publication, and the names of the publications in which any of such advertising appears). The Distribution Organization shall report to the Company within ten days after the end of each calendar month, the manner and extent distribution or other use of such sales literature, sales material and advertising during such calendar month, so that the Company will always be fully apprised thereof. c. "Advertising: is hereby defined to be material designed to create public interest in life insurance or annuities or in the Company, or to induce the public to purchase, increase, modify, reinstate, or retain a policy including: 1. printed and published material, audiovisual material, descriptive literature used in direct mail, newspapers, magazines, radio and television scripts, billboards, and similar displays; 2. descriptive literature and sales aids of all kinds issued by the Distribution Organization, including but not limited to circulars, leaflets, booklets, depictions, illustrations, and form letters; 3. material used for the recruitment, training, and education of General Agents and Agents operating under the supervision of the Distribution Organization which is designed to be used or is used to induce the public to purchase, increase, modify, reinstate, or retain a policy; 4. prepared sales talks, presentations, and material for use by the Distribution Organization, and licensed General Agents and Agents operating under the Distribution Organization's supervision. 9 2. All manuals, guides, books, tapes, programs and other materials developed by the Company which may be delivered to the Distribution Organization from time to time, and the information contained therein, will remain the sole and exclusive property of the Company, and shall be used solely in the solicitation of applications for policies and contracts covered by this Agreement. These materials may not be reproduced in any way without the prior written approval of an authorized officer of the Company. Upon termination of this Agreement, such items will be returned promptly to the Company. None of the information furnished the Distribution Organization shall be disclosed to the Company's competitors without its written consent. E. LICENSING/INDEPENDENT CONTRACTOR 1. The Company agrees to cooperate with the Distribution Organization in securing, to the extent required by state insurance law, the licensing of General Agents and Agents operating under the Distribution Organization's supervision as life insurance agents for the Company. The Distribution Organization, however, recognizes the responsibility of supervision of such licensed General Agents and Agents, and agrees to supervise such licensed General Agents and Agents, and to exercise all responsibilities required by applicable federal and state laws and regulations, and regulations of any self regulatory organization or stock exchange. F. RIGHTS OF THE COMPANY 1. In addition to other rights set forth herein or implied or necessitated by the terms hereof, the Company specifically reserves the rights to: (a) modify or amend any policy or contract form, (b) discontinue or withdraw any policy or contract form from the Distribution Organization's Territory or any part thereof, and this may be done without prejudice to continuing such form in any other Territory of the Company or in any other part of the Distribution Organization's Territory, (c) fix maximum and minimum limits on the amounts for which any policy or contract form may be issued, (d) modify or alter the conditions or terms under which any policy or contract form may be sold, or regulate its sale in any way, (e) cease doing business in all or any part of the Distribution Organization's Territory, (f) change commissions or other compensation on policies or contracts issued in the Distribution Organization's Territory, (f) change commissions or other compensation on policies or contracts issued in the future upon prior notice to the Distribution Organization, and (g) require that the Distribution Organization be bonded in an amount which bears a reasonable relationship to the composition and volume of the Distribution Organization's business with the Company. G. SUPERVISION OF AGENTS 1. The Distribution Organization will cause licensed General Agents and Agents operating under the Distribution Organization's supervision: a. who solicit applications for the Company's insurance policies and annuity contracts to be legally qualified and licensed to sell such policies and contracts in the applicable jurisdictions; 10 b. to solicit applications for, and to deliver, the Company's insurance policies and annuity contracts only in jurisdictions where such policies and contracts have been approved for sale; c. to make no representation concerning such policies and contracts except such as may be contained in the sales literature and materials and advertising furnished by the Company or previously approved in writing by an officer of the Company; and d. not to in any manner contact, enter into discussions with, or make any representations to any state or federal regulatory authority or representatives thereof in relation to the Company's policies and contracts or with respect to the Company's authority to do business. 2. Notwithstanding any of the foregoing, the Distribution Organization will not be precluded from responding to requests for information from regulatory bodies or otherwise taking defensive action in any actual or threatened proceeding. 3. The Distribution Organization shall be responsible to the Company for the acts of the Distribution Organization's licensed General Agents and Agents operating under the Distribution Organization's supervision and shall indemnify and hold the Company harmless from any loss or expense on account of any act by the Distribution Organization or any of the Distribution Organization's General Agents and licensed Agents operating under the Distribution Organization's supervision. H. LITIGATION 1. The Distribution Organization shall not litigate any dispute between the Distribution Organization and any other agent or representative of the Company, or applicant to or policyholder in the Company, upon any matter relating to the Business of the Company without the prior written consent of an authorized officer of the Company. In the event of such litigation, the entire expense and damages shall be borne by the Distribution Organization. If any legal action is brought against either the Company or the Distribution Organization or both jointly, by reason of any alleged act, fault or failure of the Distribution Organization in connection with the Distribution Organization's activities hereunder, the Company may require the Distribution Organization to defend such action. However, at its sole option, the Company may defend any such action and expend such sums, including attorney's fees, as may in the Company's judgment be necessary. The Distribution Organization shall pay to the Company on demand any amount which may be recovered against the Company in any such action and any attorney's fees and other expenses which may have been paid by the Company therein, except in those cases when the Distribution Organization has not been at fault. I. TERMINATION 1. The Agency relationship hereby established shall continue during the will and pleasure of the parties to this Agreement and shall be subject to termination at any time by the Distribution Organization, or by the Company, 11 upon, at least thirty days prior written notice to the other party in advance of the termination date. However, except for termination for cause or failure to meet production and/or persistency minimums described in the Schedule of Commissions and Allowances, the Distribution Organization shall continue to be fully responsible for one year under the terms of this Agreement for appointed General Agents and Agents which have been appointed prior to written notice by the Company of termination. The Distribution Organization shall receive during such one year period the compensation under this Agreement on new business written by such General Agents and Agents. Upon the effective date of any termination, the Company reserves the right at its discretion to appoint a subsequent Distribution Organization to perform duties under this Agreement or to have the General Agent report directly to the Company. Termination for cause may be made effective immediately upon notice. 2. Any assignment or attempt at assignment of commissions or other compensation made by the Distribution Organization for the benefit of the Distribution Organization's creditors or the filing of any Petition in Bankruptcy by or against the Distribution Organization whether voluntary or involuntary shall, without notice, constitute cancellation and termination of this Agreement and all of the Distribution Organization's rights under this Agreement. 3. This Agreement may be terminated for cause if the Distribution Organization or the Distribution Organization's licensed General Agents and Agents operating under the Distribution Organization's supervision have wrongfully withheld any funds, property or documents belonging to the Company; have misrepresented any product or service offered by or through the Company; have failed to comply with the terms of this Agreement or the Company's rules and regulations currently in force or later brought to the Distribution Organization's attention in any manner; or if the license of the Distribution Organization or General Agent or Agent operating under the Distribution Organization's supervision is revoked, suspended, or refused renewal by any regulatory agency of any branch of the government. 4. Upon termination for cause, the Distribution Organization shall have no further rights or privileges under this Agreement, and all monies including any fees, or other compensation or first year or renewal commissions otherwise payable under the terms of this Agreement shall be immediately forfeited. 5. In the event of the death of the Distribution Organization (excepting in case the Distribution Organization is a partnership) such commissions as may become due under this Agreement shall be payable to the estate of the Distribution Organization. If the Distribution Organization is a partnership, then upon death of any member, the Company shall continue to pay such commissions as may become due under this Agreement to the partnership unless or until notified to the contrary in writing by any party claiming an interest in such commissions. 12 6. Upon death of the Distribution Organization, the Company shall have the option, exercisable at its sole discretion, to pay a single sum in lieu of paying renewal commissions. The single sum to be paid shall be the value of such renewal commissions after allowing for interest and for anticipated terminations. 7. When, after termination of this Agreement, any payment to the Distribution Organization hereunder fails to exceed a total of $500.00 in any calendar year, the Company shall, after the end of such year, have the option, exercisable in its sole discretion of purchasing from the Distribution Organization any further commissions and other emoluments payable for their present value. "Present Value" as here used means the value of such commissions and other emoluments determined by the Company on the basis of accepted actuarial practices. J. GENERAL 1. The Distribution Organization and the Company agree to cooperate fully with each other in any state or federal regulatory investigation or proceeding to the extent that it relates to matters pertaining to this Agreement. Without limiting the foregoing: a. The Company will promptly notify the Distribution Organization of notice of any regulatory investigation or proceeding received by the Company with respect to the Distribution Organization or any of the Distribution Organization's licensed General Agents or Agents operating under the Distribution Organization's supervision. b. The Distribution Organization will promptly notify the Company of notice of any regulatory investigation or proceeding received by the Distribution Organization with respect to the Distribution Organization, or any of the Distribution Organization's licensed General Agents or Agents operating under the Distribution Organization's supervision, or any policy or contract or activity relating to this Agreement. 2. No assignment of this Agreement or of commissions or other payments hereunder shall be valid without the written consent of the Company. Any notice hereunder shall be given by telegraph or by mail, postage prepaid, addressed as indicated below or to such other address as either party may later designate in writing. Nothing contained herein shall prevent or restrict: a. the Distribution Organization from acting as agent and broker for other insurance companies in any jurisdiction, or b. the Company from appointing other agents and brokers either within or outside the Territory to solicit applications for its life insurance policies and annuity contracts. 13 The non-enforcement or waiver of any provision of this Agreement by either party hereto shall not imply the subsequent waiver of such provision, or any simultaneous or subsequent waiver of any other provision hereof. From and after the date hereof, this Agreement including any supplemental amendments hereto shall constitute the entire Agreement between the parties and supersedes any prior agreement or understanding between the company and the Distribution Organization. No amendment, modification, deletion or waiver of the terms hereof shall be effective unless it is in writing. To the extent this Agreement may be in conflict with any applicable law or regulation, this Agreement shall not be deemed to affect the validity or legality of any other provision of this Agreement. This Agreement may be executed in any number of counterparts, all of which shall together constitute one and the same Agreement. This Agreement shall be governed by the laws of Illinois. IN WITNESS WHEREOF, the said Parties have caused this Agreement to be executed by their respective officers hereunto duly authorized as of this _______ day of ____________ 19___. KEMPER INVESTORS LIFE INSURANCE COMPANY 120 South LaSalle Street, Chicago, Illinois 60603 By___________________________________________Title_________________________ Address____________________________________________________________________ City_____________________________State_______________________Zip___________ 14 DISTRIBUTION ORGANIZATION Name of Person or Firm To Whom Commissions are Payable - --------------------------------------------------------------------------- (Please Print) Social Security Number or Tax I.D. Number (circle one) - --------------------------------------------------------------------------- Address - --------------------------------------------------------------------------- City State Zip - --------------------------------------------------------------------------- Signature of Distribution Organization's Principal Agent Title - --------------------------------------------------------------------------- Telephone ( ) - --------------------------------------------------------------------------- PERSONAL GUARANTEE (If Distribution Organization is a partnership, each partner must sign; if a Corporation, the President and such other officers and directors as may be required by the Company must sign.) In consideration of the Company's designation of the above Distribution Organization, the undersigned agree, jointly and severally, to personally guarantee any and all indebtedness of the Distribution Organization to the Company. Signed this _____________________ day of __________________________, 19____. ____________________________________ ______________________________________ Witness Guarantor ____________________________________ ______________________________________ Witness Guarantor ____________________________________ ______________________________________ Witness Guarantor EX-99.1A.(3)(C) 3 SCHEDULE OF COMMISSIONS 1 EXHIBIT 1.(A)(3)(c) COMPENSATION SCHEDULE (Distribution Organization) Effective Date: April 1, 1987 This Schedule is part of the Distribution Organization's Agreement between the Distribution Organization and Kemper Investors Life Insurance Company ("Company"). Compensation will be paid on premiums received on the Plan(s) of Insurance at the percentage shown in accordance with the terms of the Distribution Organization Agreement and the Compensation Schedule.
PLANS OF INSURANCE/LIFE POLICY YEAR 6th Plan Description 1st 2nd 3rd 4th 5th thru 10th - ----------------------------------------------------------------------------------------------------------------------- Variable Life Insurance Policy Form Series L-8001 KemperALTERNATIVE 5.75% -0- -0- -0- -0- -0- - -----------------------------------------------------------------------------------------------------------------------
1. BASIS FOR COMPENSATION Compensation will be paid at the percentage shown upon receipt of premium payment(s) under the policies identified in this Schedule. II. CHARGE BACK OF COMPENSATION A. Compensation will be charged back by credit against compensation to be paid in the future and/or by requiring cash repayment by the Distribution Organization. B. 100% of compensation will be charged back on any policy that is rescinded by the Company for cause. C. With the exception of B above, surrender of a policy will result in a charge back of compensation as follows: Amount Withdrawn Attributable to Compensation Premium Received Within the Charge Back First 6 months 100% 7th through 12th month 50% Thereafter 0% D. No compensation adjustment will be made for termination of a policy due to maturity or death. III. NOTWITHSTANDING ANY OTHER PROVISION A. The compensation specified in this Schedule will not be paid, and the right to receive compensation and the amount of compensation to be paid shall be determined by the Company, under the following circumstances: 1. On policies not listed in this Schedule or introduced by the Company after the effective date of this Schedule; and 2. On policies which are changed from the original version, under a policy provision or otherwise, and on policies which are issued using cash values of previously issued KILICO policies or converted or exchanged for previously issued KILICO policies, either under a policy provision or otherwise. L-8010(4/87) KEMPER INVESTORS LIFE INSURANCE COMPANY 120 S. LaSalle Street Chicago, IL 60603 2 B. Termination of the Distribution Organization's Agreement for any reason, except termination for cause, shall not impair the right of the agent to receive such compensation as may have accrued and been payable on account of premium paid under policies issued on applications procured by the Distribution Organization, or by a licensed Agent operating under the supervision of the Distribution Organization, prior to such termination. WARRANTIES In consideration of the compensation to be received under the Distribution Organization's Agreement, as amended by this Schedule, the Distribution Organization agrees and warrants that: A. No person shall solicit or aid in the solicitation of any such variable life policy unless such person shall be variable life licensed pursuant to applicable state law, and such person has been specifically appointed by the Company to solicit variable life policies in the applicable jurisdictions. B. The Distribution Organization shall not allow any person to solicit a variable life policy unless such person is a registered representative of a National Association of Security Dealers (NASD) broker/dealer firm which has a Selling Group Agreement with Kemper Financial Services, Inc. C. All offerings and sales of variable life policies shall be made only in accordance with the terms and conditions of a current prospectus for the variable life policy, for any separate account, and for any mutual funds which may serve as a funding vehicle for the variable life policy. D. The Distribution Organization warrants that neither the Distribution Organization, nor any of the Distribution Organization's employees or licensed Agents operating under the Distribution Organization's supervision, will make any representation not included in the product's prospectus, or authorized sales material supplied by the Company. E. In accordance with the terms of the Distribution Organization Agreement, all sales material must be approved by the Company, in writing, prior to use by the Distribution Organization or any employee or licensed agent operating under the supervision of the Distribution Organization. APPLICABILITY This Schedule supersedes and replaces any and all previous Compensation Schedules for the policies identified in this Schedule and issued on and after the effective date of this Schedule. 3 COMPENSATION SCHEDULE (Distribution Organization) Effective Date: April 1, 1987 This Schedule is part of the Distribution Organization's Agreement between the Distribution Organization and Kemper Investors Life Insurance Company ("Company"). Compensation will be paid on premiums received on the Plan(s) of Insurance at the percentage shown in accordance with the terms of the Distribution Organization's Agreement and the Compensation Schedule.
PLANS OF INSURANCE/LIFE POLICY YEAR 6th Plan Description 1st 2nd 3rd 4th 5th thru 10th - ----------------------------------------------------------------------------------------------------------------------- Variable Life Insurance Policy Form Series L-8001 KemperALTERNATIVE 4.50% -0- -0- -0- -0- -0-
In addition to the premium compensation stated, an administrative service fee, paid monthly, at any annual rate of .25 of 1.00% of Separate Account values will be paid each month beginning with the policy's 13th monthly anniversary and each succeeding monthly anniversary thereafter. I. BASIS FOR COMPENSATION Compensation will be paid at the percentage shown upon receipt of premium payment(s) under the policies identified in this Schedule. II. CHARGE BACK OF COMPENSATION A. Compensation will be charged back by credit against compensation to be paid in the future and/or by requiring cash repayment by the Distribution Organization. B. 100% of compensation will be charged back on any policy that is rescinded by the Company for cause. C. With the exception of B above, surrender of a policy will result in a charge back of compensation as follows: Amount Withdrawn Attributable to Compensation Premium Received Within the Charge Back First 6 months 100% 7th through 12th month 50% Thereafter 0% D. No compensation adjustment will be made for termination of a policy due to maturity or death. III. NOTWITHSTANDING ANY OTHER PROVISION A. The compensation specified in this Schedule will not be paid, and the right to receive compensation and the amount of compensation to be paid shall be determined by the Company, under the following circumstances: 1. On policies not listed in this Schedule or introduced by the Company after the effective date of this Schedule; and 2. On policies which are changed from the original version, under a policy provision or otherwise, and on policies which are issued using cash values of previously issued KILICO policies or converted or exchanged for previously issued KILICO policies, either under a policy provision or otherwise. L-8012 (4/87) KEMPER INVESTORS LIFE INSURANCE COMPANY 120 S. LaSalle Street Chicago, IL 60603 4 B. Termination of the Distribution Organization's Agreement for any reason, except termination for cause, shall not impair the right of the agent to receive such compensation as may have accrued and been payable on account of premium paid under policies issued on applications procured by the Distribution Organization, or by a licensed Agent operating under the supervision of the Distribution Organization, prior to such termination. WARRANTIES In consideration of the compensation to be received under the Distribution Organization's Agreement, as amended by this Schedule, the Distribution Organization agrees and warrants that: A. No person shall solicit or aid in the solicitation of any such variable life policy unless such person shall be variable life licensed pursuant to applicable state law, and such person has been specifically appointed by the Company to solicit variable life policies in the applicable jurisdictions. B. The Distribution Organization shall not allow any person to solicit a variable life policy unless such person is a registered representative of a National Association of Security Dealers (NASD) broker/dealer firm which has a Selling Group Agreement with Kemper Financial Services, Inc. C. All offerings and sales of variable life policies shall be made only in accordance with the terms and conditions of a current prospectus for the variable life policy, for any separate account, and for any mutual funds which may serve as a funding vehicle for the variable life policy. D. The Distribution Organization warrants that neither the Distribution Organization, nor any of the Distribution Organization's employees or licensed Agents operating under the Distribution Organization's supervision, will make any representation not included in the product's prospectus, or authorized sales material supplied by the Company. E. In accordance with the terms of the Distribution Organization Agreement, all sales material must be approved by the Company, in writing, prior to use by the Distribution Organization or any employee or licensed agent operating under the supervision of the Distribution Organization. APPLICABILITY This Schedule supersedes and replaces any and all previous Compensation Schedules for the policies identified in this Schedule and issued on and after the effective date of this Schedule. 5 BONUS COMPENSATION SCHEDULE (General Agents) Effective Date: April 1, 1987 This Schedule is part of the General Agent's Agreement between the General Agent and Kemper Investors Life Insurance Company ("Company"). Compensation will be paid on premiums received on the Plan(s) of Insurance at the percentage shown in accordance with the terms of the General Agent's Agreement and the Compensation Schedule.
PLANS OF INSURANCE/LIFE POLICY YEAR 6th Plan Description 1st 2nd 3rd 4th 5th thru 10th - ----------------------------------------------------------------------------------------------------------------------- Variable Life Insurance Policy Form Series L-8001 KemperALTERNATIVE 5.25% -0- -0- -0- -0- -0-
I. BASIS FOR COMPENSATION Compensation will be paid at the percentage shown upon receipt of premium payment(s) under the policies identified in this Schedule. II. CHARGE BACK OF COMPENSATION A. Compensation will be charged back by credit against compensation to be paid in the future and/or by requiring cash repayment by the General Agent. B. 100% of compensation will be charged back on any policy that is rescinded by the Company for cause. C. With the exception of B above, surrender of a policy will result in a charge back of compensation as follows: Amount Withdrawn Attributable to Compensation Premium Received Within the Charge Back First 6 months 100% 7th through 12th month 50% Thereafter 0% D. No compensation adjustment will be made for termination of a policy due to maturity or death. III. NOTWITHSTANDING ANY OTHER PROVISION A. The compensation specified in this Schedule will not be paid, and the right to receive compensation and the amount of compensation to be paid shall be determined by the Company, under the following circumstances: 1. On policies not listed in this Schedule or introduced by the Company after the effective date of this Schedule; and 2. On policies which are changed from the original version, under a policy provision or otherwise, and on policies which are issued using cash values of previously issued KILICO policies or converted or exchanged for previously issued KILICO policies, either under a policy provision or otherwise. L-8008 (4/87) KEMPER INVESTORS LIFE INSURANCE COMPANY 120 S. LaSalle Street Chicago, IL 60603 6 B. Termination of the General Agent's Agreement for any reason, except termination for cause, shall not impair the right of the agent to receive such compensation as may have accrued and been payable on account of premium paid under policies issued on applications procured by the General Agent, or by a licensed Agent operating under the supervision of the General Agent, prior to such termination. IV. WARRANTIES In consideration of the compensation to be received under the General Agent's Agreement, as amended by this Schedule, the General Agent agrees and warrants that: A. No person shall solicit or aid in the solicitation of any such variable life policy unless such person shall be variable life licensed pursuant to applicable state law, and such person has been specifically appointed by the Company to solicit variable life policies in the applicable jurisdictions. B. The General Agent shall not allow any person to solicit a variable life policy unless such person is a registered representative of a National Association of Security Dealers (NASD) broker/dealer firm which has a Selling Group Agreement with Kemper Financial Services, Inc. C. All offerings and sales of variable life policies shall be made only in accordance with the terms and conditions of a current prospectus for the variable life policy, for any separate account, and for any mutual funds which may serve as a funding vehicle for the variable life policy. D. The General Agent warrants that neither the General Agent, nor any of the General Agent's employees or licensed Agents operating under the General Agent's supervision, will make any representation not included in the product's prospectus, or authorized sales material supplied by the Company. E. In accordance with the terms of the General Agent's Agreement, all sales material must be approved by the Company, in writing, prior to use by the General Agent or any employee or licensed agent operating under the supervision of the General Agent. V. APPLICABILITY This Schedule supersedes and replaces any and all previous Compensation Schedules for the policies identified in this Schedule and issued on and after the effective date of this Schedule. 7 COMPENSATION SCHEDULE (General Agents) Effective Date: April 1, 1987 This Schedule is part of the General Agent's Agreement between the General Agent and Kemper Investors Life Insurance Company ("Company"). Compensation will be paid on premiums received on the Plan(s) of Insurance at the percentage shown in accordance with the terms of the General Agent's Agreement and the Compensation Schedule.
PLANS OF INSURANCE/LIFE POLICY YEAR 6th Plan Description 1st 2nd 3rd 4th 5th thru 10th - ----------------------------------------------------------------------------------------------------------------------- Variable Life Insurance Policy Form Series L-8001 KemperALTERNATIVE 4.5 % -0- -0- -0- -0- -0-
I. BASIS FOR COMPENSATION Compensation will be paid at the percentage shown upon receipt of premium payment(s) under the policies identified in this Schedule. II. CHARGE BACK OF COMPENSATION A. Compensation will be charged back by credit against compensation to be paid in the future and/or by requiring cash repayment by the General Agent. B. 100% of compensation will be charged back on any policy that is rescinded by the Company for cause. C. With the exception of B above, surrender of a policy will result in a charge back of compensation as follows: Amount Withdrawn Attributable to Compensation Premium Received Within the Charge Back First 6 months 100% 7th through 12th month 50% Thereafter 0% D. No compensation adjustment will be made for termination of a policy due to maturity or death. III. NOTWITHSTANDING ANY OTHER PROVISION A. The compensation specified in this Schedule will not be paid, and the right to receive compensation and the amount of compensation to be paid shall be determined by the Company, under the following circumstances: 1. On policies not listed in this Schedule or introduced by the Company after the effective date of this Schedule; and 2. On policies which are changed from the original version, under a policy provision or otherwise, and on policies which are issued using cash values of previously issued KILICO policies or converted or exchanged for previously issued KILICO policies, either under a policy provision or otherwise. L-8006 (4/87) KEMPER INVESTORS LIFE INSURANCE COMPANY 120 S. LaSalle Street Chicago, IL 60603 8 B. Termination of the General Agent's Agreement for any reason, except termination for cause, shall not impair the right of the agent to receive such compensation as may have accrued and been payable on account of premium paid under policies issued on applications procured by the General Agent, or by a licensed Agent operating under the supervision of the General Agent, prior to such termination. IV. WARRANTIES In consideration of the compensation to be received under the General Agent's Agreement, as amended by this Schedule, the General Agent agrees and warrants that: A. No person shall solicit or aid in the solicitation of any such variable life policy unless such person shall be variable life licensed pursuant to applicable state law, and such person has been specifically appointed by the Company to solicit variable life policies in the applicable jurisdictions. B. The General Agent shall not allow any person to solicit a variable life policy unless such person is a registered representative of a National Association of Security Dealers (NASD) broker/dealer firm which has a Selling Group Agreement with Kemper Financial Services, Inc. C. All offerings and sales of variable life policies shall be made only in accordance with the terms and conditions of a current prospectus for the variable life policy, for any separate account, and for any mutual funds which may serve as a funding vehicle for the variable life policy. D. The General Agent warrants that neither the General Agent, nor any of the General Agent's employees or licensed Agents operating under the General Agent's supervision, will make any representation not included in the product's prospectus, or authorized sales material supplied by the Company. E. In accordance with the terms of the General Agent's Agreement, all sales material must be approved by the Company, in writing, prior to use by the General Agent or any employee or licensed agent operating under the supervision of the General Agent. V. APPLICABILITY This Schedule supersedes and replaces any and all previous Compensation Schedules for the policies identified in this Schedule and issued on and after the effective date of this Schedule. EX-99.1A.(5) 4 SPECIMAN POLICY 1 EXHIBIT 1-A(5) KEMPER INVESTORS LIFE INSURANCE COMPANY An Illinois stock corporation 1 Kemper Drive, Long Grove, Illinois 60049-0001 RIGHT TO CANCEL - This policy may be returned to the Company within ten days of its receipt by the owner. It may be mailed or delivered to either the Company or the agent who sold it. Upon receipt, this policy will be deemed void from the beginning. Any premium paid will be refunded within seven days of receipt of a notice of cancellation and the return of this policy. On the Maturity Date, if the insured is living and this policy is in force, the Company will pay the surrender value to the owner. If the insured dies prior to the maturity date and this policy is in force, the Company will pay to the beneficiary the death benefit in force at the time of the Insured's death. Payment made to the owner or to the beneficiary will be made subject to the terms of this policy. This policy is issued in consideration of the attached application(s) and payment of the initial premium. The terms on this and the following pages are a part of this policy. SIGNED FOR THE COMPANY AT LONG GROVE, ILLINOIS [sig] [sig] Secretary President FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MATURES AT INSURANCE AGE 95 NON-PARTICIPATING THE CASH VALUE IS BASED ON THE INVESTMENT EXPERIENCE OF THE SUBACCOUNTS AND MAY INCREASE OR DECREASE DAILY. THIS AMOUNT IS NOT GUARANTEED. THE AMOUNT OR DURATION OF THE DEATH BENEFIT MAY VARY UNDER THE CONDITIONS DESCRIBED IN THE DEATH BENEFIT AND TERMINATION PROVISIONS. This is a legal contract between the owner and Kemper Investors Life Insurance Company. READ YOUR CONTRACT CAREFULLY L-8001 (1/87) 2 POLICY SCHEDULE INITIAL DESCRIPTION OF PLAN: PREMIUM AMOUNT: FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE [$5,000] MORTALITY AND EXPENSE RISK CHARGE: [.90% PER YEAR TO BE ASSESSED DAILY ON THE SEPARATE ACCOUNT VALUE.] POLICY NUMBER: [00000] DEATH BENEFIT: [$29,575.00] INSURED: [JOHN DOE] POLICY DATE: [JANUARY 15, 1987] AGE OF INSURED ON POLICY DATE: [35] MATURITY DATE: [JANUARY 15, 2048] MONTHLY PROCESSING DAY: [15] PREMIUM CLASS: [STANDARD/NON-SMOKER] 3 POLICY SCHEDULE (CONTINUED) INSURED: [JOHN DOE] POLICY NUMBER: [00000] TRADE DATE: [FEBRUARY 1, 1987] VARIABLE ACCUMULATION UNDER SUBACCOUNTS: INITIAL ALLOCATION OF PREMIUM: KILICO MONEY MARKET SUBACCOUNT] [20%] KILICO TOTAL RETURN SUBACCOUNT] [20%] KILICO HIGH YIELD SUBACCOUNT] [20%] KILICO EQUITY SUBACCOUNT] [20%] KILICO GOVERNMENT SECURITIES SUBACCOUNT] [20%] 4 DEFINITIONS ACCUMULATION UNIT - An accounting unit of measure used to calculate the value of each subaccount. AGE - The insured's age on his or her last birthday. CASH VALUE - The cash value of this policy is the sum of the subaccount values of the Separate Account plus the loan account value or prior to the trade date any values in the general account. DEBT - The principal of any outstanding loan under this policy plus any loan interest due or accrued. FUND - The Kemper Investors Fund, an open-end diversified investment company, in which the Separate Account invests. GENERAL ACCOUNT - The assets of the Company other than those allocated to the Separate Account or any other separate account. INSURANCE AGE - The age of the insured on the first day of any policy year. If the first day of a policy year falls on the insured's birthday, the age attained on such date is the insurance age. MATURITY DATE - The maturity date is stated in the policy schedule. It is the policy anniversary coinciding with or next following the insured's ninety-fifth birthday. MONTHLY PROCESSING DATE - The monthly processing date is stated in the policy schedule. It is the same day in each month as the policy date. It is the day from which policy months are determined. MORTALITY AND EXPENSE RISK CHARGE - A charge deducted in the calculation of the accumulation unit value for the assumption of mortality risks and expense guarantees. POLICY DATE, POLICY YEAR - The policy date is stated in the policy schedule. It is used to determine policy years and monthly processing dates. Subsequent policy years will start on anniversaries of the policy date. PREMIUM - A dollar amount received by the Company in U.S. currency as consideration for the benefits to be provided under this policy. SEPARATE ACCOUNT - A unit investment trust registered with the Securities and Exchange Commission under the Investment Company Act of 1940 known as KILICO Variable Separate Account. SEPARATE ACCOUNT VALUE - On any valuation date the Separate Account value of this policy is the sum of its subaccount values. SUBACCOUNTS - The Separate Account has several subaccounts. The subaccounts available under this policy are stated in the policy schedule. SUBACCOUNT VALUE - Each subaccount shall be valued separately as determined by the formula stated in this policy. SURRENDER VALUE - The surrender value of this policy is the cash value on the date of surrender minus: (1) any applicable surrender charge; and (2) any debt. TRADE DATE - The trade date is stated in the policy schedule. It is the date on which values are allocated to the KILICO Money Market subaccount. VALUATION DATE - Each business day on which valuation of the assets of the Separate Account is required by applicable law, which currently is each day that the New York Stock Exchange is open for trading. VALUATION PERIOD - The period that starts at the close of a valuation date and ends at the close of the next succeeding valuation date. GENERAL PROVISIONS THE CONTRACT - This policy, the attached application and any supplemental application(s) form the entire contract. All statements made in the application and any supplemental application(s) are representations and not warranties unless fraud is involved. No statement will void this policy or be used to deny a claim unless it is contained in the attached application(s). MODIFICATION OF POLICY - Only the Company's president, secretary, or assistant secretaries have power to approve a change in or waive the provisions of this policy. No agent or person other than such officers can change or waive the terms of this policy. OWNERSHIP OF POLICY - Unless otherwise provided in the application, the insured is the original policy owner. The owner has the exclusive right to cancel or amend this policy by agreement with the Company and exercise every option and right conferred by this policy, including the right of assignment. The Company reserves the right to require the return of the policy for endorsement for any change. CHANGE OF OWNERSHIP - Ownership may be changed during the lifetime of the insured by written notice from the owner in a form satisfactory to the Company. After the Company receives written notice at its home office, the change will take effect as of the date the notice was signed. The change, however, will not apply to any payment made or action taken by the Company before the notice was received. EFFECTIVE DATE OF COVERAGE - The effective date of coverage under this policy is the policy date. The issue date is the same date as the policy date unless a different issue date is stated in the policy schedule. Incontestability and suicide periods are measured from the issue date. TERMINATION - All coverage under this policy terminates when any one of the following events occurs: (1) the owner requests that coverage terminate; (2) the insured dies; (3) this policy matures; or (4) the grace period ends. INCONTESTABILITY - This policy shall be incontestable after is has been in force during the lifetime of the insured for two years from the issue date. MISSTATEMENT OF AGE OR SEX - If the age or sex of the insured is misstated, the death benefit and cash value will be recalculated from the policy date using cost of insurance rates based on the correct sex and age. Page 1 L-8001 (1/87) 5 Page 2 L-8001 (1/87) SUICIDE - Suicide, while sane or insane, within two years from the issue date is a risk not assumed under this policy. The Company's liability for such suicide is limited to the cash value less any debt. When the laws of the state in which this policy is delivered require less than a two year period, the period will be as stated in such laws. DUE PROOF OF DEATH - Upon the death of the insured, written proof of death in the form of a certified copy of the death certificate, a written physician's statement or any other proof satisfactory to the Company is required within sixty days of such death or as soon thereafter as is reasonably possible. BENEFICIARY DESIGNATION AND CHANGE OF BENEFICIARY - The original beneficiary is named in the application for this policy. If a beneficiary is not named, the original beneficiary is the estate of the insured. The owner may change the beneficiary by filing a written change with the Company subject to the following: (1) the change must be filed during the insured's lifetime; (2) this policy must be in force at the time of filing for a change; (3) such change must not be prohibited by the terms of an existing: assignment, beneficiary designation, or other restriction; (4) such change shall take effect upon receipt by the Company at its home office; (5) after receipt, the change shall take effect on the date the request for change was signed. However, action taken by the Company before such request was received shall remain valid; and (6) the request for change provides information sufficient to identify the new beneficiary. DEATH OF BENEFICIARY - The interest of a beneficiary who dies before the insured will pass to the other beneficiaries, if any, share and share alike, unless otherwise provided in the beneficiary designation. If no beneficiary survives the insured, the proceeds of this policy will be paid to the insured's estate. If a beneficiary dies within ten days of the insured's death, proceeds of this policy will be paid as if the insured survived that beneficiary. ASSIGNMENT - No assignment of this policy is binding on the Company until it is received by the Company at its home office. The Company assumes no responsibility for the validity of any assignment. Any claim under an assignment is subject to proof of the extent of the interest of the assignee. If this policy is assigned, the rights of the owner and beneficiary are subject to the rights of the assignee of record. CHANGE OF PLAN - Once during the first two policy years this policy may be exchanged without imposition of any surrender charges for a permanent fixed benefit life insurance policy offered by the Company on the life of the insured. The Company will not require evidence of insurability. All indebtedness under this policy must be repaid and the return of this policy is required before the exchange is made. The exchange will become effective when the Company receives at its home office, proper written request for the policy exchange and any amount due the Company on exchange. The amount of the new policy may be either the initial death benefit or the same net amount at risk on the effective date of the exchange. The new policy will have the same policy date, issue age and rate classification as this policy. The policy owner and beneficiary of the new policy will be the same as those of this policy on the effective date of the exchange. The exchange is subject to an equitable adjustment in premiums and policy values to reflect variances, if any, in the premiums and values under both this policy and the new policy. NON-PARTICIPATING - This policy will not pay dividends. It will not participate in any of the Company's surplus or earnings. REPORTS - At least once each policy year the Company will send to the owner a report. The report will show the premiums paid, investment experience and charges made since the last report. The report will also show the current death benefit and cash value as well as any other information required by statute. RESERVES, CASH VALUE AND DEATH BENEFIT - All reserves are greater than or equal to those required by statute. Any cash value and death benefit that may be available under this policy are not less than the minimum benefits required by any statute of the state in which this policy is delivered. BASIS OF COMPUTATIONS - A detailed statement of the method of computation of cash value under this policy has been filed with the insurance department of the state in which this policy was delivered. The 1980 Commissioner's Standard Ordinary Mortality Table, age last birthday, is the basis for minimum cash values, death benefits and guaranteed maximum cost of insurance rates under this policy. TAX TREATMENT - This policy is intended to qualify as a life insurance policy under the Internal Revenue Code. The Company may return premiums which would disqualify the policy from tax treatment as a life insurance policy. This policy may be endorsed to reflect any change in the Internal Revenue Code and its regulations or rulings. The owner will receive a copy of any such endorsement. Currently, no charges are made against the Separate Account for federal, state or other taxes that may be attributable to the Separate Account. The Company may, however, in the future impose charges for federal income taxes attributable to the Separate Account. Charges for other taxes, if any, attributable to this policy may also be made. PREMIUM PROVISIONS INITIAL PREMIUM - The initial premium is stated in the policy schedule. It is payable to the Company or to an authorized agent on or before delivery of this policy. ADDITIONAL PREMIUM - Subject to the premium guidelines established under Federal tax law, additional premiums of $1,000 or more may be paid once each policy year while this policy is in force. Evidence of insurability will be required when the additional premium increases the death benefit. The Company will furnish premium receipts upon request. Premiums received in 6 excess of the premium guidelines will be refunded and no further premiums will be accepted until allowed by the then current maximum premium limitations. PREMIUM ALLOCATION - The initial premium will be held in the Company's general account and will be credited with interest on the trade date as if the premium had been in the KILICO Money Market subaccount, less applicable charges. On the trade date, such values will be allocated to the KILICO Money Market subaccount. Allocation of the KILICO Money Market subaccount value to the subaccounts, as elected in the application by the owner, will occur 15 days following the trade date. The allocation stated in the application will apply until such time as changed by the owner. The minimum initial allocation to a subaccount is $500. GRACE PERIOD - If the surrender value on the day immediately preceding a monthly processing date is less than the monthly cost of insurance deduction for the next month, a grace period of 61 days will be allowed for the payment, without evidence of insurability, of premium payment or loan repayment equal to at least three monthly cost of insurance deductions. This grace period will begin on the day the Company mails notice of the required payment to the last known address of the owner and any assignee of record. If payment is not received within the grace period, all coverage under this policy will terminate at the end of the grace period in accordance with the nonforfeiture provisions. If death of the insured occurs within the grace period, any amount payable will be reduced by any unpaid monthly cost of insurance deductions. REINSTATEMENT - If this policy lapses because of insufficient cash value to cover the monthly cost of insurance deduction, and has not been surrendered for its surrender value, it may be reinstated at any time within five years after the date of lapse. The reinstatement is subject to: (1) receipt of evidence of insurability satisfactory to the Company; (2) payment of a minimum premium sufficient to keep this policy in force for three months; and (3) payment of any debt against this policy which existed at the date of termination of coverage. The effective date of reinstatement of a policy will be the monthly processing date that coincides with or next follows the date the application for reinstatement is approved by the Company. The suicide and incontestability provisions will apply from the effective date of reinstatement. If this policy has been in force for two years during the lifetime of the insured, it will be contestable only as to statements made in the reinstatement application. VARIABLE ACCOUNT PROVISIONS SEPARATE ACCOUNT - The variable benefits under this policy are provided through the KILICO Variable Separate Account which is referred to in this policy as the Separate Account. The Separate Account is registered with the Securities and Exchange Commission as a unit investment trust under the Investment Company Act 1940. It is a separate investment account maintained by the Company into which a portion of company assets have been allocated for this policy and may be allocated for certain other policies. LIABILITIES OF SEPARATE ACCOUNT - The assets equal to the reserves and other liabilities of the Separate Account shall not be charged with liabilities arising out of any other business the Company may conduct. If the assets of the Separate Account exceed the liabilities arising under the policies supported by the Separate Account, then the excess may be used to cover the liabilities of the Company's general account. The assets of the Separate Account shall be valued on each valuation date. SUBACCOUNTS - The Separate Account consists of several subaccounts as shown in the policy schedule. The Company may, from time to time, combine or remove subaccounts in the Separate Account and establish additional subaccounts to the Separate Account. In such event the policy owner may be permitted to select other subaccounts under this policy. However, the right to make any such selection shall be limited by the terms and conditions the Company may impose on such transactions. SERIES FUND - Each subaccount of the Separate Account will buy shares of a separate series of the Kemper Investors Fund. The Kemper Investors Fund is registered under the Investment Company Act of 1940 as an open-end diversified management investment company. Each series of the Kemper Investors Series Fund represents a separate investment portfolio which corresponds to one of the subaccounts of the Separate Account. If the Company establishes additional subaccounts each new subaccount will invest in a new series of the Kemper Investors Fund or in shares of another investment company. The Company may also substitute other investment companies. CHANGE OF INVESTMENT ADVISER OR INVESTMENT OBJECTIVES - Unless otherwise required by law or regulation, the investment adviser or any investment objective may not be changed without Company consent. Any investment objective will not be materially changed unless a statement of the change is filed with and approved by the Insurance Commissioner of the State of Illinois. If required, approval of or change of any investment objective will be filed with the Insurance Department of the State where this policy is delivered. RIGHTS RESERVED BY THE COMPANY - The Company reserves the right, subject to compliance with the law as currently applicable or subsequently changed: (1) to operate the Separate Account in any form permitted under the Investment Company Act of 1940 or in any other form permitted by law; (2) to take any action necessary to comply with or obtain and continue any exemptions from the Investment Company Act of 1940 or to comply with any other applicable law; L-8001 (1/87) Page 3 7 Page 4 L-8001 (1/87) (3) to transfer any assets in any subaccount to another subaccount or to one or more separate accounts, or the Company's general account; or to add, combine or remove subaccounts in the Separate Account; (4) to delete the shares of any of the portfolios of the fund or any other open-end investment company and to substitute, for the fund shares held in any subaccount, the shares of another portfolio of the fund or the shares of another investment company or any other investment permitted by law; and (5) to change the way the Company assesses shares, but without increasing the aggregate amount beyond that currently charged to the Separate Account and the fund in connection with the policies. When required by law, the Company will obtain the owner's approval of such changes and the approval of any regulatory authority. TRANSFER PROVISIONS TRANSFERS - The owner may transfer all or part of the value of each subaccount at any time to another subaccount subject to the following conditions: (1) transfers are not permitted during the Right to Cancel period. Thereafter, one transfer shall be permitted in each thirty day period. All transfers which occur during one business day will be considered one transfer; (2) the minimum amount which may be transferred is $500.00 or, if smaller, the remaining value of this policy's interest in a subaccount; and (3) no partial transfer shall be made if the owner's remaining subaccount value shall be less than $500.00 after such transfer unless this policy's interest in such subaccount is eliminated by means of such transfer. The Company reserves the right at any time and without prior notice to any party to terminate, suspend or modify the transfer provision described above. Any transfer direction must clearly specify the amount which is to be transferred and the names of the subaccounts which are to be affected. A telephone transfer direction shall be honored by the Company only if a properly executed telephone transfer authorization is on file with the Company, and if such transfer direction complies with the authorization's conditions. NONFORFEITURE PROVISIONS CASH VALUE - The cash value of this policy is equal to the sum of the subaccount values plus the loan account value or prior to the trade date any values in the general account. SUBACCOUNT VALUE - On any valuation date, the subaccount value in a subaccount equals: (1) the subaccount value on the previous valuation date multiplied by the investment experience factor for the end of the current valuation period; plus (2) any premiums received and allocated to the subaccount during the current valuation period; plus (3) any cash value transferred into the subaccount during the current valuation period; minus (4) any cash value transferred from the subaccount; minus (5) the pro rata portion of the monthly cost of insurance deduction attributable to a subaccount whenever a valuation period includes a monthly processing date. ACCUMULATION UNIT VALUE - Each subaccount has an accumulation unit value. For each subaccount, the accumulation unit value was initially set at $1.00. When premiums or other amounts are allocated to a subaccount, a number of units are purchased based on the subaccount's accumulation unit value at the end of the valuation period during which the allocation is made. When amounts are transferred out of or deducted from a subaccount, units are redeemed in a similar manner. The accumulation unit value for each subsequent valuation period is the investment experience factor for that period multiplied by the accumulation unit value for the immediately preceding period. The accumulation unit value for a valuation period applies to each day in such period. The number of accumulation units will not change as a result of investment experience. INVESTMENT EXPERIENCE FACTOR - Each subaccount has its own investment experience factor. The investment experience of the Separate Account is calculated by applying the investment experience factor to the cash value in each subaccount during a valuation period. The investment experience factor of a subaccount for a valuation period is determined by dividing (1) by (2) and subtracting (3) from the result, where: (1) is the net result of: a. the net asset value per share of the investment held in the subaccount determined at the end of the current valuation period; plus b. the per share amount of any dividend or capital gain distributions made by the investments held in the subaccount, if the "ex-dividend" date occurs during the current valuation period; plus or minus c. a charge or credit for any taxes reserved for the current valuation period which the Company determines to have resulted from the investment operations of the subaccount; (2) is the net asset value per share of the investment held in the subaccount, determined at the end of the last prior valuation period; (3) is the factor representing the mortality and expense risk charge sated in the policy schedule for the number of days in the valuation period. INSUFFICIENT CASH VALUE - This policy will terminate as provided in the grace period provision if the surrender value on the date immediately preceding a monthly processing date is: (1) insufficient to cover the monthly cost of insurance deduction for the month following such monthly processing date; and (2) no premium payment or loan repayment sufficient to cover at least three monthly cost of insurance deductions is received before the end of the grace period. 8 Any deduction for the cost of insurance after termination of insurance will not be considered a reinstatement of this policy or a waiver by the Company of the termination. COST OF INSURANCE - The cost of insurance is determined on a monthly basis. The deduction will be allocated among the subaccounts in proportion to the value that each subaccount bears to the separate account value at the beginning of the policy month. The cost of insurance deduction will be made as of the policy date and on each monthly processing date. The cost of insurance deduction on the policy date and each monthly processing date thereafter is equal to (1) multiplied by the result of (2) minus (3) where: (1) is the cost of insurance rate, as described in the cost of insurance rate section; (2) is the death benefit divided by 1.0032737; and (3) is the cash value. COST OF INSURANCE RATE - The monthly cost of insurance rate is based on the sex, insurance age and rate classification of the insured. The monthly cost of insurance rate will be determine by the Company based on its expectations as to future mortality experience. Any change in the cost of insurance rates will apply to all individuals of the same class as the insured. At no time will such rate ever be greater than those shown in the table of guaranteed maximum cost of insurance rates. POLICY LOAN PROVISIONS POLICY LOANS - On and after the first monthly processing date, the Company will lend up to a maximum loan amount of 90% of this policy's cash value less any applicable surrender charges. The amount of any new loan may not exceed the maximum loan amount less debt on the date the loan is granted. The minimum amount of a loan is $500. On the date the loan is made, subaccount values equal to the loan amount will be transferred to the loan account held in the general account until the loan is repaid. Amount in excess of premium will be loaned first. Unless directed otherwise, the loaned amount will be deducted from the subaccounts is proportion to the values that each subaccount bears to the separate account value. Should the debt equal or exceed the cash value less surrender charge, this policy will terminate 61 days after notice has been mailed to the owner and to any assignee at their last known address. Cash values derived from premium received by the Company in the form of a check or draft shall not be available for loans until 30 days after deposit of such check or draft. POLICY LOAN INTEREST - The loan interest rate will be 6.00% per year compounded daily at the daily equivalent of a 6.00% annual rate. Interest not paid will be charged on a daily basis and will be added to the indebtedness and bear interest at the same rate. POLICY LOAN REPAYMENT - A debt may be repaid in full or in part at any time while this policy is in force. Repayment of debt will be applied first to reduce that portion of debt attributable to interest on loaned premium; second, to that portion of the debt attributable to premium; third to that portion of the debt attributable to interest on loaned amounts in excess of premium; and fourth to that portion of the debt attributable to loaned amounts in excess of premium. As debt is paid, cash value in the loan account equal to the amount of repayment which exceeds the difference between interest due and interest earned will be allocated to the subaccounts according to the then current premium allocation instructions. EFFECT OF POLICY LOANS - During the existence of a loan, cash values within the loan account attributable to premium will earn no less than 4.00% per year. Cash values within the loan account attributable to amounts in excess of premium (as it is adjusted from time to time pursuant to the policy loan provision) will earn no less than 6.00% per year. Interest will be earned on a daily basis and will be added to the loan account. SURRENDER VALUE PROVISIONS SURRENDER - This policy may be surrendered for its surrender value upon written request by the owner and return of this policy to the Company at its home office. The request must be made during the lifetime of the insured and while this policy is in force. The return of this policy is required before the surrender value is paid. Payment of the surrender value shall discharge the Company from its obligations under this policy. A surrender may subject the amount surrendered to a surrender charge. The Company will pay the surrender value of this policy to the owner on the maturity date if the insured is living and this policy is in force. SURRENDER CHARGE - During the first nine policy years a surrender charge shall be assessed if this policy is surrendered or if the cash value is applied under a settlement option. However, a surrender charge will not be assessed against cash values applied under a settlement option if this policy has been in force for five or more years and the settlement option elected provides for the payment of benefits for at least five years. Any applicable surrender charge shall be applied against the lesser of the premium paid in the first policy year or the cash value at the time of the surrender or application under a settlement option. The Surrender Charge Table is as follows: SURRENDER CHARGE TABLE POLICY YEAR 1 2 3 4 5 6 7 8 9 10 & later SURRENDER 9% 8% 7% 6% 5% 4% 3% 2% 1% 0 CHARGE In no event will a surrender charge in any year exceed $60 per $1,000 of initial death benefit. L-8001 (1/87) Page 5 9 Page 6 L-8001 (1/87) TRANSFER AND SURRENDER PROCEDURES A surrender of transfer will be effective at the end of the valuation period following a telephone transfer direction or receipt by the Company at its home office of a written transfer or surrender request which contains all required information. Accumulation units shall be redeemed to the extent necessary to achieve the dollar amount of the surrender or transfer. The accumulation units credited in each subaccount shall be reduced by the number of accumulation units redeemed. The reduction in the number of accumulation units will be determined on the basis of the accumulation unit value at the end of the valuation period during which the request containing all required information is received by the Company. An amount surrendered shall be paid within seven calendar days after the date proper written election is received by the Company unless: (1) the New York Stock Exchange is closed (other than customary weekend and holiday closings); (2) trading in the markets normally utilized is restricted, or an emergency exists as determined by the Securities and Exchange Commission, so that disposal of investments or determination of the valuation unit is not reasonably practicable; or (3) such other periods as defined by the Securities and Exchange Commission for the protection of owners. INSURANCE COVERAGE PROVISIONS DEATH BENEFIT - On any valuation date the death benefit of this policy is the greater of: (1) the death benefit stated on schedule page less debt; or (2) the amount determined by multiplying the cash value by the factor shown in the Table of Death Benefit Factors for the then insurance age of the insured less debt. PAYMENT OF DEATH BENEFIT - Death benefits will be paid following receipt by the Company at its home office of due proof that the insured died while this policy was in force. The death benefit will be determined based upon the date of death. The return of this policy is required before payment is made. Proceeds that are payable in one sum at the death of the insured will be increased to include interest at the greater of a rate declared by the Company or the rate provided by statute. Such interest will be paid for the period from the date of the insured's death to the date of payment. This period will not exceed the greater of one year or the period of time provided by statute. SETTLEMENT PROVISIONS SETTLEMENT OPTIONS - Instead of the Company paying all of the death benefit or surrender value of this policy due in one sum, amount of $4,000 or more may be applied under one of the following settlement options. Payments under these options will not be affected by the investment experience of any separate account after proceeds are applied under a settlement option. Payments must be made to a natural person in his own right, referred to below as "payee". Payment will be made as elected on a monthly, quarterly, semi-annual or annual basis. If the amount of any payment under a settlement option is less than $100, the Company may increase the interval between payments to a quarterly, semi-annual or annual payment to make the payment at least $100. ELECTION OF SETTLEMENT OPTION - Election of a settlement option may be made by written notice to the Company. This election may be made: (1) by the owner during the lifetime of the insured; (2) by the beneficiary if no election made by the owner is in effect at the time of the death of the insured; or (3) by the beneficiary if the owner reserves the right to the beneficiary to change an election upon the death of the insured. Such change must be made prior to the first settlement option payment. An election in effect during the lifetime of the insured shall be revoked by a subsequent change of beneficiary or an assignment of this policy, unless provided otherwise. GENERAL CONDITIONS - The cash value on the day immediately preceding the date on which the first benefit payment is due shall first be reduced by any applicable surrender charge and debt. The remaining value shall be used to determine the monthly benefit payment. For settlement Options 1 through 5, the monthly payment shall be based upon the settlement option elected in accordance with the appropriate settlement option table. OPTION 1 INCOME FOR SPECIFIED PERIOD - The Company will pay income for the period and payment mode elected but not less than 3 years nor more than 30 years. OPTION 2 LIFE INCOME - The Company will pay a monthly income to the payee during the payee's lifetime. OPTION 3 LIFE INCOME WITH INSTALLMENTS GUARANTEED - The Company will pay a monthly income for the guaranteed period elected and thereafter for the remaining lifetime of the payee. The period elected may be 5, 10, 15 or 20 years. OPTION 4 JOINT AND SURVIVOR ANNUITY - The Company will pay the full monthly income while both payees are living. Upon the death of either payee, the income will continue during the lifetime of the surviving payee. The surviving payee's income shall be the percentage of such full amount chosen at the time of election of this option. OPTION 5 PENSION AND SURVIVOR SETTLEMENT - The Company will pay the full monthly income during the lifetime of the primary payee. Such payments will continue whether or not the secondary payee is living. If the primary payee dies before the secondary payee dies, the benefits will continue during the lifetime of the secondary payee. However, such benefits will be for the percentage chosen for such continuation at the time this option is elected. 10 OPTION 6 INCOME OF SPECIFIED AMOUNT - The Company will pay the amount elected for as long as the amount applied and interest will last. The minimum income which may be elected is $10.00 per month for each $1,000 applied. OPTION 7 PROCEEDS LEFT AT INTEREST - The Company will hold the amount applied on deposit, subject to any withdrawal limits stated in the supplementary contract. Interest will be paid on the amount deposited at the rate established by the Company. OTHER SETTLEMENT ARRANGEMENTS - May be available with Company consent. SUPPLEMENTARY CONTRACT - A supplementary contract will be issued to reflect payments to be made under a settlement option. If settlement is a result of the death of the insured, its effective date shall be the date of death. Otherwise its effective date will be the date chosen by the owner. DATE OF FIRST PAYMENT - Interest under the settlement options will begin to accrue on the effective date of the supplementary contract. If the normal effective date is the 29th, 30th or 31st of the month, the effective date will be the 28th day of that month. EVIDENCE OF AGE, SEX AND SURVIVAL - The Company may require satisfactory evidence of the age and sex of any person on whose life the income is to be based and the continued survival of any person on whose life the income is based. INTEREST AND MORTALITY - Interest on funds held by the Company under Options 1, 6 and 7 shall be at the rate of 4.00% per year. The sums payable under the Options 2, 3, 4 and 5 are based on the 1971 Individual Annuity Mortality Tables, male and female, at 4.00% interest per year. Interest shall be compounded annually. Additionally interest earnings, if any, will be paid as determined by the Company. DISBURSEMENT OF FUNDS UPON DEATH OF PAYEE: UNDER OPTIONS 1, 3, 6 OR 7 - At payee's death, the following amounts will be paid in one sum to the estate of the payee, unless otherwise provided in the supplementary contract: (1) under Option 1 or 3, the commuted value, based on 4.00% interest, of any remaining unpaid guaranteed installments; (2) under Option 6, any remaining principal amount and accrued interest; and (3) under Option 7, the amount left on deposit and unpaid interest. PROTECTION OF BENEFITS - Unless otherwise provided in the supplementary contract the payee may not: (1) commute; (2) anticipate; (3) assign; (4) alienate; or (5) otherwise encumber any payment to be received. CREDITORS - The proceeds of the policy and any payment under an option will be exempt from the claim of creditors and from legal process to the extent permitted by law. L-8001 (1/87) Page 7 11 TABLE OF DEATH BENEFIT FACTORS
INSURANCE DEATH INSURANCE DEATH INSURANCE DEATH AGE BENEFIT FACTOR AGE BENEFIT FACTOR AGE BENEFIT FACTOR - ---------------------------------------------------------------------------------------------------------------------------- 0-40 2.50 54 1.57 68 1.17 41 2.43 55 1.50 69 1.16 42 2.36 56 1.46 70 1.15 43 2.29 57 1.42 71 1.13 44 2.22 58 1.38 72 1.11 45 2.15 59 1.34 73 1.09 46 2.09 60 1.30 74 1.07 47 2.03 61 1.28 75-90 1.05 48 1.97 62 1.26 91 1.04 49 1.91 63 1.24 92 1.03 50 1.85 64 1.22 93 1.02 51 1.78 65 1.20 94 1.01 52 1.71 66 1.19 95 1.00 53 1.64 67 1.18
Page 8 12 OPTION TABLES OPTION 1 - INCOME FOR SPECIFIED PERIOD* AMOUNT OF INSTALLMENT FOR PERIOD AND PAYMENT MODE ELECTED (FOR EACH $1000 APPLIED)
SPECIFIED PERIOD (YEARS) ANNUAL SEMI-ANNUAL QUARTERLY MONTHLY 3 346.49 174.94 87.90 29.40 4 264.89 133.75 67.20 22.47 5 215.99 109.05 54.79 18.32 6 183.42 92.61 46.53 15.56 7 160.20 80.89 40.64 13.59 8 142.82 72.11 36.23 12.12 9 129.32 65.29 32.81 10.97 10 118.55 59.86 30.07 10.06 15 86.48 43.66 21.94 7.34 20 70.75 35.72 17.95 6.00 25 61.55 31.08 15.61 5.22 30 55.61 28.08 14.11 4.72
* Values for specified periods not shown will be furnished by the Company upon request. OPTION 2 - LIFE INCOME* MONTHLY INSTALLMENT FOR EACH $1000 APPLIED
MONTHLY INCOME MONTHLY INCOME AGE MALE FEMALE AGE MALE FEMALE 35 4.17 3.96 60 6.20 5.56 36 4.21 3.99 61 6.35 5.69 37 4.25 4.02 62 6.51 5.82 38 4.30 4.06 63 6.69 5.96 39 4.35 4.09 64 6.87 6.11 40 4.40 4.13 65 7.07 6.27 41 4.45 4.17 66 7.28 6.45 42 4.51 4.21 67 7.51 6.64 43 4.57 4.26 68 7.75 6.85 44 4.63 4.31 69 8.01 7.08 45 4.70 4.36 70 8.30 7.33 46 4.77 4.41 71 8.60 7.60 47 4.85 4.46 72 8.93 7.90 48 4.92 4.52 73 9.28 8.22 49 5.00 4.59 74 9.67 8.57 50 5.09 4.65 75 10.08 8.95 51 5.17 4.72 76 10.53 9.37 52 5.27 4.80 77 11.02 9.82 53 5.36 4.87 78 11.54 10.32 54 5.47 4.96 79 12.12 10.86 55 5.57 5.05 80 12.74 11.46 56 5.68 5.14 81 13.41 12.11 57 5.80 5.24 82 14.14 12.82 58 5.93 5.34 83 14.95 13.59 59 6.06 5.45 84 15.84 14.43 85 16.83 15.34
*Values for ages not shown will be furnished by the Company upon request. OPTION 3 - LIFE INCOME WITH INSTALLMENTS GUARANTEED* MONTHLY INSTALLMENTS FOR EACH $1000 APPLIED
GUARANTEED PERIOD (M = MALE F = FEMALE) 5YR 5YR 10YR 10YR 15YR 15YR 20YR 20 YR AGE M F M F M F M F 35 4.16 3.96 4.15 3.95 4.14 3.94 4.11 3.93 36 4.20 3.99 4.19 3.98 4.18 3.97 4.15 3.96 37 4.25 4.02 4.24 4.01 4.22 4.00 4.19 3.99 38 4.29 4.05 4.28 4.05 4.26 4.04 4.22 4.02 39 4.34 4.09 4.33 4.08 4.30 4.07 4.26 4.06 40 4.39 4.13 4.38 4.12 4.35 4.11 4.30 4.09 41 4.45 4.17 4.43 4.16 4.40 4.15 4.34 4.13 42 4.50 4.21 4.48 4.20 4.45 4.19 4.39 4.16 43 4.56 4.25 4.54 4.25 4.50 4.23 4.43 4.20 44 4.63 4.30 4.60 4.29 4.55 4.27 4.48 4.24 45 4.69 4.35 4.66 4.34 4.60 4.32 4.53 4.28 46 4.76 4.40 4.72 4.39 4.66 4.37 4.57 4.33 47 4.83 4.46 4.79 4.44 4.72 4.42 4.62 4.37 48 4.91 4.52 4.86 4.50 4.78 4.47 4.68 4.42 49 4.99 4.58 4.93 4.56 4.84 4.52 4.73 4.47 50 5.07 4.64 5.01 4.62 4.91 4.58 4.78 4.52 51 5.15 4.71 5.08 4.69 4.98 4.64 4.84 4.57 52 5.24 4.79 5.17 4.76 5.05 4.70 4.89 4.63 53 5.34 4.86 5.25 4.83 5.12 4.77 4.95 4.69 54 5.43 4.95 5.34 4.91 5.19 4.84 5.01 4.75 55 5.54 5.03 5.43 4.99 5.27 4.91 5.06 4.81 56 5.64 5.12 5.53 5.07 5.35 4.99 5.12 4.87 57 5.76 5.22 5.63 5.16 5.43 5.06 5.18 4.93 58 5.88 5.32 5.73 5.25 5.51 5.15 5.24 5.00 59 6.01 5.42 5.84 5.35 5.60 5.23 5.30 5.07 60 6.14 5.53 5.96 5.45 5.69 5.32 5.36 5.14 61 6.28 5.65 6.08 5.56 5.78 5.41 5.42 5.20 62 6.43 5.78 6.21 5.68 5.87 5.51 5.48 5.27 63 6.59 5.92 6.34 5.80 5.97 5.61 5.53 5.34 64 6.77 6.06 6.48 5.93 6.06 5.71 5.59 5.41 65 6.95 6.22 6.62 6.07 6.16 5.82 5.64 5.48 66 7.14 6.39 6.77 6.22 6.26 5.93 5.69 5.54 67 7.35 6.57 6.93 6.37 6.35 6.04 5.73 5.60 68 7.57 6.77 7.09 6.54 6.45 6.15 5.78 5.66 69 7.81 6.99 7.26 6.71 6.54 6.26 5.81 5.71 70 8.06 7.22 7.43 6.89 6.63 6.38 5.85 5.76 71 8.32 7.47 7.60 7.08 6.72 6.49 5.88 5.81 72 8.60 7.74 7.78 7.28 6.80 6.59 5.91 5.84 73 8.90 8.03 7.96 7.48 6.88 6.69 5.93 5.88 74 9.22 8.34 8.14 7.68 6.95 6.79 5.95 5.90 75 9.55 8.67 8.32 7.89 7.02 6.87 5.97 5.92 76 9.90 9.02 8.50 8.10 7.08 6.95 5.98 5.94 77 10.27 9.40 8.67 8.30 7.13 7.02 5.99 5.96 78 10.66 9.80 8.84 8.50 7.18 7.08 5.99 5.97 79 11.06 10.22 9.01 8.69 7.22 7.13 6.00 5.98 80 11.48 10.66 9.16 8.88 7.25 7.17 6.00 5.98 81 11.92 11.12 9.31 9.04 7.28 7.21 6.00 5.99 82 12.38 11.60 9.44 9.20 7.29 7.24 6.00 5.99 83 12.85 12.08 9.57 9.33 7.31 7.26 6.00 6.00 84 13.34 12.57 9.67 9.45 7.32 7.28 6.00 6.00 85 13.83 13.06 9.76 9.56 7.33 7.29 6.00 6.00
*Values for ages not shown will be furnished by the Company upon request. Page 9 13 OPTION 4 - JOINT AND SURVIVOR ANNUITY (66-2/3% CONTINUING SURVIVOR BENEFIT) MONTHLY INSTALLMENT FOR EACH $1000 APPLIED*
MALE FEMALE AGE AGE 55 56 57 58 59 60 61 55 5.04 5.09 5.13 5.18 5.23 5.28 5.34 56 5.08 5.13 5.18 5.23 5.28 5.33 5.39 57 5.12 5.17 5.22 5.27 5.33 5.38 5.44 58 5.16 5.21 5.27 5.32 5.38 5.43 5.49 59 5.21 5.26 5.31 5.37 5.43 5.49 5.55 60 5.25 5.30 5.36 5.42 5.48 5.54 5.60 61 5.29 5.35 5.41 5.47 5.53 5.59 5.66 62 5.34 5.40 5.46 5.52 5.58 5.65 5.72 63 5.39 5.45 5.51 5.57 5.64 5.71 5.77 64 5.43 5.49 5.56 5.62 5.69 5.76 5.83 65 5.48 5.54 5.61 5.68 5.75 5.82 5.90 66 5.53 5.60 5.66 5.73 5.81 5.88 5.96 67 5.58 5.65 5.72 5.79 5.86 5.94 6.02 68 5.63 5.70 5.77 5.85 5.92 6.00 6.09 69 5.68 5.75 5.83 5.90 5.98 6.07 6.15 70 5.74 5.81 5.88 5.96 6.05 6.13 6.22 71 5.79 5.86 5.94 6.02 6.11 6.19 6.29 72 5.84 5.92 6.00 6.08 6.17 6.26 6.35 73 5.90 5.98 6.06 6.14 6.23 6.33 6.42 74 5.95 6.03 6.12 6.21 6.30 6.39 6.49 75 6.01 6.09 6.18 6.27 6.36 6.46 6.56 AGE 62 63 64 65 66 67 68 55 5.39 5.45 5.50 5.56 5.62 5.69 5.75 56 5.44 5.50 5.56 5.62 5.68 5.75 5.82 57 5.50 5.56 5.62 5.68 5.75 5.82 5.89 58 5.55 5.61 5.68 5.74 5.81 5.88 5.96 59 5.61 5.67 5.74 5.81 5.88 5.95 6.03 60 5.67 5.73 5.80 5.87 5.95 6.02 6.10 61 5.73 5.79 5.87 5.94 6.02 6.10 6.18 62 5.79 5.86 5.93 6.01 6.09 6.17 6.26 63 5.85 5.92 6.00 6.08 6.16 6.25 6.34 64 5.91 5.99 6.07 6.15 6.24 6.33 6.42 65 5.97 6.05 6.14 6.22 6.31 6.41 6.51 66 6.04 6.12 6.21 6.30 6.39 6.49 6.59 67 6.11 6.19 6.28 6.38 6.47 6.58 6.68 68 6.17 6.26 6.36 6.45 6.56 6.66 6.77 69 6.24 6.33 6.43 6.53 6.64 6.75 6.87 70 6.31 6.41 6.51 6.61 6.72 6.84 6.96 71 6.38 6.48 6.58 6.69 6.81 6.93 7.06 72 6.45 6.56 6.66 6.78 6.90 7.02 7.15 73 6.52 6.63 6.74 6.86 6.98 7.11 7.25 74 6.60 6.71 6.82 6.94 7.07 7.21 7.35 75 6.67 6.78 6.90 7.03 7.16 7.30 7.45 AGE 69 70 71 72 73 74 75 55 5.82 5.89 5.96 6.03 6.10 6.18 6.26 56 5.89 5.96 6.03 6.11 6.18 6.26 6.34 57 5.96 6.03 6.11 6.19 6.27 6.35 6.43 58 6.03 6.11 6.19 6.27 6.35 6.44 6.52 59 6.11 6.19 6.27 6.35 6.44 6.53 6.62 60 6.18 6.27 6.35 6.44 6.53 6.62 6.72 61 6.26 6.35 6.44 6.53 6.63 6.72 6.82 62 6.35 6.44 6.53 6.63 6.73 6.83 6.93 63 6.43 6.53 6.62 6.73 6.83 6.93 7.04 64 6.52 6.62 6.72 6.83 6.93 7.04 7.15 65 6.61 6.71 6.82 6.93 7.04 7.16 7.27 66 6.70 6.81 6.92 7.04 7.15 7.28 7.40 67 6.79 6.91 7.03 7.15 7.27 7.40 7.53 68 6.89 7.01 7.13 7.26 7.39 7.52 7.66 69 6.99 7.11 7.24 7.38 7.51 7.65 7.80 70 7.09 7.22 7.35 7.49 7.64 7.79 7.94 71 7.19 7.33 7.47 7.62 7.77 7.92 8.08 72 7.29 7.44 7.59 7.74 7.90 8.06 8.23 73 7.40 7.55 7.70 7.87 8.03 8.21 8.38 74 7.50 7.66 7.82 7.99 8.17 8.35 8.54 75 7.61 7.77 7.94 8.12 8.31 8.50 8.70
OPTION 5 - PENSION AND SURVIVOR ANNUITY PRIMARY PAYEE - MONTHLY INSTALLMENT FOR EACH $1000 APPLIED WHEN THE PRIMARY PAYEE IS MALE AND THE SECONDARY PAYEE IS FEMALE* (100% MALE CONTINUING SURVIVOR BENEFIT) (50% FEMALE CONTINUING SURVIVOR BENEFIT)
MALE SECONDARY PAYEE - FEMALE AGE AGE 55 56 57 58 59 60 61 55 5.04 5.06 5.08 5.11 5.13 5.16 5.18 56 5.10 5.12 5.15 5.18 5.20 5.23 5.25 57 5.16 5.19 5.22 5.24 5.27 5.30 5.33 58 5.22 5.25 5.28 5.31 5.34 5.37 5.40 59 5.29 5.32 5.35 5.39 5.42 5.45 5.48 60 5.36 5.39 5.43 5.46 5.49 5.53 5.56 61 5.43 5.46 5.50 5.54 5.57 5.61 5.65 62 5.50 5.54 5.58 5.62 5.65 5.69 5.73 63 5.57 5.61 5.66 5.70 5.74 5.78 5.82 64 5.65 5.69 5.74 5.78 5.82 5.87 5.91 65 5.73 5.77 5.82 5.87 5.91 5.96 6.01 66 5.81 5.86 5.91 5.95 6.00 6.05 6.11 67 5.89 5.94 5.99 6.05 6.10 6.15 6.21 68 5.98 6.03 6.08 6.14 6.19 6.25 6.31 69 6.07 6.12 6.18 6.24 6.29 6.35 6.42 70 6.16 6.21 6.27 6.33 6.40 6.46 6.53 71 6.25 6.31 6.37 6.44 6.50 6.57 6.64 72 6.34 6.41 6.47 6.54 6.61 6.68 6.75 73 6.44 6.51 6.58 6.65 6.72 6.79 6.87 74 6.54 6.61 6.68 6.75 6.83 6.91 6.99 75 6.64 6.71 6.79 6.86 6.94 7.03 7.11 AGE 62 63 64 65 66 67 68 55 5.20 5.22 5.24 5.27 5.29 5.31 5.32 56 5.28 5.30 5.32 5.35 5.37 5.39 5.41 57 5.35 5.38 5.40 5.43 5.45 5.48 5.50 58 5.43 5.46 5.49 5.51 5.54 5.57 5.59 59 5.51 5.54 5.57 5.60 5.63 5.66 5.69 60 5.60 5.63 5.66 5.69 5.73 5.76 5.79 61 5.68 5.72 5.75 5.79 5.82 5.86 5.89 62 5.77 5.81 5.85 5.89 5.92 5.96 6.00 63 5.86 5.90 5.95 5.99 6.03 6.07 6.11 64 5.96 6.00 6.05 6.09 6.14 6.18 6.23 65 6.06 6.10 6.15 6.20 6.25 6.30 6.35 66 6.16 6.21 6.26 6.31 6.37 6.42 6.47 67 6.26 6.32 6.37 6.43 6.49 6.54 6.60 68 6.37 6.43 6.49 6.55 6.61 6.67 6.74 69 6.48 6.54 6.61 6.67 6.74 6.81 6.87 70 6.59 6.66 6.73 6.80 6.87 6.94 7.02 71 6.71 6.78 6.85 6.93 7.01 7.09 7.17 72 6.83 6.90 6.98 7.06 7.15 7.23 7.32 73 6.95 7.03 7.11 7.20 7.29 7.38 7.47 74 7.07 7.16 7.25 7.34 7.43 7.53 7.63 75 7.20 7.29 7.38 7.48 7.58 7.69 7.79 AGE 69 70 71 72 73 74 75 55 5.34 5.36 5.38 5.39 5.41 5.42 5.44 56 5.43 5.45 5.47 5.49 5.50 5.52 5.53 57 5.52 5.54 5.56 5.58 5.60 5.62 5.64 58 5.62 5.64 5.66 5.68 5.71 5.72 5.74 59 5.71 5.74 5.77 5.79 5.81 5.83 5.85 60 5.82 5.85 5.87 5.90 5.93 5.95 5.97 61 5.92 5.96 5.99 6.02 6.04 6.07 6.09 62 6.03 6.07 6.10 6.14 6.17 6.20 6.22 63 6.15 6.19 6.23 6.26 6.30 6.33 6.36 64 6.27 6.31 6.35 6.39 6.43 6.47 6.50 65 6.39 6.44 6.49 6.53 6.57 6.61 6.65 66 6.52 6.58 6.62 6.67 6.72 6.77 6.81 67 6.66 6.71 6.77 6.82 6.88 6.93 6.97 68 6.80 6.86 6.92 6.98 7.04 7.09 7.15 69 6.94 7.01 7.08 7.14 7.20 7.27 7.33 70 7.09 7.16 7.24 7.31 7.38 7.45 7.51 71 7.25 7.33 7.40 7.48 7.56 7.64 7.71 72 7.40 7.49 7.58 7.66 7.75 7.83 7.92 73 7.57 7.66 7.76 7.85 7.94 8.04 8.13 74 7.73 7.84 7.94 8.04 8.15 8.25 8.35 75 7.90 8.01 8.13 8.24 8.35 8.46 8.58
*Values for other ages, sex and percent combinations will be furnished by the Company upon request. 14 TABLE OF GUARANTEED MAXIMUM COST OF INSURANCE RATES STANDARD RATE CLASSIFICATION Monthly Cost of Insurance - Rate per $1,000
- -------------------------------------------------------------------------------------------------------------------------- Insurance Male Female Insurance Male Female Insurance Male Female Age Age Age - -------------------------------------------------------------------------------------------------------------------------- 0 $.21921 $.15669 32 $.12668 $.11085 64 $ 1.67447 $ 1.07532 1 .08584 .07000 33 .13168 .11501 65 1.85761 1.18975 2 .08251 .06667 34 .13752 .12001 66 2.05583 1.30838 3 .08084 .06500 35 .14419 .12585 67 2.26847 1.42954 4 .07751 .06417 36 .15169 .13418 68 2.49957 1.55491 5 .07334 .06250 37 .16169 .14419 69 2.75591 1.69453 6 .06917 .06084 38 .17253 .15502 70 3.04592 1.85845 7 .06500 .05917 39 .18420 .16669 71 3.37720 2.05839 8 .06250 .05834 40 .19837 .18087 72 3.75992 2.30363 9 .06167 .05750 41 .21338 .19587 73 4.19334 2.59756 10 .06250 .05667 42 .22922 .21088 74 4.67004 2.93610 11 .06750 .05834 43 .24673 .22588 75 5.18003 3.31428 12 .07667 .06084 44 .26590 .24089 76 5.71919 3.72382 13 .08917 .06417 45 .28758 .25757 77 6.28340 4.16309 14 .10334 .06834 46 .31093 .27508 78 6.87612 4.63892 15 .11335 .07167 47 .33595 .29425 79 7.51607 5.16656 16 .12335 .07501 48 .36347 .31427 80 8.22375 5.76724 17 .13085 .07751 49 .39349 .33678 81 9.01810 6.45895 18 .13585 .08001 50 .42768 .36180 82 9.91569 7.25729 19 .13919 .08251 51 .46688 .38932 83 10.91280 8.15937 20 .14002 .08417 52 .51193 .42101 84 11.99040 9.15556 21 .13835 .08584 53 .56365 .45604 85 13.12418 10.23537 22 .13585 .08667 54 .62122 .49191 86 14.29994 11.39164 23 .13252 .08834 55 .68547 .53028 87 15.49991 12.62319 24 .12918 .09001 56 .75557 .56866 88 16.71910 13.93142 25 .12502 .09168 57 .82985 .60620 89 17.97489 15.32721 26 .12252 .09418 58 .91250 .64375 90 19.28574 16.82248 27 .12085 .09584 59 1.00518 .68630 91 20.68243 18.45266 28 .12001 .09834 60 1.10873 .73638 92 22.21791 20.28063 29 .12001 .10168 61 1.22400 .79814 93 24.04369 22.43826 30 .12085 .10418 62 1.35684 .87493 94 26.50346 25.22305 31 .12335 .10751 63 1.50727 .96927 - --------------------------------------------------------------------------------------------------------------------------
L-8027 (1/87) 15
INDEX PAGE POLICY SCHEDULE DEFINITIONS ACCUMULATION UNIT .......................................................... 1 AGE......................................................................... 1 CASH VALUE ................................................................. 1 DEBT ....................................................................... 1 FUND ....................................................................... 1 GENERAL ACCOUNT ............................................................ 1 INSURANCE AGE .............................................................. 1 MATURITY DATE .............................................................. 1 MONTHLY PROCESSING DATE .................................................... 1 MORTALITY AND EXPENSE RISK CHARGE .......................................... 1 POLICY DATE, POLICY YEAR ................................................... 1 PREMIUM .................................................................... 1 SEPARATE ACCOUNT ........................................................... 1 SEPARATE ACCOUNT VALUE ..................................................... 1 SUBACCOUNTS ................................................................ 1 SUBACCOUNT VALUE ........................................................... 1 SURRENDER VALUE ............................................................ 1 TRADE DATE ................................................................. 1 VALUATION DATE ............................................................. 1 VALUATION PERIOD ........................................................... 1 GENERAL PROVISIONS THE CONTRACT ............................................................... 1 MODIFICATION OF POLICY ..................................................... 1 OWNERSHIP OF POLICY ........................................................ 1 CHANGE OF OWNERSHIP ........................................................ 1 EFFECTIVE DATE OF COVERAGE ................................................. 1 TERMINATION ................................................................ 1 INCONTESTABILITY ........................................................... 1 MISSTATEMENT OF AGE OR SEX ................................................. 1 SUICIDE .................................................................... 1 DUE PROOF OF DEATH ......................................................... 2 BENEFICIARY DESIGNATION AND CHANGE OF BENEFICIARY .......................... 2 DEATH OF BENEFICIARY ....................................................... 2 ASSIGNMENT ................................................................. 2 CHANGE OF PLAN ............................................................. 2 NON-PARTICIPATION .......................................................... 2 REPORTS .................................................................. 2 RESERVES, CASH VALUE AND DEATH BENEFIT ..................................... 2 BASIS OF COMPUTATIONS ...................................................... 2 TAX TREATMENT .............................................................. 2 PREMIUM PROVISIONS INITIAL PREMIUM ............................................................ 2 ADDITIONAL PREMIUM ......................................................... 2 PREMIUM ALLOCATION ......................................................... 2 GRACE PERIOD ............................................................... 2 REINSTATEMENT .............................................................. 3 VARIABLE ACCOUNT PROVISIONS SEPARATE ACCOUNT ........................................................... 3 LIABILITIES OF SEPARATE ACCOUNT ............................................ 3 SUBACCOUNTS ................................................................ 3 SERIES FUND ................................................................ 3 CHANGE OF INVESTMENT ADVISER OR INVESTMENT OBJECTIVES ...................... 3 RIGHTS RESERVED BY THE COMPANY ............................................. 3 TRANSFER PROVISIONS TRANSFERS .................................................................. 4 NONFORFEITURE PROVISIONS CASH VALUE ................................................................. 4 SUBACCOUNT VALUE ........................................................... 4 ACCUMULATION UNIT VALUE .................................................... 4
16 Page 12 NONFORFETURE PROVISIONS (CONTINUED) INVESTMENT EXPERIENCE FACTOR .............................................. 4 INSUFFICIENT CASH VALUE ................................................... 4 COST OF INSURANCE ......................................................... 4 COST OF INSURANCE RATE .................................................... 5 POLICY LOAN PROVISIONS POLICY LOANS .............................................................. 5 POLICY LOAN INTEREST ...................................................... 5 POLICY LOAN REPAYMENT ..................................................... 5 EFFECTIVE ON POLICY LOANS ................................................. 5 SURRENDER VALUE PROVISIONS SURRENDER ................................................................. 5 SURRENDER CHARGE .......................................................... 5 SURRENDER CHARGE TABLE .................................................... 5 TRANSFER AND SURRENDER PROCEDURES ......................................... 5 INSURANCE COVERAGE PROVISIONS DEATH BENEFIT ............................................................. 6 PAYMENT OF DEATH BENEFIT .................................................. 6 SETTLEMENT PROVISIONS SETTLEMENT OPTIONS ........................................................ 6 ELECTION OF SETTLEMENT OPTION ............................................. 6 GENERAL CONDITIONS ........................................................ 6 OPTIONS 1-7 ............................................................... 6 OTHER SETTLEMENT ARRANGEMENTS ............................................. 7 SUPPLEMENTARY CONTRACT .................................................... 7 DATE OF FIRST PAYMENT ..................................................... 7 EVIDENCE OF AGE, SEX AND SURVIVAL ......................................... 7 INTEREST AND MORTALITY .................................................... 7 DISBURSEMENT OF FUNDS UPON DEATH OF PAYEE ................................. 7 PROTECTION OF BENEFITS .................................................... 7 CREDITORS ................................................................. 7 TABLE OF DEATH BENEFIT FACTORS ............................................ 8 OPTION TABLES ............................................................. 9-10 TABLE OF GUARANTEED MAXIMUM INSURANCE RATES
17 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MATURES AT INSURANCE AGE 95 NON-PARTICIPATING This is a legal contract between the owner and Kemper Investors Life Insurance Company. READ YOUR CONTRACT CAREFULLY KEMPER INVESTORS LIFE INSURANCE COMPANY An Illinois stock corporation 1 Kemper Drive, Long Grove, Illinois 60049-0001 Form L-8001 (1/87) EX-99.1A.(B) 5 SUBSCRIPTION AGREEMENT 1 EXHIBIT 1-A(8) KEMPER INVESTORS FUND Subscription Agreement 1. Share Subscription. The undersigned, on behalf of its KILICO Variable Separate Account, agrees to purchase from Kemper Investors Fund (the "Fund") the number of shares (the "Shares") of the Fund's Money Market Portfolio, Total Return Portfolio, High Yield Portfolio, Equity Portfolio and Investment Securities Portfolio, without par value, set forth at the end of this Agreement on the terms and conditions set forth herein and in the Preliminary Prospectus ("Preliminary Prospectus") described below, and hereby tenders the amount of the price required to purchase these shares at a price of $1.00 per share. The undersigned understands that the Fund has prepared a registration statement for filing with the Securities and Exchange Commission on Form N-1A, which contains the Preliminary Prospectus which describes the Fund and the Shares. By its signature hereto, the undersigned hereby acknowledges receipt of a copy of the Preliminary Prospectus. The undersigned recognizes that the Fund will be not fully operational until such time as it commences the public offering of its shares. Accordingly, a number of features of the Fund described in the Preliminary Prospectus, including, without limitation, the declaration and payment of dividends, and redemption of shares upon request of shareholders, are not, in fact, in existence at the present time and will not be instituted until the Fund's registration under the Securities Act of 1933 is made effective. 2 2. Registration and Warranties. The undersigned hereby represents and warrants as follows: (a) It is aware that no Federal or state agency has made any findings or determination as to the fairness for investment, nor any recommendation or endorsement, of the Shares; (b) It has such knowledge and experience of financial and business matters as will enable it to utilize the information made available to it in connection with the offering of the Shares, to evaluate the merits and risks of the prospective investment and to make an informed investment decision; (c) It recognizes that the Fund has only recently been organized and has no financial or operating history and, further, that investment in the Fund involves certain risks, and it has taken full cognizance of and understands all of the risks related to the purchase of the Shares, and it acknowledges that is has suitable financial resources and anticipated income to bear the economic risk of such an investment; (d) It is purchasing the Shares for its own account, for investment, and not with any intention of redemption, distribution, or resale of the Shares, either in whole or in part; (e) It agrees that it will not sell or dispose of the shares or any part thereof, except pursuant to redemption of the shares by the Fund. (f) This Agreement and Preliminary Prospectus and such material documents relating to the Fund as it has requested have been provided to it by 3 the Fund and have been reviewed carefully by it; and (g) It has also had the opportunity to ask questions of, and receive answers from, representatives of the Fund concerning the Fund and the terms of the offering. 3. The undersigned recognizes that the Fund reserves the unrestricted right to reject or limit any subscription and to close the offer at any time. 4. It represents and warrants that it will acquire the shares solely for its KILICO Variable Separate Account and solely for investment purposes and not with a view to the resale or disposition of all or any part thereof, and that it has no present plan or intention to sell or otherwise dispose of the shares or any part thereof. Number of shares: 100,000 each of the Money Market Portfolio, Total Return Portfolio, High Yield Portfolio, Equity Portfolio and Investment Securities Portfolio. Subscription price $1.00 per share for an aggregate price of $500,000.00. IN WITNESS WHEREOF, the undersigned has executed this instrument this _______ day of ___________, 1987. KEMPER INVESTORS LIFE INSURANCE COMPANY By:____________________________________ Title:_________________________________ EX-99.1A.(10) 6 APPLICATION FOR POLICY 1 EXHIBIT 1-A(10) KEMPER INVESTORS LIFE INSURANCE COMPANY 120 South LaSalle Street, Chicago, Illinois 60603 APPLICATION FOR FLEXIBLE PREMIUM VARIABLE LIFE [KEMPER GROUP LOGO] - ------------------------------------------------------------------------------------------------------------------------------------ 1 PAYMENT TYPE (% OF GUIDELINE SINGLE PREMIUM) / / Single(100%) /X/ Flexible (90%) / / Flexible (80%) Total Premium $5,000 /X/ Enclosed / / To Follow - ------------------------------------------------------------------------------------------------------------------------------------ 2 ALLOCATIONS The initial premium will be allocated to the subaccounts selected in accordance with the policy and prospectus. The selections must total 100%. These percentages may be changed at any time by the owner. - ------------------------------------------------------------------------------------------------------------------------------------ /20%/ KILICO Money Market /20%/ KILICO U.S. Government /20%/ KILICO High Yield - ------------------------------------------------------------------------------------------------------------------------------------ /20%/ KILICO Total Return /20%/ KILICO Equity / %/ / %/ - ------------------------------------------------------------------------------------------------------------------------------------ 3 NAME (PROPOSED INSURED) 4 SEX 5 BIRTHDATE 6 BIRTHPLACE John J. Doe /X/ M / /F 1 1 52 Chicago, IL FIRST MIDDLE LAST MO DAY YR - ------------------------------------------------------------------------------------------------------------------------------------ 7 ADDRESS CITY STATE ZIP 8 MARTIAL STATUS 123 Main Street Chicago IL 60603 M - ------------------------------------------------------------------------------------------------------------------------------------ 9 SOC. SEC. NO. 10 EMPLOYER'S NAME ADDRESS 123-45-6789 County Hospital 1 N. Main Street - ------------------------------------------------------------------------------------------------------------------------------------ CITY STATE ZIP OCCUPATION/DUTIES Chicago IL 60603 Physician - ------------------------------------------------------------------------------------------------------------------------------------ 11 NAME OF OWNER (IF OTHER THAN PROPOSED INSURED) SOC. SEC. NO. RELATIONSHIP TO PROPOSED INSURED - ------------------------------------------------------------------------------------------------------------------------------------ ADDRESS CITY STATE ZIP - ------------------------------------------------------------------------------------------------------------------------------------ 12 SEND NOTICES TO: /X/ Insured / / Owner / / Other: ADDRESS CITY STATE ZIP - ------------------------------------------------------------------------------------------------------------------------------------ 13 PRIMARY BENEFICIARY(IES) % EACH IS TO RECEIVE RELATIONSHIP Mary J. Doe 100% Spouse - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ CONTINGENT BENEFICIARY(IES) % EACH IS TO RECEIVE RELATIONSHIP None - ------------------------------------------------------------------------------------------------------------------------------------ 14 LIST ALL LIFE INSURANCE CURRENTLY IN FORCE COMPANY ISSUE YEAR AMOUNT OF LIFE INSURANCE AMOUNT OF ACCIDENTAL DEATH BENEFIT - ------------------------------------------------------------------------------------------------------------------------------------ None - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ 15 Is this policy to replace existing life insurance or annuities? (if yes, complete any required forms) / / Yes /X/ No - ------------------------------------------------------------------------------------------------------------------------------------ 16 HAS THE PROPOSED INSURED: A. Within the last 3 years, engaged in any sport or avocation such as flying, skydiving, hang gliding scuba diving or racing? / / Yes /X/ No B. smoked cigarettes in the past 12 Months? / / Yes /X/ No C. been rated up, postponed or declined for life insurance? / / Yes /X/ No D. any mental or physical impairment, disease or deformity currently? / / Yes /X/ No E. been advised to take any medication, or currently is taking medication? / / Yes /X/ No F. been hospitalized or consulted any doctor in the past 5 years? / / Yes /X/ No G. received medical advice or treatment for the use of alcohol or drugs in the past 5 years? / / Yes /X/ No H. ever been treated for heart disease, high blood pressure, stroke, cancer or tumor? / / Yes /X/ No I. ever been treated for kidney or liver disorder, diabetes or a mental or nervous disorder? / / Yes /X/ No - ------------------------------------------------------------------------------------------------------------------------------------ 17 HEIGHT WEIGHT 6'2" 180 Has proposed insured lost 10 or more pounds in the last year? / / Yes /X/ No - ------------------------------------------------------------------------------------------------------------------------------------ 18 DETAILS OF YES ANSWERS FOR ANY PART OF QUESTION 16 & 17, CONDITION (Include routine physical exam) DATE TREATMENT NAME AND ADDRESS OF PHYSICIAN OR HOSPITAL - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ 19 PERSONAL PHYSICIAN'S NAME (IF NONE, PLEASE STATE) ADDRESS CITY Dr. W. Smith 50 E. Center Street Chicago - ------------------------------------------------------------------------------------------------------------------------------------ STATE ZIP DATE LAST SEEN WHY? IL 60606 1-1-87 Physical - ------------------------------------------------------------------------------------------------------------------------------------ WHAT TESTS WERE MADE? None - ------------------------------------------------------------------------------------------------------------------------------------
CONTINUED ON REVERSE L-8005(3/87) 2 KEMPER INVESTORS LIFE INSURANCE COMPANY 120 South LaSalle Street, Chicago, Illinois 60603 - ------------------------------------------------------------------------------------------------------------------------------------ 20 SUITABILITY A) Annual Salary $ B) Total Assets $ C) Total Debts $ - ------------------------------------------------------------------------------------------------------------------------------------ A) Annual Salary $ E) Other Income $ Source: - ------------------------------------------------------------------------------------------------------------------------------------ /X/ The Proposed Owner declines to answer the foregoing parts of question #20. - ------------------------------------------------------------------------------------------------------------------------------------ AGREEMENT I (we) have read all the questions and answers in this application. I (we) declare all responses are true and complete to the best of my (our) knowledge and belief. I (we) promise to tell the Company of any change in the health or habits of the Proposed Insured that occurs after this application, but before the Policy is delivered to me (us) and the first premium paid. I (we) agree: 1. this application, including all its parts, will be the basis for and form part of this Policy; 2. an Agent has no authority to alter the Company's rules or requirements, this Agreement, the Receipt, or the Policy; 3. the first premium will not be deemed paid unless any check or draft (given as premium) is paid in accordance with its terms; and 4. the insurance applied for never takes effect unless, during the lifetime of the Proposal Insured; a. the Policy has been issued, delivered to, and accepted by me (us); b. the required first premium has been paid; c. any amendments issued with the Policy have been completed and signed; all while the health and habits of the Proposed Insured remain as stared in this application. AUTHORIZATION FOR THE RELEASE OF INFORMATION TO KEMPER INVESTORS LIFE INSURANCE COMPANY I (we) authorize any physician, medical practitioner, hospital, clinic, other medical or medically-related facility, insurance or reinsuring company, Medical Information Bureau, consumer reporting agency, employer, or the Veterans Administration, having information available as to advice, diagnosis, treatment, or care or any physical or mental condition concerning me, and any other non-medical information concerning me to give to the Company, its legal representative, the Medical Information Bureau or its reinsurers any and all such information. This shall include information about drugs, alcoholism or mental illness. This authorization also applies to any minor child proposed for insurance in this application. I understand the information obtained by use of this authorization also applies to any minor child proposed for insurance in this application. I understand the information obtained by use of this authorization will be used by the Company to determine eligibility for insurance. This authorization will be valid for two years from the date signed. I have received and read the notice about investigative consumer reports and the Medical Information Bureau. I know that I have a right to receive a copy of this authorization upon request. A exact copy of this authorization is as valid as the original. / / I do not wish to have personal information disclosed to non-affiliates of the Company for marketing purposes and the affiliates of the Company for purposes other than the marketing of insurance products and services. - ------------------------------------------------------------------------------------------------------------------------------------ RECEIPT IS ACKNOWLEDGED OF THE CURRENT PROSPECTUS FOR KEMPER INVESTORS FUND AND THE KILICO VARIABLE SEPARATE ACCOUNT. THE CASH VALUE IS BASED ON THE INVESTMENT EXPERIENCE OF THE SUBACCOUNTS AND MAY INCREASE OR DECREASE DAILY. THIS AMOUNT IS NOT GUARANTEED. THE AMOUNT OR DURATION OF THE DEATH BENEFIT MAY VARY. If you want a Statement of Additional Information check here / / - ------------------------------------------------------------------------------------------------------------------------------------ SIGNATURES OF PROPOSED (IF AGE 15 OR OVER) SIGNATURE OF PROPOSED (IF OTHER THAN PROPOSED INSURED) X John J. Doe X - ------------------------------------------------------------------------------------------------------------------------------------ SIGNED AT ON ON WITNESS (AGENT) Chicago IL 1 10 87 X CITY STATE MONTH DAY YEAR - ------------------------------------------------------------------------------------------------------------------------------------ AGENT'S REPORT (PLEASE PRINT) - ------------------------------------------------------------------------------------------------------------------------------------ 1. How long have you known the Proposed Insured? How well? 2. What is your estimate of the Proposed Insured's gross annual income? $ Financial worth $ 3. Nationality of Proposed Insured (if not a U.S. citizen) 4. To the best of your knowledge, does the policy applied for replace any existing life insurance or annuity? (If yes, explain) / /Yes /X/ No 5. Is the telephone transfer option requested and the necessary authorization for attached? / /Yes /X/ No - ------------------------------------------------------------------------------------------------------------------------------------ AGENT NAME KILICO AGENT NUMBER TELEPHONE NUMBER - ------------------------------------------------------------------------------------------------------------------------------------ FIRM NAME TELEPHONE MAILING ADDRESS - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ - ------------------------------------------------------------------------------------------------------------------------------------ CITY STATE ZIP AGENT SIGNATURE X - ------------------------------------------------------------------------------------------------------------------------------------ SPECIAL REQUESTS
EX-99.3.(A) 7 OPINION & CONSENT OF KILICO 1 [KEMPER FINANCIAL LETTERHEAD] Exhibit 3(a) April 20, 1992 Kemper Investors Life Insurance Company 120 South LaSalle Street Chicago, Illinois 60603 Dear Sirs: This opinion is furnished in connection with the filing of an S-6 Registration Statement ("Registration Statement") by Kemper Investors Life Insurance Company ("KILICO") for the KILICO Variable Separate Account ("Variable Separate Account"), in connection with its proposed registration of units of beneficial interest, no par value, ("Units"), of the Money Market Subaccount, the Total Return Subaccount, the High Yield Subaccount, the Equity Subaccount and the Government Securities Subaccount ("Subaccounts"). The Registration Statement covers an indefinite number of Units of interest in the Subaccounts of the Variable Separate Account. Premiums to be received under individual flexible premium variable life insurance policies ("Policies") offered by KILICO may be allocated by KILICO to the Subaccounts of the Variable Separate Account in accordance with the owners' direction with reserves established by KILICO to support such Policies. The Policies are designed to provide life insurance protection and are to be offered in the manner described in the Prospectus which is included in the Registration Statement. The Policies will be sold only in jurisdictions authorizing such sales. I have examined all such corporate records of KILICO and such other documents and laws as I consider appropriate as a basis for this opinion. On the basis of such examination, it is my opinion that: 1. KILICO is a corporation duly organized and validly existing under the laws of the State of Illinois. 2. The Variable Separate Account is an account established and maintained by KILICO pursuant to the laws of the State of Illinois, under which income, gains and losses, whether or not realized, from assets allocated to the Variable Separate Account, are, in accordance with the Policies, credited to or charged against the Variable Separate Account without regard to other income, gains or losses of KILICO. 2 Kemper Investors Life Insurance Company April 20, 1992 Page 2 3. Assets allocated to the Subaccounts of the Variable Separate Account will be owned by KILICO. The Policies provide that the portion of the assets of the Variable Separate Account equal to the reserves and other Policy liabilities with respect to the Variable Separate Account will not be chargeable with liabilities arising out of any other business KILICO may conduct. 4. When issued and sold as described above, the Policies will be duly authorized and will constitute validly issued and binding obligations of KILICO in accordance with their terms. I hereby consent to the use of this opinion as an exhibit to the Registration Statement and to the references to my name under the heading "Legal Matters" in the Prospectus. Sincerely, /s/ David F. Dierenfeldt David F. Dierenfeldt Counsel EX-99.3.(B) 8 ACTUARIAL CONSENT 1 EXHIBIT 3(b) ACTUARIAL OPINION This opinion is supplied with the filing of Post-Effective Amendment No. 10 to the Registration Statement on Form S-6, File No. 33-11803, by the KILICO Variable Separate Account (the "Separate Account") and Kemper Investors Life Insurance Company ("KILICO") covering an indefinite number of units of interest in the Separate Account. Premiums received under KILICO's Variable Life Policies may be allocated by KILICO to the Separate Account as described in the Prospectus included in the Registration Statement. I am familiar with the Policy provisions and the description in the Prospectus and it is my opinion that the illustrations of death benefits, accumulated values, cash values, and accumulated premiums included in Appendix A of the Prospectus, based on the assumptions in the illustrations, are consistent with the Policy provisions. The Policy rate structure has not been designed to make the relationship between planned premiums and benefits, as shown in the illustrations, appear more favorable to prospective nonsmoker males ages 25 and 45, than to nonsmoker males at other ages. The nonsmoker risk class generally has a more favorable rate structure than the smoker risk classes. Female risk classes generally have a more favorable rate structure than male risk classes. The current and guaranteed monthly mortality rates used in the illustrations have not been designed so as to make the relationship between current and guaranteed rates more favorable for the ages and sexes illustrated than for a nonsmoker male at other ages. The nonsmoker risk classes generally have lower monthly mortality rates than the smoker risk classes. The female risk classes generally have lower monthly mortality rates than the male risk classes. I consent to the use of this opinion as an Exhibit to Post-Effective Amendment No. 10 to the Registration Statement and to the reference to me under the heading "Experts" in the Prospectus. /s/ Steven D. Powell ------------------------------ Steven D. Powell, FSA MAAA Actuarial Officer - Financial EX-99.6.(A) 9 CONSENT OF INDEPENDENT AUDITORS 1 Exhibit 6(a) CONSENT OF INDEPENDENT AUDITORS The Board of Directors Kemper Investors Life Insurance Company: We consent to the use of our reports included herein on Kemper Investors Life Insurance Company (KILICO) and on the financial statements of the subaccounts of KILICO Variable Separate Account and to the KILICO Variable Separate Account and to the reference to our firm under the heading "Experts" in the prospectus. Our report on KILICO's financial statements dated March 21, 1997, contains an explanatory paragraph that states as a result of the acquisition of its parent, Kemper Corporation, the consolidated financial information for the periods after the acquisition is presented on a different cost basis than that for the periods before the acquisition and, therefore, is not comparable. KPMG PEAT MARWICK LLP Chicago, Illinois April 25, 1997 EX-99.8 10 PROCEDURES MEMORANDUM 1 EXHIBIT 8 PROCEDURES MEMORANDUM, PURSUANT TO RULE 6e-3(T)(b)(12)(ii) UNDER THE 1940 ACT 2 March, 1987 Description of KILICO's Issuance, Transfer and Redemption Procedures for Policies Pursuant to Rule 6e-3(T)(b)(12)(ii) under the Investment Company Act of 1940 I. INTRODUCTION Set forth below is the information called for under Rule 6e-3(T)(b)(12(ii) under the Investment Company Act of 1940 ("1940 Act"). That rule provides an exemption for separate accounts, their investment advisers, principal underwriters and sponsoring insurance company from Sections 22(d), 22(e), and 27(c)(1) of the 1940 Act, and Rule 22c-1 promulgated thereunder, for issuance, transfer and redemption procedures under flexible premium variable life insurance policies to the extent necessary to comply with Rule 6e-3(T), state administrative law or established administrative procedures of the life insurance company. In order to qualify for the exemption, procedures must be reasonable, fair and not discriminatory and they must be disclosed in the registration statement filed by the separate account. -1- 3 The KILICO Variable Separate Account (the "Separate Account") is registered under the 1940 Act. Within the Separate Account are Subaccounts, which are as of the date of this filing, the Money Market Subaccount, the Total Return Subaccount, the High Yield Subaccount, the Equity Subaccount and the Government Securities Subaccount (the "Subaccounts"). Procedures apply equally to each Subaccount and for purposes of this description are defined in terms of the Separate Account, except where a discussion of both the Separate Account and its Subaccounts is necessary. Each Subaccount invests in shares of a corresponding portfolio of the Kemper Investors Fund (the "Fund"), a "series" type of mutual fund registered under the 1940 Act. The investment experience of the Subaccounts of the Account depends on the market performance of the corresponding fund portfolios. KILICO believes its procedures meet the requirements of Rule 6e-3(T)(b)(12)(ii) and states the following: A. Because of the insurance nature of KILICO's flexible premium variable life insurance policies ("policies") and due to the requirements of state insurance laws, the procedures necessarily differ in significant respects from procedures for mutual funds and contractual plans for which the 1940 Act was designed. B. Many of the procedures used by KILICO have been adopted from its established procedures for its flexible premium universal life insurance policies. -2- 4 C. In structuring its procedures to comply with Rule 6e-3(T), state insurance laws and its established administrative procedures, KILICO has attempted to comply with the intent of the 1940 Act, to the extent deemed feasible. D. In general, state insurance laws require that KILICO's procedures be reasonable, fair and not discriminatory. E. Because of the nature of the insurance product, it is often difficult to determine precisely when KILICO's procedures deviate from those required under Section 22(d), 22(e) or 27(c)(1) of the 1940 Act or Rule 22c-1 thereunder. Accordingly, set out below is a summary of the principal policy provisions and procedures which may be deemed to constitute, either directly or indirectly, such a deviation. The summary, while comprehensive, does not attempt to address each and every procedure of variation which might occur and does include certain procedural steps which might be deemed as deviations from the above-cited sections rules. F. KILICO has filed registration statements under the Securities Act of 1933 and the Investment Company Act of 1940 for Separate Account units of interest with respect to the Kemper Alternative and the Kemper Select, flexible premium life insurance policies. Where the provisions of the policies are the same they will be referred to jointly as "policy" or "policies". Where the provisions differ, the provisions will be distinguished by reference to "Select" or "Select II". -3- 5 II. ISSUANCE This section outlines those provisions and administrative procedures which might be deemed to constitute, either directly or indirectly, a "purchase" transaction. Because of the insurance nature of the policies, the procedures involved necessarily differ in certain significant respects from the purchase procedures for mutual funds and contractual plans. The chief differences revolve around the structure of the cost of insurance and the insurance underwriting (i.e., evaluation of risk) process. There are also certain policy provisions, such as reinstatement, which do not result in the issuance of a policy but which require certain payments by the policyowner and involve a transfer of assets supporting the policy reserve into the Account. A. Insurance Charges and Underwriting Standards Cost of insurance charges for KILICO's policies will not be the same for all policyholders. The chief reason is that the principle of pooling and distribution of mortality risks is based on the assumption that each policyowner pays a cost of insurance charge commensurate with the insured persons mortality risk. This mortality risk is actuarially determined based upon factors such as age, smoking status, sex, health, and occupation. Each insured is charged a monthly deduction based on applying a cost of insurance rate commensurate with his/her mortality risk to the Net Amount at Risk. In the case -4- 6 of the Kemper Select II, the calculation is done indirectly by multiplying the cash value by a factor (.005). This factor produces different rates for different mortality risks because the Net Amount at Risk as a percentage of the cash value varies appropriately. The policies will be offered and sold pursuant to the cost of insurance schedules and underwriting standards and in accordance with state insurance laws. Such laws prohibit discrimination among insureds, but recognize that premiums must be based on factors such as age, sex, health and occupation. A table showing the maximum cost of insurance rates will be delivered as part of the policy. Although we anticipate charging 50 b.p. for mortality for Kemper Select II for the foreseeable future, there are potential circumstances which may cause us to change either the level of charges or the method (or both). There are many possibilities, but two specific examples are: (1) The level of expected mortality or the slope of expected mortality (by rating class) changes significantly, (2) investment performance is significantly worse than expected, so that the average cash value is lower and thus, the average net amount at risk is significantly higher than expected. There are at least two alternative procedures we can adopt to change the level and/or method of assessing mortality charges: -5- 7 (1) Increase the level to an amount higher than 50 b.p. At the same time, we would have the system perform an alternate calculation equal to the maximum charge based on 1980 CSO. The cost of insurance charge would then be the lesser of the two amounts. (2) Assess cost of insurance based on the actual net amount at risk for each policy, using cost of insurance rates less than or equal to 1980 CSO. B. Application and Initial Premium Processing 1. DEATH BENEFIT The normal minimum initial Death Benefit for the policies varies with the age, sex, and for the Kemper Select, also smoking status and underwriting class of the Insured. A policy will be issued if the following conditions are met: a. A premium payment of at least $5,000 is paid by the Trade Date of the policy. b. A completed application is submitted. c. Required underwriting information, satisfactory to KILICO, is provided. -6- 8 There is no maximum Death Benefit for the policy, except reinsurance satisfactory to KILICO must be obtained if the initial net amount at risk exceeds $200,000. 2. POLICY ISSUE Before KILICO will issue a policy, it must receive a completed application and a full initial premium at its Home Office. A policy ordinarily will be issued only for Insureds Age 0 through 75 who supply satisfactory evidence of insurability to KILICO. Acceptance of an application is subject to underwriting by KILICO. KILICO reserves the right to decline an application for any reason. After underwriting is complete and the policy is delivered to the owner, insurance coverage under the policy will be deemed to have begun as of the day following the date of receipt of a completed application and the full initial premium. This date is the Policy Date. 3. PREMIUMS Premiums are to be paid to KILICO at its Home Office. Checks ordinarily must be made payable to KILICO. -7- 9 Initial Premium. The minimum initial premium that KILICO will accept under a policy is $5,000. KILICO reserves the right to increase or decrease this amount for a class of policies issued after some future date. For a given initial premium, the minimum death benefit will depend upon the Insurance Age and sex (and in addition for the Select, the rate class) of the Insured. The minimum death benefit for a given initial premium will be consistent with the assumptions for the Guideline Single Premium calculated under section 7702 of the Internal Revenue Code (the "Code"). On the day following the date of receipt the initial premium will be allocated to the KILICO General Account. It will be credited with interest equivalent to the investment experience of the Money Market Subaccount. This premium will remain in the KILICO General Account until the Trade Date. On the Trade Date the initial premium, plus interest, will be allocated to the Money Market Subaccount. Additional applicable charges which are currently the charge for the cost of insurance will be deducted as of the Policy Date. On the Trade Date the Policy Cash Value will thus be the same as if the initial premium had been allocated to the Money Market Subaccount on the Policy Date. The Separate Account Value will remain in the Money Market Subaccount until 15 days from the -8- 10 Trade Date of the Policy. At the end of the 15 day period, the Separate Account Value in the Money Market Subaccount will be allocated to the Subaccounts elected by the Owner in the application for the policy. The Policy Date is the date used to determine Policy Years and Monthly Processing Dates. The Policy Date will be the date following receipt of the application, except that if such date is the 29th, 30th, or 31st of a month, the Policy Date will be the first of the following month. Acceptance is subject to KILICO's underwriting rules, and KILICO reserves the right to reject an application for any reason. The contestability period and suicide exclusion period are measure from the Policy Date. The Trade Date is the date when KILICO accepts the risk of providing insurance coverage to the Insured. Insurance coverage will be limited to a maximum of $200,000 net amount at risk by the temporary insurance provisions of the application until the Trade Date. Monthly deductions and the crediting of investment experience begin as of the Policy Date, even if the Trade Date of the Policy is delayed due to underwriting requirements. The cost of insurance for the full amount of coverage applied for (which may or may not be greater than the -9- 11 $200,000 amount provided for under the temporary insurance provision) is applied as of the Policy Date. This is consistent with established administrative procedures of KILICO and is permitted and consistent with common insurance company administrative practice and insurance laws. Were an insured to die prior to the Trade Date, but KILICO had assumed the risk by affirmatively completing underwriting, KILICO would pay the full amount of coverage. Insurance coverage is limited to $200,000 only in cases when the insured dies prior to the Trade Date, and KILICO would not have issued the Policy. Additional Premiums. Subject to the premium guidelines established under Federal tax law, additional premiums may be contributed while this policy is in force, including when necessary to prevent lapse. Upon request, KILICO will tell the Owner whether an additional premium payment can be made and what its maximum amount is. These premium payments will not increase the maximum possible Surrender Charge. Except to prevent lapse, such an additional premium payment must be at least $1,000. KILICO reserves the right to limit the ability to make more than one additional premium payment in each Policy Year. Evidence of insurability may be required if an additional premium payment would result in an increase in the Death Benefit. -10- 12 4. ALLOCATION OF PREMIUMS AND SEPARATE ACCOUNT VALUE Allocation of Premiums. The Owner allocates premiums to Subaccounts of the Separate Account. The Owner must indicate the initial allocation in the policy application. Fifteen days after the Trade Date, the policy's Separate Account Value in the Money Market Subaccount will be allocated to the Subaccounts of the Separate Account in accordance with the Owner's allocation instructions in the application. Additional premiums received will continue to be allocated in accordance with the Owner's instructions in the application unless contrary written instructions are received. Once a change in allocation is made, all future premiums will be allocated in accordance with the new allocation, unless contrary written instructions are received. C. Delivery Period - Policies Issued -- Other Than As Applied For 1. KILICO will take steps to protect itself against anti-selection by the prospective Owner resulting from a deterioration in the health of the proposed Insured -11- 13 including requiring policies to be delivered promptly. Generally, the period will not exceed 60 days from the date the policy is issued. 2. Failure to Complete Delivery - KILICO will review the file to verify that delivery requirements were not satisfied. a. If KILICO determines that delivery was satisfied, the policy will be placed in force as of the Policy Date. b. If delivery was not satisfied, the policy will be terminated as of the Policy Date and any premium refunded to the Owner, subject to the refund rules mentioned herein. Notification will be sent to the Owner advising him or her that delivery was never completed and that no insurance has been in effect. 3. KILICO may underwrite applicants for Kemper Select II for issue eligibility for Kemper Select in which case, these delivery period procedures will be followed. D. Delivery Requirements 1. An agent/agency must submit all outstanding delivery -12- 14 requirements to the KILICO Home Office prior to the end of the delivery period. 2. The KILICO Home Office cannot accept partial requirements; however, if an agency does inadvertently submit only part of the requirements necessary to complete delivery, KILICO will record any documents as received, and return the policy to the agency with a memo advising them of the remaining requirements. 3. Any money submitted with incomplete delivery requirements will be returned to proposed owner and correspondence specifying the remaining requirements. 4. If a policy is reported as delivered after the delivery period has expired, the policy will be placed in force, subject to Underwriting approval. 5. If a policy is returned to the agency due to incomplete requirements, a delivery extension may be obtained on the agency's behalf. E. Policy Lapse Lapse will occur when the Surrender Value of a policy is -13- 15 insufficient to cover the monthly deduction for the cost of insurance, and a grace period expires without a sufficient payment being made. The duration of coverage depends upon the Surrender Value being sufficient to cover the monthly deductions for cost of insurance. A grace period of 61 days will be given to the Owner. It begins when notice is sent that the Surrender Value of the policy is insufficient to cover the monthly deduction for the cost of insurance. Failure to make a premium payment or loan repayment during the grace period sufficient to keep the policy in force for three months will cause the policy to lapse and terminate without value. If payment is received within the grace period, the premium or loan repayment will be allocated to the Subaccounts in accordance with the most current allocation instructions, unless otherwise requested. Amounts over and above the amounts necessary to prevent lapse may be paid as additional premiums, however, to the extent otherwise permitted. KILICO will not accept any payment that would cause the total premium payment to exceed the maximum payment -14- 16 permitted by the Code. However, the Owner may voluntarily repay a portion of Debt to avoid lapse. If premium Payments have not exceeded the maximum payment permitted by the Code, the Owner may choose to make a larger payment than the minimum required payment to avoid the recurrence of the potential lapse of coverage. The Owner may also combine premium payments with Debt repayments. The death benefit payable during the grace period will be the Death Benefit in effect immediately prior to the grace period, less any Debt. F. Reinstatement If a policy lapses because of insufficient Cash Value to cover the monthly cost of insurance deduction, and it has not been surrendered for its Surrender Value, it may be reinstated at any time within five years after the date of lapse. Reinstatement is subject to: (1) receipt of evidence of insurability satisfactory to KILICO; (2) payment of a minimum premium sufficient to keep the policy in force three months; and -15- 17 (3) payment or reinstatement of any Debt against the policy which existed at the date of termination of coverage. The effective date of reinstatement of a Policy will be the Monthly Processing Date that coincides with or next follows the date the application for reinstatement is approved by KILICO. Suicide and incontestability provisions will apply from the effective date of reinstatement. If the Policy has been in force for two years during the lifetime of the Insured, it will be contestable only as to statements made in the reinstatement application. G. Contestability 1. This policy is contestable for two years during the lifetime of the Insured, measured from the Policy Date, for material misrepresentations made in the initial application for the policy. Policy changes and reinstatements may be contested for two years after the date of the signed application for change or reinstatement. No statement will be used to contest a policy unless it is contained in an application. The two year limitation does not apply in the event of fraud. -16- 18 III. TRANSFER PROCEDURES A. Separate Account Value may be transferred among the Subaccounts of the Separate Account. One transfer of all or a part of the Separate Account Value may be made within a thirty day period. All transfers made during a business day will be treated as one request. 1. Transfer requests must be in writing in a form acceptable to KILICO, or by telephone authorization under forms authorized by KILICO. 2. The minimum transfer amount is $500 or the total amount in a particular Subaccount. No partial transfer may be made if the value of the Owner's remaining interest in a Subaccount, from which amounts are to be transferred, would be less than $500 after such transfer. 3. Transfers will be based on the Accumulation Unit Values next determined following receipt of valid, complete transfer instructions by KILICO. 4. The transfer provision may be suspended, modified or terminated at any time by KILICO. 5. Written acknowledgement of transfers between Subaccounts will be provided at two points in time: -17- 19 a. A confirmation notice will be sent to the Owner within seven days of receipt of the request. b. The annual report will also reflect transfers. B. Policy Loans 1. On and after the first Monthly Processing Date after the Policy Date of the policy, the Owner may by written request to KILICO borrow all or part of the Maximum Loan Amount of the policy. The Maximum Loan Amount is 90% of the policy's Cash Value minus applicable surrender charges. The amount of any new loan may not exceed the Maximum Loan Amount less Debt on the date a loan is granted. The minimum amount of a loan is $500. Any amount due an Owner under a Policy Loan ordinarily will be paid within 7 days after KILICO receives a loan request at its Home Office, although payments may be postponed under certain circumstances. 2. On the date a loan is made, Separate Account Value equal to the loan amount will be transferred from the Separate Account to the loan account in the General Account. Unless the Owner directs otherwise, the loaned amount will be deducted from the Subaccounts in proportion to the values that each Subaccount bears to -18- 20 the Separate Account Value of the policy in all of the Subaccounts at the end of the Valuation Period during which the request is received. 3. If Surrender Value on the day immediately preceding a Monthly Processing Date is less than the monthly cost of insurance deduction for the next month, KILICO will notify the Owner and any assignee of record. 4. A policy loan will have an effect on the Cash Value of a policy. The collateral for the loan (the amount held in the General Account) does not participate in the experience of the Subaccount while the loan is outstanding. If the amount credited to the General Account is more than the amount that would have been earned in the Subaccount, the Cash Value will, and the Death Benefit may, be higher as a result of the loan. Conversely, if the amount credited to the General Account is less than would have been earned in the Subaccount, the Cash Value, as well as the Death Benefit, may be less. C. Loan Interest 1. The loan interest will be assessed at an effective annual rate of 6.00% for the Kemper Select and 6.50% for the Select II. Interest not paid will be added to the loan amount due and bear interest at the same rate. -19- 21 2. Cash Value in the loan account within the General Account attributable to the premium will earn no less than 4.00% annual interest. Cash Value in the loan account within the General Account attributable to amounts in excess of premium will earn no less than 6.00% annual interest for the Kemper Select and 6.50% annual interest for the Select II. Such earnings will be allocated to the General Account. D. Loan Repayment 1. While the policy is in force, policy loans may be repaid at any time, in whole or in part. Payments will be treated as payment of outstanding Debt unless the Owner indicates that the payments should be treated otherwise. If otherwise permitted by the guideline premium limits of the Code where there is no indication made, the portion of a payment that exceeds the amount of any Debt will be treated as a premium payment. If not permitted by the Code, the amount that exceeds any Debt will be refunded to the Owner. 2. At the time of repayment, Cash Value in the loan account of the General Account equal to the amount of the repayment which exceeds the difference between interest due and interest earned will be allocated to the Subaccounts according to the Owner's current allocation instructions, unless otherwise requested by the Owner. -20- 22 Loan repayments will be applied first to reduce that portion of the loan account attributable to interest due on loaned premium; second, to that portion of the loan account attributable to premium; third, to that portion of the loan account attributable to interest due on loaned amounts in excess of premium; and fourth to that portion of the loan account attributable to loaned amounts in excess of premium. Transfers from the General Account to the Separate Account as a result of the repayment of Debt will be allocated at the end of the Valuation Period during which the repayment is received. Such transfers will not be counted in determining the transfers made within a 30 day period. 3. KILICO will provide written confirmation of loan repayments, including the effective date of the payment, and the effect on specific Subaccounts, within seven days of the receipt of payment. E. Policy Anniversary and Monthly Processing Date 1. For Kemper Select the Cost of Insurance (COI) is calculated on the net amount at risk for the Kemper Select using current rates obtained from the issue age file. These mortality rates, which are renewable, are ultimate. An option by plan allows a guarantee period for current rates (e.g., one policy year). -21- 23 The COI for Kemper Select II is .50 basis points per year on the unloaned cash value. For Kemper Select after calculating COI, substandard ratings are applied. Increases in specified amount can be rated separately from the original rating. 2. The calculated deductions are distributed among the funds according to the selected allocation percentages specified by the policyholder. IV. REDEMPTION PROCEDURES The following outlines are administrative procedures attendant to transactions which involve redemption of a policy's values. A. Free Look Period 1. The Owner may, until the end of the period of time specified in the policy, examine the policy and return it for a refund. The applicable period of time will depend on the state in which the policy is issued; however, it will be at least 10 days from the date the policy is received by the Owner. The amount of the refund will be the premium paid. An Owner seeking a refund should return the policy to KILICO at its Home Office or to the agent who sold the policy. -22- 24 2. The policy will receive a refund equal to the premium paid. 3. Refunds will be made within seven working days of receipt of the request, providing the original payment has had sufficient time from the date of our deposit to clear the payor's bank account. Normally, this is 30 days for payments made by personal check, money order or cashier's check. Any refund or portion thereof is subject to being held in KILICO's office until this time requirement is met. If only a portion of the refund is needed to meet the time requirements, the undisputed portion will be released within the seven day time frame. The disputed portion will be held until the time requirement is met and then refunded by separate check. Any refund that needs to be held to meet the time requirement from KILICO date of deposit can be expedited if the payor submits proof that the item has been honored by the bank. B. Exchange Rights 1. The Owner may, while the policy is in force, exchange it at any time after its issue, for a non-variable permanent fixed benefit life insurance policy then currently being offered by KILICO on the life of the Insured. No evidence of insurability will be required. -23- 25 2. During the first two years after the policy trade date, the amount of the new policy may be, at the election of the Owner, either the initial Death Benefit or the same net amount at risk as the policy on the exchange date. 3. After two years from the policy trade date, the amount of the new policy will be for the same net amount at risk as the policy on the exchange date. 4. All Debt under the policy must be repaid and the surrender of the policy is required before the exchange is made. The policy date and issue age will be the same as existed under the policy. 5. The exchange will be subject to an adjustment in the Policy Cash Value to reflect variances in contractual charges against premium payments between the Kemper Select or Select II, as applicable, and the new policy; however, surrender charges will have no effect on the amount transferred to the new policy. If this adjustment results in an increase in the policy cash value, the adjustment will be credited toward the new policy. If this adjustment results in a decrease in policy cash value, then KILICO will require a payment from the policyowner for the decrease amount and the full policy cash value will be credited to the new policy. -24- 26 6. Once this right of exchange is exercised, all contractual provisions will be according to the new policy selected. These include, but are not limited to, surrender charges, current and guaranteed monthly deduction rates, charges against premium payments and the method of calculation of policy gross value. C. Surrender Privilege 1. While the Insured is living and the policy is in force, the Owner may surrender the policy for its Surrender Value. To surrender the policy, the Owner must make written request to KILICO at its Home Office and return the policy to KILICO. The Surrender Value is equal to the Cash Value less any applicable Surrender Charge and any Debt. Partial surrenders are not permitted. 2. No sales charge is deducted from any premium payment. However, a contingent deferred sales charge ("Surrender Charge") will be used to cover expenses relating to the distribution of the policy including commissions paid to sales personnel, and other promotion and acquisition expenses. If this policy is surrendered or if the Cash Value is applied under a Settlement Option, the amount payable may reflect a deduction for applicable Surrender Charges. -25- 27 3. A Surrender Charge will not be assessed against Cash Values applied under a settlement option if the policy has been in force for five or more years and the settlement option elected provides for benefit payments of at least five years. The amount of the Surrender Charge will be calculated as a percentage of the lesser of premium paid in the first Policy Year or Cash Value under the policy. 4. The charge decreases from 9% to 0% depending on the length of time between the Policy Date and the date of surrender or application under a settlement option, provided, however, that for Kemper Select II the Surrender Charge will never exceed $60 per $1,000 of initial Death Benefit. 5. During the period from the Policy Date to the first Policy Anniversary, the rate is 9%; on the first Policy Anniversary, the rate decreases to 8%, and on each of the next eight Policy Anniversaries it will decrease an additional 1%. Thus, there will be no Surrender Charge with respect to the premium paid in the first Policy Year beginning on the ninth Policy Anniversary. 6. The applicable Surrender Charge will be determined based upon the date of receipt of the written request for surrender. -26- 28 7. No minimum amount of Surrender Value is guaranteed. 8. KILICO will make the payment of Surrender Value out of its General Account and at the same time, transfer assets from the Separate Account to the General Account in an amount equal to the policy reserves in the Separate Account. D. Death Claims 1. KILICO will ordinarily pay a death benefit to the beneficiary within seven calendar days after receipt, at its Home Office, of the policy, due proof of death of the Insured and all other requirements necessary* to make payment. KILICO will send the check to the beneficiary within seven days after KILICO receives all required documents. *State insurance laws impose various requirements, such as receipt of a tax waiver, before payment of the death benefit may be made. In addition, payment of the death benefit is subject to the provisions of the policies regarding suicide and incontestability. -27- 29 2. The Death Benefit may vary with the Cash Value of the policy, which depends on the investment experience of the Separate Account Subaccounts to which a policy's Separate Account Value is allocated. An increase in the Cash Value may increase the Death Benefit. However while the policy is in force, because the Death Benefit will never be less than the guaranteed minimum death benefit, a decrease in Cash Value may decrease the Death Benefit but never below the guaranteed minimum death benefit. 3. The Death Benefit will be the greater of the guaranteed minimum death benefit or the applicable multiple of the Cash Value, less Debt. 4. KILICO will make payment of the death benefit out of its General Account, and will transfer assets from the Separate Account to the General Account in an amount equal to the reserve in the Separate Account. The excess, if any, of the death benefit over the amount transferred will be paid out of the General Account reserve maintained for that purpose. F. Premium Refunds KILICO will not normally refund premium payments unless one of the following situations occurs: -28- 30 1. The Insured is rated substandard during the underwriting process and the Owner does not accept the rating. 2. The proposed Insured is determined to be uninsurable by KILICO's standards. 3. The premium paid is in permanent suspense because underwriting requirements were never completed. 4. The delivery period has expired and delivery has not been completed. 5. The Owner exercised the Free Look Privilege. 6. The premium payment would disqualify the policy as life insurance coverage; (see Guideline Premium Test) however, in this instance, the payment will first be applied as a repayment of any outstanding loans. 7. In the event an application is declined by KILICO, the initial premium will be refunded, together with the earnings credited based on the investment experience of the KILICO Money Market Subaccount. G. Guideline Premium Test - Tax Qualification The Guideline Premium Test is a two part test applied to -29- 31 determine if a policy qualifies as life insurance as defined in the IRS Code, Section 7702. 1. Part I - Guideline Premium Limitation. The sum of the actual premiums paid into the contract cannot exceed the greater of: a. the guideline single premium, or b. the sum of the guideline level premiums at that time. 2. The guideline single premium is the premium needed at issue for the future benefits under contract, computed on the basis of: a. the guaranteed mortality charges specified in the contract. b. other guaranteed charges specified in the contract, and c. an interest rate which is the greater of an annual effective rate of six percent or the rate or rates guaranteed at issue. 3. For this plan the guideline single premium is based on: -30- 32 a. the guaranteed maximum mortality rates, for all durations. b. mortality and expense risk charge, and, for Kemper Select II, also the administrative expense charge as specified in the contract and c. six percent interest. 4. Guideline level premiums are the annual premium version of the guideline single premium based on the above assumptions and a premium payment period extending to age 95. The interest rate used will be four percent. At the point where a policy is recognized as being out of compliance, the Death Benefit must be decreased or premiums refunded as necessary for qualification as life insurance. 5. Part II - Cash Value Corridor Requirement. The Cash Value test regulates the ratio of the policy Cash Value to the death benefit regardless of the effect of the guideline premium limit. The death benefit payable under the contract must always be greater than or equal to the policy Cash Value times the death benefit factor. -31- 33 Death benefit factors vary only by attained age and range from 1.00 to 2.50 for Kemper Select and 1.00 to 8.33 for Kemper Select II. A check for compliance will be made at the time premiums are applied and at least annually thereafter. If a violation is detected, the agent will be notified and monies refunded. H. Misstatement of Age or Sex If the age or sex of the Insured is misstated, the Cash Value and Death Benefit will be recalculated from the Policy Date based on the correct sex and age. I. Postponement of Payments Payment of any amount due upon: (a) policy termination at the maturity date, (b) surrender of the policy, (c) payment of any policy loan, or (d) death of the Insured, may be postponed whenever: (1) The New York Stock Exchange is closed other than customary weekend and holiday closing, or trading on the New York Stock Exchange is restricted as determined by the SEC; -32- 34 (2) The SEC by order permits postponement for the protection of Owners; or (3) An emergency exists, as determined by the SEC, as a result of which disposal of securities of the Fund is not reasonably practicable or it is not reasonably practicable to determine the value of the net assets of the Separate Account. Transfers may also be postponed under these circumstances. J. Payment Not Honored by Bank The portion of any payment due under the policy which is derived from any amount paid to KILICO by check or draft may be postponed until such time as KILICO determines that such instrument has been honored by the bank upon which it was drawn. K. Suicide Suicide by the Insured, while sane or insane, within two years from the Policy Date of the policy is a risk not assumed under the policy. KILICO's liability for such suicide is limited to the Cash Value less any Debt. When the laws of the state in which a policy is delivered require less than a two year period, or -33- 35 return of premium paid the period or amount paid will be as stated in such laws. V. RECORDS AND REPORTS KILICO will maintain all records relating to the Separate Account. KILICO will send Owners, at their last known address of record, an annual report stating the Death Benefit, the Accumulation Unit Value, the Cash Value and Surrender Value under the policy, and indicating any additional premium payments, transfers, policy loans and repayments and charges made during the Policy Year. Owners will also be sent annual and semi-annual reports for the Fund to the extent required by the 1940 Act. -34- -----END PRIVACY-ENHANCED MESSAGE-----