-----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, REVZjuWRYENlrrjcJXs08wr51rwPn/2EvwumXBYlNMYTfC3rZnjnn77IT4TNpeQ3 wCi5QkCyecjNUhrM+pKVLg== 0000950124-99-000435.txt : 19990126 0000950124-99-000435.hdr.sgml : 19990126 ACCESSION NUMBER: 0000950124-99-000435 CONFORMED SUBMISSION TYPE: 485APOS PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19990125 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: 485APOS SEC ACT: SEC FILE NUMBER: 033-65399 FILM NUMBER: 99512091 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 485APOS 1 FORM 485APOS 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 25, 1999 REGISTRATION STATEMENT 33-65399 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------ POST-EFFECTIVE AMENDMENT NO. 4 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 Jorden Burt Boros Cicchetti Berenson & Johnson 1 Kemper Drive 1025 Thomas Jefferson Street, N.W. Long Grove, Illinois 60049 Suite 400E Washington, D.C. 20007
It is proposed that this filing will become effective (check appropriate box) [ ] Immediately upon filing pursuant to paragraph (b), or [X] 60 days after filing pursuant to paragraph (a)(1), or [ ] on (date) pursuant to paragraph (b), or [ ] on (date) pursuant to paragraph (a)(1) of 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. 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. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 This amendment to the registration statement on Form S-6 includes two prospectuses describing flexible premium variable life insurance policies which are substantially identical, except that the policy described in the second prospectus makes available to policy owners different investment subaccounts of Registrant than does the prospectus described in the original prospectus. 3 PROSPECTUS-- , 1999 - -------------------------------------------------------------------------------- FLEXIBLE PREMIUM 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 (800) 321-9313 This Prospectus describes a variable life insurance policy of Kemper Investors Life Insurance Company. The Policy provides life insurance and accumulates variable Cash Value. Policy benefits depend upon the investment experience of the KILICO Variable Separate Account. Generally, Policy premiums are flexible. The Policy is "life insurance" for federal tax purposes. If the Policy is a modified endowment contract, different tax rules apply to distributions. See "Federal Tax Matters", page 21 for a discussion of laws that affect the tax treatment of the Policy. A Policy owner has the following choices for allocating premium: - the Fixed Account, which accrues interest at our guaranteed rate, and - the Subaccounts of the Separate Account, which invest in portfolios of underlying mutual funds. The following portfolios of underlying mutual funds are currently available under the Policy: - Investors Fund Series - Kemper Money Market - Kemper Total Return - Kemper High Yield - Kemper Growth - Kemper Government - Kemper International - Kemper Small Cap Growth - - American Skandia Trust - Lord Abbett Growth and Income - JanCap Growth - T. Rowe Price International Equity - T. Rowe Price Asset Allocation - Founders Capital Appreciation - INVESCO Equity Income - PIMCO Total Return Bond - PIMCO Limited Maturity Bond - Neuberger & Berman Mid-Cap Growth - Fidelity Variable Insurance Products Fund - Fidelity VIP Equity-Income - Fidelity VIP High Income - Fidelity Variable Insurance Products Fund II - Fidelity VIP II Contrafund - Fidelity VIP II Index 500 - - Fidelity Variable Insurance Products Fund III - Fidelity VIP III Growth Opportunities - - Scudder Variable Life Investment Fund - Scudder VLIF International (B-Shares) - Scudder VLIF Growth and Income (B-Shares) You may obtain more information about these portfolios in the attached prospectuses. Not all portfolios described in the prospectuses may be available under the Policy. The Policy owner chooses from two death benefit options. The Death Benefit is at least the amount shown in the Policy Specifications, unless there are loans. Cash Value is not guaranteed. If the Surrender Value does not cover all Policy charges, the Policy will lapse. The Policy Specifications show the guarantee premium and the guarantee period. The Policy will not lapse during the guarantee period if the guarantee premium is paid. The Policy owner may cancel the Policy and receive a refund during the Free-Look Period. If you already own a flexible premium variable life insurance policy, it may not be advantageous to buy additional insurance or to replace your policy with the Policy described in this Prospectus. THIS PROSPECTUS MUST BE ACCOMPANIED OR PRECEDED BY A CURRENT PROSPECTUS FOR THE AVAILABLE UNDERLYING PORTFOLIOS. YOU SHOULD READ AND RETAIN ALL PROSPECTUSES FOR FUTURE REFERENCE. YOU CAN FIND THIS PROSPECTUS AND OTHER INFORMATION ABOUT THE SEPARATE ACCOUNT REQUIRED TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC) AT THE SEC'S WEB SITE AT HTTP://WWW.SEC.GOV. THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. 4 TABLE OF CONTENTS - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Page ---- DEFINITIONS................................................. 1 SUMMARY..................................................... 2 KILICO AND THE SEPARATE ACCOUNT............................. 5 THE FUNDS................................................... 5 FIXED ACCOUNT OPTION........................................ 8 THE POLICY.................................................. 9 POLICY BENEFITS AND RIGHTS.................................. 11 CHARGES AND DEDUCTIONS...................................... 15 GENERAL PROVISIONS.......................................... 18 DOLLAR COST AVERAGING....................................... 21 SYSTEMATIC WITHDRAWAL PLAN.................................. 21 DISTRIBUTION OF POLICIES.................................... 21 FEDERAL TAX MATTERS......................................... 22 LEGAL CONSIDERATIONS........................................ 24 SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS................ 24 VOTING INTERESTS............................................ 24 STATE REGULATION OF KILICO.................................. 25 KILICO'S DIRECTORS AND OFFICERS ............................ 26 LEGAL MATTERS............................................... 28 LEGAL PROCEEDINGS........................................... 28 YEAR 2000 COMPLIANCE........................................ 28 EXPERTS..................................................... 28 REGISTRATION STATEMENT...................................... 29 FINANCIAL STATEMENTS........................................ 29 CHANGE OF ACCOUNTANTS....................................... 29 APPENDIX A ILLUSTRATIONS OF CASH VALUES, CASH SURRENDER VALUES AND DEATH BENEFITS................................. 65 APPENDIX B TABLE OF DEATH BENEFIT FACTORS................... 74
5 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 nearest 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, Fixed Account and Loan Account. DATE OF RECEIPT--The date on which a request, form or payment is received at our home office, provided: (1) that date is a Valuation Date and (2) we receive the request, form or payment before the close of the New York Stock Exchange (usually 3:00 p.m. Long Grove time). Otherwise, the next Valuation Date. DEBT--The sum of (1) the principal of any outstanding loan, plus (2) any loan interest due or accrued to KILICO. FIXED ACCOUNT--The amount of assets held in the General Account attributable to the fixed portion of the Policy. FREE-LOOK PERIOD--The time when a Policy owner may cancel the Policy and receive a refund. This time depends on the state where the Policy is issued; however, it will be at least 10 days from the date the owner receives the Policy. FUNDS--The underlying mutual funds 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--The maximum initial amount of premium that can be paid while retaining qualification as a life insurance policy under the Internal Revenue Code. INSURED--The person whose life is covered by the Policy and who is named in the Policy Specifications. ISSUE DATE--The date shown in the Policy Specifications. Incontestability and suicide periods are measured from the Issue Date. LOAN ACCOUNT--The amount of assets transferred from the Separate Account and the Fixed Account and held in the General Account as collateral for Debt. MATURITY DATE--The Policy Date anniversary nearest the Insured's 100th birthday. MONTHLY PROCESSING DATE--The same day in each month as the Policy Date. 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. PLANNED PREMIUM--The scheduled premium specified by the Policy owner in the application. POLICY DATE--The date shown in the Policy Specifications. The Policy Date is used to determine Policy Years and Monthly Processing Dates. The Policy Date is the date that insurance coverage takes effect subject to principles of conditional receipt. 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. SPECIFIED AMOUNT--The amount chosen by the Policy owner and used to calculate the death benefit. The Specified Amount is shown in the Policy Specifications. SUBACCOUNT--A subdivision of the Separate Account. SURRENDER VALUE--Cash Value minus (1) any applicable Surrender Charge and minus (2) any Debt. TRADE DATE--The date 30 days following the date the Policy owner completes all requirements for coverage and we record coverage under the Policy as in force. 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 6 SUMMARY This section summarizes this Prospectus. Please read the entire Prospectus. You should refer to the heading "Definitions" for the meaning of certain terms. If states require variations, they appear in supplements attached to this Prospectus or in endorsements to the Policy. Unless otherwise indicated, this Prospectus describes an in force Policy with no loans. The Policy owner pays a premium for life insurance coverage on the Insured. Generally, an owner may choose the amount and frequency of premium payments. 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 investment experience. Cash Value is not guaranteed. If the Surrender Value is insufficient to pay Policy charges, the Policy will lapse unless an additional premium payment or loan repayment is made. The Policy will remain in force during the guarantee period if the premiums paid, minus withdrawals and Debt, are at least equal to the guarantee premiums. (See "The Policy--Premiums and Allocation of Premiums and Separate Account Value," page 9, "Charges and Deductions," page 15, and "Policy Benefits and Rights," page 11.) A Policy may be issued as or become a modified endowment contract as a result of a material change or reduction in benefits as defined by the Internal Revenue Code. The Policy may also become a modified endowment contract if excess premiums are paid. For a Policy treated as a modified endowment contract, certain distributions will be included in the Policy owner's gross federal income (See "Federal Tax Matters," page 22.) The purpose of the Policy is to provide insurance protection for the beneficiary. The Policy is not comparable to a systematic investment plan of a mutual fund. POLICY BENEFITS CASH VALUE. Cash Value reflects the amount and frequency of premium payments, the investment experience of the selected Subaccounts, any values in the Fixed Account and Loan Account, and Policy charges. The Policy owner bears the entire investment risk on amounts allocated to the Separate Account. We do not guarantee Separate Account Value. (See "Policy Benefits and Rights--Cash Value," page 13.) The Policy owner may surrender a Policy at any time and receive the Surrender Value. The Surrender Value is the Cash Value minus surrender charges and outstanding Debt. Partial withdrawals are available subject to restrictions. (See "Policy Benefits and Rights--Surrender Privilege," page 15.) POLICY LOANS. The Policy owner may borrow up to 90% of Cash Value minus surrender charges. The minimum amount of a loan is $500. Interest is charged at an effective annual rate of 4.50% in the first nine Policy Years and 3.00% thereafter. (See "Federal Tax Matters," page 22.) When a loan is made, a portion of Cash Value equal to the loan amount is transferred from the Separate Account and the Fixed Account (pro rata, unless the Policy owner requests otherwise) to the Loan Account. We credit 3% annual interest to Cash Value held in the Loan Account. (See "Policy Benefits and Rights--Policy Loans," page 14.) If the Policy is a modified endowment contract, a loan is treated as a taxable distribution. (See "Federal Tax Matters," page 22.) DEATH BENEFITS. An in force Policy pays a death benefit payment upon the death of the Insured. The Policy has two death benefit options. Under Option A, the death benefit is the Specified Amount stated in the Policy Specifications. Under Option B, the death benefit is the Specified Amount stated in the Policy Specifications plus the Cash Value. The death benefit is never less than the multiple of Cash Value specified in Appendix B. The death benefit payable is reduced by any Debt. (See "Policy Benefits and Rights--Death Benefits," page 11.) PREMIUMS The amount and frequency of premium payments are flexible. The Policy owner specifies a Planned Premium on the application. However, the owner is not required to make the planned premiums, and, subject to certain restrictions, may make premium payments in any amount and at any frequency. The amount, frequency, and period of time over which an owner pays premiums affects whether the Policy will be classified as a modified 2 7 endowment contract. The minimum monthly premium payment is $50. Other minimums apply for other payment modes. Payment of the Planned Premium does not guarantee that a Policy remains in force. Instead, Surrender Value must be sufficient to cover all Policy charges for the Policy to remain in force. A Policy will remain in force during the guarantee period if premiums paid, less withdrawals and Debt, equal or exceed the sum of the guarantee premiums. (See "The Policy--Premiums," page 9.) THE SEPARATE ACCOUNT ALLOCATION OF PREMIUMS. The portion of the premium available for allocation equals the premium paid less applicable charges. A Policy owner indicates in the application the percentages of premium to be allocated among the Subaccounts of the Separate Account and the Fixed Account. The Policy currently offers twenty-three Subaccounts, each of which invests in shares of a designated portfolio of one of the Funds. The initial premium, minus applicable charges, is allocated to the Kemper Money Market Subaccount on the day after receipt. On the Trade Date, the Separate Account Value in the Kemper Money Market Subaccount is allocated among the Subaccounts and the Fixed Account in accordance with the Policy owner's instructions in the application. (See "The Policy -- Policy Issue," page 9.) TRANSFERS. The Policy owner may transfer Separate Account Value among the Subaccounts once every fifteen days. One annual transfer is permitted between the Fixed Account and the Subaccounts. (See "Allocation of Premiums and Separate Account Value," page 9.) THE FUNDS The following portfolios of Investors Fund Series are currently available for investment by the Separate Account: - KEMPER MONEY MARKET PORTFOLIO - KEMPER TOTAL RETURN PORTFOLIO - KEMPER HIGH YIELD PORTFOLIO - KEMPER GROWTH PORTFOLIO - KEMPER GOVERNMENT SECURITIES PORTFOLIO - KEMPER INTERNATIONAL PORTFOLIO - KEMPER SMALL CAP GROWTH PORTFOLIO. The following portfolios of American Skandia Trust are currently available for investment by the Separate Account: - LORD ABBETT GROWTH AND INCOME - JANCAP GROWTH - T. ROWE PRICE INTERNATIONAL EQUITY - T. ROWE PRICE ASSET ALLOCATION - FOUNDERS CAPITAL APPRECIATION - INVESCO EQUITY INCOME - PIMCO TOTAL RETURN BOND - PIMCO LIMITED MATURITY BOND - NEUBERGER & BERMAN MID-CAP GROWTH (FORMERLY BERGER CAPITAL GROWTH). The following portfolios of Fidelity Variable Insurance Products Fund, Fidelity Variable Insurance Products Fund II and Fidelity Variable Insurance Products Fund III are currently available for investment by the Separate Account: - FIDELITY VIP EQUITY-INCOME - FIDELITY VIP HIGH INCOME - FIDELITY VIP II CONTRAFUND - FIDELITY VIP II INDEX 500 3 8 - FIDELITY VIP III GROWTH OPPORTUNITIES. The following portfolios of Scudder Variable Life Investment Fund are currently available for investment by the Separate Account: - SCUDDER VLIF INTERNATIONAL (B-SHARES) - SCUDDER VLIF GROWTH AND INCOME (B-SHARES). For a more detailed description of the Funds, see "The Funds," page 5, the Funds' prospectuses, and Statements of Additional Information available upon request. CHARGES We deduct a state and local premium tax charge of 2.5% from each premium payment before net premium is allocated. In addition, we deduct a charge of 1% of each premium payment to compensate us for corporate income tax liability. (See Charges and Deductions--Deductions from Premiums, page 15.) We currently do not deduct any other charges from premium or the Separate Account for federal, state or other taxes. Should we determine that these taxes apply, we may make deductions from the Separate Account to pay those taxes. (See "Federal Tax Matters," page 22.) We will deduct a charge from Cash Value in each Subaccount and the Fixed Account on the Policy Date and on each Monthly Processing Date for the cost of life insurance coverage. In addition, we deduct an asset charge, at an annual rate of .90%, from each Subaccount on a daily basis for our assumption of mortality and expense risks. (See "Charges and Deductions--Cost of Insurance Charge and Mortality and Expense Risk Charge," pages 15 and 16, respectively.) On each Monthly Processing Date, we deduct from Cash Value a $5 per month administrative expense charge. (See "Charges and Deductions--Monthly Administrative Charge," page 16.) We deduct a surrender charge if the Policy is surrendered or the Cash Value is applied under a Settlement Option prior to the 15th Policy Year (or the 15th Policy Year following an increase in Specified Amount). (See "Policy Benefits and Rights--Surrender Privilege," page 15.) The Policy owner indirectly bears the annual Fund operating expenses of the Portfolios in which the Subaccounts invest. These may include management fees, 12b-1 fees and other expenses. (See "Charges and Deductions--Charges Against the Funds," page 17.) TAX TREATMENT UNDER CURRENT FEDERAL TAX LAW Under existing tax law, any increase in Cash Value is generally not taxable until a distribution occurs through a withdrawal or surrender. Generally, distributions are not included in income until the amount of the distributions exceeds the premiums paid for the Policy. If the Policy is a modified endowment contract, a loan is also treated as a distribution. Generally, distributions from a modified endowment contract (including loans) are included in income to the extent the Cash Value exceeds premiums paid. A change of Owners, an assignment, a loan or a surrender of the Policy may have tax consequences. Death Benefits payable under the Policy are generally excludable from the gross income of the Beneficiary. As a result, the Beneficiary would not be subject to income tax on the Death Benefit. (See "Federal Tax Matters," page 22.) FREE-LOOK PERIOD The Policy owner may examine a Policy and return it for a refund during the Free-Look Period. The length of the Free-Look Period depends on the state where the Policy is issued; however, it will be at least 10 days from the date the owner receives the Policy. (See "Policy Benefits and Rights--Free-Look Period and Exchange Rights," page 15.) 4 9 ILLUSTRATIONS OF CASH VALUES, SURRENDER VALUES, DEATH BENEFITS Tables in Appendix A illustrate Cash Values, Surrender Values and Death Benefits. These illustrations are based on Policy charges and hypothetical assumed rates of return for the Separate Account. The Separate Account's investment experience will differ, and actual Policy values will be higher or lower than those illustrated. 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 is a wholly-owned subsidiary of Kemper Corporation, a nonoperating holding company. Kemper Corporation is a wholly-owned subsidiary of Zurich Holding Company of America ("ZHCA"), which is a wholly-owned subsidiary of Zurich Insurance Company ("Zurich"). Zurich is a wholly-owned subsidiary of Zurich Financial Services ("ZFS"). ZFS was formed in the September, 1998 merger of the Zurich Group with the financial services business of B.A.T. Industries. ZFS is owned by Zurich Allied A.G. and Allied Zurich p.l.c. fifty-seven percent and forty-three percent, respectively. KILICO offers life insurance and annuity products and is admitted to do business in the District of Columbia and all states except New York. SEPARATE ACCOUNT KILICO Variable Separate Account (the "Separate Account") was established as a separate investment account on January 22, 1987. The Separate Account receives and invests net premiums under the Policy. In addition, the Separate Account may receive and invest net premiums for other variable life insurance policies offered by KILICO. The Separate Account is administered and accounted for as part of our general business. The income, capital gains or capital losses of the Separate Account are credited to or charged against Separate Account assets, without regard to the income, capital gains or capital losses of any other separate account or any other business we conduct. The Policy benefits are our obligations. The Separate Account is registered with the Securities and Exchange Commission ("Commission") as a unit investment trust under the Investment Company Act of 1940 (the "1940 Act"). However, the Commission does not supervise the management, investment practices or policies of the Separate Account or KILICO. The Policy currently offers twenty-three Subaccounts. Additional Subaccounts may be added in the future. Not all Subaccounts may be available in all jurisdictions or under all Policies. THE FUNDS The Separate Account invests in shares of the Investors Fund Series, American Skandia Trust, Fidelity Variable Insurance Products Fund, Fidelity Variable Insurance Products Fund II, Fidelity Variable Insurance Products Fund III and Scudder Variable Life Investment Fund. Each is a series type mutual fund registered as an open-end management investment company. The Commission does not supervise their management, investment practices or policies. The Funds provide investment vehicles for variable life insurance and variable annuity contracts. Shares of the Funds currently are sold only to insurance company separate accounts and certain qualified retirement plans. In addition to the Separate Account, shares of the Funds 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 variable life insurance separate accounts, variable annuity separate accounts and qualified retirement plans to invest simultaneously in the Funds. Currently we do not foresee disadvantages to variable life insurance owners, variable annuity owners or qualified retirement plans. The Funds have an obligation to monitor events for material conflicts between owners and determine what action, if any, should be taken. In addition, if we believe that a Fund's response to any of those events or conflicts insufficiently protects owners, we will take appropriate action on our own. The Separate Account invests in the portfolios of the Funds. 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. 5 10 Each portfolio operates as a separate investment fund, and the income, gains or losses of one portfolio generally have no effect on the investment performance of any other portfolio. INVESTORS FUND SERIES The Investors Fund Series portfolios in which the Separate Account invests are summarized below: KEMPER MONEY MARKET PORTFOLIO: This 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. KEMPER TOTAL RETURN PORTFOLIO: This Portfolio seeks a high total return, a combination of income and capital appreciation, by investing in a combination of debt securities and common stocks. KEMPER HIGH YIELD PORTFOLIO: This Portfolio seeks a high level of current income by investing in fixed-income securities. KEMPER GROWTH PORTFOLIO: This Portfolio seeks maximum appreciation of capital through diversification of investment securities having potential for capital appreciation. KEMPER GOVERNMENT SECURITIES PORTFOLIO: This Portfolio seeks high current return consistent with preservation of capital from a portfolio composed primarily of U.S. Government securities. KEMPER INTERNATIONAL PORTFOLIO: This Portfolio seeks a total return, a combination of capital growth and income, principally through an internationally diversified portfolio of equity securities. KEMPER SMALL CAP GROWTH PORTFOLIO: This Portfolio seeks maximum appreciation of investors' capital. Scudder Kemper Investments, Inc. ("SKI") (formerly Zurich Kemper Investments, Inc.), an affiliate of KILICO, serves as the investment adviser to each Portfolio of the Investors Fund Series specified above. Zurich Investment Management Limited ("ZIML"), an affiliate of SKI, serves as sub-adviser for the Kemper International Portfolio. AMERICAN SKANDIA TRUST The American Skandia Trust portfolios in which the Separate Account invests are summarized below: LORD ABBETT GROWTH AND INCOME PORTFOLIO: This Portfolio seeks long-term growth of capital and income while attempting to avoid excessive fluctuations in market value by investing in common stocks of seasoned companies which are expected to show above-average growth. JANCAP GROWTH PORTFOLIO: This Portfolio seeks growth of capital in a manner consistent with preservation of capital by emphasizing investments in common stocks. T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO: This Portfolio seeks total return on its assets from long-term growth of capital and income principally through investment primarily in common stocks of established, non-U.S. companies. T. ROWE PRICE ASSET ALLOCATION PORTFOLIO: This Portfolio seeks a high level of total return by investing primarily in a diversified group of fixed income and equity securities. FOUNDERS CAPITAL APPRECIATION PORTFOLIO: This Portfolio seeks capital appreciation through investment primarily in common stocks of U.S. companies with market capitalizations of $1.5 billion or less. These stocks normally will be traded in the over-the-counter market. INVESCO EQUITY INCOME PORTFOLIO: This Portfolio seeks high current income while following sound investment practices, with capital growth potential as an additional but secondary consideration. The Portfolio invests primarily in dividend-paying, marketable common stocks of domestic and foreign industrial issuers. PIMCO TOTAL RETURN BOND PORTFOLIO: This Portfolio seeks to maximize total return, consistent with preservation of capital by investing primarily in fixed income securities of various types. 6 11 PIMCO LIMITED MATURITY BOND PORTFOLIO: This Portfolio seeks to maximize total return, consistent with preservation of capital and prudent investment management by investing primarily in fixed income securities of various types. NEUBERGER & BERMAN MID-CAP GROWTH PORTFOLIO (FORMERLY BERGER CAPITAL GROWTH PORTFOLIO): This Portfolio seeks capital appreciation. American Skandia Investment Services, Incorporated ("ASISI") is the investment manager for the American Skandia Trust. ASISI engages a sub-adviser for each Portfolio as described in the prospectus to the American Skandia Trust. FIDELITY VARIABLE INSURANCE PRODUCTS FUND FIDELITY VARIABLE INSURANCE PRODUCTS FUND II FIDELITY VARIABLE INSURANCE PRODUCTS FUND III The Fidelity Variable Insurance Products Fund, Fidelity Variable Insurance Products Fund II, and Fidelity Variable Insurance Products Fund III portfolios in which the Separate Account invests are summarized below: FIDELITY VIP EQUITY-INCOME PORTFOLIO: This Portfolio seeks reasonable income by investing primarily in income-producing equity securities. FIDELITY VIP HIGH INCOME PORTFOLIO: This Portfolio seeks to obtain a high level of current income by investing primarily in high-yielding, lower rated, fixed income securities. FIDELITY VIP II CONTRAFUND PORTFOLIO: This Portfolio seeks long-term capital appreciation. FIDELITY VIP II INDEX 500 PORTFOLIO: This Portfolio seeks investment results that correspond to the total return of common stocks publicly traded in the United States, as represented by the S&P 500. FIDELITY VIP III GROWTH OPPORTUNITIES PORTFOLIO: This Portfolio seeks capital growth by investing in a wide range of common stocks, convertible and foreign securities and bonds that may offer long-term growth potential. Fidelity Management & Research Company ("FMR") is the investment manager of the Fidelity VIP, VIP II and VIP III Funds. SCUDDER VARIABLE LIFE INVESTMENT FUND The Scudder Variable Life Investment Fund portfolios in which the Separate Account invests are summarized below: SCUDDER VLIF INTERNATIONAL PORTFOLIO (B-SHARES): This Portfolio seeks long-term growth of capital principally from a diversified portfolio of foreign equity securities. SCUDDER VLIF GROWTH AND INCOME PORTFOLIO (B-SHARES): This Portfolio seeks long-term growth of capital, current income and growth of income from a portfolio consisting primarily of common stocks and securities convertible into common stocks. Scudder Kemper Investments, Inc. ("SKI") is the investment advisor of each portfolio of the Scudder Variable Life Investment Fund specified above. The Portfolios may not achieve their stated objectives. More detailed information, including a description of risks involved in investing in the Portfolios, is found in the Funds' prospectuses and Statements of Additional Information. We will send a Portfolio prospectus and Fund Statement of Additional Information upon request. CHANGE OF INVESTMENTS We reserve the right to make additions to, deletions from, or substitutions for the shares held by the Separate Account or that the Separate Account may purchase. We reserve the right to eliminate the shares of any of the portfolios and to substitute shares of another portfolio or of another investment company, if the shares of a portfolio are no longer available for investment, or if in our judgment further investment in any portfolio becomes inappropriate in view of the purposes of the Policy or the Separate Account. We may also eliminate or 7 12 combine one or more subaccounts, transfer assets, or substitute one subaccount for another subaccount, if, in our discretion, marketing, tax or investment conditions warrant. We will not substitute any shares attributable to a Policy owner's interest in a Subaccount without notice to the owner and the Commission's prior approval, if required. 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 Policy owners. We also reserve the right to establish additional subaccounts of the Separate Account, each of which would invest in a new portfolio of the Funds, or in shares of another investment company. New subaccounts may be established when, in our sole discretion, marketing needs or investment conditions warrant. New subaccounts may be made available to existing owners as we determine. If we deem it to be in the best interests of persons having voting interests 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 our other separate accounts. To the extent permitted by law, we may also transfer assets of the Separate Account to another separate account, or to the General Account. FIXED ACCOUNT OPTION AMOUNTS ALLOCATED OR TRANSFERRED TO THE FIXED ACCOUNT ARE PART OF OUR GENERAL ACCOUNT, SUPPORTING INSURANCE AND ANNUITY OBLIGATIONS. INTERESTS IN THE FIXED ACCOUNT ARE NOT REGISTERED UNDER THE SECURITIES ACT OF 1933 ("1933 ACT"), AND THE FIXED ACCOUNT IS NOT REGISTERED AS AN INVESTMENT COMPANY UNDER THE INVESTMENT COMPANY ACT OF 1940 ("1940 ACT"). ACCORDINGLY, NEITHER THE FIXED ACCOUNT NOR ANY FIXED ACCOUNT INTERESTS GENERALLY ARE SUBJECT TO THE PROVISIONS OF THE 1933 OR 1940 ACTS. WE HAVE BEEN ADVISED THAT THE STAFF OF THE COMMISSION HAS NOT REVIEWED THE DISCLOSURES IN THIS PROSPECTUS RELATING TO THE FIXED ACCOUNT. STATEMENTS REGARDING THE FIXED ACCOUNT, HOWEVER, MAY BE SUBJECT TO THE GENERAL PROVISIONS OF THE FEDERAL SECURITIES LAWS RELATING TO THE ACCURACY AND COMPLETENESS OF STATEMENTS MADE IN PROSPECTUSES. Under the Fixed Account Option, we pay a fixed interest rate for stated periods. This Prospectus describes only the aspects of the Policy involving the Separate Account, unless we refer to fixed accumulation and settlement options. We guarantee the interest rate credited to the Fixed Account will be at least 3% annually. At our discretion, we may credit interest in excess of 3%. We reserve the right to change the rate of excess interest credited. We also reserve the right to declare different rates of excess interest depending on when amounts are allocated or transferred to the Fixed Account. As a result, amounts at any designated time may be credited with a different rate of excess interest than the rate previously credited to such amounts and to amounts allocated or transferred at any other designated time. 8 13 THE POLICY POLICY ISSUE Before we issue a Policy, we must receive a completed application and a full initial premium at our home office. We ordinarily issue a Policy only for Insureds Age 1 through 75 who supply satisfactory evidence of insurability. Acceptance of an application is subject to our underwriting requirements. If we decline an application, we will refund the Cash Value in the Kemper Money Market Subaccount plus the total amount of monthly deductions and deductions against premiums. After underwriting is complete and the Policy is delivered to its owner, insurance coverage begins as of the Policy Date. (See "Premiums," below.) PREMIUMS We must receive premiums at our home office. (See "Distribution of Policies.") Checks must be made payable to KILICO. PLANNED PREMIUMS. A Policy owner specifies a Planned Premium payment on the application that provides for the payment of level premiums over a specified period of time. However, the owner is not required to pay Planned Premiums. The minimum monthly premium is $50. Other minimums are: single premium $5,000; annual $600; semi-annual $300; quarterly $150. The amount, frequency and period of time over which a Policy owner pays premiums may affect whether the Policy will be classified as a modified endowment contract. Accordingly, variations from Planned Premiums may cause the Policy to become a modified endowment contract, and therefore subject to different tax treatment from conventional life insurance contracts for certain pre-death distributions (See "Federal Tax Matters".) Payment of the Planned Premium does not guarantee that a Policy remains in force. Instead, the duration of the Policy depends upon the Policy's Surrender Value. Even if Planned Premiums are paid, the Policy will lapse any time Surrender Value is insufficient to pay the current monthly deductions and a grace period expires without sufficient payment. (See "Policy Lapse and Reinstatement.") A guarantee period and a monthly guarantee premium are specified in the Policy Specifications. The guarantee period ends on the third Policy anniversary. During the guarantee period, the Policy remains in force and no grace period will begin, provided that the total premiums received, minus any withdrawals and any Debt, equals or exceeds the monthly guarantee premium times the number of months since the Policy Date, including the current month. 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.") We may reject or limit any premium payment below the current minimum premium amount, or that would increase the death benefit by more than the amount of the premium. We may return all or a portion of a premium payment if it would disqualify the Policy as life insurance under the Internal Revenue Code. Certain charges are deducted from each premium payment. (See "Charges and Deductions.") The remainder of the premium, known as the net premium, is allocated as described below under "Allocation of Premiums and Separate Account Value." POLICY DATE. The Policy Date is used to determine Policy Years and Monthly Processing Dates. The Policy Date is the date that insurance coverage takes effect. If this date is the 29th, 30th, or 31st of a month, the Policy Date will be the first of the following month. ALLOCATION OF PREMIUMS AND SEPARATE ACCOUNT VALUE ALLOCATION OF PREMIUMS. The initial net premium is allocated to the Kemper Money Market Subaccount. The Separate Account Value remains in the Kemper Money Market Subaccount until the Trade Date. On the Trade Date, the Separate Account Value in the Kemper Money Market Subaccount is allocated to the Subaccounts and the Fixed Account as specified in the application. Additional premiums received will be allocated as specified in the application or in later written instructions received from the Policy owner. The minimum amount of any premium that may be allocated to a Subaccount is $50. Cash Value may be allocated to a total of ten accounts at any given time. 9 14 The Separate Account Value will vary with the investment experience of the chosen Subaccounts. The Policy owner bears the entire investment risk. TRANSFERS. After the Trade Date, Separate Account Value may be transferred among the Subaccounts and into the Fixed Account. These transfers are limited to one transfer every fifteen days. All transfers made during a business day are treated as one transfer. Fixed Account Value may be transferred to one or more Subaccounts. One transfer of Fixed Account Value may be made once each Policy Year in the thirty day period following the end of a Policy Year. Transfer requests must be in writing in a form acceptable to us, or by telephone authorization under forms we authorize. (See "General Provisions--Written Notices and Requests.") The minimum partial transfer amount is $500. No partial transfer may be made if the value of the Policy owner's remaining interest in a Subaccount or the Fixed Account, from which amounts are to be transferred, would be less than $500 after the transfer. We may waive these minimums for reallocations under established third party asset allocation programs. Transfers are based on the Accumulation Unit values next determined following our receipt of valid, complete transfer instructions. We may suspend, modify or terminate the transfer provision. We reserve the right to charge up to $25 for each transfer. We disclaim all liability if we follow in good faith instructions given in accordance with our procedures, including requests for personal identifying information, that are designed to limit unauthorized use of the privilege. Therefore, a Policy owner bears the risk of loss in the event of a fraudulent telephone transfer. If a Policy owner authorizes a third party to transact transfers on the Policy owner's behalf, we will reallocate the Cash Value pursuant to the authorized asset allocation program. However, we do not offer or participate in any asset allocation program and we take no responsibility for any third party asset allocation program. We may suspend or cancel acceptance of a third party's instructions at any time and may restrict the investment options available for transfer under third party authorizations. AUTOMATIC ASSET REALLOCATION. A Policy owner may elect to have transfers made automatically among the Subaccounts on an annual or a quarterly basis so that Cash Value is reallocated to match the percentage allocations in the Policy owner's predefined premium allocation elections. Transfers under this program are not subject to the $500 minimum transfer limitations. An election to participate in the automatic asset reallocation program must be in writing on our form and returned to our home office. POLICY LAPSE AND REINSTATEMENT LAPSE. The Policy will lapse when the Surrender Value is insufficient to cover the current monthly deductions and a grace period expires without a sufficient payment. (See "Charges and Deductions.") The grace period is 61 days. The grace period begins when we send notice that the Surrender Value is insufficient to cover the monthly deductions. If we do not receive a premium payment or loan repayment during the grace period sufficient to keep the Policy in force for three months, the Policy will lapse and terminate without value. If payment is received within the grace period, the premium or loan repayment will be allocated to the Subaccounts and the Fixed Account in accordance with current allocation instructions. Amounts over and above the amounts necessary to prevent lapse may be paid as additional premiums, to the extent permissible. (See "The Policy--Premiums.") We will not accept any payment causing the total premium payment to exceed the maximum payment permitted for life insurance under the guideline premium limits. However, the Policy owner may voluntarily repay a portion of Debt to avoid lapse. The owner may also combine premium payments with Debt repayments. (See "Federal Tax Matters.") The death benefit payable during the grace period will be the Death Benefit in effect immediately prior to the grace period, less any Debt and any unpaid monthly deductions. REINSTATEMENT. If a Policy lapses because of insufficient Surrender Value to cover the monthly deductions, and it has not been surrendered for its Surrender Value, it may be reinstated at any time within three 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 us; (2) payment of a minimum premium sufficient to cover monthly deductions for the grace period and to keep the Policy in force three months; and (3) payment or reinstatement of any Debt which existed at the date of termination of coverage. 10 15 The effective date of reinstatement of a Policy is the Monthly Processing Date that coincides with or next follows the date we approve the application for reinstatement. Suicide and incontestability provisions apply from the effective date of reinstatement. POLICY BENEFITS AND RIGHTS DEATH BENEFITS While the Policy is in force (see "Policy Lapse and Reinstatement--Lapse," above), the death benefit is based on the death benefit option, the Specified Amount and the table of death benefit percentages applicable at the time of death. The death benefit proceeds equal the death benefit minus any Debt and minus any monthly deductions due during the grace period. A Policy owner selects in the application one of two death benefit options: Option A or Option B. Subject to certain restrictions, the owner can change the death benefit option selected. So long as the Policy remains in force, the death benefit under either option will never be less than the Specified Amount. The Policy owner chooses the Specified Amount on the application. The Specified Amount is stated in the Policy Specifications. The minimum Specified Amount is $50,000. OPTION A. Under Option A, the death benefit equals the Specified Amount or, if greater, the Cash Value (determined as of the end of the Valuation Period during which the Insured dies) multiplied by a death benefit percentage. The death benefit percentages vary according to the Insured's age. The death benefit percentage is 250% for an Insured at Age 40 or under, and it declines for older Insureds. In setting the death benefit percentages, we seek to ensure that the Policy will qualify for favorable federal income tax treatment. A table showing the death benefit percentages is in the Appendix B to this Prospectus and in the Policy. OPTION B. Under Option B, the death benefit equals the Specified Amount plus the Cash Value (determined as of the end of the Valuation Period during which the Insured dies) or, if greater, the Cash Value multiplied by a death benefit percentage. The specified percentage is the same as that used in connection with Option A. The death benefit under Option B always varies as Cash Value varies. EXAMPLES OF OPTIONS A AND B. The following examples demonstrate the determination of death benefits under Options A and B. The examples show three Policies--Policies I, II, and III--with the same Specified Amount, but different Cash Values and assume that the Insured is Age 35 at the time of death and that there is no outstanding Debt.
POLICY I POLICY II POLICY III -------- --------- ---------- Specified Amount.......................... $100,000 $100,000 $100,000 Cash Value on Date of Death............... $ 25,000 $ 50,000 $ 75,000 Death Benefit Percentage.................. 250% 250% 250% Death Benefit Under Option A.............. $100,000 $125,000 $187,500 Death Benefit Under Option B.............. $125,000 $150,000 $187,500
Under Option A, the death benefit for Policy I equals $100,000 since the death benefit is the greater of the Specified Amount ($100,000) or the Cash Value at the date of death multiplied by the death benefit percentage ($25,000 X 250% = $62,500). For both Policies II and III under Option A, the Cash Value multiplied by the death benefit percentage ($50,000 X 250% = $125,000 for Policy II; $75,000 X 250% = $187,500 for Policy III) is greater than the Specified Amount ($100,000), so the death benefit equals the higher value. Under Option B, the death benefit for Policy I equals $125,000 since the death benefit is the greater of Specified Amount plus Cash Value ($100,000 + $25,000 = $125,000) or the Cash Value multiplied by the death benefit percentage ($25,000 X 250% = $62,500). Similarly, in Policy II, Specified Amount plus Cash Value ($100,000 + $50,000 = $150,000) is greater than Cash Value multiplied by the death benefit percentage ($50,000 X 250% = $125,000). In Policy III, the Cash Value multiplied by the death benefit percentage ($75,000 X 250% = $187,500) is greater than the Specified Amount plus Cash Value ($100,000 + $75,000 = $175,000), so the death benefit equals the higher value. All calculations of death benefit are made as of the end of the Valuation Period during which the Insured dies. Death benefit proceeds may be paid to a Beneficiary in a lump sum or under the Policy's settlements options. Death Benefits ordinarily are paid within seven days after we receive all required documentation. Payments may be postponed in certain circumstances. (See "General Provisions -- Postponement of Payments") 11 16 CHANGES IN DEATH BENEFIT OPTION After the first Policy Year, a Policy owner may change the death benefit option from Option A to Option B, or from Option B to Option A. Changes in the death benefit option may be made, in writing once per Policy Year. The effective date of the change is the next Monthly Processing Date after we accept the change. A change in the death benefit from Option A to Option B reduces the Specified Amount by the amount of the Policy's Cash Value. Therefore, the death benefit payable under Option B at the time of the change equals the amount payable under Option A immediately prior to the change. The change in option affects the determination of the death benefit since Cash Value will then be added to the new Specified Amount, and the death benefit then varies with Cash Value. A change in the death benefit from Option B to Option A increases the Specified Amount by the amount of the Policy's Cash Value. Therefore, the death benefit payable under Option A at the time of the change equals the amount payable under Option B immediately prior to the change. However, the change in option affects the determination of the death benefit since the Cash Value is not added to the Specified Amount in determining the death benefit. The death benefit then equals the new Specified Amount (or, if higher, the Cash Value times the applicable specified percentage). A change in death benefit option may affect the future monthly cost of insurance charge, which varies with the net amount at risk. Generally, net amount at risk is the amount by which the death benefit exceeds Cash Value. (See "Charges and Deductions--Cost of Insurance Charge.") If the death benefit does not equal Cash Value times a death benefit percentage under either Options A or B, changing from Option B to Option A will generally decrease the future net amount at risk. This would decrease the future cost of insurance charges. Changing from Option A to Option B generally results in a net amount at risk that remains level. Such a change, however, results in an increase in the cost of insurance charges over time, since the cost of insurance rates increase with the Insured's Age. CHANGES IN SPECIFIED AMOUNT After the first Policy Year, a Policy owner may increase or decrease the Specified Amount, subject to our approval. A change in Specified Amount may only be made once per Policy Year. The minimum change in Specified Amount is $25,000. Increases are not allowed after the Insured attains age 75. Increasing the Specified Amount could increase the death benefit. Decreasing the Specified Amount could decrease the death benefit. The amount of change in the death benefit will depend, among other things, upon the selected death benefit option and the degree to which the death benefit exceeds the Specified Amount prior to the change. Changing the Specified Amount could affect the subsequent level of death benefit and Policy values. An increase in Specified Amount may increase the net amount at risk, thereby increasing a Policy owner's cost of insurance charge and the guarantee premium amount. However, an increase in Specified Amount does not extend the guarantee period. Conversely, a decrease in Specified Amount may decrease the net amount at risk, thereby decreasing an owner's cost of insurance charge. A decrease in Specified Amount will not decrease the guarantee premium. Decreases in the death benefit may have tax consequences. (See "Federal Tax Matters.") INCREASES. We require additional evidence of insurability for an increase in Specified Amount. DECREASES. Any decrease in Specified Amount is first applied to the most recent increases successively, then to the original Specified Amount. A decrease is not permitted if the Specified Amount would fall below the lesser of the initial Specified Amount or $50,000. If after a decrease in the Specified Amount, total premiums paid exceed the tax law's premium limitations, we will refund the amount exceeding the premium limitations. Some or all of the amount refunded may be subject to tax. (See "Federal Tax Matters.") We reserve the right to deny a requested decrease in Specified Amount. The reasons for denial may include: - our determination that the decrease would cause the Policy to fail the tax guideline premium limitations, resulting in the Policy's termination or - our determination that the decrease would cause the Policy to fail the tax guideline premium limitations because the payments from Cash Value required to effect the decrease exceed Surrender Value. Requests for change in Specified Amount must be made in writing. The requested change becomes effective on the Monthly Processing Date on or next following our acceptance of the request. If the Policy owner is not the Insured, we require the Insured's consent. 12 17 BENEFITS AT MATURITY If the Insured is alive on the Policy Date anniversary nearest the Insured's 100th birthday, we pay the Policy owner the Surrender Value of the Policy. On the Maturity Date, the Policy terminates and we have no further obligations under the Policy. CASH VALUE Cash Value reflects - the investment experience of the selected Subaccounts - the frequency and amount of premiums paid - transfers between Subaccounts - withdrawals - any Fixed Account or Loan Account values - Policy charges A Policy owner may make partial withdrawals of Cash Value or surrender the Policy and receive the Policy's Surrender Value. (See "Surrender Privilege.") Cash Value is not guaranteed. CALCULATION OF CASH VALUE. Cash Value is the total of - Separate Account Value - Fixed Account Value - Loan Account value Cash Value is determined on each Valuation Date. It is first calculated on the Policy Date. On that date, the Cash Value equals the initial premium, minus the monthly deductions for the first Policy Month. (See "Charges and Deductions.") On any Valuation Date, Separate Account Value in any Subaccount equals: (1) Separate Account Value in the Subaccount at the end of the preceding Valuation Period times the Investment Experience Factor (defined below) for the current Valuation Period; plus (2) Any net premiums received and allocated to the Subaccount during the current Valuation Period; plus (3) All amounts transferred to the Subaccount during the current Valuation Period (from a Subaccount, the Fixed Account or the Loan Account for Policy loan repayment (see "Policy Benefits and Rights--Policy Loans,")); minus (4) The pro rata portion of the monthly cost of insurance charge, administrative charge, and any other charges assessed to the Subaccount. (See "Charges and Deductions--Cost of Insurance Charge."); minus (5) All amounts transferred from the Subaccount during the current Valuation Period; minus (6) All amounts withdrawn from the Subaccount during the current Valuation Period; minus (7) All amounts loaned from the Subaccount during the current Valuation Period. There will also be Cash Value in the Loan Account if there is a Policy loan outstanding. The Loan Account is credited with amounts transferred from Subaccounts for Policy loans. The Loan Account balance accrues daily interest at an effective annual rate of 3.00%. (See "Policy Benefits and Rights--Policy Loans.") The Cash Value in the Fixed Account is credited with interest at our declared annual rate. The annual rate will never be less than 3%. ACCUMULATION UNIT VALUE. Each Subaccount has its own Accumulation Unit Value. When net premiums or other amounts are allocated to a Subaccount, 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. 13 18 For each Subaccount, Accumulation Unit Value was initially set at the same unit value as the net asset value of a share of the underlying Fund. The Accumulation Unit Value for each subsequent Valuation Period is the Investment Experience Factor for that Valuation Period times the Accumulation Unit Value for the preceding Valuation 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 due to 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 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 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 we determine 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 preceding Valuation Period; (3) is the factor representing the Mortality and Expense Risk Charge. (See "Charges and Deductions--Mortality and Expense Risk Charge.") POLICY LOANS After the first Policy Year, the Policy owner may borrow all or part of the Policy's maximum loan amount. The maximum loan amount is 90% of Cash Value minus 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. The loan ordinarily is paid within 7 days after we receive a written loan request, although payments may be postponed under certain circumstances. (See "Postponement of Payments," and "Federal Tax Matters.") On the date a loan is made, the loan amount is transferred from the Separate Account and Fixed Account to the Loan Account. Unless the Policy owner directs otherwise, the loan amount is deducted from the Subaccounts and the Fixed Account in proportion to the values that each bears to the total of Separate Account Value and Fixed Account Value at the end of the Valuation Period during which the request is received. Loan interest is charged at an effective annual rate of 4.5% in the first nine Policy Years and 3.00% thereafter. Interest not paid when due is added to the loan amount. Unpaid interest is due upon the earlier of the next Policy Date anniversary or when coverage ceases. The same interest rates apply to unpaid interest. When interest is added to the loan amount, we transfer an equal amount from the Separate Account and the Fixed Account to the Loan Account. Cash Value in the Loan Account earns 3.00% annual interest. Such interest is allocated to the Loan Account. LOAN REPAYMENT. All or any portion of a loan may be repaid at any time. At the time of repayment, the Loan Account is reduced by the repayment amount, adjusted for the difference between interest charged and interest earned. The net repayment amount is allocated to the Subaccounts and the Fixed Account, according to the Policy owner's current allocation instructions, at the end of the Valuation Period during which the repayment is received. These transfers are not limited by the 15 day transfer restriction. EFFECTS OF POLICY LOAN. Policy loans decrease Surrender Value and, therefore, the amount available to pay Policy charges. If Surrender Value on the day preceding a Monthly Processing Date is less than the next monthly deductions we will notify the Policy owner. (See "General Provisions--Written Notices and Requests.") The Policy will lapse and terminate without value, unless we receive a sufficient payment within 61 days of the date notice is sent. (See "The Policy--Policy Lapse and Reinstatement.") EFFECT ON INVESTMENT EXPERIENCE. A Policy Loan affects Cash Value. The collateral for the outstanding loan (the amount held in the Loan Account) does not participate in the experience of the Subaccounts or earn current interest in the Fixed Account. If the interest credited to the Loan Account is more than the amount that would 14 19 have been earned in the Subaccounts or the Fixed Account, the Cash Value will, and the Death Benefit may, be higher as a result of the loan. Conversely, if the amount credited to the Loan Account is less than would have been earned in the Subaccounts or the Fixed Account, the Cash Value, as well as the Death Benefit, may be less. TAX TREATMENT. If the Policy is a modified endowment contract, a loan is treated as a distribution and is includible in income to the extent that Cash Value exceeds premiums paid. Therefore, a loan may result in federal income tax and a 10% tax penalty may also apply. (See "Federal Tax Matters.") SURRENDER PRIVILEGE If the Insured is alive, the Policy owner may surrender the Policy for its Surrender Value. To surrender the Policy, the owner must return the Policy to us, along with a written request. Surrender Value equals Cash Value, minus Surrender Charges and Debt. (See "Surrender Charge," below.) PARTIAL WITHDRAWALS. After the first Policy Year, a Policy owner may withdraw a portion of Surrender Value. The minimum amount of each withdrawal is $500 and when a Surrender Charge is assessable, the maximum amount is 10% of the Surrender Value. A $25 withdrawal charge is imposed for each withdrawal. (See "Charges and Deductions.") A withdrawal decreases Cash Value by the amount of the withdrawal and, if Death Benefit Option A is in effect, reduces Specified Amount by the amount of the withdrawal. FREE-LOOK PERIOD AND EXCHANGE RIGHTS During the Free-Look Period, the Policy owner may examine the Policy and return it for a refund. The time period depends on where the Policy is issued; however, it will be at least 10 days from the date the Policy is received by the owner, or, 45 days after the owner completes the application for insurance, whichever is later. The amount of the refund is the sum of Cash Value in the Kemper Money Market Subaccount plus the total amount of monthly deductions and deductions from Premium. An owner seeking a refund should return the Policy to us or to the agent who sold the Policy. At any time during the first two years after the Issue Date, the Policy owner may exchange the Policy for a non-variable permanent fixed benefit life insurance policy then currently offered by KILICO or an affiliate. Evidence of insurability is not required. 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. All Debt must be repaid and the Policy must be surrendered before the exchange is made. The new policy will have the same Policy Date and issue age as the exchanged Policy. CHARGES AND DEDUCTIONS DEDUCTIONS FROM PREMIUMS We deduct a state and local premium tax charge of 2.5% from each premium payment before net premium is allocated. This charge reimburses us for paying state premium taxes. We expect to pay an average state premium tax rate of approximately 2.5%, but the actual premium tax attributable to a Policy may be more or less. In addition, a charge for federal taxes, equal to 1% of each premium payment, is deducted to compensate us for higher corporate income taxes under the current Internal Revenue Code. COST OF INSURANCE CHARGE We deduct a cost of insurance charge monthly from the Subaccounts and the Fixed Account. This charge covers our anticipated mortality costs. The cost of insurance charge is deducted monthly in advance and is allocated pro rata among the Subaccounts and the Fixed Account. We deduct the cost of insurance by cancelling units 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 is determined on the next Valuation Date. The cost of insurance charge is determined by multiplying the cost of insurance rate (see below) by the "net amount at risk" for each Policy month. The net amount at risk equals 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 issue age, sex, rate class of the Insured and Policy Year. We determine the monthly cost of insurance rates based on our expectations as to future mortality experience. Any change in the schedule of rates applies 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 15 20 Commissioner's Standard Ordinary Smoker and Non-Smoker Mortality Tables, Age Nearest Birthday, published by the National Association of Insurance Commissioners. RATE CLASS. The rate class of an Insured will affect the cost of insurance rate. We currently place Insureds in preferred 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 preferred rates. (See "Charges and Deductions--Cost of Insurance Rate," above.) MORTALITY AND EXPENSE RISK CHARGE We deduct a daily charge, at an annual rate of 0.90%, from the Subaccounts for mortality and expense risks we assume. The mortality and expense risk we assume is that our estimates of longevity and of the expenses incurred over the life of the Policy will not be correct. MONTHLY ADMINISTRATIVE CHARGE We deduct a monthly administrative expense charge to reimburse us for certain expenses related to maintenance of the Policies, accounting and record keeping and periodic reporting to Policy owners. This charge is designed only to reimburse us for actual administrative expenses. Currently, this charge is $5 per month. OTHER CHARGES SURRENDER CHARGE. We deduct a Surrender Charge from Cash Value if the Policy is surrendered or Cash Value is applied under a Settlement Option during the first 14 Policy Years. A Surrender Charge is also assessed during the first 14 Policy Years following an increase in Specified Amount. The Surrender Charge is: (a) an administrative component (issue charge); plus (b) a sales component (deferred sales charge); times (c) the Surrender Charge percentage. During the 14 Policy Years following an increase in Specified Amount, an additional Surrender Charge applies. The additional charge is calculated as described below based on the amount of the increase, years commencing on the date of the increase and Target Premium associated with the increase. The Surrender Charge is determined based upon the date we receive the written request for surrender. (a) Issue Charge. The issue charge is a level charge of $5.00 per thousand of Specified Amount and the sum of coverage amounts for any other insureds. This charge covers the administrative expenses associated with underwriting and issuing a Policy. These expenses include the costs of processing applications, conducting medical examinations, determining insurability and the Insured's underwriting class, and establishing Policy records. (b) Deferred Sales Charge. The deferred sales charge is (i) 30% of premiums paid up to one Target Premium shown in the Policy plus (ii) for the sum of all premiums paid in excess of one Target Premium ("excess premium charge"), a percentage which varies by the issue age of the Insured as follows:
Excess Premium Charge Issue Ages --------------------- ---------- 7.5% 0-65 5.0% 66-75
The deferred sales charge reimburses us for some of the expenses of distributing the Policies. (c) Surrender Charge Percentage. For issue ages up to age 66, the Surrender Charge percentage is 100% for Policy Years 1-5 and declines by 10% each year in Policy Years 6-14 until reaching zero at the beginning of Policy Year 15. For issue ages 66-75, the Surrender Charge percentage is 100% for Policy Years 1-3 and declines by 10% 16 21 each year in Policy Years 4-11 and by 5% in Policy Years 12-14 until reaching zero at the beginning of Policy Year 15.
SURRENDER CHARGE PERCENTAGES SURRENDER CHARGE PERCENTAGES ISSUE AGES UP TO AGE 66 ISSUE AGES 66-75 --------------------------------- --------------------------------- SURRENDER CHARGE SURRENDER CHARGE PERCENTAGE AT PERCENTAGE AT BEGINNING OF BEGINNING OF POLICY YEAR PERCENTAGE POLICY YEAR PERCENTAGE ---------------- ---------- ---------------- ---------- 1-5 100% 1-3 100% 6 90% 4 90% 7 80% 5 80% 8 70% 6 70% 9 60% 7 60% 10 50% 8 50% 11 40% 9 40% 12 30% 10 30% 13 20% 11 20% 14 10% 12 15% 15+ 0% 13 10% 14 5% 15+ 0%
(d) Example. Assume a female Insured purchases the Policy at age 40 for $100,000 of Specified Amount, paying the Target Premium of $630 and an additional premium amount of $1,000 in excess of the Target Premium, for a total premium of $1,630. Assume further that she surrenders the Policy during the second Policy Year. The Surrender Charge is calculated as follows: (i) Issue Charge -- [100 x $5.00]........................... $500.00 ($5.00 per $1,000.00 of Specified Amount) (ii) Deferred Sales Charge (1) 30% of Target Premium Paid......................... $189.00 (.30 x $630.00); and (2) 7.5% of Premiums Paid In Excess of Target Premium............................................... $ 75.00 (.075 x $1,000.00) (iii) Surrender Charge Percentage........................... 100% (iv) Calculation of Surrender Charge [(a)$500.00 + (b)$189.00 + $75.00)] x (c) 100%......... $764.00
WITHDRAWAL CHARGE. We impose a charge of $25 for each partial withdrawal. This charge reimburses us for the administrative expenses related to the withdrawal. TRANSFER CHARGE. We reserve the right to charge up to $25 for each transfer. The transfer charge reimburses us for the administrative expenses related to the transfer. TAXES. Currently, no charges are made against the Separate Account for federal, state or other taxes attributable to the Separate Account. We may, however, in the future impose charges for income taxes or other taxes attributable to the Separate Account or the Policy. (See "Federal Tax Matters.") CHARGES AGAINST THE FUNDS. Under investment advisory agreements with each Fund, the investment manager and/or adviser provides investment advisory and/or management services for the portfolios. The Funds are responsible for advisory fees and various other expenses. Investment advisory fees and expenses differ with respect to each of the portfolios of the Funds. (See "The Funds.") Each portfolio incurs annual fund operating expenses consisting of management fees, 12b-1 fees and other expenses. [TO BE UPDATED BY AMENDMENT] [The management fees for each Portfolio for the year ending December 31, 1997 as a percentage of average net assets were as follows: Kemper Money Market 0.50%; Kemper Total Return 0.55%; Kemper High Yield 0.60%; Kemper Growth 0.60%; Kemper Government Securities 0.55%; Kemper International 0.75%; Kemper Small Cap Growth 0.65%; Lord Abbett Growth and Income 0.75%; JanCap Growth 0.90%; T. Rowe Price Asset Allocation 0.85%; T. Rowe Price International Equity 1.00%; Founders Capital Appreciation 0.90%; INVESCO Equity Income 0.75%; PIMCO Total Return Bond 0.65%; 17 22 PIMCO Limited Maturity Bond 0.65%; Neuberger & Berman Mid-Cap Growth 0.90%; Fidelity VIP Equity-Income 0.50%; Fidelity VIP High Income 0.59%; Fidelity VIP II Contrafund 0.60%; Fidelity VIP II Index 500 0.24%; Fidelity VIP III Growth Opportunities 0.60%; Scudder VLIF International (B-Shares) 0.83%; and Scudder VLIF Growth and Income (B-Shares) 0.48%. The investment manager of the JanCap Growth Portfolio has voluntarily agreed to waive a portion of its management fee equal to 0.05% of the average daily net assets of the Portfolio in excess of $1 billion. With this fee waiver the management fee is 0.88%. The other expenses for each Portfolio for the year ending December 31, 1997 as a percentage of average net assets were as follows: Kemper Money Market 0.05%; Kemper Total Return 0.05%; Kemper High Yield 0.05%; Kemper Growth 0.05%; Kemper Government Securities 0.09%; Kemper International 0.16%; Kemper Small Cap Growth 0.06%; Lord Abbett Growth and Income 0.18%; JanCap Growth 0.18%; T. Rowe Price Asset Allocation 0.28%; T. Rowe Price International Equity 0.26%; Founders Capital Appreciation 0.23%; INVESCO Equity Income 0.20%; PIMCO Total Return Bond 0.21%; PIMCO Limited Maturity Bond 0.23%; Neuberger & Berman Mid-Cap Growth 0.24%; Fidelity VIP Equity-Income 0.08%; Fidelity VIP High Income 0.12%; Fidelity VIP II Contrafund 0.11%; Fidelity VIP II Index 500 0.04%; Fidelity VIP III Growth Opportunities 0.14%; Scudder VLIF International (B-Shares) 0.16%; and Scudder VLIF Growth and Income (B-Shares) 0.07%. In addition, the Scudder VLIF International Portfolio and Scudder VLIF Growth and Income Portfolio each also have a 12b-1 fee of 0.25%. The investment manager for the American Skandia Trust has agreed to reimburse each Portfolio to the extent expenses exceed specified percentage limits. For additional information about the fees and expenses of the Funds, see "The Funds", page 5, and the prospectuses for the Funds.] The Fund(s) may pay 12b-1 fees to us or our affiliates for support services relating to Fund shares. We may receive compensation from the investment advisers for services related to the Funds. This compensation will be consistent with the services rendered or the cost savings resulting from the arrangement. For more information concerning investment advisory fees and other charges against the portfolios, see the Funds' prospectuses and Statements of Additional Information available upon request. SYSTEMATIC WITHDRAWAL PLAN. A charge of $50 is imposed to enter into a Systematic Withdrawal Plan. In addition, a $25 charge is imposed each time a change is made to the plan. These charges reimburse us for administrative expenses of this plan. (See "Systematic Withdrawal Plan.") REDUCTION OF CHARGES. We 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 our 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 unfairly discriminate against any person, including the affected Policy owners and owners of all other policies funded by the Separate Account. GENERAL PROVISIONS SETTLEMENT OPTIONS The Policy owner, or Beneficiary at the death of the Insured if no election by the owner is in effect, may elect to have the Death Benefit or Surrender Value paid in a lump sum or have the amount applied to one of the Settlement Options. Payments under these options will not be affected by the investment experience of the Separate Account after proceeds are applied under a Settlement Option. The payee elects monthly, quarterly, semi-annual or annual payments. The option selected must result in a payment that at least equals our required minimum in effect when the option is chosen. If at any time the payments are less than the minimum, we may increase the period between payments to quarterly, semi-annual or annual or make the payment in one lump sum. Benefit payments are based on Surrender Value calculated on the day preceding the date the first benefit payment is due. The payment will be based on the Settlement Option elected in accordance with the appropriate settlement option table. OPTION 1--INCOME FOR SPECIFIED PERIOD. We pay income for the period and payment mode elected. The period elected must at least 5 years, but not more than 30 years. OPTION 2--LIFE INCOME. We pay 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 payee 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. 18 23 OPTION 3--LIFE INCOME WITH INSTALLMENTS GUARANTEED. We pay monthly income for the guaranteed period elected and thereafter for the remaining lifetime of the payee. The available guaranteed periods are 5, 10, 15 or 20 years. OPTION 4--JOINT AND SURVIVOR ANNUITY. We pay the full monthly income while both payees are living. Upon the death of either payee, the income continues during the lifetime of the surviving payee. The surviving payee's income is based on the percentage designated (50%, 66 2/3%, 75% or 100%) at the time this option is elected. Payments terminate automatically and immediately upon the death of the surviving payee without regard to the number or total amount of payments received. Our consent is necessary for any other payment methods. The guaranteed monthly payments are based on an interest rate of 2.50% per year and, where mortality is involved, the "1983 Table a" individual mortality table developed by the Society of Actuaries, with a 5 year setback. 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 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 us by check or draft may be postponed until such time as we determine 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 us and the Policy 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 Death Benefit will be adjusted to reflect the correct sex and age. INCONTESTABILITY We may contest the validity of a Policy if any material misrepresentations are made in the application. However, a Policy will be incontestable after it has been in force during the lifetime of the Insured for two years from the Issue Date. A new two year contestability period will apply to increases in insurance and to reinstatements, beginning with the effective date of the increase or reinstatement. SUICIDE Suicide by the Insured, while sane or insane, within two years from the Issue Date (or within two years following an increase in Specified Amount) is a risk not assumed under the Policy. Our liability for such suicide is limited to the premiums paid less any withdrawals and Debt. When the laws of the state in which a Policy is delivered require less than a two year period, the period or amount paid will be as stated in such laws. 19 24 ASSIGNMENT No Policy assignment is binding on us until we receive it. We assume no responsibility for the validity of the assignment. Any claim under an assignment is subject to proof of the extent of the assignee's interest. If the Policy is assigned, the rights of the Policy owner and Beneficiary are subject to the rights of the assignee of record. NONPARTICIPATING The Policy does not pay dividends. It does not participate in any of KILICO's surplus or earnings. OWNER AND BENEFICIARY The Policy owner may designate a new owner while the Insured is alive. The Policy owner designates primary and secondary Beneficiaries in the application. KILICO relies upon the latest filed change of beneficiary. If the Insured dies, and no designated Beneficiary is alive at that time, we will pay the Insured's estate. The interest of any Beneficiary may be subject to that of an assignee. In order to change the Policy owner or a designated Beneficiary, the owner must sign our form. The change is effective when the owner signs the form, but we are not liable for payments made or actions taken before we receive the signed form. RECORDS AND REPORTS We keep the Separate Account records. We send Policy owners, at their last known address of record, an annual report showing: - Death Benefit - partial withdrawals - Accumulation Unit Value - transfers - Cash Value - Policy loans and repayments - Surrender Value - Policy charges - additional premium payments
Confirmations and acknowledgments of various transactions are also sent to Policy owners. We also send annual and semi-annual Fund reports. WRITTEN NOTICES AND REQUESTS Send written notices or requests to our home office at 1 Kemper Drive, Long Grove, Illinois 60049. Please include the Policy number and the Insured's full name. We send notices to a Policy owner's address shown in the application unless an address change is filed with us. OPTIONAL INSURANCE BENEFITS The following optional insurance benefits are available by Rider at the time of application: - waiver of monthly deductions due to Insured's total disability - term insurance on the Insured's dependent children - acceleration of a portion of the death benefit due to Insured's terminal illness - term insurance on additional insureds The cost of these benefits is added to the monthly deduction. These benefits and restrictions are described in the Rider. We provide samples of these provisions upon written request. 20 25 DOLLAR COST AVERAGING Under our Dollar Cost Averaging program, Cash Value in the Fixed Account, the Kemper Money Market Subaccount or the Kemper Government Securities Subaccount ("DCA Subaccount") is automatically transferred monthly to other Subaccounts and the Fixed Account. A Policy owner may enroll any time by completing our Dollar Cost Averaging form. Transfers are made on the 10th day of the month. We must receive the enrollment form at least 5 business days before the transfer date. Transfers commence on the first transfer date following the Trade Date. The minimum transfer amount is $500 per Subaccount or Fixed Account. In order to enroll, Cash Value in the DCA Subaccount must be at least $10,000. Dollar Cost Averaging automatically ends if Cash Value in the DCA Subaccount is less than the amount designated to be transferred. Cash Value remaining in the DCA Subaccount will be transferred. Dollar Cost Averaging ends if: - the number of designated monthly transfers has been completed - Cash Value attributable to the DCA Subaccount is insufficient to complete the next transfer - we receive the Policy owner's written termination at least 5 business days before the next transfer date - the Policy is surrendered. We will give 30 days notice if we amend the Dollar Cost Averaging program. We may terminate the program at any time. A Policy owner may change Dollar Cost Averaging instructions by completing our enrollment form. We must receive the enrollment form at least 5 business days (10 business days for Fixed Account transfers), before the next transfer date. To participate in Dollar Cost Averaging, a Policy owner may have Cash Value in the Fixed Account and no more than 8 non-DCA Subaccounts. SYSTEMATIC WITHDRAWAL PLAN We offer a Systematic Withdrawal Plan ("SWP") allowing Policy owners to preauthorize periodic withdrawals after the first Policy Year. Policy owners instruct us to withdraw selected amounts from the Fixed Account, or up to 2 Subaccounts, on a monthly, quarterly, semi-annual or annual basis. The Policy owner's periodic payment must be at least $500. These periodic payments are partial withdrawals and are subject to surrender charges. (See "Policy Benefits and Rights--Surrender Privileges," page 14.) The $25 withdrawal charge does not apply. However, we charge $50 to establish an SWP and a $25 charge each time a change is made. These charges reimburse us for SWP administrative expenses. Periodic payments may be subject to income taxes, withholding and tax penalties. (See "Federal Tax Matters.") An SWP application and additional information may be obtained from the Policy owner's representative or us. We will give 30 days notice if we amend the SWP. The SWP may be terminated at any time by the Policy owner or us. DISTRIBUTION OF POLICIES The Policy is sold by licensed insurance representatives who represent us and who are registered representatives of broker-dealers that 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"), our affiliate. IBS is engaged in the sale and distribution of other variable life policies and annuities. The maximum sales commission payable to registered representatives is approximately 63% of premiums up to the commission target premium and 2.5% of excess premium in the first year and 2.5% of total premium in renewal years two through ten. Beginning in the second Policy Year, a service fee on assets which have been maintained and serviced may also be paid. In addition, certain overrides and production and managerial bonuses may be paid. These additional amounts may constitute a substantial portion of total commissions and fees paid. Firms to which service fees and commissions may be paid include affiliated broker-dealers. In addition to the commissions described above, we may pay additional promotional incentives, in the form of cash or other compensation, to licensed broker-dealers that sell the Policy. These incentives may be offered to certain broker-dealers that sell or are expected to sell certain minimums during specified periods. 21 26 FEDERAL TAX MATTERS INTRODUCTION This discussion of the federal income tax treatment of the Policy is not exhaustive, does not purport to cover all situations, and is not intended as tax advice. The federal income tax treatment of the Policy is unclear in certain circumstances, and a qualified tax adviser should always be consulted with regard to the application of law to individual circumstances. This discussion is based on the Internal Revenue Code of 1986, as amended ("Code"), Treasury Department regulations, and interpretations existing on the date of this Prospectus. These authorities, however, are subject to change by Congress, the Treasury Department, and judicial decisions. This discussion does not address state or local tax consequences associated with owning the Policy. IN ADDITION, WE MAKE NO GUARANTEE REGARDING ANY TAX TREATMENT -- FEDERAL, STATE OR LOCAL -- OF ANY POLICY OR OF ANY TRANSACTION INVOLVING A POLICY. OUR TAX STATUS We are taxed as a life insurance company and the operations of the Separate Account are treated as part of our total operations. The operations of the Separate Account do not materially affect our federal income tax liability because we are allowed a deduction to the extent that net investment income of the Separate Account is applied to increase Cash Value. We may incur state and local taxes attributable to the Separate Account. At present, these taxes are not significant. Accordingly, we do not charge or credit the Separate Account for federal, state or local taxes. However, our federal income taxes are increased because of the federal tax law's treatment of deferred acquisition costs. Accordingly, we charge 1% of each premium payment to compensate us for our higher corporate income tax liability. If there is a material change in law, charges or credits may be made to the Separate Account for taxes or reserves for taxes. These charges or credits are determined independently of the taxes we actually pay. TAXATION OF LIFE INSURANCE POLICIES TAX STATUS OF THE POLICY. The Code establishes a definition of life insurance which, in part, places limitations on the amount of premiums that may be paid and the Cash Value that can accumulate relative to the Death Benefit. We believe the Policy meets this definition. We reserve the right to refund premiums, increase the Death Benefit (which may result in higher Policy charges), or take any other action we deem necessary to ensure the Policy's compliance with the tax definition of life insurance. The Death Benefit is generally excludable from the Beneficiary's gross income. Interest and other income credited are not taxable unless certain withdrawals are made (or are deemed to be made) from the Policy prior to the Insured's death, as discussed below. This tax treatment will only apply, however, if (1) the investments of the Separate Account are "adequately diversified", and (2) we, rather than the Policy owner, are considered the owner of the assets of the Separate Account. DIVERSIFICATION REQUIREMENTS. The Code prescribes the manner in which the Separate Account must be "adequately diversified." If the Separate Account fails to comply with these diversification standards, the Policy will not be treated as a life insurance contract, and the Policy owner is taxable on the income on the contract (as defined in the tax law). We expect that the Separate Account, through the Funds, will comply with the prescribed diversification requirements. OWNERSHIP TREATMENT. In certain circumstances, variable life insurance contract owners may be considered the owners of the assets of the Separate Account. Income and gains from the Separate Account would then be includible in the Policy owners' gross income. The IRS has stated that a variable contract owner will be considered the owner of the assets of a separate account if the owner possesses the ability to exercise investment control. As of the date of this Prospectus, no investor control guidance is available. We reserve the right to modify the Policy as necessary to attempt to prevent Policy owners from being considered the owners of the assets of the Separate Account. However, there is no assurance that such efforts would be successful. The following discussion assumes that the Policy will be treated as a life insurance contract for tax purposes. TAX TREATMENT OF LIFE INSURANCE DEATH BENEFIT PROCEEDS. In general, the Death Benefit is excludable from gross income under the Code. Certain transfers of the Policy, however, may result in a portion of the Death Benefit being taxable. If the Death Benefit is paid under a Settlement Option, generally payments will be prorated between the non-taxable Death Benefit and taxable interest. 22 27 TAX DEFERRAL DURING ACCUMULATION PERIOD. Any increase in Cash Value is generally not taxable to the Policy owner unless amounts are received (or are deemed to be received) from the Policy before the Insured's death. If the Policy is surrendered, the excess of Cash Value over the "investment in the contract" is includible in the owner's ordinary income. The "investment in the contract" generally is premium payments minus non-taxable distributions. Distributions may be taxable to the owner if the Policy is considered a "modified endowment contract" ("MEC"). POLICIES WHICH ARE NOT MECS TAX TREATMENT OF WITHDRAWALS GENERALLY. If the Policy is not a MEC, the amount of any withdrawal generally will be treated first as a non-taxable recovery of premiums and then as taxable income. Thus, a withdrawal from a non-MEC Policy generally is not taxable income unless the total withdrawals exceed the investment in the contract. DISTRIBUTIONS REQUIRED IN THE FIRST 15 POLICY YEARS. The Code limits the amount of premium that may be paid and Cash Value that can accumulate relative to the Death Benefit. Where cash distributions are required in connection with a reduction in benefits during the first 15 years after the Policy is issued (or if withdrawals are made in anticipation of a reduction in benefits during this period), some or all of such amounts may be taxable. A reduction in benefits may result from a decrease in Specified Amount, a change from an Option B Death Benefit to an Option A Death Benefit, if withdrawals are made, and in certain other instances. TAX TREATMENT OF LOANS. If a Policy is not a MEC, a loan generally is treated as indebtedness of the Policy owner. As a result, the loan is not taxable income to the owner if the Policy remains in force. However, when the interest rate credited to the Loan Account is the same as the interest rate charged for the loan, some or all of the loan proceeds may be includible in income. If a Policy lapses when a loan is outstanding, the amount of the loan outstanding will be treated as a surrender in determining whether any amounts are includible in the Policy owner's income. Interest on an individual's Policy loans and interest on any loans of a Policy owner that is a business entity are subject to possible disallowance under complex rules. Consult a tax adviser on these issues. POLICIES WHICH ARE MECS CHARACTERIZATION OF A POLICY AS A MEC. A Policy is a MEC if (1) the Policy is received in exchange for a life insurance contract that was a MEC, or (2) the Policy is issued after June 21, 1988 and premiums are paid more rapidly than permitted under the "7-Pay Test." A Policy fails this test (and thus is a MEC) if the accumulated amount paid during the 1st 7 Policy Years exceeds the cumulative sum of the net level premiums which would have been paid to that time if the Policy provided for paid-up future benefits after the payment of 7 level annual premiums. Under the Code, a material change of the Policy generally results in a reapplication of the 7-Pay Test. In addition, any reduction in benefits during the 7-Pay period will affect the application of this test. We monitor the Policies and attempt to notify Policy owners on a timely basis if a Policy is in jeopardy of becoming a MEC. The owner may then request that we take available steps to avoid treating the Policy as a MEC. TAX TREATMENT OF WITHDRAWALS, LOANS, ASSIGNMENTS AND PLEDGES UNDER MECS. If the Policy is a MEC, withdrawals are treated first as withdrawals of income and then as a recovery of premiums. Thus, withdrawals are includible in income if Cash Value exceeds the investment in the contract. A Policy loan is treated as a withdrawal for tax purposes. If the Policy owner assigns or pledges Cash Value under a MEC (or agrees to assign or pledge any portion), such portion is a withdrawal for tax purposes. The investment in the contract is increased by the amount includible in income with respect to any assignment, pledge, or loan, though it is not affected by any other aspect of the assignment, pledge, or loan (including its release or repayment). Before assigning, pledging, or requesting a loan under a MEC, a Policy owner should consult a qualified tax adviser. PENALTY TAX. Generally, proceeds of a surrender or a withdrawal (or the amount of any deemed withdrawal) from a MEC are subject to a penalty tax of 10% of the portion of the proceeds that is includible in income, unless the surrender or withdrawal is made (1) after the owner attains age 59 1/2, (2) because the owner has become disabled (as defined in the Code), or (3) as substantially equal periodic payments over the life or life expectancy of the owner (or the joint lives or life expectancies of the owner and his or her beneficiary). AGGREGATION OF POLICIES. All life insurance contracts which are treated as MECs and which are purchased by the same person from us or our affiliates within the same calendar year are aggregated and treated as one contract in determining the tax on withdrawals (including deemed withdrawals). The effects of aggregation are not clear; 23 28 however, it could affect the taxable amount of a withdrawal (or a deemed withdrawal) and could subject the withdrawal to the 10% penalty tax. OTHER CONSIDERATIONS. Changing the Policy owner, exchanging the Policy, changing from one Death Benefit option to another, and other Policy changes may have tax consequences depending on the circumstances of the change. Federal estate and state and local estate taxes, or inheritance taxes and other tax consequences of ownership or receipt of Policy proceeds depend on the circumstances of each Policy owner or Beneficiary. FEDERAL INCOME TAX WITHHOLDING We withhold and send to the federal government a part of the taxable portion of withdrawals unless the Policy owner notifies us in writing at the time of withdrawal that he or she elects no withholding. The Policy owner is always responsible for the payment of any taxes and early distribution penalties that may be due on the amounts received. The Policy owner may also be required to pay penalties under the estimated tax rules, if the owner's withholding and estimated tax payments are insufficient to satisfy the owner's total tax liability. 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 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 the Policy. SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS We hold the assets of the Separate Account. We keep these assets segregated and apart from our general funds. We maintain records of all purchases and redemptions of the shares of each portfolio of the Funds by each of the Subaccounts. VOTING INTERESTS We vote a 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. Owners of all Policies participating in each Subaccount are entitled to give us instructions with respect to that Subaccount. An owner's proportionate interest in that Subaccount is measured by units. We determine the number of shares for which a Policy owner may give voting instructions as of the record date for the meeting. Owners will receive proxy material, reports, and other materials relating to the appropriate portfolio of the Funds. We vote all Fund shares held in the Separate Account proportionately based on Policy owners' instructions. If changes in law permit, we may vote a Fund's shares in our own right. We 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, we may disregard voting instructions in favor of changes initiated by a Policy owner in the investment policy or the investment adviser of a portfolio of a Fund if we reasonably disapprove 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 we determine that the change would have an adverse effect on our General Account in that the proposed investment policy for a portfolio may result in overly speculative or unsound investments. In the event we disregard voting instructions, we will include a summary of that action and the reasons for it in the next annual report to Policy owners. 24 29 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. We file an annual statement with the Director of Insurance on or before March 1st of each year covering our operations and reporting on our financial condition 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. The National Association of Insurance Commissioners conducts a full examination of our operations at least once every three years. In addition, we are subject to the insurance laws and regulations of the other states where we operate. Generally, the insurance departments of other states apply the laws of Illinois in determining our permissible investments. 25 30 KILICO'S DIRECTORS AND OFFICERS [TO BE UPDATED BY AMENDMENT] Our directors and principal officers 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 (53) 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 1992. President and Director of Zurich Life Insurance Company of 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 (Kemper) 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 (50) Executive Vice President of FKLA and FLA since 1995. Executive Vice President since 1995. Executive Vice President of ZLICA and ZD since March 1996. Director of FLA since December 1997. Director of ZD from March 1996 to March 1997. 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 (46) 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 and Chief Financial Officer of ZD since March 1996. Director of ZD from March 1996 to March 1997. Treasurer and Chief Financial Officer of Kemper since January 1996. Chief Financial Officer of Alexander Hamilton Life Insurance Company from April 1989 to November 1995. James C. Harkensee (39) Senior Vice President of FKLA and FLA since January 1996. Senior Vice President since January Senior Vice President of ZLICA since 1995. Senior Vice 1996. President of ZD since 1995. Director of ZD from April 1993 to March 1997. 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 (42) 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 and Chief Actuary of ZD since March 1996. Director of FLA since June 1997. Director of ZD from March 1996 to March 1997. 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 (43) Senior Vice President and Corporate Development Officer of Senior Vice President and Corporate FKLA and FLA since January 1996. Senior Vice President and Development Officer since January Corporate Development Officer for ZLICA and ZD since March 1996. 1996. Senior Vice President of Human Resources of Zurich-American Insurance Group from February 1992 to March 1996.
26 31
NAME AND AGE POSITION WITH KILICO YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE -------------------- ----------------------------------------------------- Phillip D. Meserve (47) Senior Vice President of FKLA, FLA, ZLICA and ZD since March Senior Vice President since March 1997. Director of IBSIA and IBS since March and May, 1997, 1997 respectively. Managing Director of Equitable Distributors from May 1996 to March 1997. Senior Vice President of Banker's Trust from April 1995 to April 1996. Senior Vice President of Fidelity Investments Insurance Services from February 1992 to March 1995. Debra P. Rezabek (42) 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. Corporate President of KILICO, FKLA and FLA since 1995. General Secretary since January 1996. Counsel and Director of Government Affairs of FKLA and FLA 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 and Corporate Secretary of ZD since March 1996. Director of ZD from March 1996 to March 1997. 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 Kemper since January 1996. Kenneth M. Sapp (52) Senior Vice President of FKLA, FLA and ZLICA since January Senior Vice President since January 1998. Vice President -- Aetna Life Brokerage of Aetna Life & 1998. Annuity Company from February 1992 to January 1998. George Vlaisavljevich (55) Senior Vice President of FKLA, FLA and ZLICA since October Senior Vice President since October 1996. Senior Vice President of ZD since March 1997. Director 1996. of IBS and IBSIA since October 1996. Executive Vice President of The Copeland Companies from April 1983 to September 1996. Loren J. Alter (59) Director of FKLA, FLA and Scudder Kemper Investments, Inc. Director since January 1996. (SKI) 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 Kemper since January 1996. William H. Bolinder (54) 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 and Director of Kemper since January 1996. Vice Chairman and Director of SKI 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. David A. Bowers (51) Director of FKLA and ZLICA since May 1997. Director of FLA Director since May 1997. since June 1997. Executive Vice President, Corporate Secretary and General Counsel of Zurich-American Insurance Group since August 1985. Vice President, General Council and Secretary of Kemper since January 1996. Markus Rohrbasser (43) 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.
27 32 LEGAL MATTERS All matters of Illinois law pertaining to the Policy, including the validity of the Policy and our right to issue the Policy under Illinois Insurance Law, have been passed upon by Frank J. Julian, our Associate General Counsel. Jorden Burt Boros Cicchetti Berenson & Johnson, Washington, D.C., has advised us 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. We are not a party in any litigation that is of material importance in relation to our total assets or that relates to the Separate Account. YEAR 2000 COMPLIANCE [TO BE UPDATED BY AMENDMENT] Many existing computer programs were originally designed without considering the impact of the year 2000 and currently use only two digits to identify the year in the date field. This issue affects nearly all companies and organizations and could cause computer applications and systems to fail or create erroneous results to occur for any transaction with a date of January 1, 2000, or later. Many companies must undertake major projects to address the year 2000 issue. Each company's costs and uncertainties will depend on a number of factors, including its software and hardware, and the nature of the industry. Companies must also coordinate with other entities with which they electronically interact, including suppliers, customers, creditors and other financial services institutions. If a company does not successfully address its year 2000 issues it could face material adverse consequences in the form of lawsuits against the company, lost business, erroneous results and substantial operating problems after January 1, 2000. We have taken substantial steps over the last several years to ensure that our systems will be compliant for the year 2000. These steps include the replacement of older systems with new compliant systems. In 1996, we replaced our investment accounting system. In 1997 we replaced our general ledger and accounts payable system. We have also ensured that new systems developed to support new product introductions in 1996 and 1997 are already year 2000 compliant. Data processing expenses related solely to bringing our systems in compliance with the year 2000 amounted to $88 thousand in 1997 and we anticipate that it will cost an additional $895 thousand to bring all remaining systems into compliance. We have also taken steps which require that all other entities with which we electronically interact, including suppliers and other financial services institutions, attest to us in writing that their systems are year 2000 compliant. EXPERTS [TO BE UPDATED BY AMENDMENT] The consolidated balance sheet of KILICO as of December 31, 1997 and the related consolidated statements of operations, stockholder's equity, and cash flows for the year ended December 31, 1997 have been included herein and in the registration statement in reliance upon the report of PricewaterhouseCoopers LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The consolidated balance sheet of KILICO as of December 31, 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 the year ended December 31, 1995 have been included herein and in the registration statement in reliance upon the report of KPMG 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 LLP covering KILICO's financial statements referred to above contains an explanatory paragraph that states as a result of the acquisition of its parent, Kemper Corporation, the consolidated financial information for the period after the acquisition is presented on a different cost basis than that for the period before the acquisition and, therefore, is not comparable. The statements of assets and liabilities and policy owners' equity of the Separate Account as of December 31, 1997 and the related statements of operations for the year then ended and the statements of changes in policy owners' equity for the year then ended has been included herein in reliance upon the report of 28 33 PricewaterhouseCoopers LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The statement of changes in policy owners' equity of the Separate Account for the year ended December 31, 1996 has been included herein in reliance upon the report of KPMG LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. Actuarial matters included in this prospectus have been examined by Christopher J. Nickele, 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 upon payment of a fee. FINANCIAL STATEMENTS [TO BE UPDATED BY AMENDMENT] The financial statements of the Separate Account relate to other life insurance policies in addition to those offered by this Prospectus. Our included financial statements should be considered only as bearing upon our ability to meet our contractual obligations under the Policy. The investment experience of the Separate Account does not affect our financial statements. CHANGE OF ACCOUNTANTS [TO BE UPDATED BY AMENDMENT] On September 12, 1997, Kemper Investors Life Insurance Company ("KILICO") appointed the accounting firm of PricewaterhouseCoopers LLP as independent accountants for the year ended December 31, 1997 to replace KPMG LLP effective with such appointment. KILICO's Board of Directors approved the selection of PricewaterhouseCoopers LLP as the new independent accountants. Management had not consulted with PricewaterhouseCoopers LLP on any accounting, auditing or reporting matter, prior to that time. During the two most recent fiscal years ended December 31, 1996, there have been no disagreements with KPMG LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure or any reportable events. KPMG LLP's report on the financial statements for the past two years contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. There were no disagreements with PricewaterhouseCoopers LLP on accounting or financial disclosures for the year ended December 31, 1997. 29 34 [TO BE UPDATED BY AMENDMENT] REPORT OF INDEPENDENT ACCOUNTANTS THE BOARD OF DIRECTORS OF KEMPER INVESTORS LIFE INSURANCE COMPANY AND POLICY OWNERS OF KILICO VARIABLE SEPARATE ACCOUNT: We have audited the accompanying statements of assets and liabilities and policy owners' equity of the Kemper Money Market Subaccount, Kemper Total Return Subaccount, Kemper High Yield Subaccount, Kemper Growth Subaccount, Kemper Government Securities Subaccount, Kemper International Subaccount and Kemper SmallCap Growth Subaccount (investment options within the Investors Fund Series), Founders Capital Appreciation Subaccount, Neuberger & Berman Mid-Cap Growth Subaccount, Jancap Growth Subaccount, Lord Abbett Growth & Income Subaccount, T. Rowe Price International Equity Subaccount, T. Rowe Price Asset Allocation Subaccount, PIMCO Limited Maturity Bond Subaccount, PIMCO Total Return Subaccount and INVESCO Equity Income Subaccount (investment options within the American Skandia Trust), of KILICO Variable Separate Account as of December 31, 1997 and the related statements of operations and the statements of changes in policy owners' equity for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The statement of changes in policy owners' equity for the year ended December 31, 1996 was audited by other auditors, whose report, dated March 26, 1997, expressed an unqualified opinion on that statement. We conducted our audit 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, 1997 by correspondence with transfer agents. 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 audit provides a reasonable basis for our opinion. In our opinion, the December 31, 1997 financial statements referred to above present fairly, in all material respects, the financial position of the subaccounts of KILICO Variable Separate Account at December 31, 1997 and the results of their operations and changes in their policy owners' equity for the year then ended, in conformity with generally accepted accounting principles. PricewaterhouseCoopers LLP Chicago, Illinois February 20, 1998 30 35 INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS KEMPER INVESTORS LIFE INSURANCE COMPANY: We have audited the accompanying statement of changes in policy owners' equity of the Kemper Money Market Subaccount, Kemper Total Return Subaccount, Kemper High Yield Subaccount, Kemper Growth Subaccount, Kemper Government Securities Subaccount, Kemper International Subaccount, Kemper SmallCap Growth Subaccount (investment options within the Investors Fund Series), Founders Capital Appreciation Subaccount, Neuberger & Berman Mid-Cap Growth Subaccount, Jancap Growth Subaccount, Lord Abbett Growth & Income Subaccount, T. Rowe Price International Equity Subaccount, T. Rowe Price Asset Allocation Subaccount, PIMCO Limited Maturity Bond Subaccount, PIMCO Total Return Subaccount, and INVESCO Equity Income Subaccount (investment options within the American Skandia Trust), of KILICO Variable Separate Account (the Account) for the year ended December 31, 1996. This financial statement is the responsibility of the Account's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit 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 statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statement referred to above presents fairly, in all material respects, the changes in policy owners' equity of the subaccounts of KILICO Variable Separate Account for the year ended December 31, 1996 in conformity with generally accepted accounting principles. KPMG LLP Chicago, Illinois March 26, 1997 31 36 KILICO VARIABLE SEPARATE ACCOUNT STATEMENTS OF ASSETS AND LIABILITIES AND POLICY OWNERS' EQUITY DECEMBER 31, 1997 (IN THOUSANDS)
INVESTORS FUND SERIES --------------------------------------------------------------------------------------------- KEMPER KEMPER KEMPER MONEY KEMPER KEMPER KEMPER GOVERNMENT KEMPER SMALLCAP MARKET TOTAL RETURN HIGH YIELD GROWTH SECURITIES INTERNATIONAL GROWTH SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ---------- ------------ ---------- ---------- ---------- ------------- ---------- ASSETS Investments in underlying portfolio funds, at current value......................... $885 2,890 1,934 2,758 4,709 48 224 Dividends and other receivables................... 101 148 1 -- -- -- 1 ---- ----- ----- ----- ----- --- --- Total assets.............. 986 3,038 1,935 2,758 4,709 48 225 LIABILITIES AND POLICY OWNERS' EQUITY Liabilities: Mortality and expense risk charges..................... 1 2 1 2 3 -- -- Other......................... 19 -- -- 15 9 -- 1 ---- ----- ----- ----- ----- --- --- Total liabilities......... 20 2 1 17 12 -- 1 ---- ----- ----- ----- ----- --- --- Policy owners' equity........... $966 3,036 1,934 2,741 4,697 48 224 ==== ===== ===== ===== ===== === === ANALYSIS OF POLICY OWNERS' EQUITY Excess of proceeds from units sold over payments for units redeemed...................... 414 726 939 993 2,445 49 204 Accumulated net investment income (loss)................. 552 1,209 832 975 1,635 -- 2 Accumulated net realized gain on sales of investments.......... -- 883 108 607 294 -- -- Unrealized appreciation (depreciation) of investments................... -- 218 55 166 323 (1) 18 ---- ----- ----- ----- ----- --- --- Policy owners' equity........... $966 3,036 1,934 2,741 4,697 48 224 ==== ===== ===== ===== ===== === ===
See accompanying notes to financial statements. 32 37
AMERICAN SKANDIA TRUST ------------------------------------------------------------------------------------------------------------ FOUNDERS NEUBERGER & BERMAN LORD ABBETT T. ROWE PRICE T. ROWE PRICE PIMCO LIMITED CAPITAL MID-CAP JANCAP GROWTH & INTERNATIONAL ASSET MATURITY APPRECIATION GROWTH GROWTH INCOME EQUITY ALLOCATION BOND SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------ ------------------ ---------- ----------- ------------- ------------- ------------- 135 201 527 112 96 58 8 -- -- -- -- -- -- -- --- --- --- --- --- -- -- 135 201 527 112 96 58 8 -- -- -- -- -- -- -- -- -- -- -- -- -- -- --- --- --- --- --- -- -- -- -- -- -- -- -- -- --- --- --- --- --- -- -- 135 201 527 112 96 58 8 === === === === === == == 131 197 507 109 100 56 8 -- (1) -- -- (1) -- -- -- -- -- -- -- -- -- 4 5 20 3 (3) 2 -- --- --- --- --- --- -- -- 135 201 527 112 96 58 8 === === === === === == == AMERICAN SKANDIA TRUST --------------------------- PIMCO TOTAL INVESCO RETURN EQUITY INCOME SUBACCOUNT SUBACCOUNT ----------- ------------- 17 72 -- -- -- -- 17 72 -- -- -- -- -- -- -- -- -- -- 17 72 == == 17 70 -- -- -- -- -- 2 -- -- 17 72 == ==
33 38 KILICO VARIABLE SEPARATE ACCOUNT STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
INVESTORS FUND SERIES --------------------------------------------------------------------------------------------- KEMPER KEMPER KEMPER MONEY KEMPER KEMPER KEMPER GOVERNMENT KEMPER SMALLCAP MARKET TOTAL RETURN HIGH YIELD GROWTH SECURITIES INTERNATIONAL GROWTH SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ---------- ------------ ---------- ---------- ---------- ------------- ---------- Dividends and capital gains distributions................... $66 414 101 522 325 -- 2 Mortality and expense risk charges......................... 32 24 14 26 42 -- -- --- ---- --- ---- ---- -- -- Net investment income (loss).... 34 390 87 496 283 -- 2 --- ---- --- ---- ---- -- -- Net realized and unrealized gain (loss) on investments: Net realized gain (loss) on sales of investments.......... -- 426 96 (10) 19 -- -- Change in unrealized appreciation (depreciation) of investments................... -- (281) (27) (21) 17 (1) 18 --- ---- --- ---- ---- -- -- Net realized and unrealized gain (loss) on investments........... -- 145 69 (31) 36 (1) 18 --- ---- --- ---- ---- -- -- Net increase (decrease) in policy owners' equity resulting from operations...................... $34 535 156 465 319 (1) 20 === ==== === ==== ==== == ==
See accompanying notes to financial statements. 34 39
AMERICAN SKANDIA TRUST ------------------------------------------------------------------------------------------------------------ FOUNDERS NEUBERGER & BERMAN LORD ABBETT T. ROWE PRICE T. ROWE PRICE PIMCO LIMITED CAPITAL MID-CAP JANCAP GROWTH & INTERNATIONAL ASSET MATURITY APPRECIATION GROWTH GROWTH INCOME EQUITY ALLOCATION BOND SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------ ------------------ ---------- ----------- ------------- ------------- ------------- -- -- -- -- -- -- -- -- 1 -- -- 1 -- -- -- -- -- -- -- -- -- -- (1) -- -- (1) -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- 4 5 20 3 (3) 2 -- -- -- -- -- -- -- -- 4 5 20 3 (3) 2 -- -- -- -- -- -- -- -- 4 4 20 3 (4) 2 -- == == == == == == == AMERICAN SKANDIA TRUST ---------------------------- PIMCO TOTAL INVESCO EQUITY RETURN INCOME SUBACCOUNT SUBACCOUNT ----------- -------------- -- -- -- -- -- -- -- -- -- -- -- -- -- 2 -- -- -- 2 -- -- -- 2 == ==
35 40 KILICO VARIABLE SEPARATE ACCOUNT STATEMENTS OF CHANGES IN POLICY OWNERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (IN THOUSANDS)
INVESTORS FUND SERIES ----------------------------------------------------------------------------- KEMPER KEMPER KEMPER MONEY MARKET TOTAL RETURN HIGH YIELD SUBACCOUNT SUBACCOUNT SUBACCOUNT --------------------- ------------------- ------------------- 1997 1996 1997 1996 1997 1996 ---- ---- ---- ---- ---- ---- Operations: Net investment income................... $ 34 46 390 142 87 154 Net realized gain (loss) on sales of investments........................... -- -- 426 128 96 9 Change in unrealized appreciation (depreciation) of investments......... -- -- (281) 117 (27) 34 ------- ----- ----- ----- ----- ----- Net increase (decrease) in policy owners' equity resulting from operations.......................... 34 46 535 387 156 197 ------- ----- ----- ----- ----- ----- Account unit transactions: Proceeds from units sold................ 2,965 270 27 43 22 6 Net transfers (to) from affiliated divisions and subaccounts............. (1,059) 55 (400) 484 298 (567) Payments for units redeemed............. (2,011) (336) (217) (376) (50) (217) ------- ----- ----- ----- ----- ----- Net increase (decrease) in policy owners' equity from account unit transactions........................ (105) (11) (590) 151 270 (778) ------- ----- ----- ----- ----- ----- Total increase (decrease) in policy owners' equity.......................... (71) 35 (55) 538 426 (581) Policy owners' equity: Beginning of year....................... 1,037 1,002 3,091 2,553 1,508 2,089 ------- ----- ----- ----- ----- ----- End of year............................. $ 966 1,037 3,036 3,091 1,934 1,508 ======= ===== ===== ===== ===== =====
See accompanying notes to financial statements. 36 41
INVESTORS FUND SERIES - --------------------------------------------------------------- KEMPER KEMPER GOVERNMENT KEMPER KEMPER GROWTH SECURITIES INTERNATIONAL SMALLCAP GROWTH SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT - ------------- ------------- ------------- --------------- 1997 1996 1997 1996 1997 1996 1997 1996 - ---- ---- ---- ---- ---- ---- ---- ---- 496 261 283 251 -- -- 2 -- (10) 397 19 17 -- -- -- -- (21) (228) 17 (203) (1) -- 18 -- - ----- ----- ----- ----- -- -- --- -- 465 430 319 65 (1) -- 20 -- - ----- ----- ----- ----- -- -- --- -- 92 121 32 22 35 -- 137 2 (38) 65 492 (37) 19 -- 93 -- (138) (179) (131) (162) (5) -- (28) -- - ----- ----- ----- ----- -- -- --- -- (84) 7 393 (177) 49 -- 202 2 - ----- ----- ----- ----- -- -- --- -- 381 437 712 (112) 48 -- 222 2 2,360 1,923 3,985 4,097 -- -- 2 -- - ----- ----- ----- ----- -- -- --- -- 2,741 2,360 4,697 3,985 48 -- 224 2 ===== ===== ===== ===== == == === ==
\ 37 42 KILICO VARIABLE SEPARATE ACCOUNT STATEMENTS OF CHANGES IN POLICY OWNERS' EQUITY (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (IN THOUSANDS)
AMERICAN SKANDIA TRUST ------------------------------------------------------- NEUBERGER & FOUNDERS BERMAN LORD ABBETT CAPITAL MID-CAP JANCAP GROWTH & APPRECIATION GROWTH GROWTH INCOME SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------- ----------- ----------- ----------- 1997 1996 1997 1996 1997 1996 1997 1996 ---- ---- ---- ---- ---- ---- ---- ---- Operations: Net investment loss................................ $ -- -- (1) -- -- -- -- -- Net realized gain on sales of investments.......... -- -- -- -- -- -- -- -- Change in unrealized appreciation (depreciation) of investments...................................... 4 -- 5 -- 20 -- 3 -- ---- --- --- -- --- -- --- -- Net increase (decrease) in policy owners' equity resulting from operations...................... 4 -- 4 -- 20 -- 3 -- ---- --- --- -- --- -- --- -- Account unit transactions: Proceeds from units sold........................... 89 -- 124 2 330 4 58 2 Net transfers from affiliated divisions and subaccounts...................................... 63 -- 99 -- 242 -- 61 -- Payments for units redeemed........................ (21) -- (28) -- (69) -- (12) -- ---- --- --- -- --- -- --- -- Net increase in policy owners' equity from account unit transactions...................... 131 -- 195 2 503 4 107 2 ---- --- --- -- --- -- --- -- Total increase in policy owners' equity.............. 135 -- 199 2 523 4 110 2 Policy owners' equity: Beginning of year.................................. -- -- 2 -- 4 -- 2 -- ---- --- --- -- --- -- --- -- End of year........................................ $135 -- 201 2 527 4 112 2 ==== === === == === == === ==
See accompanying notes to financial statements. 38 43
AMERICAN SKANDIA TRUST ------------------------------------------------------------------------- T. ROWE PRICE T. ROWE PRICE PIMCO LIMITED INVESCO INTERNATIONAL ASSET MATURITY PIMCO TOTAL EQUITY EQUITY ALLOCATION BOND RETURN INCOME SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------- ------------- ------------- ----------- ----------- 1997 1996 1997 1996 1997 1996 1997 1996 1997 1996 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- (1) -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- (3) -- 2 -- -- -- -- -- 2 -- --- -- -- -- -- -- -- -- -- -- (4) -- 2 -- -- -- -- -- 2 -- --- -- -- -- -- -- -- -- -- -- 63 -- 35 -- 4 -- 11 -- 49 -- 50 -- 27 -- 5 -- 8 -- 28 -- (13) -- (6) -- (1) -- (2) -- (7) -- --- -- -- -- -- -- -- -- -- -- 100 -- 56 -- 8 -- 17 -- 70 -- --- -- -- -- -- -- -- -- -- -- 96 -- 58 -- 8 -- 17 -- 72 -- -- -- -- -- -- -- -- -- -- -- --- -- -- -- -- -- -- -- -- -- 96 -- 58 -- 8 -- 17 -- 72 -- === == == == == == == == == ==
39 44 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 is a wholly-owned subsidiary of Kemper Corporation. Kemper Corporation was acquired by an investor group led by Zurich Insurance Company ("Zurich") on January 4, 1996. Effective February 27, 1998, KILICO and Kemper Corporation became wholly-owned subsidiaries of Zurich. The Separate Account is used to fund policies ("Policy") for the Select variable universal life policies and the Power V flexible premium variable universal life policies. The Separate Account is divided into sixteen subaccounts. The Select policies have five subaccounts which are available to Policy Owners and each subaccount invests exclusively in the shares of a corresponding portfolio of the Investors Fund Series (the "Fund"), an open-end diversified management investment company. The Power V policies have sixteen subaccounts which are available to Policy Owners and each subaccount invests exclusively in the shares of a corresponding portfolio of the Investors Fund Series and the American Skandia Trust, also an open-end diversified management investment company. 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, 1997. 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 a first in, first out ("FIFO") cost basis. ACCOUNT UNIT TRANSACTIONS Proceeds from a Policy are automatically allocated to the Kemper 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. 40 45 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) In early 1998, the Clinton Administration's Fiscal Year 1999 Budget was released and contained certain proposals to change the taxation of non-qualified fixed and variable annuities as well as variable universal life contracts. It is currently unknown whether such proposals will be adopted, amended or omitted in the final 1999 budget approved by Congress. (2) SUMMARY OF INVESTMENTS Investments, at cost, at December 31, 1997, are as follows (in thousands):
SHARES OWNED COST ------ ---- INVESTORS FUND SERIES Kemper Money Market Subaccount............................ 885 $ 885 Kemper Total Return Subaccount............................ 1,024 2,672 Kemper High Yield Subaccount.............................. 1,493 1,879 Kemper Growth Subaccount.................................. 919 2,592 Kemper Government Securities Subaccount................... 3,900 4,386 Kemper International Subaccount........................... 30 49 Kemper Small Cap Growth Subaccount........................ 114 206 AMERICAN SKANDIA TRUST Founders Capital Appreciation Subaccount.................. 8 131 Neuberger & Berman Mid-Cap Growth Subaccount.............. 12 196 Jancap Growth Subaccount.................................. 23 507 Lord Abbett Growth & Income Subaccount.................... 5 109 T. Rowe Price International Equity Subaccount............. 8 99 T. Rowe Price Asset Allocation Subaccount................. 4 56 PIMCO Limited Maturity Bond Subaccount.................... 1 8 PIMCO Total Return Subaccount............................. 1 17 INVESCO Equity Income Subaccount.......................... 4 70 ------- TOTAL INVESTMENTS.................................... $13,862 =======
The underlying investments are summarized below. INVESTORS FUND SERIES KEMPER MONEY MARKET SUBACCOUNT: This subaccount invests primarily in short-term obligations of major banks and corporations. KEMPER TOTAL RETURN SUBACCOUNT: This subaccount'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 subaccount may also make private placement investments (which are normally restricted securities). KEMPER HIGH YIELD SUBACCOUNT: This subaccount 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. KEMPER GROWTH SUBACCOUNT: This subaccount'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). KEMPER GOVERNMENT SECURITIES SUBACCOUNT: This subaccount invests primarily in U.S. Government Securities. The subaccount may also invest in fixed-income securities other than U.S. Government securities and may engage in options and financial futures transactions. KEMPER INTERNATIONAL SUBACCOUNT: This subaccount's investments will normally consist of equity securities of non-United States issuers, however, it may also invest in convertible and debt securities of non-United States issuers and foreign currencies. 41 46 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) KEMPER SMALL CAP GROWTH SUBACCOUNT: This subaccount's investments will consist primarily of common stocks and securities convertible into or exchangeable for common stocks and to a limited degree in preferred stocks and debt securities. At least 65% of the subaccount's total assets will be invested in equity securities of companies having a market capitalization of $1 billion or less at the time of initial investment. AMERICAN SKANDIA TRUST FOUNDERS CAPITAL APPRECIATION SUBACCOUNT: This subaccount seeks capital appreciation through investment primarily in common stocks of U.S. companies with market capitalizations of $1.5 billion or less. These stocks normally will be traded in the over-the-counter market. NEUBERGER & BERMAN MID-CAP GROWTH (FORMERLY BERGER CAPITAL GROWTH) SUBACCOUNT: This subaccount seeks long-term capital appreciation by investing primarily in the common stocks of established companies. JANCAP GROWTH SUBACCOUNT: This subaccount seeks growth of capital in a manner consistent with preservation of capital by emphasizing investments in common stocks. LORD ABBETT GROWTH & INCOME SUBACCOUNT: This subaccount seeks long-term growth of capital and income while attempting to avoid excessive fluctuations in market value by investing in common stocks of seasoned companies which are expected to show above-average growth. T. ROWE PRICE INTERNATIONAL EQUITY SUBACCOUNT: This subaccount seeks total return on its assets from long-term growth of capital and income principally through investment primarily in common stocks of established, non-U.S. companies. T. ROWE PRICE ASSET ALLOCATION SUBACCOUNT: This subaccount seeks a high level of total return by investing primarily in a diversified group of fixed income and equity securities. PIMCO LIMITED MATURITY BOND SUBACCOUNT: This subaccount seeks to maximize total return, consistent with preservation of capital and prudent investment management by investing primarily in fixed income securities of various types. PIMCO TOTAL RETURN SUBACCOUNT: This subaccount seeks to maximize total return, consistent with preservation of capital by investing primarily in fixed income securities of various types. INVESCO EQUITY INCOME SUBACCOUNT: This subaccount seeks high current income while following sound investment practices, with capital growth potential as an additional but secondary consideration. The subaccount invests primarily in dividend-paying, marketable common stocks of domestic and foreign industrial issuers. (3) TRANSACTIONS WITH AFFILIATES KILICO provides a death benefit payment upon the death of the Policy owner under the terms of the death benefit option selected by the Policy owner as further described in the Policy. KILICO assesses a monthly charge to the subaccounts for the cost of providing this insurance protection to the Policy owner. These cost of insurance charges vary with the issue age, sex and rate class of the Policy owner, and are allocated among the subaccounts in the proportion of each subaccount to the Separate Account value. Cost of insurance charges totaled approximately $121,300 and $396,200 for the Select and Power V variable universal life products, respectively, for the year ended December 31, 1997. 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. A state and local premium tax charge of 2.5% is deducted from each premium payment under the Power V policy prior to allocation of the net premium. This charge is to reimburse KILICO for the payment of state premium taxes. KILICO expects to pay an average state premium tax rate of approximately 2.5% but the actual premium tax attributable to a Policy may be more or less. In addition, a charge for federal taxes equal to 1% of each premium payment will be deducted to compensate KILICO for a higher corporate income tax liability resulting from changes made to the Internal Revenue Code by the Omnibus Budget Reconciliation Act of 1990. Policy loans are also provided for under the terms of the Policy. The minimum amount of the loan is $500 and is limited to 90% of the Policy's investment value, less applicable surrender charges. Interest is assessed against the policy loan under the terms of the Policy. Policy loans are carried in KILICO's general account. Proceeds payable on the surrender of a Policy are reduced by the amount of any applicable contingent deferred sales charge. 42 47 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Scudder Kemper Investments, Inc. ("SKI"), formerly Zurich Kemper Investments, Inc., an affiliated company, is the investment manager of the portfolios of the Investors Fund Series portfolios. American Skandia Investment Services, Incorporated ("ASISI"), an unaffiliated company, is the investment manager for the American Skandia Trust. Investors Brokerage Services, Inc. ("IBS"), a wholly-owned subsidiary of KILICO, is the principal underwriter for the Separate Account. (4) NET TRANSFERS (TO) FROM AFFILIATED DIVISIONS AND SUBACCOUNTS Net transfers (to) from affiliated divisions or accounts include transfers of all or part of the Policy Owner's interest to or from another subaccount or to the general account of KILICO. (5) POLICY OWNERS' EQUITY Policy Owners' equity at December 31, 1997, is as follows (in thousands, except unit value; differences are due to rounding):
NUMBER POLICY OF UNIT OWNERS' UNITS VALUE EQUITY ------ ----- ------- POWER V POLICIES INVESTORS FUND SERIES: Kemper Money Market Subaccount.............................. 362 $ 1.054 $ 382 Kemper Total Return Subaccount.............................. 4 3.340 14 Kemper High Yield Subaccount................................ 26 1.413 36 Kemper Growth Subaccount.................................... 32 4.045 129 Kemper Government Securities Subaccount..................... 5 1.301 7 Kemper International Subaccount............................. 29 1.693 48 Kemper Small Cap Growth Subaccount.......................... 101 2.225 224
AMERICAN SKANDIA TRUST: Founders Capital Appreciation Subaccount.................... 8 17.611 135 Neuberger & Berman Mid-Cap Growth Subaccount................ 12 16.603 201 JanCap Growth Subaccount.................................... 22 23.905 527 Lord Abbett Growth & Income Subaccount...................... 5 21.040 112 T. Rowe Price International Equity Subaccount............... 8 12.098 96 T. Rowe Price Asset Allocation Subaccount................... 4 15.536 58 PIMCO Limited Maturity Bond Subaccount...................... -- 11.487 8 PIMCO Total Return Subaccount............................... 1 12.071 17 Invesco Equity Income Subaccount............................ 4 17.062 72 ------- TOTAL POWER V POLICY OWNERS' EQUITY.................... $ 2,066 =======
SELECT POLICIES INVESTORS FUND SERIES: Kemper Money Market Subaccount.............................. 357 $ 1.635 $ 584 Kemper Total Return Subaccount.............................. 1,215 2.488 3,022 Kemper High Yield Subaccount................................ 776 2.446 1,898 Kemper Growth Subaccount.................................... 779 3.354 2,612 Kemper Government Securities Subaccount..................... 2,330 2.013 4,690 ------- TOTAL SELECT POLICY OWNERS' EQUITY..................... $12,806 =======
43 48 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS THE BOARD OF DIRECTORS AND STOCKHOLDER'S KEMPER INVESTORS LIFE INSURANCE COMPANY: We have audited the accompanying consolidated balance sheet of Kemper Investors Life Insurance Company and subsidiaries as of December 31, 1997, and the related consolidated statements of operations, stockholder's equity, and cash flows for the year then ended. 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 audit. The financial statements of Kemper Investors Life Insurance Company and subsidiaries for the period from January 4, 1996 to December 31, 1996 (post-acquisition basis) and for the year ended December 31, 1995 (pre-acquisition basis), were audited by other auditors, whose unqualified report, dated March 21, 1997, included an explanatory paragraph that described the acquisition of Kemper Investors Life Insurance Company as discussed in Note 1 to the financial statements. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Kemper Investors Life Insurance Company and subsidiaries as of December 31, 1997, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ PricewaterhouseCoopers L.L.P. Coopers & Lybrand L.L.P. Chicago, Illinois March 18, 1998 44 49 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS THE BOARD OF DIRECTORS AND STOCKHOLDER KEMPER INVESTORS LIFE INSURANCE COMPANY: We have audited the accompanying consolidated balance sheet of Kemper Investors Life Insurance Company and subsidiaries as of December 31, 1996 and the related consolidated statements of operations, stockholder's equity, and cash flows for the period from January 4, 1996 to December 31, 1996 (post-acquisition), and for the year 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 the results of their operations and their cash flows for the post-acquisition period, in conformity with generally accepted accounting principles. Also, in our opinion, the aforementioned pre-acquisition consolidated financial statements present fairly, in all material respects, the results of their operations and their cash flows for the pre-acquisition period, 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 Corporation, the parent 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 period after the acquisition is presented on a different cost basis than that for the period before the acquisition and, therefore, is not comparable. KPMG LLP Chicago, Illinois March 21, 1997 45 50 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
DECEMBER 31 DECEMBER 31 1997 1996 ----------- ----------- ASSETS Fixed maturities, available for sale, at fair value (amortized cost: December 31, 1997, $3,644,075; December 31, 1996, $3,929,650)..................................... $ 3,668,643 $3,866,431 Short-term investments...................................... 236,057 71,696 Joint venture mortgage loans................................ 72,663 110,971 Third-party mortgage loans.................................. 102,974 106,585 Other real estate-related investments....................... 44,409 50,157 Policy loans................................................ 282,439 288,302 Equity securities........................................... 24,839 9,910 Other invested assets....................................... 20,820 13,597 ----------- ---------- Total investments................................. 4,452,844 4,517,649 Cash........................................................ 23,868 2,776 Accrued investment income................................... 117,789 115,199 Goodwill.................................................... 229,393 244,688 Value of business acquired.................................. 138,482 189,639 Deferred insurance acquisition costs........................ 59,459 26,811 Deferred income taxes....................................... 39,993 -- Reinsurance recoverable..................................... 382,609 427,165 Receivable on sales of securities........................... 20,076 32,569 Other assets and receivables................................ 3,187 34,117 Assets held in separate accounts............................ 5,121,950 2,127,247 ----------- ---------- Total assets...................................... $10,589,650 $7,717,860 =========== ========== LIABILITIES Future policy benefits...................................... $ 3,856,871 $4,256,521 Ceded future policy benefits................................ 382,609 427,165 Benefits and funds payable.................................. 150,524 36,142 Other accounts payable and liabilities...................... 212,133 59,462 Deferred income taxes....................................... -- 60,362 Liabilities related to separate accounts.................... 5,121,950 2,127,247 ----------- ---------- Total liabilities................................. 9,724,087 6,966,899 ----------- ---------- 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.................................. 806,538 761,538 Unrealized gain (loss) on investments....................... 12,637 (47,498) Retained earnings........................................... 43,888 34,421 ----------- ---------- Total stockholder's equity........................ 865,563 750,961 ----------- ---------- Total liabilities and stockholder's equity........ $10,589,650 $7,717,860 =========== ==========
See accompanying notes to consolidated financial statements. 46 51 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands)
YEAR ENDED DECEMBER 31 ------------------------------------ PREACQUISITION -------------- 1997 1996 1995 ---- ---- ---- REVENUE Net investment income....................................... $296,195 $299,688 $ 348,448 Realized investment gains (losses).......................... 10,546 13,602 (318,700) Premium income.............................................. 22,239 7,822 236 Separate account fees and charges........................... 85,413 25,309 21,909 Other income................................................ 11,087 9,786 16,192 -------- -------- --------- Total revenue..................................... 425,480 356,207 68,085 -------- -------- --------- BENEFITS AND EXPENSES Interest credited to policyholders.......................... 199,782 223,094 237,984 Claims incurred and other policyholder benefits............. 28,372 14,255 7,631 Taxes, licenses and fees.................................... 52,608 2,173 6,912 Commissions................................................. 32,602 25,962 24,881 Operating expenses.......................................... 36,837 24,678 20,837 Deferral of insurance acquisition costs..................... (38,177) (27,820) (36,870) Amortization of insurance acquisition costs................. 3,204 2,316 14,423 Amortization of value of business acquired.................. 24,948 21,530 -- Amortization of goodwill.................................... 15,295 10,195 -- -------- -------- --------- Total benefits and expenses....................... 355,471 296,383 275,798 -------- -------- --------- Income (loss) before income tax expense (benefit)........... 70,009 59,824 (207,713) Income tax expense (benefit)................................ 31,292 25,403 (74,664) -------- -------- --------- Net income (loss)................................. $ 38,717 $ 34,421 $(133,049) ======== ======== =========
See accompanying notes to consolidated financial statements. 47 52 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (in thousands)
PREACQUISITION -------------- DECEMBER 31 DECEMBER 31 JANUARY 4 DECEMBER 31 1997 1996 1996 1995 ----------- ----------- --------- ----------- CAPITAL STOCK, beginning and end of period........... $ 2,500 $ 2,500 $ 2,500 $ 2,500 -------- -------- -------- --------- ADDITIONAL PAID-IN CAPITAL, beginning of period...... 761,538 743,104 491,994 491,994 Capital contributions from parent.................... 45,000 18,434 -- -- Adjustment to reflect purchase accounting method..... -- -- 251,110 -- -------- -------- -------- --------- End of period.............................. 806,538 761,538 743,104 491,994 -------- -------- -------- --------- UNREALIZED GAIN (LOSS) ON INVESTMENTS, beginning of period............................................. (47,498) -- 68,502 (236,443) Unrealized gain (loss) on revaluation of investments, net................................................ 60,135 (47,498) -- 304,945 Adjustment to reflect purchase accounting method..... -- -- (68,502) -- -------- -------- -------- --------- End of period.............................. 12,637 (47,498) -- 68,502 -------- -------- -------- --------- RETAINED EARNINGS, beginning of period............... 34,421 -- 42,880 175,929 Net income (loss).................................... 38,717 34,421 -- (133,049) Dividends to parent.................................. (29,250) -- -- -- Adjustment to reflect purchase accounting method..... -- -- (42,880) -- -------- -------- -------- --------- End of period.............................. 43,888 34,421 -- 42,880 -------- -------- -------- --------- Total stockholder's equity................. $865,563 $750,961 $745,604 $ 605,876 ======== ======== ======== =========
See accompanying notes to consolidated financial statements. 48 53 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
YEAR ENDED DECEMBER 31 ---------------------------------------- PREACQUISITION -------------- 1997 1996 1995 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)...................................... $ 38,717 $ 34,421 $(133,049) Reconcilement of net income (loss) to net cash provided: Realized investment losses (gains).................. (10,546) (13,602) 318,700 Interest credited and other charges................. 198,206 230,298 237,984 Deferred insurance acquisition costs................ (34,973) (25,504) (22,447) Amortization of value of business acquired.......... 24,948 21,530 -- Amortization of goodwill............................ 15,295 10,195 -- Amortization of discount and premium on investments....................................... 17,866 25,743 4,586 Deferred income taxes............................... (99,370) (897) 38,423 Net change in current federal income taxes.......... 97,386 108,806 (86,990) Benefits and premium taxes due related to separate account bank-owned life insurance................. 180,546 -- -- Other, net.......................................... 17,168 (22,283) (29,905) --------- ----------- --------- Net cash provided from operating activities.... 445,243 368,707 327,302 --------- ----------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Cash from investments sold or matured: Fixed maturities held to maturity................... 229,208 264,383 320,143 Fixed maturities sold prior to maturity............. 633,872 891,995 297,637 Mortgage loans, policy loans and other invested assets............................................ 131,866 168,727 450,573 Cost of investments purchased or loans originated: Fixed maturities.................................... (606,028) (1,369,091) (549,867) Mortgage loans, policy loans and other invested assets............................................ (76,350) (119,044) (131,966) Short-term investments, net............................ (164,361) 300,819 (168,351) Net change in receivable and payable for securities transactions........................................ 29,746 (31,667) (1,397) Net reductions in other assets......................... 244 115 1,996 --------- ----------- --------- Net cash provided by investing activities...... 178,197 106,237 218,768 --------- ----------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Policyholder account balances: Deposits............................................ 145,687 141,159 247,778 Withdrawals......................................... (745,510) (700,084) (755,917) Capital contributions from parent...................... 45,000 18,434 -- Dividends to parent.................................... (29,250) -- -- Other.................................................. (18,275) 42,512 (35,309) --------- ----------- --------- Net cash used in financing activities.......... (602,348) (497,979) (543,448) --------- ----------- --------- Net increase (decrease) in cash........... 21,092 (23,035) 2,622 CASH, beginning of period................................ 2,776 25,811 23,189 --------- ----------- --------- CASH, end of period...................................... $ 23,868 $ 2,776 $ 25,811 ========= =========== =========
See accompanying notes to consolidated financial statements. 49 54 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 that change in control, Zurich and Insurance Partners owned 80 percent and 20 percent, respectively, of Kemper and therefore the Company. On February 27, 1998, Zurich acquired Insurance Partner's remaining 20 percent interest for cash. As a result of this transaction, Kemper and the Company became wholly-owned subsidiaries of Zurich. The financial statements include the accounts of the Company on a consolidated basis. All significant intercompany balances and transactions have been eliminated. Certain reclassifications have been made to the 1996 and 1995 consolidated financial statements in order for them to conform to the 1997 presentation. 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 years ended December 31, 1996 and 1997, 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 where appropriate 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 values as of the acquisition date. The difference between the cost of acquiring the Company and the net fair values of the Company's assets and liabilities as of the acquisition date has been recorded as goodwill. 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 began to amortize goodwill during 1996 on a straight-line basis over twenty-five years. In December of 1997, the Company changed its amortization period to twenty years in order to conform to Zurich's accounting practices and policies. As a result of the change in amortization periods, the Company recorded an increase in goodwill amortization expense of $5.1 million during 1997. 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, 1997, 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 50 55 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. 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, 2002 are as follows:
PROJECTED (IN THOUSANDS) BEGINNING ACCRETION OF ENDING YEAR ENDED DECEMBER 31 BALANCE AMORTIZATION INTEREST BALANCE - ---------------------------------------------------- --------- ------------ ------------ --------- 1996 (actual)....................................... $190,222 $(31,427) $ 9,897 $168,692 1997 (actual)....................................... 168,692 (34,906) 9,958 143,744 1998................................................ 143,744 (25,633) 8,933 127,044 1999................................................ 127,044 (23,701) 7,873 111,216 2000................................................ 111,216 (21,668) 6,876 96,424 2001................................................ 96,424 (19,122) 5,973 83,275 2002................................................ 83,275 (17,835) 5,134 70,574
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, 1997 and 1996, this adjustment increased (decreased) the value of business acquired by $(5.3) million and $20.9 million, respectively, and stockholder's equity by approximately $(3.4) 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, variable life insurance and interest-sensitive life insurance products consists of investment income, and policy charges such as mortality, expense and surrender charges and expense loads for premium taxes on certain contracts. 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. 51 56 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DEFERRED INSURANCE ACQUISITION COSTS The costs of acquiring new business, 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. 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 3.0 percent to 7.3 percent. Future minimum guaranteed interest rates vary from 3.0 percent to 4.0 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 and equity securities 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 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; 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. 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. 52 57 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 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 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 amounted to $108.8 million and $25.2 million, respectively. The Company paid federal income taxes of $29.0 million and $28.1 million directly to the United States Treasury Department during 1997 and 1996, respectively. 53 58 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, 1997 U.S. treasury securities and obligations of U.S. government agencies and authorities................. $ 6,258 $ 6,298 $ 4 $ (44) Obligations of states and political subdivisions, special revenue and nonguaranteed................... 29,330 29,308 160 (138) Debt securities issued by foreign governments......... 92,563 92,722 188 (347) Corporate securities.................................. 1,861,655 1,846,588 24,733 (9,666) Mortgage and asset-backed securities.................. 1,678,837 1,669,159 10,035 (357) ---------- ---------- ------- -------- Total fixed maturities......................... $3,668,643 $3,644,075 $35,120 $(10,552) ========== ========== ======= ======== 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) ========== ========== ======= ========
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 $220.0 million real estate portfolio at December 31, 1997 consists of joint venture and third-party mortgage loans and other real estate-related investments. At December 31, 1997 and 1996, total impaired real estate-related loans were as follows:
DECEMBER 31 DECEMBER 31 1997 1996 (in millions) ----------- ----------- Impaired loans without reserves--gross...................... $39.3 $39.8 Impaired loans with reserves--gross......................... 2.2 7.6 ----- ----- Total gross impaired loans........................... 41.5 47.4 Reserves related to impaired loans.......................... (2.1) (4.4) ----- ----- Net impaired loans................................... $39.4 $43.0 ===== =====
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, 1997 and 1996, the 54 59 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (3) INVESTED ASSETS AND RELATED INCOME (CONTINUED) Company's deficit in equity investments considered in determining reserves and write-downs amounted to $0 and $5.9 million, respectively. The Company had an average balance of $45.2 million and $30.8 million in impaired loans for 1997 and 1996, respectively. Cash payments received on impaired loans are generally applied to reduce the outstanding loan balance. At December 31, 1997 and December 31, 1996, loans on nonaccrual status, before reserves and write-downs, amounted to $47.4 million and $43.5 million, respectively. The Company's nonaccrual loans are generally included in impaired loans. At December 31, 1997, securities carried at approximately $6.3 million were on deposit with governmental agencies as required by law. Proceeds from sales of investments in fixed maturities prior to maturity were $633.9 million, $892.0 million and $297.6 million during 1997, 1996 and 1995, respectively. Gross gains of $3.1 million, $9.9 million and $21.2 million and gross losses of $13.7 million, $16.2 million and $11.9 million were realized on sales and write-downs of fixed maturities in 1997, 1996 and 1995, respectively. The carrying value and amortized cost of fixed maturity investments, by contractual maturity at December 31, 1997, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties and because mortgage-backed and asset-backed securities provide for periodic payments throughout their life.
CARRYING AMORTIZED VALUE COST VALUE (in thousands) -------- ---------- One year or less............................................ $ 47,724 $ 47,797 Over one year through five.................................. 649,279 648,291 Over five years through ten................................. 988,849 984,495 Over ten years.............................................. 303,954 294,333 Securities not due at a single maturity date, primarily mortgage and asset-backed securities(1)................... 1,678,837 1,669,159 ---------- ---------- Total fixed maturities............................... $3,668,643 $3,644,075 ========== ==========
- --------------- (1) Weighted average maturity of 3.8 years. The sources of net investment income were as follows:
PREACQUISITION -------------- 1997 1996 1995 (in thousands) -------- -------- -------------- Interest and dividends on fixed maturities................. $250,170 $250,683 $269,934 Dividends on equity securities............................. 2,123 646 681 Income from short-term investments......................... 4,128 9,130 13,159 Income from mortgage loans................................. 16,283 20,257 40,494 Income from policy loans................................... 20,549 20,700 19,658 Income from other real estate-related investments.......... 6,631 4,917 15,565 Income from other loans and investments.................... 2,045 2,480 1,555 -------- -------- -------- Total investment income............................. 301,929 308,813 361,046 Investment expense......................................... (5,734) (9,125) (12,598) -------- -------- -------- Net investment income............................... $296,195 $299,688 $348,448 ======== ======== ========
55 60 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, 1997, 1996 and 1995, were as follows:
REALIZED GAINS (LOSSES) ----------------------------------------------- PREACQUISITION -------------- 1997 1996 1995 (in thousands) -------- ------- -------------- Real estate-related...................................... $ 19,758 $17,462 $(325,611) Fixed maturities......................................... (10,656) (6,344) 9,336 Equity securities........................................ 914 -- (346) Other.................................................... 530 2,484 (2,079) -------- ------- --------- Realized investment gains (losses) before income tax expense (benefit)................................... 10,546 13,602 (318,700) Income tax expense (benefit) 3,691 4,761 (111,545) -------- ------- --------- Net realized investment gains (losses)................. $ 6,855 $ 8,841 $(207,155) ======== ======= =========
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, 1997, 1996 and 1995 were as follows:
CHANGE IN UNREALIZED GAINS (LOSSES) --------------------------------------------------------- PREACQUISITION -------------- DECEMBER 31 DECEMBER 31 JANUARY 4 DECEMBER 31 1997 1996 1996 1995 (in thousands) ------------ ------------ ---------- -------------- Fixed maturities..................................... $ 87,787 $(63,219) $ $351,964 Equity and other securities.......................... (103) 1,256 -- 180 Adjustment to deferred insurance acquisition costs... (2,325) 1,307 -- (14,277) Adjustment to value of business acquired............. (26,209) 20,947 -- -- -------- -------- -- -------- Unrealized gain (loss) before income tax expense... 59,150 (39,709) -- 337,867 Income tax expense (benefit)......................... (985) 7,789 -- 32,922 -------- -------- -- -------- Net unrealized gain (loss) on investments..... $ 60,135 $(47,498) $-- $304,945 ======== ======== == ========
(4) UNCONSOLIDATED INVESTEES At December 31, 1997 and 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, 1997 and December 31, 1996, the Company's net equity investment in unconsolidated investees amounted to $19.3 million and $11.7 million, respectively. The Company's share of net income related to such unconsolidated investees amounted to $835 thousand and $223 thousand in 1997 and 1996, respectively, and a net loss of $453 thousand in 1995. (5) CONCENTRATION OF CREDIT RISK The Company generally strives to maintain a diversified invested asset portfolio; however, certain concentrations of credit risk exist in mortgage and asset-backed securities and real estate. Approximately 35.1 percent of the Company's investment-grade fixed maturities at December 31, 1997 were mortgage-backed securities, down from 36.4 percent at December 31, 1996, due to sales and paydowns during 56 61 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (5) CONCENTRATION OF CREDIT RISK (CONTINUED) 1997. These investments consist 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 AAA credit quality. Approximately 10.8 percent and 8.8 percent of the Company's investment-grade fixed maturities at December 31, 1997 and 1996, respectively, consisted of corporate asset-backed securities. The majority of the Company's investments in asset-backed securities were backed by home equity loans (27.7%), auto loans (22.3%), manufactured housing loans (17.2%), equipment loans (13.7%), and commercial mortgage backed securities (10.7%). 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, 1997 California....................... 38.2% Hawaii........................... 14.2 Colorado......................... 9.8 Oregon........................... 9.2 Washington....................... 9.1 Florida.......................... 6.4 Texas............................ 5.1 Michigan......................... 3.7 Ohio............................. 3.3 Illinois......................... 1.0 ----- Total.................. 100.0% =====
DISTRIBUTION BY PROPERTY TYPE AS OF DECEMBER 31, 1997 Hotel............................ 41.3% Land............................. 28.2 Residential...................... 13.1 Retail........................... 3.3 Office........................... 3.1 Industrial....................... .9 Other............................ 10.1 ----- Total.................. 100.0% =====
Undeveloped land represented approximately 28.2 percent of the Company's real estate portfolio at December 31, 1997. 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 mortgage 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, 1997, loans to and investments in joint ventures in which Patrick M. Nesbitt or his affiliates ("Nesbitt"), a third-party real estate developer, have ownership interests constituted approximately $88.2 million, or 40.1 percent, of the Company's real estate portfolio. The Nesbitt ventures consist of nine hotel properties and two office buildings. At December 31, 1997, the Company did not have any Nesbitt-related off-balance-sheet legal funding commitments outstanding. At December 31, 1997, loans to a master limited partnership (the "MLP") between subsidiaries of Kemper and subsidiaries of Lumbermens Mutual Casualty Company ("Lumbermens"), a former affiliate, constituted approximately $60.5 million, or 27.5 percent, of the Company's real estate portfolio. Kemper's interest is 57 62 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 75 percent at December 31, 1997. At December 31, 1997, MLP-related commitments accounted for approximately $7.4 million of the Company's off-balance-sheet legal commitments, which the Company expects to fund. At December 31, 1997, the Company no longer had any outstanding loans or investments in projects with the Prime Group, Inc. or its affiliates, as all such investments have been sold or written-down to zero. However, the Company continues to have Prime Group-related commitments, which accounted for $25.7 million of the Company's off-balance-sheet legal commitments at December 31, 1997. The Company does not expect to fund any of these commitments. (6) INCOME TAXES Income tax expense (benefit) was as follows for the years ended December 31, 1997, 1996 and 1995:
PREACQUISITION -------------- 1997 1996 1995 (in thousands) -------- ------- -------------- Current.................................................. $130,662 $26,300 $(113,087) Deferred................................................. (99,370) (897) 38,423 -------- ------- --------- Total.......................................... $ 31,292 $25,403 $ (74,664) ======== ======= =========
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 each filed 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. The actual income tax expense (benefit) for 1997, 1996 and 1995 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 1997, 1996, and 1995 to income (loss) before income tax expense (benefit).
PREACQUISITION -------------- 1997 1996 1995 (in thousands) ------- ------- -------------- Computed expected tax expense (benefit)................... $24,503 $20,938 $(72,700) Difference between "expected" and actual tax expense (benefit): State taxes............................................. 1,801 913 (1,370) Amortization of goodwill................................ 5,353 3,568 -- Foreign tax credit...................................... (278) -- (183) Other, net.............................................. (87) (16) (411) ------- ------- -------- Total actual tax expense (benefit).............. $31,292 $25,403 $(74,664) ======= ======= ========
Deferred tax assets and liabilities are generally determined based on the difference between the financial statement and tax basis 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 valuation allowance is subject to future adjustments based upon, among other items, the Company's estimates of future operating earnings and capital gains. 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. 58 63 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 asset or liability were as follows:
DECEMBER 31 DECEMBER 31 JANUARY 4 1997 1996 1996 (in thousands) ----------- ------------ --------- Deferred federal tax assets: Deferred insurance acquisition costs.................. $ 75,522 $ 4,520 $ -- Unrealized losses on investments...................... -- 16,624 -- Life policy reserves.................................. 43,337 46,452 46,654 Unearned revenue...................................... 37,243 -- -- Real estate-related................................... 13,400 20,642 27,736 Other investment-related.............................. 3,298 5,409 1,773 Other................................................. 4,371 3,639 9,750 -------- -------- -------- Total deferred federal tax assets.................. 177,171 97,286 85,913 Valuation allowance................................... (15,201) (31,825) (15,201) -------- -------- -------- Total deferred federal tax assets after valuation allowance........................................ 161,970 65,461 70,712 -------- -------- -------- Deferred federal tax liabilities: Value of business acquired............................ 48,469 66,373 66,578 Deferred insurance acquisition costs.................. 20,811 9,384 -- Depreciation and amortization......................... 20,201 15,473 15,490 Other investment-related.............................. 18,774 28,855 37,919 Unrealized gains on investments....................... 9,002 -- -- Other................................................. 4,720 5,738 4,197 -------- -------- -------- Total deferred federal tax liabilities............. 121,977 125,823 124,184 -------- -------- -------- Net deferred federal tax assets (liabilities)........... $ 39,993 $(60,362) $(53,472) ======== ======== ========
The net deferred tax assets relate primarily to unearned revenue and the tax on deferred insurance acquisition costs ("DAC Tax") associated with $2.7 billion of new 1997 sales from a non-registered individual and group variable bank-owned life insurance contract ("BOLI"). As a result of proposed tax law changes, as more fully discussed below, the level of DAC Tax experienced in 1997 is not anticipated to occur in future periods and it is expected that the Company will return to its normalized earnings patterns in 1998. Management believes that it is more likely, than not, that the results of future operations will generate sufficient taxable income over the ten year amortization period of the unearned revenue and DAC Tax to realize such deferred tax assets. In early 1998, the Clinton Administration's Fiscal Year 1998 Budget ("Budget") was released and contained certain proposals to change the taxation of non-qualified fixed and variable annuities and variable life insurance contracts, including BOLI. It is currently unknown whether or not such proposals will be accepted, amended or omitted in the final 1999 Budget approved by Congress. If the current Budget proposals are accepted, certain of the Company's non-qualified fixed and variable annuities and certain of its variable life insurance products, including BOLI and the non-registered individual variable universal life insurance contracts introduced during 1997, may no longer be tax advantaged products and therefore no longer attractive to those customers who purchase them because of their favorable tax attributes. Additionally, sales of such products during 1998 may also be negatively impacted until the likelihood of the current proposals being enacted into law has been determined. 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 $45.0 million and $18.4 million during 1997 and 1996, respectively. The Company paid cash dividends of $29.3 million to Kemper during 1997. 59 64 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (7) RELATED-PARTY TRANSACTIONS (CONTINUED) 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, 1997 and December 31, 1996, joint venture mortgage loans totaled $72.7 million and $111.0 million, respectively, and during 1997, 1996 and 1995, the Company earned interest income on these joint venture loans of $7.5 million, $9.5 million and $19.6 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 Scudder Kemper Investments, Inc. ("SKI"), formerly Zurich Kemper Investments, Inc., an affiliated company, and the information systems of Kemper Service Company ("KSvC"), an SKI subsidiary, based on the Company's share of administrative, legal, marketing, investment management, information systems and operation and support services. During 1997, 1996 and 1995, expenses allocated to the Company from SKI and KSvC amounted to $114 thousand, $1.7 million and $4.4 million, respectively. The Company also paid to SKI investment management fees of $3.5 million, $3.6 million and $3.4 million during 1997, 1996 and 1995, respectively. In addition, expenses allocated to the Company from FKLA during 1997, 1996 and 1995 amounted to $30.0 million, $10.5 million and $14.3 million, respectively. During 1995, the Company sold certain mortgages and real estate-related investments, net of reserves, amounting to approximately $3.5 million 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 an affiliated non-life realty subsidiary for cash. The Company also paid to Kemper real estate subsidiaries $2.2 million, $1.8 million and $1.8 million in 1997, 1996 and 1995, respectively, 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 Fidelity Life Association, a Mutual Legal Reserve Company ("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, 1997 and 1996, the reinsurance recoverable related to the fixed-rate annuity liabilities ceded to FLA amounted to $382.6 million and $427.2 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. Premiums assumed during 1997 under the terms of the treaty amounted to $21.1 million and the face amount which remained outstanding at December 31, 1997 amounted to $12.6 billion. The Company's retention limit on term life insurance prior to 1997 was $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. Effective January 1, 1997, the Company ceded 90 percent of all new term life insurance premiums to outside reinsurers. Term life reserves ceded to outside reinsurers on the Company's direct business amounted to approximately $139 thousand and $102 thousand as of December 31, 1997 and 1996, respectively. 60 65 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During December 1997, the Company entered into a funds held reinsurance agreement with a Zurich affiliated company, EPICENTRE Reinsurance (Bermuda) Limited ("EPICENTRE"). Under the terms of this agreement, the Company ceded, on a yearly renewable term basis, ninety percent of the net amount at risk (death benefit payable to the insured less the insured's separate account cash surrender value) related to a new product developed in 1997, a non-registered variable bank-owned life insurance contract ("BOLI"), which is held in the Company's separate accounts. During 1997, the Company issued $59.3 billion (face amount) of new BOLI business and ceded $51.1 billion (face amount) to EPICENTRE under the terms of the treaty. During 1997, the Company also ceded $24.3 million of separate account fees (cost of insurance charges) to EPICENTRE. The Company has also withheld approximately $23.4 million of such funds due to EPICENTRE under the terms of the reinsurance agreement as a component of benefits and funds payable in the accompanying consolidated balance sheet as of December 31, 1997. (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 $1.9 million and $1.7 million at December 31, 1997 and 1996, respectively. The discount rate used in determining the allocated postretirement benefit obligation was 7.25 percent and 7.75 percent for 1997 and 1996, respectively. The assumed health care trend rate used was based on projected experience for 1997 and 1998, 8 percent in 1999, gradually declining to 5.0 percent by the year 2002 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, 1997 and 1996 by $242 thousand and $191 thousand, respectively. The Company also provides certain severance-related policies to provide benefits, generally limited in time, to former or inactive employees after employment but before retirement. (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 neither 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. 61 66 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (10) COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED) The Company is liable for guaranty fund assessments related to certain unaffiliated insurance companies that have become insolvent during the years 1997 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, 1997. (11) FINANCIAL INSTRUMENTS--OFF-BALANCE-SHEET RISK At December 31, 1997, the Company had future legal loan commitments and stand-by financing agreements totaling $75.3 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 $21.2 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. (12) 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 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, SKI. 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 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. 62 67 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (12) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) 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 maturities consistent with those remaining for the contracts being valued. The Company had projected its future average crediting rate in 1997 and 1996 to be 5.25 percent and 4.75 percent, respectively, while the assumed average market crediting rate was 6.0 percent and 5.8 percent in 1997 and 1996, respectively. The carrying values and estimated fair values of the Company's financial instruments at December 31, 1997 and 1996 were as follows:
DECEMBER 31, 1997 DECEMBER 31, 1996 ------------------------ ------------------------ CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE (in thousands) -------- ----- -------- ----- Financial instruments recorded as assets: Fixed maturities.............................. $3,668,643 $3,668,643 $3,866,431 $3,866,431 Cash and short-term investments............... 259,925 259,925 74,472 74,472 Mortgage loans and other real estate-related assets..................................... 220,046 220,046 267,713 267,713 Policy loans.................................. 282,439 282,439 288,302 288,302 Equity securities............................. 24,839 24,839 9,910 9,910 Other invested assets......................... 20,820 24,404 13,597 13,597 Financial instruments recorded as liabilities: Life policy benefits, excluding term life reserves................................... 3,846,023 4,050,852 4,249,264 4,101,588
(13) 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 1998 is $58.4 million. The Company paid cash dividends of $29.3 million to Kemper during 1997. The Company paid no cash dividends in 1996 or 1995. The Company's net income (loss) and capital and surplus as determined in accordance with statutory accounting principles were as follows:
1997 1996 1995 (in thousands) ---- ---- ---- Net income (loss)........................................... $ 58,372 $ 37,287 $(64,707) ======== ======== ======== Statutory capital and surplus............................... $476,924 $411,837 $383,374 ======== ======== ========
63 68 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (14) UNAUDITED INTERIM FINANCIAL INFORMATION The following table sets forth the Company's unaudited quarterly financial information: (in thousands)
QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ------------- -------- ------- ------------ ----------- 1997 OPERATING SUMMARY Net investment income.............................. $74,249 $74,050 $72,950 $ 74,946 Realized investment gains (losses)................. 889 8,161 (3,032) 4,528 Premium income..................................... 5,008 4,121 3,938 9,172 Separate account fees and other income............. 8,909 12,961 12,215 62,415(1) ------- ------- ------- -------- Total revenue.............................. 89,055 99,293 86,071 151,061 ------- ------- ------- -------- Interest credited and benefits to policyholders.... 57,859 56,643 57,965 55,687 Commissions, taxes, licenses and fees.............. 8,023 9,475 8,389 59,323(1) Operating expenses................................. 7,175 8,780 10,014 10,868 Net deferral of insurance acquisition costs........ (7,216) (6,877) (7,471) (13,409) Amortization of value of business acquired......... 4,821 6,991 6,743 6,393 Amortization of goodwill........................... 2,547 2,552 2,549 7,647(2) ------- ------- ------- -------- Total benefits and expenses................ 73,209 77,564 78,189 126,509 ------- ------- ------- -------- Income before income tax expense................... 15,846 21,729 7,882 24,552 Income tax expense................................. 5,678 8,723 3,778 13,113 ------- ------- ------- -------- Net income................................. $10,168 $13,006 $ 4,104 $ 11,439 ======= ======= ======= ======== 1996 OPERATING SUMMARY Net investment income.............................. $72,302 $74,647 $76,070 $ 76,669 Realized investment gains (losses)................. (1,248) (2,439) 13,518 3,771 Premium income..................................... 130 109 150 7,433(3) Separate account fees and other income............. 8,028 9,419 8,478 9,170 ------- ------- ------- -------- Total revenue.............................. 79,212 81,736 98,216 97,043 ------- ------- ------- -------- Interest credited and benefits to policyholders.... 58,296 57,335 57,512 64,206 Commissions, taxes, licenses and fees.............. 6,868 6,486 6,819 7,962 Operating expenses................................. 5,440 4,920 6,974 7,344 Net deferral of insurance acquisition costs........ (5,032) (7,302) (5,434) (7,736) Amortization of value of business acquired......... 4,234 2,787 11,582 2,927 Amortization of goodwill........................... 2,547 2,552 2,549 2,547 ------- ------- ------- -------- Total benefits and expenses................ 72,353 66,778 80,002 77,250 ------- ------- ------- -------- Income before income tax expense................... 6,859 14,958 18,214 19,793 Income tax expense................................. 3,513 6,402 7,391 8,097 ------- ------- ------- -------- Net income................................. $ 3,346 $ 8,556 $10,823 $ 11,696 ======= ======= ======= ========
- --------------- Notes: (1) Reflects premium tax expense loads received and premium taxes incurred of $49.1 million related to new BOLI sales of $2.6 billion in the fourth quarter of 1997. (2) Reflects the effect of the change in amortization of goodwill from 25 to 20 years. (3) Reflects the assumption of term life insurance business from FKLA. 64 69 APPENDIX A [TO BE UPDATED BY AMENDMENT] ILLUSTRATIONS OF CASH VALUES, CASH SURRENDER VALUES AND 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%. This charge is guaranteed not to exceed an effective annual rate of 0.90%. In addition, the net investment returns also reflect the deduction of the Fund investment advisory fees and other Fund expenses, (.83%, the average of the fees and expenses). The tables also reflect applicable charges and deductions including a 3.5% deduction against premiums, a monthly administrative charge of $5 and 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 -1.73%, 4.27% and 10.27%, on a current basis. On a guaranteed basis, these rates of return would be -1.73%, 4.27% and 10.27%, respectively. Cost of insurance rates vary by issue age, sex, rating class and Policy Year and, therefore, are not reflected in the approximate net annual investment rate of return above. Values are shown for Policies which are issued to a male standard nonsmoker and a male preferred nonsmoker. Values for Policies issued on a basis involving a higher mortality risk would result in lower Cash Values, Surrender Values and Death Benefits than those illustrated. Females generally have a more favorable rate structure than males. 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, we will furnish an illustration based on the proposed Insured's age, sex and premium payment requested. 65 70 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE STANDARD NON-SMOKER $1,000.00 ANNUAL PREMIUM ISSUE AGE 35 $100,000 INITIAL DEATH BENEFIT: VALUES--CURRENT COST OF INSURANCE
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN PAID PLUS ----------------------------- ---------------------------- ----------------------------- POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT - ------ --------- ------- --------- ------- ------ --------- ------- ------- --------- ------- 1 1,050 724 18 100,000 775 68 100,000 826 119 100,000 2 2,153 1,431 650 100,000 1,578 797 100,000 1,731 950 100,000 3 3,310 2,116 1,259 100,000 2,405 1,549 100,000 2,720 1,863 100,000 4 4,526 2,778 1,847 100,000 3,258 2,326 100,000 3,799 2,868 100,000 5 5,802 3,419 2,412 100,000 4,136 3,130 100,000 4,980 3,973 100,000 6 7,142 4,033 3,060 100,000 5,037 4,063 100,000 6,267 5,294 100,000 7 8,549 4,621 3,695 100,000 5,961 5,035 100,000 7,672 6,747 100,000 8 10,027 5,183 4,321 100,000 6,909 6,047 100,000 9,208 8,345 100,000 9 11,578 5,720 4,936 100,000 7,884 7,100 100,000 10,889 10,105 100,000 10 13,207 6,248 5,558 100,000 8,902 8,212 100,000 12,746 12,055 100,000 11 14,917 6,769 6,186 100,000 9,967 9,384 100,000 14,800 14,218 100,000 12 16,713 7,282 6,822 100,000 11,080 10,621 100,000 17,072 16,613 100,000 13 18,599 7,788 7,466 100,000 12,244 11,923 100,000 19,584 19,263 100,000 14 20,579 8,286 8,118 100,000 13,462 13,294 100,000 22,362 22,194 100,000 15 22,657 8,777 8,777 100,000 14,735 14,735 100,000 25,434 25,434 100,000 16 24,840 9,261 9,261 100,000 16,065 16,065 100,000 28,831 28,831 100,000 17 27,132 9,738 9,738 100,000 17,457 17,457 100,000 32,587 32,587 100,000 18 29,539 10,207 10,207 100,000 18,912 18,912 100,000 36,741 36,741 100,000 19 32,066 10,671 10,671 100,000 20,434 20,434 100,000 41,335 41,335 100,000 20 34,719 11,127 11,127 100,000 22,025 22,025 100,000 46,415 46,415 100,000 25 50,113 11,077 11,077 100,000 29,003 29,003 100,000 79,852 79,852 107,001 30 69,761 8,797 8,797 100,000 36,042 36,042 100,000 134,111 134,111 163,616 35 94,836 2,506 2,506 100,000 42,304 42,304 100,000 220,552 220,552 255,840 40 126,840 0 0 0 46,297 46,297 100,000 358,956 358,956 384,083 45 167,685 0 0 0 44,406 44,406 100,000 582,976 582,976 612,124
ASSUMPTIONS: (1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES 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. (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. 66 71 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE STANDARD NON-SMOKER $1,000.00 ANNUAL PREMIUM ISSUE AGE 35 $100,000 INITIAL DEATH BENEFIT: VALUES--GUARANTEED COST OF INSURANCE
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN PAID PLUS ----------------------------- ---------------------------- ----------------------------- POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT - ------ --------- ------- --------- ------- ------ --------- ------- ------- --------- ------- 1 1,050 723 17 100,000 774 67 100,000 825 118 100,000 2 2,153 1,428 646 100,000 1,574 793 100,000 1,727 946 100,000 3 3,310 2,110 1,253 100,000 2,399 1,542 100,000 2,713 1,856 100,000 4 4,526 2,771 1,839 100,000 3,249 2,317 100,000 3,790 2,858 100,000 5 5,802 3,408 2,401 100,000 4,123 3,117 100,000 4,966 3,959 100,000 6 7,142 4,021 3,047 100,000 5,022 4,049 100,000 6,250 5,277 100,000 7 8,549 4,608 3,683 100,000 5,945 5,019 100,000 7,652 6,727 100,000 8 10,027 5,169 4,307 100,000 6,892 6,030 100,000 9,185 8,323 100,000 9 11,578 5,703 4,919 100,000 7,862 7,078 100,000 10,860 10,076 100,000 10 13,207 6,209 5,519 100,000 8,857 8,166 100,000 12,692 12,001 100,000 11 14,917 6,686 6,103 100,000 9,875 9,292 100,000 14,697 14,114 100,000 12 16,713 7,130 6,671 100,000 10,915 10,455 100,000 16,890 16,431 100,000 13 18,599 7,543 7,221 100,000 11,977 11,656 100,000 19,293 18,972 100,000 14 20,579 7,921 7,753 100,000 13,061 12,893 100,000 21,927 21,759 100,000 15 22,657 8,263 8,263 100,000 14,166 14,166 100,000 24,816 24,816 100,000 16 24,840 8,567 8,567 100,000 15,291 15,291 100,000 27,987 27,987 100,000 17 27,132 8,828 8,828 100,000 16,432 16,432 100,000 31,469 31,469 100,000 18 29,539 9,040 9,040 100,000 17,586 17,586 100,000 35,294 35,294 100,000 19 32,066 9,198 9,198 100,000 18,748 18,748 100,000 39,498 39,498 100,000 20 34,719 9,296 9,296 100,000 19,913 19,913 100,000 44,124 44,124 100,000 25 50,113 8,675 8,675 100,000 25,652 25,652 100,000 75,587 75,587 101,287 30 69,761 5,335 5,335 100,000 30,644 30,644 100,000 126,888 126,888 154,804 35 94,836 0 0 0 33,276 33,276 100,000 208,259 208,259 241,580 40 126,840 0 0 0 30,182 30,182 100,000 338,103 338,103 361,770 45 167,685 0 0 0 11,940 11,940 100,000 547,985 547,985 575,384
ASSUMPTIONS: (1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES 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. (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. 67 72 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE STANDARD NON-SMOKER $3,000.00 ANNUAL PREMIUM ISSUE AGE 55 $100,000 INITIAL DEATH BENEFIT: VALUES--CURRENT COST OF INSURANCE
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN PAID PLUS -------------------------------- ----------------------------- --------------------------------- POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT - ------ --------- ---------- --------- ------- ------- --------- ------- --------- --------- --------- 1 3,150 2,034 789 100,000 2,182 937 100,000 2,330 1,085 100,000 2 6,457 3,975 2,505 100,000 4,399 2,929 100,000 4,841 3,372 100,000 3 9,930 5,815 4,120 100,000 6,644 4,949 100,000 7,547 5,852 100,000 4 13,577 7,558 5,638 100,000 8,924 7,004 100,000 10,473 8,553 100,000 5 17,406 9,192 7,047 100,000 11,228 9,084 100,000 13,635 11,490 100,000 6 21,426 10,759 8,626 100,000 13,600 11,468 100,000 17,103 14,971 100,000 7 25,647 12,317 10,241 100,000 16,104 14,028 100,000 20,975 18,899 100,000 8 30,080 13,867 11,893 100,000 18,746 16,772 100,000 25,296 23,322 100,000 9 34,734 15,409 13,582 100,000 21,535 19,708 100,000 30,119 28,292 100,000 10 39,620 16,942 15,307 100,000 24,478 22,843 100,000 35,502 33,867 100,000 11 44,751 18,467 17,070 100,000 27,584 26,186 100,000 41,510 40,112 100,000 12 50,139 19,985 18,869 100,000 30,863 29,747 100,000 48,216 47,100 100,000 13 55,796 21,494 20,705 100,000 34,322 33,534 100,000 55,701 54,912 100,000 14 61,736 22,995 22,578 100,000 37,974 37,557 100,000 64,055 63,638 100,000 15 67,972 24,488 24,488 100,000 41,828 41,828 100,000 73,380 73,380 100,000 16 74,521 25,973 25,973 100,000 45,896 45,896 100,000 83,787 83,787 100,000 17 81,397 27,450 27,450 100,000 50,189 50,189 100,000 95,369 95,369 107,767 18 88,617 28,920 28,920 100,000 54,719 54,719 100,000 108,152 108,152 120,049 19 96,198 30,381 30,381 100,000 59,501 59,501 100,000 122,259 122,259 133,262 20 104,158 31,835 31,835 100,000 64,548 64,548 100,000 137,831 137,831 147,479 25 150,340 22,121 22,121 100,000 88,219 88,219 100,000 240,534 240,534 252,561 30 209,282 0 0 0 121,897 121,897 127,992 402,274 402,274 422,388 35 284,509 0 0 0 160,765 160,765 168,803 651,846 651,846 684,438 40 380,519 0 0 0 208,570 208,570 210,656 1,052,401 1,052,401 1,062,925 45 503,055 0 0 0 273,173 273,173 273,173 1,735,012 1,735,012 1,735,012
ASSUMPTIONS: (1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES 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. (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. 68 73 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE STANDARD NON-SMOKER $3,000.00 ANNUAL PREMIUM ISSUE AGE 55 $100,000 INITIAL DEATH BENEFIT: VALUES--GUARANTEED COST OF INSURANCE
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN PAID PLUS ---------------------------- ---------------------------- --------------------------------- POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT - ------ --------- ------ --------- ------- ------ --------- ------- --------- --------- --------- 1 3,150 2,032 787 100,000 2,180 935 100,000 2,328 1,083 100,000 2 6,457 3,968 2,498 100,000 4,392 2,922 100,000 4,834 3,364 100,000 3 9,930 5,807 4,112 100,000 6,636 4,941 100,000 7,538 5,843 100,000 4 13,577 7,547 5,627 100,000 8,912 6,992 100,000 10,459 8,539 100,000 5 17,406 9,180 7,035 100,000 11,214 9,070 100,000 13,618 11,474 100,000 6 21,426 10,701 8,568 100,000 13,540 11,407 100,000 17,039 14,906 100,000 7 25,647 12,102 10,026 100,000 15,883 13,808 100,000 20,750 18,674 100,000 8 30,080 13,372 11,398 100,000 18,238 16,264 100,000 24,780 22,806 100,000 9 34,734 14,498 12,671 100,000 20,593 18,766 100,000 29,165 27,338 100,000 10 39,620 15,464 13,829 100,000 22,941 21,306 100,000 33,948 32,313 100,000 11 44,751 16,258 14,860 100,000 25,275 23,877 100,000 39,184 37,786 100,000 12 50,139 16,869 15,753 100,000 27,591 26,476 100,000 44,945 43,829 100,000 13 55,796 17,285 16,496 100,000 29,887 29,098 100,000 51,316 50,527 100,000 14 61,736 17,490 17,073 100,000 32,160 31,743 100,000 58,401 57,984 100,000 15 67,972 17,464 17,464 100,000 34,404 34,404 100,000 66,328 66,328 100,000 16 74,521 17,173 17,173 100,000 36,607 36,607 100,000 75,251 75,251 100,000 17 81,397 16,528 16,528 100,000 38,715 38,715 100,000 85,351 85,351 100,000 18 88,617 15,566 15,566 100,000 40,778 40,778 100,000 96,787 96,787 107,434 19 96,198 14,170 14,170 100,000 42,734 42,734 100,000 109,402 109,402 119,248 20 104,158 12,260 12,260 100,000 44,560 44,560 100,000 123,326 123,326 131,959 25 150,340 0 0 0 51,219 51,219 100,000 216,653 216,653 227,486 30 209,282 0 0 0 50,019 50,019 100,000 362,686 362,686 380,820 35 284,509 0 0 0 19,973 19,973 100,000 585,679 585,679 614,963 40 380,519 0 0 0 0 0 0 942,572 942,572 951,998 45 503,055 0 0 0 0 0 0 1,555,949 1,555,949 1,555,949
ASSUMPTIONS: (1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES 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. (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. 69 74 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE PREFERRED NON-SMOKER $1,500.00 ANNUAL PREMIUM ISSUE AGE 35 $150,000 INITIAL DEATH BENEFIT: VALUES--CURRENT COST OF INSURANCE
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN PAID PLUS ---------------------------- ----------------------------- ------------------------------- POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT - ------ --------- ------ --------- ------- ------- --------- ------- ------- --------- --------- 1 1,575 1,116 63 150,000 1,193 140 150,000 1,270 217 150,000 2 3,229 2,206 1,040 150,000 2,430 1,264 150,000 2,664 1,498 150,000 3 4,965 3,262 1,983 150,000 3,704 2,426 150,000 4,185 2,907 150,000 4 6,788 4,297 2,907 150,000 5,032 3,641 150,000 5,861 4,471 150,000 5 8,703 5,317 3,814 150,000 6,419 4,916 150,000 7,714 6,211 150,000 6 10,713 6,321 4,867 150,000 7,868 6,413 150,000 9,760 8,306 150,000 7 12,824 7,310 5,927 150,000 9,381 7,998 150,000 12,021 10,639 150,000 8 15,040 8,283 6,994 150,000 10,962 9,674 150,000 14,519 13,230 150,000 9 17,367 9,241 8,069 150,000 12,614 11,442 150,000 17,278 16,107 150,000 10 19,810 10,185 9,152 150,000 14,339 13,306 150,000 20,327 19,294 150,000 11 22,376 11,113 10,242 150,000 16,142 15,271 150,000 23,695 22,824 150,000 12 25,069 12,028 11,341 150,000 18,025 17,338 150,000 27,416 26,729 150,000 13 27,898 12,928 12,448 150,000 19,992 19,512 150,000 31,527 31,046 150,000 14 30,868 13,815 13,563 150,000 22,047 21,796 150,000 36,069 35,817 150,000 15 33,986 14,687 14,687 150,000 24,194 24,194 150,000 41,086 41,086 150,000 16 37,261 15,547 15,547 150,000 26,437 26,437 150,000 46,629 46,629 150,000 17 40,699 16,393 16,393 150,000 28,780 28,780 150,000 52,753 52,753 150,000 18 44,309 17,226 17,226 150,000 31,227 31,227 150,000 59,519 59,519 150,000 19 48,099 18,046 18,046 150,000 33,784 33,784 150,000 66,993 66,993 150,000 20 52,079 18,853 18,853 150,000 36,455 36,455 150,000 75,251 75,251 150,000 25 75,170 20,535 20,535 150,000 49,677 49,677 150,000 130,294 130,294 174,594 30 104,641 19,990 19,990 150,000 64,673 64,673 150,000 219,425 219,425 267,698 35 142,254 15,713 15,713 150,000 81,476 81,476 150,000 362,518 362,518 420,521 40 190,260 4,856 4,856 150,000 100,560 100,560 150,000 593,019 593,019 634,531 45 251,528 0 0 0 123,575 123,575 150,000 966,984 966,984 1,015,333
ASSUMPTIONS: (1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES 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. (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. 70 75 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE PREFERRED NON-SMOKER $1,500.00 ANNUAL PREMIUM ISSUE AGE 35 $150,000 INITIAL DEATH BENEFIT: VALUES--GUARANTEED COST OF INSURANCE
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN PAID PLUS ----------------------------- ---------------------------- ----------------------------- POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT - ------ --------- ------- --------- ------- ------ --------- ------- ------- --------- ------- 1 1,575 1,115 62 150,000 1,192 138 150,000 1,269 215 150,000 2 3,229 2,200 1,035 150,000 2,424 1,258 150,000 2,657 1,492 150,000 3 4,965 3,253 1,975 150,000 3,695 2,417 150,000 4,175 2,896 150,000 4 6,788 4,272 2,882 150,000 5,005 3,614 150,000 5,833 4,442 150,000 5 8,703 5,256 3,753 150,000 6,353 4,850 150,000 7,644 6,140 150,000 6 10,713 6,203 4,749 150,000 7,740 6,286 150,000 9,623 8,168 150,000 7 12,824 7,111 5,728 150,000 9,163 7,781 150,000 11,783 10,401 150,000 8 15,040 7,980 6,691 150,000 10,626 9,337 150,000 14,146 12,858 150,000 9 17,367 8,807 7,635 150,000 12,125 10,953 150,000 16,729 15,557 150,000 10 19,810 9,593 8,560 150,000 13,664 12,631 150,000 19,557 18,524 150,000 11 22,376 10,333 9,462 150,000 15,238 14,367 150,000 22,650 21,779 150,000 12 25,069 11,026 10,338 150,000 16,849 16,162 150,000 26,037 25,350 150,000 13 27,898 11,669 11,189 150,000 18,495 18,015 150,000 29,748 29,267 150,000 14 30,868 12,262 12,011 150,000 20,178 19,926 150,000 33,818 33,566 150,000 15 33,986 12,800 12,800 150,000 21,893 21,893 150,000 38,282 38,282 150,000 16 37,261 13,281 13,281 150,000 23,642 23,642 150,000 43,185 43,185 150,000 17 40,699 13,697 13,697 150,000 25,419 25,419 150,000 48,571 48,571 150,000 18 44,309 14,039 14,039 150,000 27,217 27,217 150,000 54,488 54,488 150,000 19 48,099 14,301 14,301 150,000 29,033 29,033 150,000 60,997 60,997 150,000 20 52,079 14,473 14,473 150,000 30,858 30,858 150,000 68,161 68,161 150,000 25 75,170 13,667 13,667 150,000 39,927 39,927 150,000 116,943 116,943 156,704 30 104,641 8,801 8,801 150,000 48,070 48,070 150,000 196,219 196,219 239,388 35 142,254 0 0 0 53,048 53,048 150,000 321,962 321,962 373,476 40 190,260 0 0 0 50,256 50,256 150,000 522,611 522,611 559,194 45 251,528 0 0 0 26,905 26,905 150,000 846,942 846,942 889,290
ASSUMPTIONS: (1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES 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. (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. 71 76 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE PREFERRED NON-SMOKER $4,500.00 ANNUAL PREMIUM ISSUE AGE 55 $150,000 INITIAL DEATH BENEFIT: VALUES--CURRENT COST OF INSURANCE
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN PAID PLUS ------------------------------ ----------------------------- --------------------------------- POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT - ------ --------- -------- --------- ------- ------- --------- ------- --------- --------- --------- 1 4,725 3,081 1,220 150,000 3,304 1,443 150,000 3,527 1,666 150,000 2 9,686 6,093 3,895 150,000 6,735 4,537 150,000 7,405 5,207 150,000 3 14,896 9,077 6,541 150,000 10,341 7,806 150,000 11,716 9,181 150,000 4 20,365 12,033 9,160 150,000 14,133 11,260 150,000 16,508 13,635 150,000 5 26,109 14,961 11,751 150,000 18,118 14,907 150,000 21,835 18,625 150,000 6 32,139 17,863 14,670 150,000 22,307 19,114 150,000 27,757 24,564 150,000 7 38,471 20,737 17,628 150,000 26,710 23,602 150,000 34,341 31,232 150,000 8 45,120 23,584 20,628 150,000 31,338 28,382 150,000 41,659 38,703 150,000 9 52,101 26,405 23,668 150,000 36,204 33,467 150,000 49,794 47,057 150,000 10 59,431 29,199 26,750 150,000 41,318 38,869 150,000 58,837 56,388 150,000 11 67,127 31,967 29,873 150,000 46,693 44,599 150,000 68,889 66,795 150,000 12 75,208 34,710 33,038 150,000 52,344 50,672 150,000 80,065 78,393 150,000 13 83,694 37,426 36,244 150,000 58,284 57,102 150,000 92,487 91,305 150,000 14 92,604 40,118 39,493 150,000 64,527 63,903 150,000 106,297 105,672 150,000 15 101,959 42,784 42,784 150,000 71,090 71,090 150,000 121,648 121,648 150,000 16 111,782 45,426 45,426 150,000 77,989 77,989 150,000 138,691 138,691 159,495 17 122,096 48,043 48,043 150,000 85,240 85,240 150,000 157,498 157,498 177,972 18 132,926 50,635 50,635 150,000 92,863 92,863 150,000 178,243 178,243 197,850 19 144,297 53,203 53,203 150,000 100,875 100,875 150,000 201,132 201,132 219,234 20 156,237 55,747 55,747 150,000 109,297 109,297 150,000 226,390 226,390 242,238 25 225,511 53,599 53,599 150,000 155,044 155,044 162,796 394,402 394,402 414,123 30 313,924 38,775 38,775 150,000 212,310 212,310 222,925 662,076 662,076 695,180 35 426,763 0 0 0 279,543 279,543 293,520 1,082,860 1,082,860 1,137,003 40 570,779 0 0 0 362,287 362,287 365,910 1,761,618 1,761,618 1,779,234 45 754,583 0 0 0 470,852 470,852 470,852 2,901,097 2,901,097 2,901,097
ASSUMPTIONS: (1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES 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. (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. 72 77 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE PREFERRED NON-SMOKER $4,500.00 ANNUAL PREMIUM ISSUE AGE 55 $150,000 INITIAL DEATH BENEFIT: VALUES--GUARANTEED COST OF INSURANCE
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN PAID PLUS ---------------------------- ---------------------------- --------------------------------- POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT - ------ --------- ------ --------- ------- ------ --------- ------- --------- --------- --------- 1 4,725 3,078 1,218 150,000 3,301 1,440 150,000 3,524 1,663 150,000 2 9,686 6,011 3,813 150,000 6,651 4,453 150,000 7,318 5,120 150,000 3 14,896 8,799 6,264 150,000 10,051 7,516 150,000 11,413 8,877 150,000 4 20,365 11,438 8,565 150,000 13,501 10,628 150,000 15,839 12,966 150,000 5 26,109 13,917 10,707 150,000 16,993 13,783 150,000 20,627 17,417 150,000 6 32,139 16,228 13,035 150,000 20,522 17,329 150,000 25,814 22,621 150,000 7 38,471 18,359 15,251 150,000 24,080 20,972 150,000 31,441 28,333 150,000 8 45,120 20,294 17,337 150,000 27,658 24,701 150,000 37,557 34,601 150,000 9 52,101 22,011 19,275 150,000 31,240 28,504 150,000 44,213 41,477 150,000 10 59,431 23,491 21,042 150,000 34,815 32,366 150,000 51,477 49,028 150,000 11 67,127 24,713 22,619 150,000 38,372 36,278 150,000 59,433 57,339 150,000 12 75,208 25,662 23,991 150,000 41,909 40,238 150,000 68,191 66,519 150,000 13 83,694 26,319 25,137 150,000 45,421 44,239 150,000 77,881 76,699 150,000 14 92,604 26,661 26,036 150,000 48,904 48,279 150,000 88,663 88,038 150,000 15 101,959 26,658 26,658 150,000 52,352 52,352 150,000 100,732 100,732 150,000 16 111,782 26,260 26,260 150,000 55,746 55,746 150,000 114,324 114,324 150,000 17 122,096 25,333 25,333 150,000 59,010 59,010 150,000 129,718 129,718 150,000 18 132,926 23,935 23,935 150,000 62,218 62,218 150,000 147,087 147,087 163,267 19 144,297 21,888 21,888 150,000 65,282 65,282 150,000 166,228 166,228 181,188 20 156,237 19,077 19,077 150,000 68,169 68,169 150,000 187,355 187,355 200,470 25 225,511 0 0 0 79,377 79,377 150,000 328,965 328,965 345,413 30 313,924 0 0 0 80,791 80,791 150,000 550,545 550,545 578,072 35 426,763 0 0 0 47,336 47,336 150,000 888,895 888,895 933,340 40 570,779 0 0 0 0 0 0 1,430,415 1,430,415 1,444,719 45 754,583 0 0 0 0 0 0 2,361,113 2,361,113 2,361,113
ASSUMPTIONS: (1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES 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. (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. 73 78 APPENDIX B TABLE OF DEATH BENEFIT FACTORS
ATTAINED ATTAINED ATTAINED ATTAINED AGE* PERCENT AGE* PERCENT AGE* PERCENT AGE* PERCENT - -------- ------- -------- ------- -------- ------- -------- ------- 0-40 250 50 185 60 130 70 115 41 243 51 178 61 128 71 113 42 236 52 171 62 126 72 111 43 229 53 164 63 124 73 109 44 222 54 157 64 122 74 107 45 215 55 150 65 120 75-90 105 46 209 56 146 66 119 91 104 47 203 57 142 67 118 92 103 48 197 58 138 68 117 93 102 49 191 59 134 69 116 94 101 95-99 100
* ATTAINED AGE AS OF THE BEGINNING OF THE POLICY YEAR 74 79 (This page intentionally left blank) 75 80 PROSPECTUS-- , 1999 - -------------------------------------------------------------------------------- FLEXIBLE PREMIUM 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 (800) 321-9313 This Prospectus describes a variable life insurance policy of Kemper Investors Life Insurance Company. The Policy provides life insurance and accumulates variable Cash Value. Policy benefits depend upon the investment experience of the KILICO Variable Separate Account. Generally, Policy premiums are flexible. The Policy is "life insurance" for federal tax purposes. If the Policy is a modified endowment contract, different tax rules apply to distributions. See "Federal Tax Matters", page 21 for a discussion of laws that affect the tax treatment of the Policy. A Policy owner has the following choices for allocating premium: - the Fixed Account, which accrues interest at our guaranteed rate, and - the Subaccounts of the Separate Account, which invest in portfolios of underlying mutual funds. The following portfolios of underlying mutual funds are currently available under the Policy: - Investors Fund Series - Kemper High Yield - Kemper Government Securities - Kemper Dreman High Return Equity - Kemper Small Cap Growth - Janus Aspen Series - Capital Appreciation Portfolio - PIMCO Variable Insurance Trust - PIMCO Low Duration Bond - PIMCO Foreign Bond - - Templeton Variable Products Series Fund - Templeton Developing Markets Fund (Class 2 Shares) - - Scudder Variable Life Investment Fund - Scudder VLIF International (A-Shares) - Scudder VLIF Growth and Income (A-Shares) - Scudder VLIF Bond (A-Shares) - Scudder VLIF Money Market You may obtain more information about these portfolios in the attached prospectuses. Not all portfolios described in the prospectuses may be available under the Policy. The Policy owner chooses from two death benefit options. The Death Benefit is at least the amount shown in the Policy Specifications, unless there are loans. Cash Value is not guaranteed. If the Surrender Value does not cover all Policy charges, the Policy will lapse. The Policy Specifications show the guarantee premium and the guarantee period. The Policy will not lapse during the guarantee period if the guarantee premium is paid. The Policy owner may cancel the Policy and receive a refund during the Free-Look Period. If you already own a flexible premium variable life insurance policy, it may not be advantageous to buy additional insurance or to replace your policy with the Policy described in this Prospectus. THIS PROSPECTUS MUST BE ACCOMPANIED OR PRECEDED BY A CURRENT PROSPECTUS FOR THE AVAILABLE UNDERLYING PORTFOLIOS. YOU SHOULD READ AND RETAIN ALL PROSPECTUSES FOR FUTURE REFERENCE. YOU CAN FIND THIS PROSPECTUS AND OTHER INFORMATION ABOUT THE SEPARATE ACCOUNT REQUIRED TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC) AT THE SEC'S WEB SITE AT HTTP://WWW.SEC.GOV. THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. 81 TABLE OF CONTENTS ===================================================================
Page ---- DEFINITIONS................................................. 1 SUMMARY..................................................... 2 KILICO AND THE SEPARATE ACCOUNT............................. 4 THE FUNDS................................................... 5 FIXED ACCOUNT OPTION........................................ 7 THE POLICY.................................................. 8 POLICY BENEFITS AND RIGHTS.................................. 10 CHARGES AND DEDUCTIONS...................................... 14 GENERAL PROVISIONS.......................................... 17 DOLLAR COST AVERAGING....................................... 19 SYSTEMATIC WITHDRAWAL PLAN.................................. 20 DISTRIBUTION OF POLICIES.................................... 20 FEDERAL TAX MATTERS......................................... 20 LEGAL CONSIDERATIONS........................................ 23 SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS................ 23 VOTING INTERESTS............................................ 23 STATE REGULATION OF KILICO.................................. 23 DIRECTORS AND OFFICERS OF KILICO............................ 24 LEGAL MATTERS............................................... 26 LEGAL PROCEEDINGS........................................... 26 YEAR 2000 COMPLIANCE........................................ 26 EXPERTS..................................................... 26 REGISTRATION STATEMENT...................................... 27 FINANCIAL STATEMENTS........................................ 27 CHANGE OF ACCOUNTANTS....................................... 27 APPENDIX A ILLUSTRATIONS OF CASH VALUES, CASH SURRENDER VALUES AND DEATH BENEFITS................................. 70 APPENDIX B TABLE OF DEATH BENEFIT FACTORS................... 79
82 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 nearest 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, Fixed Account and Loan Account. DATE OF RECEIPT--The date on which a request, form or payment is received at our home office, provided: (1) that date is a Valuation Date and (2) we receive the request, form or payment before the close of the New York Stock Exchange (usually 3:00 p.m. Long Grove time). Otherwise, the next Valuation Date. DEBT--The sum of (1) the principal of any outstanding loan, plus (2) any loan interest due or accrued to KILICO. FIXED ACCOUNT--The amount of assets held in the General Account attributable to the fixed portion of the Policy. FREE-LOOK PERIOD--The time when a Policy owner may cancel the Policy and receive a refund. This time depends on the state where the Policy is issued; however, it will be at least 10 days from the date the owner receives the Policy. FUNDS--The underlying mutual funds 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--The maximum initial amount of premium that can be paid while retaining qualification as a life insurance policy under the Internal Revenue Code. INSURED--The person whose life is covered by the Policy and who is named in the Policy Specifications. ISSUE DATE--The date shown in the Policy Specifications. Incontestability and suicide periods are measured from the Issue Date. LOAN ACCOUNT--The amount of assets transferred from the Separate Account and the Fixed Account and held in the General Account as collateral for Debt. MATURITY DATE--The Policy Date anniversary nearest the Insured's 100th birthday. MONTHLY PROCESSING DATE--The same day in each month as the Policy Date. 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. PLANNED PREMIUM--The scheduled premium specified by the Policy owner in the application. POLICY DATE--The date shown in the Policy Specifications. The Policy Date is used to determine Policy Years and Monthly Processing Dates. The Policy Date is the date that insurance coverage takes effect subject to principles of conditional receipt. 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. SPECIFIED AMOUNT--The amount chosen by the Policy owner and used to calculate the death benefit. The Specified Amount is shown in the Policy Specifications. SUBACCOUNT--A subdivision of the Separate Account. SURRENDER VALUE--Cash Value minus (1) any applicable Surrender Charge and minus (2) any Debt. TRADE DATE--The date 30 days following the date the Policy owner completes all requirements for coverage and we record coverage under the Policy as in force. 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 83 SUMMARY This section summarizes this Prospectus. Please read the entire Prospectus. You should refer to the heading "Definitions" for the meaning of certain terms. If states require variations, they appear in supplements attached to this Prospectus or in endorsements to the Policy. Unless otherwise indicated, this Prospectus describes an in force Policy with no loans. The Policy owner pays a premium for life insurance coverage on the Insured. Generally, an owner may choose the amount and frequency of premium payments. 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 investment experience. Cash Value is not guaranteed. If the Surrender Value is insufficient to pay Policy charges, the Policy will lapse unless an additional premium payment or loan repayment is made. The Policy will remain in force during the guarantee period if the premiums paid, minus withdrawals and Debt, are at least equal to the guarantee premiums. (See "The Policy--Premiums and Allocation of Premiums and Separate Account Value," page 8, "Charges and Deductions," page 14, and "Policy Benefits and Rights," page 10.) A Policy may be issued as or become a modified endowment contract as a result of a material change or reduction in benefits as defined by the Internal Revenue Code. The Policy may also become a modified endowment contract if excess premiums are paid. For a Policy treated as a modified endowment contract, certain distributions will be included in the Policy owner's gross federal income (See "Federal Tax Matters," page 20.) The purpose of the Policy is to provide insurance protection for the beneficiary. The Policy is not comparable to a systematic investment plan of a mutual fund. POLICY BENEFITS CASH VALUE. Cash Value reflects the amount and frequency of premium payments, the investment experience of the selected Subaccounts, any values in the Fixed Account and Loan Account, and Policy charges. The Policy owner bears the entire investment risk on amounts allocated to the Separate Account. We do not guarantee Separate Account Value. (See "Policy Benefits and Rights--Cash Value," page 12.) The Policy owner may surrender a Policy at any time and receive the Surrender Value. The Surrender Value is the Cash Value minus surrender charges and outstanding Debt. Partial withdrawals are available subject to restrictions. (See "Policy Benefits and Rights--Surrender Privilege," page 14.) POLICY LOANS. The Policy owner may borrow up to 90% of Cash Value minus surrender charges. The minimum amount of a loan is $500. Interest is charged at an effective annual rate of 4.50% in the first nine Policy Years and 3.00% thereafter. (See "Federal Tax Matters," page 20.) When a loan is made, a portion of Cash Value equal to the loan amount is transferred from the Separate Account and the Fixed Account (pro rata, unless the Policy owner requests otherwise) to the Loan Account. We credit 3% annual interest to Cash Values held in the Loan Account. (See "Policy Benefits and Rights--Policy Loans," page 13.) If the Policy is a modified endowment contract, a loan is treated as a taxable distribution. (See "Federal Tax Matters," page 20.) DEATH BENEFITS. An in force Policy pays a death benefit payment upon the death of the Insured. The Policy has two death benefit options. Under Option A, the death benefit is the Specified Amount stated in the Policy Specifications. Under Option B, the death benefit is the Specified Amount stated in the Policy Specifications plus the Cash Value. The death benefit is never less than the multiple of Cash Value specified in Appendix B. The death benefit payable is reduced by any Debt. (See "Policy Benefits and Rights--Death Benefits," page 10.) PREMIUMS The amount and frequency of premium payments are flexible. The Policy owner specifies a Planned Premium on the application. However, the owner is not required to make the planned premiums, and, subject to certain restrictions, may make premium payments in any amount and at any frequency. The amount, frequency, and period of time over which an owner pays premiums affects whether the Policy will be classified as a modified 2 84 endowment contract. The minimum monthly premium payment is $50. Other minimums apply for other payment modes. Payment of the Planned Premium does not guarantee that a Policy remains in force. Instead, Surrender Value must be sufficient to cover all Policy charges for the Policy to remain in force. A Policy will remain in force during the guarantee period if premiums paid, less withdrawals and Debt, equal or exceed the sum of the guarantee premiums. (See "The Policy--Premiums," page 8.) THE SEPARATE ACCOUNT ALLOCATION OF PREMIUMS. The portion of the premium available for allocation equals the premium paid less applicable charges. A Policy owner indicates in the application the percentages of premium to be allocated among the Subaccounts of the Separate Account and the Fixed Account. The Policy currently offers twelve Subaccounts, each of which invests in shares of a designated portfolio of one of the Funds. The initial premium, minus applicable charges, is allocated to the Scudder VLIF Money Market Subaccount on the day after receipt. On the Trade Date, the Separate Account Value in the Scudder VLIF Money Market Subaccount is allocated among the Subaccounts and the Fixed Account in accordance with the Policy owner's instructions in the application. (See "The Policy -- Policy Issue," page 8.) TRANSFERS. The Policy owner may transfer Separate Account Value among the Subaccount once every fifteen days. One annual transfer is permitted between the Fixed Account and the Subaccounts. (See "Allocation of Premiums and Separate Account Value," page 8.) THE FUNDS The following portfolios of Investors Fund Series are currently available for investment by the Separate Account: - KEMPER HIGH YIELD PORTFOLIO - KEMPER GOVERNMENT SECURITIES PORTFOLIO - KEMPER-DREMAN HIGH RETURN EQUITY PORTFOLIO - KEMPER SMALL CAP GROWTH PORTFOLIO. The following portfolios of Janus Aspen Series are currently available for investment by the Separate Account: - CAPITAL APPRECIATION PORTFOLIO ("JANUS ASPEN CAPITAL APPRECIATION PORTFOLIO") The following portfolios of PIMCO Variable Insurance Trust are currently available for investment by the Separate Account: - PIMCO LOW DURATION BOND - PIMCO FOREIGN BOND The following portfolio of Templeton Variable Products Series Fund is currently available for investment by the Separate Account: - TEMPLETON DEVELOPING MARKETS FUND (CLASS 2 SHARES). The following portfolios of Scudder Variable Life Investment Fund are currently available for investment by the Separate Account: - SCUDDER VLIF INTERNATIONAL (A-SHARES) - SCUDDER VLIF GROWTH AND INCOME (A-SHARES) - SCUDDER VLIF BOND (A SHARES) - SCUDDER VLIF MONEY MARKET For a more detailed description of the Funds, see "The Funds," page 5, the Funds' prospectuses, and Statements of Additional Information available upon request. 3 85 CHARGES We deduct a state and local premium tax charge of 2.5% from each premium payment before net premium is allocated. In addition, we deduct a charge of 1% of each premium payment to compensate us for corporate income tax liability. (See Charges and Deductions--Deductions from Premiums, page 14.) We currently do not deduct any other charges from premium or the Separate Account for federal, state or other taxes. Should we determine that these taxes apply, we may make deductions from the Separate Account to pay those taxes. (See "Federal Tax Matters," page 20.) We will deduct a charge from Cash Value in each Subaccount and the Fixed Account on the Policy Date and on each Monthly Processing Date for the cost of life insurance coverage. In addition, we deduct an asset charge, at an annual rate of .90%, from each Subaccount on a daily basis for our assumption of mortality and expense risks. (See "Charges and Deductions--Cost of Insurance Charge and Mortality and Expense Risk Charge," pages 14 and 15, respectively.) On each Monthly Processing Date, we deduct from Cash Value a $5 per month administrative expense charge. (See "Charges and Deductions--Monthly Administrative Charge," page 15.) We deduct a surrender charge if the Policy is surrendered or the Cash Value is applied under a Settlement Option prior to the 15th Policy Year (or the 15th Policy Year following an increase in Specified Amount). (See "Policy Benefits and Rights--Surrender Privilege," page 14.) The Policy owner indirectly bears the annual Fund operating expenses of the Portfolios in which the Subaccounts invest. These may include management fees, 12b-1 fees and other expenses. (See "Charges and Deductions--Charges Against the Funds," page 16.) TAX TREATMENT UNDER CURRENT FEDERAL TAX LAW Under existing tax law, any increase in Cash Value is generally not taxable until a distribution occurs through a withdrawal or surrender. Generally, distributions are not included in income until the amount of the distributions exceeds the premiums paid for the Policy. If the Policy is a modified endowment contract, a loan is also treated as a distribution. Generally, distributions from a modified endowment contract (including loans) are included in income to the extent the Cash Value exceeds premiums paid. A change of Owners, an assignment, a loan or a surrender of the Policy may have tax consequences. Death Benefits payable under the Policy are generally excludable from the gross income of the Beneficiary. As a result, the Beneficiary would not be subject to income tax on the Death Benefit. (See "Federal Tax Matters," page 20.) FREE-LOOK PERIOD The Policy owner may examine a Policy and return it for a refund during the Free-Look Period. The length of the Free-Look Period depends on the state where the Policy is issued; however, it will be at least 10 days from the date the owner receives the Policy. (See "Policy Benefits and Rights--Free-Look Period and Exchange Rights," page 14.) ILLUSTRATIONS OF CASH VALUES, SURRENDER VALUES, DEATH BENEFITS Tables in Appendix A illustrate Cash Values, Surrender Values and Death Benefits. These illustrations are based on Policy charges and hypothetical assumed rates of return for the Separate Account. The Separate Account's investment experience will differ, and actual Policy values will be higher or lower than those illustrated. 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 is a wholly-owned subsidiary of Kemper Corporation, a nonoperating holding company. Kemper Corporation is a 4 86 wholly-owned subsidiary of Zurich Holding Company of America ("ZHCA"), which is a wholly-owned subsidiary of Zurich Insurance Company ("Zurich"). Zurich is a wholly-owned subsidiary of Zurich Financial Services ("ZFS"). ZFS was formed in the September, 1998 merger of the Zurich Group with the financial services business of B.A.T. Industries. ZFS is owned by Zurich Allied A.G. and Allied Zurich p.l.c. fifty-seven percent and forty-three percent, respectively. KILICO offers life insurance and annuity products and is admitted to do business in the District of Columbia and all states except New York. SEPARATE ACCOUNT KILICO Variable Separate Account (the "Separate Account") was established as a separate investment account on January 22, 1987. The Separate Account receives and invests net premiums under the Policy. In addition, the Separate Account may receive and invest net premiums for other variable life insurance policies offered by KILICO. The Separate Account is administered and accounted for as part of our general business. The income, capital gains or capital losses of the Separate Account are credited to or charged against Separate Account assets, without regard to the income, capital gains or capital losses of any other separate account or any other business we conduct. The Policy benefits are our obligations. The Separate Account is registered with the Securities and Exchange Commission ("Commission") as a unit investment trust under the Investment Company Act of 1940 (the "1940 Act"). However, the Commission does not supervise the management, investment practices or policies of the Separate Account or KILICO. The Policy currently offers twelve Subaccounts. Additional Subaccounts may be added in the future. Not all Subaccounts may be available in all jurisdictions or under all Policies. THE FUNDS The Separate Account invests in shares of the Investors Fund Series, Janus Aspen Series, PIMCO Variable Insurance Trust, Templeton Variable Products Series Fund and Scudder Variable Life Investment Fund. Each is a series type mutual fund registered as an open-end management investment company. The Commission does not supervise their management, investment practices or policies. The Funds provide investment vehicles for variable life insurance and variable annuity contracts. Shares of the Funds currently are sold only to insurance company separate accounts and certain qualified retirement plans. In addition to the Separate Account, shares of the Funds 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 variable life insurance separate accounts, variable annuity separate accounts and qualified retirement plans to invest simultaneously in the Funds. Currently we do not foresee disadvantages to variable life insurance owners, variable annuity owners or qualified retirement plans. The Funds have an obligation to monitor events for material conflicts between owners and determine what action, if any, should be taken. In addition, if we believe that a Fund's response to any of those events or conflicts insufficiently protects owners, we will take appropriate action on our own. The Separate Account invests in the portfolios of the Funds. 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, gains or losses of one portfolio generally have no effect on the investment performance of any other portfolio. INVESTORS FUND SERIES The Investors Fund Series portfolios in which the Separate Account invests are summarized below: KEMPER HIGH YIELD PORTFOLIO: This Portfolio seeks a high level of current income by investing in fixed-income securities. KEMPER GOVERNMENT SECURITIES PORTFOLIO: This Portfolio seeks high current return consistent with preservation of capital from a portfolio composed primarily of U.S. Government securities. KEMPER-DREMAN HIGH RETURN EQUITY PORTFOLIO: This Portfolio seeks to achieve a high rate of total return. 5 87 KEMPER SMALL CAP GROWTH PORTFOLIO: This Portfolio seeks maximum appreciation of investors' capital. Scudder Kemper Investments, Inc. ("SKI") (formerly Zurich Kemper Investments, Inc.), an affiliate of KILICO, serves as the investment manager for each Portfolio of the Investors Fund Series specified above. Dreman Value Management L.L.C. ("DVM") serves as sub-adviser for the Kemper-Dreman High Return Equity Portfolio. Under the terms of the sub-advisory agreement between SKI and DVM, DVM manages the investment and reinvestment of the Portfolio's assets in accordance with the investment objectives, policies and limitations and subject to the supervision of SKI and the Board of Trustees. JANUS ASPEN SERIES The Janus Aspen Series portfolio in which the Separate Account invests is summarized below: CAPITAL APPRECIATION PORTFOLIO: This Portfolio seeks long-term growth of capital. Janus Capital Corporation is the investment adviser for the portfolio of the Janus Aspen Series specified above. PIMCO VARIABLE INSURANCE TRUST The PIMCO Variable Insurance Trust portfolios in which the Separate Account invests are summarized below: PIMCO LOW DURATION BOND PORTFOLIO: This Portfolio seeks to maximize total return, consistent with preservation of capital and prudent investment management. PIMCO FOREIGN BOND PORTFOLIO: This Portfolio seeks to maximize total return, consistent with preservation of capital and prudent investment management. Pacific Investment Management Company is the investment adviser for each portfolio of the PIMCO Variable Insurance Trust specified above. TEMPLETON VARIABLE PRODUCTS SERIES FUND The Templeton Variable Products Series Fund portfolio in which the Separate Account invests is summarized below: TEMPLETON DEVELOPING MARKETS FUND (CLASS 2 SHARES): This Portfolio seeks long-term capital appreciation. Templeton Asset Management Ltd. is the investment manager for the portfolio of the Templeton Variable Products Series Fund specified above. SCUDDER VARIABLE LIFE INVESTMENT FUND The Scudder Variable Life Investment Fund portfolios in which the Separate Account invests are summarized below: SCUDDER VLIF INTERNATIONAL PORTFOLIO (A-SHARES): This Portfolio seeks long-term growth of capital principally from a diversified portfolio of foreign equity securities. SCUDDER VLIF GROWTH AND INCOME PORTFOLIO (A-SHARES): This Portfolio seeks long-term growth of capital, current income and growth of income from a portfolio consisting primarily of common stocks and securities convertible into common stocks. SCUDDER VLIF BOND PORTFOLIO (A-SHARES): This Portfolio seeks high income from a high quality portfolio of bonds. SCUDDER VLIF MONEY MARKET PORTFOLIO: This Portfolio seeks stability and current income from a portfolio of money market instruments. Scudder Kemper Investments, Inc. ("SKI") is the investment manager for each portfolio of the Scudder Variable Life Investment Fund specified above. The Portfolios may not achieve their stated objectives. More detailed information, including a description of risks involved in investing in the Portfolios, is found in the Funds' prospectuses and Statements of Additional Information. We will send a Portfolio prospectus and Fund Statement of Additional Information upon request. 6 88 CHANGE OF INVESTMENTS We reserve the right to make additions to, deletions from, or substitutions for the shares held by the Separate Account or that the Separate Account may purchase. We reserve the right to eliminate the shares of any of the portfolios and to substitute shares of another portfolio or of another investment company, if the shares of a portfolio are no longer available for investment, or if in our judgment further investment in any portfolio becomes inappropriate in view of the purposes of the Policy or the Separate Account. We may also eliminate or combine one or more subaccounts, transfer assets, or substitute one subaccount for another subaccount, if, in our discretion, marketing, tax or investment conditions warrant. We will not substitute any shares attributable to a Policy owner's interest in a Subaccount without notice to the owner and the Commission's prior approval, if required. 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 Policy owners. We also reserve the right to establish additional subaccounts of the Separate Account, each of which would invest in a new portfolio of the Funds, or in shares of another investment company. New subaccounts may be established when, in our sole discretion, marketing needs or investment conditions warrant. New subaccounts may be made available to existing owners as we determine. If we deem it to be in the best interests of persons having voting interests 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 our other separate accounts. To the extent permitted by law, we may also transfer assets of the Separate Account to another separate account, or to the General Account. FIXED ACCOUNT OPTION AMOUNTS ALLOCATED OR TRANSFERRED TO THE FIXED ACCOUNT ARE PART OF OUR GENERAL ACCOUNT, SUPPORTING INSURANCE AND ANNUITY OBLIGATIONS. INTERESTS IN THE FIXED ACCOUNT ARE NOT REGISTERED UNDER THE SECURITIES ACT OF 1933 ("1933 ACT"), AND THE FIXED ACCOUNT IS NOT REGISTERED AS AN INVESTMENT COMPANY UNDER THE INVESTMENT COMPANY ACT OF 1940 ("1940 ACT"). ACCORDINGLY, NEITHER THE FIXED ACCOUNT NOR ANY FIXED ACCOUNT INTERESTS GENERALLY ARE SUBJECT TO THE PROVISIONS OF THE 1933 OR 1940 ACTS. WE HAVE BEEN ADVISED THAT THE STAFF OF THE COMMISSION HAS NOT REVIEWED THE DISCLOSURES IN THIS PROSPECTUS RELATING TO THE FIXED ACCOUNT. STATEMENTS REGARDING THE FIXED ACCOUNT, HOWEVER, MAY BE SUBJECT TO THE GENERAL PROVISIONS OF THE FEDERAL SECURITIES LAWS RELATING TO THE ACCURACY AND COMPLETENESS OF STATEMENTS MADE IN PROSPECTUSES. Under the Fixed Account Option, we pay a fixed interest rate for stated periods. This Prospectus describes only the aspects of the Policy involving the Separate Account, unless we refer to fixed accumulation and settlement options. We guarantee the interest rate credited to the Fixed Account will be at least 3% annually. At our discretion, we may credit interest in excess of 3%. We reserve the right to change the rate of excess interest credited. We also reserve the right to declare different rates of excess interest depending on when amounts are allocated or transferred to the Fixed Account. As a result, amounts at any designated time may be credited with a different rate of excess interest than the rate previously credited to such amounts and to amounts allocated or transferred at any other designated time. 7 89 THE POLICY POLICY ISSUE Before we issue a Policy, we must receive a completed application and a full initial premium at our home office. We ordinarily issue a Policy only for Insureds Age 1 through 75 who supply satisfactory evidence of insurability. Acceptance of an application is subject to our underwriting requirements. If we decline an application, we will refund the Cash Value in the Scudder VLIF Money Market Subaccount plus the total amount of monthly deductions and deductions against premiums. After underwriting is complete and the Policy is delivered to its owner, insurance coverage begins as of the Policy Date. (See "Premiums," below.) PREMIUMS We must receive premiums at our home office. (See "Distribution of Policies.") Checks must be made payable to KILICO. PLANNED PREMIUMS. A Policy owner specifies a Planned Premium payment on the application that provides for the payment of level premiums over a specified period of time. However, the owner is not required to pay Planned Premiums. The minimum monthly premium is $50. Other minimums are: single premium $5,000; annual $600; semi-annual $300; quarterly $150. The amount, frequency and period of time over which a Policy owner pays premiums may affect whether the Policy will be classified as a modified endowment contract. Accordingly, variations from Planned Premiums may cause the Policy to become a modified endowment contract, and therefore subject to different tax treatment from conventional life insurance contracts for certain pre-death distributions (See "Federal Tax Matters".) Payment of the Planned Premium does not guarantee that a Policy remains in force. Instead, the duration of the Policy depends upon the Policy's Surrender Value. Even if Planned Premiums are paid, the Policy will lapse any time Surrender Value is insufficient to pay the current monthly deductions and a grace period expires without sufficient payment. (See "Policy Lapse and Reinstatement.") A guarantee period and a monthly guarantee premium are specified in the Policy Specifications. The guarantee period ends on the third Policy anniversary. During the guarantee period, the Policy remains in force and no grace period will begin, provided that the total premiums received, minus any withdrawals and any Debt, equals or exceeds the monthly guarantee premium times the number of months since the Policy Date, including the current month. 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.") We may reject or limit any premium payment below the current minimum premium amount, or that would increase the death benefit by more than the amount of the premium. We may return all or a portion of a premium payment will be rejected and returned to the Policy owner if it would disqualify the Policy as life insurance under the Internal Revenue Code. Certain charges are deducted from each premium payment. (See "Charges and Deductions.") The remainder of the premium, known as the net premium, is allocated as described below under "Allocation of Premiums and Separate Account Value." POLICY DATE. The Policy Date is used to determine Policy Years and Monthly Processing Dates. The Policy Date is the date that insurance coverage takes effect. If this date is the 29th, 30th, or 31st of a month, the Policy Date will be the first of the following month. ALLOCATION OF PREMIUMS AND SEPARATE ACCOUNT VALUE ALLOCATION OF PREMIUMS. The initial net premium is allocated to the Scudder VLIF Money Market Subaccount. The Separate Account Value remains in the Scudder VLIF Money Market Subaccount until the Trade Date. On the Trade Date, the Separate Account Value in the Scudder VLIF Money Market Subaccount is allocated to the Subaccounts and the Fixed Account as specified in the application. Additional premiums received will be allocated as specified in the application or in later written instructions received from the Policy owner. The minimum amount of any premium that may be allocated to a Subaccount is $50. Cash Value may be allocated to a total of ten accounts at any given time. 8 90 The Separate Account Value will vary with the investment experience of the chosen Subaccounts. The Policy owner bears the entire investment risk. TRANSFERS. After the Trade Date, Separate Account Value may be transferred among the Subaccounts and into the Fixed Account. These transfers are limited to one transfer every fifteen days. All transfers made during a business day are treated as one transfer. Fixed Account Value may be transferred to one or more Subaccounts. One transfer of Fixed Account Value may be made once each Policy Year in the thirty day period following the end of a Policy Year. Transfer requests must be in writing in a form acceptable to us, or by telephone authorization under forms we authorize. (See "General Provisions--Written Notices and Requests.") The minimum partial transfer amount is $500. No partial transfer may be made if the value of the Policy owner's remaining interest in a Subaccount or the Fixed Account, from which amounts are to be transferred, would be less than $500 after the transfer. We may waive these minimums for reallocations under established third party asset allocation programs. Transfers are based on the Accumulation Unit values next determined following our receipt of valid, complete transfer instructions. We may suspend, modify or terminate the transfer provision. We reserve the right to charge up to $25 for each transfer. We disclaim all liability if we follow in good faith instructions given in accordance with our procedures, including requests for personal identifying information, that are designed to limit unauthorized use of the privilege. Therefore, a Policy owner bears the risk of loss in the event of a fraudulent telephone transfer. If a Policy owner authorizes a third party to transact transfers on the Policy owner's behalf, we will reallocate the Cash Value pursuant to the authorized asset allocation program. However, we do not offer or participate in any asset allocation program and we take no responsibility for any third party asset allocation program. We may suspend or cancel acceptance of a third party's instructions at any time and may restrict the investment options available for transfer under third party authorizations. AUTOMATIC ASSET REALLOCATION. A Policy owner may elect to have transfers made automatically among the Subaccounts on an annual or a quarterly basis so that Cash Value is reallocated to match the percentage allocations in the Policy owner's predefined premium allocation elections. Transfers under this program are not subject to the $500 minimum transfer limitation. An election to participate in the automatic asset reallocation program must be in writing on our form and returned to our home office. POLICY LAPSE AND REINSTATEMENT LAPSE. The Policy will lapse when the Surrender Value is insufficient to cover the current monthly deductions and a grace period expires without a sufficient payment. (See "Charges and Deductions.") The grace period is 61 days. The grace period begins when we send notice that the Surrender Value is insufficient to cover the monthly deductions. If we do not receive a premium payment or loan repayment during the grace period sufficient to keep the Policy in force for three months, the Policy will lapse and terminate without value. If payment is received within the grace period, the premium or loan repayment will be allocated to the Subaccounts and the Fixed Account in accordance with current allocation instructions. Amounts over and above the amounts necessary to prevent lapse may be paid as additional premiums, to the extent permissible. (See "The Policy--Premiums.") We will not accept any payment causing the total premium payment to exceed the maximum payment permitted for life insurance under the guideline premium limits. However, the Policy owner may voluntarily repay a portion of Debt to avoid lapse. The owner may also combine premium payments with Debt repayments. (See "Federal Tax Matters.") The death benefit payable during the grace period will be the Death Benefit in effect immediately prior to the grace period, less any Debt and any unpaid monthly deductions. REINSTATEMENT. If a Policy lapses because of insufficient Surrender Value to cover the monthly deductions, and it has not been surrendered for its Surrender Value, it may be reinstated at any time within three 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 us; (2) payment of a minimum premium sufficient to cover monthly deductions for the grace period and to keep the Policy in force three months; and (3) payment or reinstatement of any Debt which existed at the date of termination of coverage. 9 91 The effective date of reinstatement of a Policy is the Monthly Processing Date that coincides with or next follows the date we approve the application for reinstatement. Suicide and incontestability provisions apply from the effective date of reinstatement. POLICY BENEFITS AND RIGHTS DEATH BENEFITS While the Policy is in force (see "Policy Lapse and Reinstatement--Lapse," above), the death benefit is based on the death benefit option, the Specified Amount and the table of death benefit percentages applicable at the time of death. The death benefit proceeds equal the death benefit minus any Debt and minus any monthly deductions due during the grace period. A Policy owner selects in the application one of two death benefit options: Option A or Option B. Subject to certain restrictions, the owner can change the death benefit option selected. So long as the Policy remains in force, the death benefit under either option will never be less than the Specified Amount. The Policy owner chooses the Specified Amount on the application. The Specified Amount is stated in the Policy Specifications. The minimum Specified Amount is $50,000. OPTION A. Under Option A, the death benefit equals the Specified Amount or, if greater, the Cash Value (determined as of the end of the Valuation Period during which the Insured dies) multiplied by a death benefit percentage. The death benefit percentages vary according to the Insured's age. The death benefit percentage is 250% for an Insured at Age 40 or under, and it declines for older Insureds. In setting the death benefit percentages, we seek to ensure that the Policy will qualify for favorable federal income tax treatment. A table showing the death benefit percentages is in the Appendix B to this Prospectus and in the Policy. OPTION B. Under Option B, the death benefit equals the Specified Amount plus the Cash Value (determined as of the end of the Valuation Period during which the Insured dies) or, if greater, the Cash Value multiplied by a death benefit percentage. The specified percentage is the same as that used in connection with Option A. The death benefit under Option B always varies as Cash Value varies. EXAMPLES OF OPTIONS A AND B. The following examples demonstrate the determination of death benefits under Options A and B. The examples show three Policies--Policies I, II, and III--with the same Specified Amount, but different Cash Values and assume that the Insured is Age 35 at the time of death and that there is no outstanding Debt.
POLICY I POLICY II POLICY III -------- --------- ---------- Specified Amount.......................... $100,000 $100,000 $100,000 Cash Value on Date of Death............... $ 25,000 $ 50,000 $ 75,000 Death Benefit Percentage.................. 250% 250% 250% Death Benefit Under Option A.............. $100,000 $125,000 $187,500 Death Benefit Under Option B.............. $125,000 $150,000 $187,500
Under Option A, the death benefit for Policy I equals $100,000 since the death benefit is the greater of the Specified Amount ($100,000) or the Cash Value at the date of death multiplied by the death benefit percentage ($25,000 X 250% = $62,500). For both Policies II and III under Option A, the Cash Value multiplied by the death benefit percentage ($50,000 X 250% = $125,000 for Policy II; $75,000 X 250% = $187,500 for Policy III) is greater than the Specified Amount ($100,000), so the death benefit equals the higher value. Under Option B, the death benefit for Policy I equals $125,000 since the death benefit is the greater of Specified Amount plus Cash Value ($100,000 + $25,000 = $125,000) or the Cash Value multiplied by the death benefit percentage ($25,000 X 250% = $62,500). Similarly, in Policy II, Specified Amount plus Cash Value ($100,000 + $50,000 = $150,000) is greater than Cash Value multiplied by the death benefit percentage ($50,000 X 250% = $125,000). In Policy III, the Cash Value multiplied by the death benefit percentage ($75,000 X 250% = $187,500) is greater than the Specified Amount plus Cash Value ($100,000 + $75,000 = $175,000), so the death benefit equals the higher value. All calculations of death benefit are made as of the end of the Valuation Period during which the Insured dies. Death benefit proceeds may be paid to a Beneficiary in a lump sum or under the Policy's settlements options. Death Benefits ordinarily are paid within seven days after we receive all required documentation. Payments may be postponed in certain circumstances. (See "General Provisions--Postponement of Payments") 10 92 CHANGES IN DEATH BENEFIT OPTION After the first Policy Year, a Policy owner may change the death benefit option from Option A to Option B, or from Option B to Option A. Changes in the death benefit option may be made, in writing once per Policy Year. The effective date of the change is the next Monthly Processing Date after we accept the change. A change in the death benefit from Option A to Option B reduces the Specified Amount by the amount of the Policy's Cash Value. Therefore, the death benefit payable under Option B at the time of the change equals the amount payable under Option A immediately prior to the change. The change in option affects the determination of the death benefit since Cash Value will then be added to the new Specified Amount, and the death benefit then varies with Cash Value. A change in the death benefit from Option B to Option A increases the Specified Amount by the amount of the Policy's Cash Value. Therefore, the death benefit payable under Option A at the time of the change equals the amount payable under Option B immediately prior to the change. However, the change in option affects the determination of the death benefit since the Cash Value is not added to the Specified Amount in determining the death benefit. The death benefit then equals the new Specified Amount (or, if higher, the Cash Value times the applicable specified percentage). A change in death benefit option may affect the future monthly cost of insurance charge, which varies with the net amount at risk. Generally, net amount at risk is the amount by which the death benefit exceeds Cash Value. (See "Charges and Deductions--Cost of Insurance Charge.") If the death benefit does not equal Cash Value times a death benefit percentage under either Options A or B, changing from Option B to Option A will generally decrease the future net amount at risk. This would decrease the future cost of insurance charges. Changing from Option A to Option B generally results in a net amount at risk that remains level. Such a change, however, results in an increase in the cost of insurance charges over time, since the cost of insurance rates increase with the Insured's Age. CHANGES IN SPECIFIED AMOUNT After the first Policy Year, a Policy owner may increase or decrease the Specified Amount, subject to our approval. A change in Specified Amount may only be made once per Policy Year. The minimum change in Specified Amount is $25,000. Increases are not allowed after the Insured attains age 75. Increasing the Specified Amount could increase the death benefit. Decreasing the Specified Amount could decrease the death benefit. The amount of change in the death benefit will depend, among other things, upon the selected death benefit option and the degree to which the death benefit exceeds the Specified Amount prior to the change. Changing the Specified Amount could affect the subsequent level of death benefit and Policy values. An increase in Specified Amount may increase the net amount at risk, thereby increasing a Policy owner's cost of insurance charge and the guarantee premium amount. However, an increase in Specified Amount does not extend the guarantee period. Conversely, a decrease in Specified Amount may decrease the net amount at risk, thereby decreasing an owner's cost of insurance charge. A decrease in Specified Amount will not decrease the guarantee premium. Decreases in the death benefit may have tax consequences. (See "Federal Tax Matters.") INCREASES. We require additional evidence of insurability for an increase in Specified Amount. DECREASES. Any decrease in Specified Amount is first applied to the most recent increases successively, then to the original Specified Amount. A decrease is not permitted if the Specified Amount would fall below the lesser of the initial Specified Amount or $50,000. If after a decrease in the Specified Amount, total premiums paid exceed the tax law's premium limitations, we will refund the amount exceeding the premium limitations. Some or all of the amount refunded may be subject to tax. (See "Federal Tax Matters.") We reserve the right to deny a requested decrease in Specified Amount. The reasons for denial may include: - our determination that the decrease would cause the Policy to fail the tax guideline premium limitations, resulting in the Policy's termination or - our determination that the decrease would cause the Policy to fail the tax guideline premium limitations because the payments from Cash Value required to effect the decrease exceed Surrender Value. Requests for change in Specified Amount must be made in writing. The requested change becomes effective on the Monthly Processing Date on or next following our acceptance of the request. If the Policy owner is not the Insured, we require the Insured's consent. 11 93 BENEFITS AT MATURITY If the Insured is alive on the Policy Date anniversary nearest the Insured's 100th birthday, we pay the Policy owner the Surrender Value of the Policy. On the Maturity Date, the Policy terminates and we have no further obligations under the Policy. CASH VALUE Cash Value reflects - the investment experience of the selected Subaccounts - the frequency and amount of premiums paid - transfers between Subaccounts - withdrawals - any Fixed Account or Loan Account values - Policy charges A Policy owner may make partial withdrawals of Cash Value or surrender the Policy and receive the Policy's Surrender Value. (See "Surrender Privilege.") Cash Value is not guaranteed. CALCULATION OF CASH VALUE. Cash Value is the total of - Separate Account Value - Fixed Account Value - Loan Account value Cash Value is determined on each Valuation Date. It is first calculated on the Policy Date. On that date, the Cash Value equals the initial premium, minus the monthly deductions for the first Policy Month. (See "Charges and Deductions.") On any Valuation Date, Separate Account Value in any Subaccount equals: (1) Separate Account Value in the Subaccount at the end of the preceding Valuation Period times the Investment Experience Factor (defined below) for the current Valuation Period; plus (2) Any net premiums received and allocated to the Subaccount during the current Valuation Period; plus (3) All amounts transferred to the Subaccount during the current Valuation Period (from a Subaccount, the Fixed Account or the Loan Account for Policy loan repayment (see "Policy Benefits and Rights--Policy Loans,")); minus (4) The pro rata portion of the monthly cost of insurance charge, administrative charge, and any other charges assessed to the Subaccount. (See "Charges and Deductions--Cost of Insurance Charge."); minus (5) All amounts transferred from the Subaccount during the current Valuation Period; minus (6) All amounts withdrawn from the Subaccount during the current Valuation Period; minus (7) All amounts loaned from the Subaccount during the current Valuation Period. There will also be Cash Value in the Loan Account if there is a Policy loan outstanding. The Loan Account is credited with amounts transferred from Subaccounts for Policy loans. The Loan Account balance accrues daily interest at an effective annual rate of 3.00%. (See "Policy Benefits and Rights--Policy Loans.") The Cash Value in the Fixed Account is credited with interest at our declared annual rate. The annual rate will never be less than 3%. ACCUMULATION UNIT VALUE. Each Subaccount has its own Accumulation Unit Value. When net premiums or other amounts are allocated to a Subaccount, 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. 12 94 For each Subaccount, Accumulation Unit Value was initially set at the same unit value as the net asset value of a share of the underlying Fund. The Accumulation Unit Value for each subsequent Valuation Period is the Investment Experience Factor for that Valuation Period times the Accumulation Unit Value for the preceding Valuation 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 due to 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 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 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 we determine 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 preceding Valuation Period; (3) is the factor representing the Mortality and Expense Risk Charge. (See "Charges and Deductions--Mortality and Expense Risk Charge.") POLICY LOANS After the first Policy Year, the Policy owner may borrow all or part of the Policy's maximum loan amount. The maximum loan amount is 90% of Cash Value minus 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. The loan ordinarily is paid within 7 days after we receive a written loan request, although payments may be postponed under certain circumstances. (See "Postponement of Payments," and "Federal Tax Matters.") On the date a loan is made, the loan amount is transferred from the Separate Account and Fixed Account to the Loan Account. Unless the Policy owner directs otherwise, the loan amount is deducted from the Subaccounts and the Fixed Account in proportion to the values that each bears to the total of Separate Account Value and Fixed Account Value at the end of the Valuation Period during which the request is received. Loan interest is charged at an effective annual rate of 4.5% in the first nine Policy Years and 3.00% thereafter. Interest not paid when due is added to the loan amount. Unpaid interest is due upon the earlier of the next Policy Date anniversary or when coverage ceases. The same interest rates apply to unpaid interest. When interest is added to the loan amount, we transfer an equal amount from the Separate Account and the Fixed Account to the Loan Account. Cash Value in the Loan Account earns 3.00% annual interest. Such interest is allocated to the Loan Account. LOAN REPAYMENT. All or any portion of a loan may be repaid at any time. At the time of repayment, the Loan Account is reduced by the repayment amount, adjusted for the difference between interest charged and interest earned. The net repayment amount is allocated to the Subaccounts and the Fixed Account, according to the Policy owner's current allocation instructions, at the end of the Valuation Period during which the repayment is received. These transfers are not limited by the 15 day transfer restriction. EFFECTS OF POLICY LOAN. Policy loans decrease Surrender Value and, therefore, the amount available to pay Policy charges. If Surrender Value on the day preceding a Monthly Processing Date is less than the next monthly deductions we will notify the Policy owner. (See "General Provisions--Written Notices and Requests.") The Policy will lapse and terminate without value, unless we receive a sufficient payment within 61 days of the date notice is sent. (See "The Policy--Policy Lapse and Reinstatement.") EFFECT ON INVESTMENT EXPERIENCE. A Policy Loan affects Cash Value. The collateral for the outstanding loan (the amount held in the Loan Account) does not participate in the experience of the Subaccounts or earn current interest in the Fixed Account. If the interest credited to the Loan Account is more than the amount that would 13 95 have been earned in the Subaccounts or the Fixed Account, the Cash Value will, and the Death Benefit may, be higher as a result of the loan. Conversely, if the amount credited to the Loan Account is less than would have been earned in the Subaccounts or the Fixed Account, the Cash Value, as well as the Death Benefit, may be less. TAX TREATMENT. If the Policy is a modified endowment contract, a loan is treated as a distribution and is includible in income to the extent that Cash Value exceeds premiums paid. Therefore, a loan may result in federal income tax and a 10% tax penalty may also apply. (See "Federal Tax Matters.") SURRENDER PRIVILEGE If the Insured is alive, the Policy owner may surrender the Policy for its Surrender Value. To surrender the Policy, the owner must return the Policy to us, along with a written request. Surrender Value equals Cash Value, minus Surrender Charges and Debt. (See "Surrender Charge," below.) PARTIAL WITHDRAWALS. After the first Policy Year, a Policy owner may withdraw a portion of Surrender Value. The minimum amount of each withdrawal is $500 and when a Surrender Charge is assessable, the maximum amount is 10% of the Surrender Value. A $25 withdrawal charge is imposed for each withdrawal. (See "Charges and Deductions.") A withdrawal decreases Cash Value by the amount of the withdrawal and, if Death Benefit Option A is in effect, reduces Specified Amount by the amount of the withdrawal. FREE-LOOK PERIOD AND EXCHANGE RIGHTS During the Free-Look Period, the Policy owner may examine the Policy and return it for a refund. The time period depends on where the Policy is issued; however, it will be at least 10 days from the date the Policy is received by the owner, or, 45 days after the owner completes the application for insurance, whichever is later. The amount of the refund is the sum of Cash Value in the Kemper Money Market Subaccount plus the total amount of monthly deductions and deductions from Premium. An owner seeking a refund should return the Policy to us or to the agent who sold the Policy. At any time during the first two years after the Issue Date, the Policy owner may exchange the Policy for a non-variable permanent fixed benefit life insurance policy then currently offered by KILICO or an affiliate. Evidence of insurability is not required. 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. All Debt must be repaid and the Policy must be surrendered before the exchange is made. The new policy will have the same Policy Date and issue age as the exchanged Policy. CHARGES AND DEDUCTIONS DEDUCTIONS FROM PREMIUMS We deduct a state and local premium tax charge of 2.5% from each premium payment before net premium is allocated. This charge reimburses us for paying state premium taxes. We expect to pay an average state premium tax rate of approximately 2.5%, but the actual premium tax attributable to a Policy may be more or less. In addition, a charge for federal taxes, equal to 1% of each premium payment, is deducted to compensate us for higher corporate income taxes under the current Internal Revenue Code. COST OF INSURANCE CHARGE We deduct a cost of insurance charge monthly from the Subaccounts and the Fixed Account. This charge covers our anticipated mortality costs. The cost of insurance charge is deducted monthly in advance and is allocated pro rata among the Subaccounts and the Fixed Account. We deduct the cost of insurance by cancelling units 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 is determined on the next Valuation Date. The cost of insurance charge is determined by multiplying the cost of insurance rate (see below) by the "net amount at risk" for each Policy month. The net amount at risk equals 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 issue age, sex, rate class of the Insured and Policy Year. We determine the monthly cost of insurance rates based on our expectations as to future mortality experience. Any change in the schedule of rates applies 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 14 96 Commissioner's Standard Ordinary Smoker and Non-Smoker Mortality Tables, Age Nearest Birthday, published by the National Association of Insurance Commissioners. RATE CLASS. The rate class of an Insured will affect the cost of insurance rate. We currently place Insureds in preferred 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 preferred rates. (See "Charges and Deductions--Cost of Insurance Rate," above.) MORTALITY AND EXPENSE RISK CHARGE We deduct a daily charge, at an annual rate of 0.90%, from the Subaccounts for mortality and expense risks we assume. The mortality and expense risk we assume is that our estimates of longevity and of the expenses incurred over the life of the Policy will not be correct. MONTHLY ADMINISTRATIVE CHARGE We deduct a monthly administrative expense charge to reimburse us for certain expenses related to maintenance of the Policies, accounting and record keeping and periodic reporting to Policy owners. This charge is designed only to reimburse us for actual administrative expenses. Currently, this charge is $5 per month. OTHER CHARGES SURRENDER CHARGE. We deduct a Surrender Charge from Cash Value if the Policy is surrendered or Cash Value is applied under a Settlement Option during the first 14 Policy Years. A Surrender Charge is also assessed during the first 14 Policy Years following an increase in Specified Amount. The Surrender Charge is: (a) an administrative component (issue charge); plus (b) a sales component (deferred sales charge); times (c) the Surrender Charge percentage. During the 14 Policy Years following an increase in Specified Amount, an additional Surrender Charge applies. The additional charge is calculated as described below based on the amount of the increase, years commencing on the date of the increase and Target Premium associated with the increase. The Surrender Charge is determined based upon the date we receive the written request for surrender. (a) Issue Charge. The issue charge is a level charge of $5.00 per thousand of Specified Amount and the sum of coverage amounts for any other insureds. This charge covers the administrative expenses associated with underwriting and issuing a Policy. These expenses include the costs of processing applications, conducting medical examinations, determining insurability and the Insured's underwriting class, and establishing Policy records. (b) Deferred Sales Charge. The deferred sales charge is (i) 30% of premiums paid up to one Target Premium shown in the Policy plus (ii) for the sum of all premiums paid in excess of one Target Premium ("excess premium charge"), a percentage which varies by the issue age of the Insured as follows:
Excess Premium Charge Issue Ages --------------------- ---------- 7.5% 0-65 5.0% 66-75
The deferred sales charge reimburses us for some of the expenses of distributing the Policies. (c) Surrender Charge Percentage. For issue ages up to age 66, the Surrender Charge percentage is 100% for Policy Years 1-5 and declines by 10% each year in Policy Years 6-14 until reaching zero at the beginning of Policy Year 15. For issue ages 66-75, the Surrender Charge percentage is 100% for Policy Years 1-3 and declines by 10% 15 97 each year in Policy Years 4-11 and by 5% in Policy Years 12-14 until reaching zero at the beginning of Policy Year 15.
SURRENDER CHARGE PERCENTAGES SURRENDER CHARGE PERCENTAGES ISSUE AGES UP TO AGE 66 ISSUE AGES 66-75 --------------------------------- --------------------------------- SURRENDER CHARGE SURRENDER CHARGE PERCENTAGE AT PERCENTAGE AT BEGINNING OF BEGINNING OF POLICY YEAR PERCENTAGE POLICY YEAR PERCENTAGE ---------------- ---------- ---------------- ---------- 1-5 100% 1-3 100% 6 90% 4 90% 7 80% 5 80% 8 70% 6 70% 9 60% 7 60% 10 50% 8 50% 11 40% 9 40% 12 30% 10 30% 13 20% 11 20% 14 10% 12 15% 15+ 0% 13 10% 14 5% 15+ 0%
(d) Example. Assume a female Insured purchases the Policy at age 40 for $100,000 of Specified Amount, paying the Target Premium of $630 and an additional premium amount of $1,000 in excess of the Target Premium, for a total premium of $1,630. Assume further that she surrenders the Policy during the second Policy Year. The Surrender Charge is calculated as follows: (i) Issue Charge -- [100 x $5.00]........................... $500.00 ($5.00 per $1,000.00 of Specified Amount) (ii) Deferred Sales Charge (1) 30% of Target Premium Paid......................... $189.00 (.30 x $630.00); and (2) 7.5% of Premiums Paid In Excess of Target Premium............................................... $ 75.00 (.075 x $1,000.00) (iii) Surrender Charge Percentage........................... 100% (iv) Calculation of Surrender Charge [(a)$500.00 + (b)$189.00 + $75.00)] x (c) 100%......... $764.00
WITHDRAWAL CHARGE. We impose a charge of $25 for each partial withdrawal. This charge reimburses us for the administrative expenses related to the withdrawal. TRANSFER CHARGE. We reserve the right to charge up to $25 for each transfer. The transfer charge reimburses us for the administrative expenses related to the transfer. TAXES. Currently, no charges are made against the Separate Account for federal, state or other taxes attributable to the Separate Account. We may, however, in the future impose charges for income taxes or other taxes attributable to the Separate Account or the Policy. (See "Federal Tax Matters.") CHARGES AGAINST THE FUNDS. Under investment advisory agreements with each Fund, the investment manager and/or adviser provides investment advisory and/or management services for the portfolios. The Funds are responsible for advisory fees and various other expenses. Investment advisory fees and expenses differ with respect to each of the portfolios of the Funds. (See "The Funds.") Each portfolio incurs annual fund operating expenses consisting of management fees, 12b-1 fees and other expenses. [TO BE UPDATED BY AMENDMENT] [The management fees for each Portfolio for the year ending December 31, 1997 as a percentage of average net assets were as follows: Kemper High Yield 0.60%; Kemper Government Securities 0.55%; Kemper-Dreman High Return Equity 0.75%; Kemper Small Cap Growth 0.65%; Janus Aspen Capital Appreciation Portfolio 0.23%; PIMCO Low Duration Bond 0.65%; PIMCO Foreign Bond 0.90%; Templeton Developing Markets (Class 2 Shares) 1.25%; Scudder VLIF International (A-Shares) 0.88%; Scudder VLIF Growth and Income (A-Shares) 0.48%; Scudder VLIF Bond (A-Shares) 0.48%; and 16 98 Scudder VLIF Money Market 0.37%. The investment adviser of the Janus Aspen Capital Appreciation Portfolio has voluntarily agreed to reduce or waive a portion of its management fee. Without this reduction or waiver, the management fees for Janus Aspen Capital Appreciation Portfolio would have been 1.14%. With regard to PIMCO Low Duration Bond and PIMCO Foreign Bond, management fees include fixed advisory and administrative fees. The administrative fee covers most of the expenses of the portfolios. However, the portfolios are responsible for bearing certain expenses associated with their operations that are not covered by the administrative fee. While it is expected that these expenses generally will not have a material effect on the portfolio expense ratios, they may have a material effect in certain circumstances, such as when the average net assets of a portfolio are lower than anticipated. The other expenses for each Portfolio for the year ending December 31, 1997 as a percentage of average net assets were as follows: Kemper High Yield 0.05%; Kemper Government Securities 0.09%; Kemper-Dreman High Return Equity 0.12%; Kemper Small Cap Growth 0.06%; Janus Aspen Capital Appreciation Portfolio 1.03%; PIMCO Low Duration Bond 0.00%; PIMCO Foreign Bond 0.00%; Templeton Developing Markets (Class 2 Shares) 0.33%; Scudder VLIF International (A-Shares) 0.12%; Scudder VLIF Growth and Income (A-Shares) 0.10%; Scudder VLIF Bond (A-Shares) 0.14%; and Scudder VLIF Money Market 0.09%. In addition, the Templeton Developing Markets Fund also has a 12b-1 fee of 0.25% as described in the Fund's prospectus. Except for 12b-1 fees, all expenses of the Templeton Developing Markets Fund are estimated for 1998 based on the historical expenses of the portfolio's Class 1 Shares for the fiscal year ended December 31, 1997. The investment adviser of the Janus Aspen Capital Appreciation Portfolio has voluntarily agreed to reduce or waive other expenses. Without this reduction or waiver, the other expenses for Janus Aspen Capital Appreciation Portfolio would have been 1.05% and total operating expenses would have been 2.19%. For additional information about the fees and expenses of the Funds, see "The Funds", page 5, and the prospectuses for the Funds. The Fund(s) may pay 12b-1 fees to us or our affiliates for support services relating to Fund shares. We may receive compensation from the investment advisers for services related to the Funds. This compensation will be consistent with the services rendered or the cost savings resulting from the arrangement. For more information concerning investment advisory fees and other charges against the portfolios, see the Funds' prospectuses and Statements of Additional Information available upon request. SYSTEMATIC WITHDRAWAL PLAN. A charge of $50 is imposed to enter into a Systematic Withdrawal Plan. In addition, a $25 charge is imposed each time a change is made to the plan. These charges reimburse us for administrative expenses of this plan. (See "Systematic Withdrawal Plan.") REDUCTION OF CHARGES. We 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 our 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 unfairly discriminate against any person, including the affected Policy owners and owners of all other policies funded by the Separate Account. GENERAL PROVISIONS SETTLEMENT OPTIONS The Policy owner, or Beneficiary at the death of the Insured if no election by the owner is in effect, may elect to have the Death Benefit or Surrender Value paid in a lump sum or have the amount applied to one of the Settlement Options. Payments under these options will not be affected by the investment experience of the Separate Account after proceeds are applied under a Settlement Option. The payee elects monthly, quarterly, semi-annual or annual payments. The option selected must result in a payment that at least equals our required minimum in effect when the option is chosen. If at any time the payments are less than the minimum, we may increase the period between payments to quarterly, semi-annual or annual or make the payment in one lump sum. Benefit payments are based on Surrender Value calculated on the day preceding the date the first benefit payment is due. The payment will be based on the Settlement Option elected in accordance with the appropriate settlement option table. OPTION 1--INCOME FOR SPECIFIED PERIOD. We pay income for the period and payment mode elected. The period elected must at least 5 years, but not more than 30 years. OPTION 2--LIFE INCOME. We pay 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 payee without regard to 17 99 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. We pay monthly income for the guaranteed period elected and thereafter for the remaining lifetime of the payee. The available guaranteed periods are 5, 10, 15 or 20 years. OPTION 4--JOINT AND SURVIVOR ANNUITY. We pay the full monthly income while both payees are living. Upon the death of either payee, the income continues during the lifetime of the surviving payee. The surviving payee's income is based on the percentage designated (50%, 66 2/3%, 75% or 100%) at the time this option is elected. Payments terminate automatically and immediately upon the death of the surviving payee without regard to the number or total amount of payments received. Our consent is necessary for any other payment methods. The guaranteed monthly payments are based on an interest rate of 2.50% per year and, where mortality is involved, the "1983 Table a" individual mortality table developed by the Society of Actuaries, with a 5 year setback. 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 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 us by check or draft may be postponed until such time as we determine 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 us and the Policy 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 Death Benefit will be adjusted to reflect the correct sex and age. INCONTESTABILITY We may contest the validity of a Policy if any material misrepresentations are made in the application. However, a Policy will be incontestable after it has been in force during the lifetime of the Insured for two years from the Issue Date. A new two year contestability period will apply to increases in insurance and to reinstatements, beginning with the effective date of the increase or reinstatement. SUICIDE Suicide by the Insured, while sane or insane, within two years from the Issue Date (or within two years following an increase in Specified Amount) is a risk not assumed under the Policy. Our liability for such suicide is limited to the premiums paid less any withdrawals and Debt. When the laws of the state in which a Policy is delivered require less than a two year period, the period or amount paid will be as stated in such laws. 18 100 ASSIGNMENT No Policy assignment is binding on us until we receive it. We assume no responsibility for the validity of the assignment. Any claim under an assignment is subject to proof of the extent of the assignee's interest. If the Policy is assigned, the rights of the Policy owner and Beneficiary are subject to the rights of the assignee of record. NONPARTICIPATING The Policy does not pay dividends. It does not participate in any of KILICO's surplus or earnings. OWNER AND BENEFICIARY The Policy owner may designate a new owner while the Insured is alive. The Policy owner designates primary and secondary Beneficiaries in the application. KILICO relies upon the latest filed change of beneficiary. If the Insured dies, and no designated Beneficiary is alive at that time, we will pay the Insured's estate. The interest of any Beneficiary may be subject to that of an assignee. In order to change the Policy owner or a designated Beneficiary, the owner must sign our form. The change is effective when the owner signs the form, but we are not liable for payments made or actions taken before we receive the signed form. RECORDS AND REPORTS We keep the Separate Account records. We send Policy owners, at their last known address of record, an annual report showing: - Death Benefit - partial withdrawals - Accumulation Unit Value - transfers - Cash Value - Policy loans and repayments - Surrender Value - Policy charges - additional premium payments
Confirmations and acknowledgments of various transactions are also sent to Policy owners. We also send annual and semi-annual Fund reports. WRITTEN NOTICES AND REQUESTS Send written notices or requests to our home office at 1 Kemper Drive, Long Grove, Illinois 60049. Please include the Policy number and the Insured's full name. We send notices to a Policy owner's address shown in the application unless an address change is filed with us. OPTIONAL INSURANCE BENEFITS The following optional insurance benefits are available by Rider at the time of application: - waiver of monthly deductions due to Insured's total disability - term insurance on the Insured's dependent children - acceleration of a portion of the death benefit due to Insured's terminal illness - term insurance on additional insureds The cost of these benefits is added to the monthly deduction. These benefits and restrictions are described in the Rider. We provide samples of these provisions upon written request. DOLLAR COST AVERAGING Under our Dollar Cost Averaging program, Cash Value in the Fixed Account, the Scudder VLIF Money Market Subaccount or the Kemper Government Securities Subaccount ("DCA Subaccount") is automatically transferred monthly to other Subaccounts and the Fixed Account. A Policy owner may enroll any time by completing our Dollar Cost Averaging form. Transfers are made on the 10th day of the month. We must receive the enrollment form at least 5 business days before the transfer date. 19 101 Transfers commence on the first transfer date following the Trade Date. The minimum transfer amount is $500 per Subaccount or Fixed Account. In order to enroll, Cash Value in the DCA Subaccount must be at least $10,000. Dollar Cost Averaging automatically ends if Cash Value in the DCA Subaccount is less than the amount designated to be transferred. Cash Value remaining in the DCA Subaccount will be transferred. Dollar Cost Averaging ends if: - the number of designated monthly transfers has been completed - Cash Value attributable to the DCA Subaccount is insufficient to complete the next transfer - we receive the Policy owner's written termination at least 5 business days before the next transfer date - the Policy is surrendered. We will give 30 days notice if we amend the Dollar Cost Averaging program. We may terminate the program at any time. A Policy owner may change Dollar Cost Averaging instructions by completing our enrollment form. We must receive the enrollment form at least 5 business days (10 business days for Fixed Account transfers), before the next transfer date. To participate in Dollar Cost Averaging, a Policy owner may have Cash Value in the Fixed Account and no more than 8 non-DCA Subaccounts. SYSTEMATIC WITHDRAWAL PLAN We offer a Systematic Withdrawal Plan ("SWP") allowing Policy owners to preauthorize periodic withdrawals after the first Policy Year. Policy owners instruct us to withdraw selected amounts from the Fixed Account, or up to 2 Subaccounts, on a monthly, quarterly, semi-annual or annual basis. The Policy owner's periodic payment must be at least $500. These periodic payments are partial withdrawals and are subject to surrender charges. (See "Policy Benefits and Rights--Surrender Privileges," page 14.) The $25 withdrawal charge does not apply. However, we charge $50 to establish an SWP and a $25 charge each time a change is made. These charges reimburse us for SWP administrative expenses. Periodic payments may be subject to income taxes, withholding and tax penalties. (See "Federal Tax Matters.") An SWP application and additional information may be obtained from the Policy owner's representative or us. We will give 30 days notice if we amend the SWP. The SWP may be terminated at any time by the Policy owner or us. DISTRIBUTION OF POLICIES The Policy is sold by licensed insurance representatives who represent us and who are registered representatives of broker-dealers that 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"), our affiliate. IBS is engaged in the sale and distribution of other variable life policies and annuities. The maximum sales commission payable to registered representatives is approximately 63% of premiums up to the commission target premium and 2.5% of excess premium in the first year and 2.5% of total premium in renewal years two through ten. Beginning in the second Policy Year, a service fee on assets which have been maintained and serviced may also be paid. In addition, certain overrides and production and managerial bonuses may be paid. These additional amounts may constitute a substantial portion of total commissions and fees paid. Firms to which service fees and commissions may be paid include affiliated broker-dealers. In addition to the commissions described above, we may pay additional promotional incentives, in the form of cash or other compensation, to licensed broker-dealers that sell the Policy. These incentives may be offered to certain broker-dealers that sell or are expected to sell certain minimums during specified periods. FEDERAL TAX MATTERS INTRODUCTION This discussion of the federal income tax treatment of the Policy is not exhaustive, does not purport to cover all situations, and is not intended as tax advice. The federal income tax treatment of the Policy is unclear in certain circumstances, and a qualified tax adviser should always be consulted with regard to the application of law 20 102 to individual circumstances. This discussion is based on the Internal Revenue Code of 1986, as amended ("Code"), Treasury Department regulations, and interpretations existing on the date of this Prospectus. These authorities, however, are subject to change by Congress, the Treasury Department, and judicial decisions. This discussion does not address state or local tax consequences associated with owning the Policy. IN ADDITION, WE MAKE NO GUARANTEE REGARDING ANY TAX TREATMENT -- FEDERAL, STATE OR LOCAL -- OF ANY POLICY OR OF ANY TRANSACTION INVOLVING A POLICY. OUR TAX STATUS We are taxed as a life insurance company and the operations of the Separate Account are treated as part of our total operations. The operations of the Separate Account do not materially affect our federal income tax liability because we are allowed a deduction to the extent that net investment income of the Separate Account is applied to increase Cash Value. We may incur state and local taxes attributable to the Separate Account. At present, these taxes are not significant. Accordingly, we do not charge or credit the Separate Account for federal, state or local taxes. However, our federal income taxes are increased because of the federal tax law's treatment of deferred acquisition costs. Accordingly, we charge 1% of each premium payment to compensate us for our higher corporate income tax liability. If there is a material change in law, charges or credits may be made to the Separate Account for taxes or reserves for taxes. These charges or credits are determined independently of the taxes we actually pay. TAXATION OF LIFE INSURANCE POLICIES TAX STATUS OF THE POLICY. The Code establishes a definition of life insurance which, in part, places limitations on the amount of premiums that may be paid and the Cash Value that can accumulate relative to the Death Benefit. We believe the Policy meets this definition. We reserve the right to refund premiums, increase the Death Benefit (which may result in higher Policy charges), or take any other action we deem necessary to ensure the Policy's compliance with the tax definition of life insurance. The Death Benefit is generally excludable from the Beneficiary's gross income. Interest and other income credited are not taxable unless certain withdrawals are made (or are deemed to be made) from the Policy prior to the Insured's death, as discussed below. This tax treatment will only apply, however, if (1) the investments of the Separate Account are "adequately diversified", and (2) we, rather than the Policy owner, are considered the owner of the assets of the Separate Account. DIVERSIFICATION REQUIREMENTS. The Code prescribes the manner in which the Separate Account must be "adequately diversified." If the Separate Account fails to comply with these diversification standards, the Policy will not be treated as a life insurance contract, and the Policy owner is taxable on the income on the contract (as defined in the tax law). We expect that the Separate Account, through the Funds, will comply with the prescribed diversification requirements. OWNERSHIP TREATMENT. In certain circumstances, variable life insurance contract owners may be considered the owners of the assets of the Separate Account. Income and gains from the Separate Account would then be includible in the Policy owners' gross income. The IRS has stated that a variable contract owner will be considered the owner of the assets of a separate account if the owner possesses the ability to exercise investment control. As of the date of this Prospectus, no investor control guidance is available. We reserve the right to modify the Policy as necessary to attempt to prevent Policy owners from being considered the owners of the assets of the Separate Account. However, there is no assurance that such efforts would be successful. The following discussion assumes that the Policy will be treated as a life insurance contract for tax purposes. TAX TREATMENT OF LIFE INSURANCE DEATH BENEFIT PROCEEDS. In general, the Death Benefit is excludable from gross income under the Code. Certain transfers of the Policy, however, may result in a portion of the Death Benefit being taxable. If the Death Benefit is paid under a Settlement Option, generally payments will be prorated between the non-taxable Death Benefit and taxable interest. TAX DEFERRAL DURING ACCUMULATION PERIOD. Any increase in Cash Value is generally not taxable to the Policy owner unless amounts are received (or are deemed to be received) from the Policy before the Insured's death. If the Policy is surrendered, the excess of Cash Value over the "investment in the contract" is includible in the owner's income. The "investment in the contract" generally is premium payments minus non-taxable distributions. Distributions may be taxable to the owner if the Policy is considered a "modified endowment contract" ("MEC"). 21 103 POLICIES WHICH ARE NOT MECS TAX TREATMENT OF WITHDRAWALS GENERALLY. If the Policy is not a MEC, the amount of any withdrawal generally will be treated first as a non-taxable recovery of premiums and then as taxable income. Thus, a withdrawal from a non-MEC Policy generally is not taxable income unless the total withdrawals exceed the investment in the contract. DISTRIBUTIONS REQUIRED IN THE FIRST 15 POLICY YEARS. The Code limits the amount of premium that may be paid and Cash Value that can accumulate relative to the Death Benefit. Where cash distributions are required in connection with a reduction in benefits during the first 15 years after the Policy is issued (or if withdrawals are made in anticipation of a reduction in benefits during this period), some or all of such amounts may be taxable. A reduction in benefits may result from a decrease in Specified Amount, a change from an Option B Death Benefit to an Option A Death Benefit, if withdrawals are made, and in certain other instances. TAX TREATMENT OF LOANS. If a Policy is not a MEC, a loan generally is treated as indebtedness of the Policy owner. As a result, the loan is not taxable income to the owner if the Policy remains in force. However, when the interest rate credited to the Loan Account is the same as the interest rate charged for the loan, some or all of the loan proceeds may be includible in income. If a Policy lapses when a loan is outstanding, the amount of the loan outstanding will be treated as a surrender in determining whether any amounts are includible in the Policy owner's income. Interest on an individual's Policy loans and interest on any loans of a Policy owner that is a business entity are subject to possible disallowance under complex rules. Consult a tax adviser on these issues. POLICIES WHICH ARE MECS CHARACTERIZATION OF A POLICY AS A MEC. A Policy is a MEC if (1) the Policy is received in exchange for a life insurance contract that was a MEC, or (2) the Policy is issued after June 21, 1988 and premiums are paid more rapidly than permitted under the "7-Pay Test." A Policy fails this test (and thus is a MEC) if the accumulated amount paid during the 1st 7 Policy Years exceeds the cumulative sum of the net level premiums which would have been paid to that time if the Policy provided for paid-up future benefits after the payment of 7 level annual premiums. Under the Code, a material change of the Policy generally results in a reapplication of the 7-Pay Test. In addition, any reduction in benefits during the 7-Pay period will affect the application of this test. We monitor the Policies and attempt to notify Policy owners on a timely basis if a Policy is in jeopardy of becoming a MEC. The owner may then request that we take available steps to avoid treating the Policy as a MEC. TAX TREATMENT OF WITHDRAWALS, LOANS, ASSIGNMENTS AND PLEDGES UNDER MECS. If the Policy is a MEC, withdrawals are treated first as withdrawals of income and then as a recovery of premiums. Thus, withdrawals are includible in income if Cash Value exceeds the investment in the contract. A Policy loan is treated as a withdrawal for tax purposes. If the Policy owner assigns or pledges Cash Value under a MEC (or agrees to assign or pledge any portion), such portion is a withdrawal for tax purposes. The investment in the contract is increased by the amount includible in income with respect to any assignment, pledge, or loan, though it is not affected by any other aspect of the assignment, pledge, or loan (including its release or repayment). Before assigning, pledging, or requesting a loan under a MEC, a Policy owner should consult a qualified tax adviser. PENALTY TAX. Generally, proceeds of a surrender or a withdrawal (or the amount of any deemed withdrawal) from a MEC are subject to a penalty tax of 10% of the portion of the proceeds that is includible in income, unless the surrender or withdrawal is made (1) after the owner attains age 59 1/2, (2) because the owner has become disabled (as defined in the Code), or (3) as substantially equal periodic payments over the life or life expectancy of the owner (or the joint lives or life expectancies of the owner and his or her beneficiary). AGGREGATION OF POLICIES. All life insurance contracts which are treated as MECs and which are purchased by the same person from us or our affiliates within the same calendar year are aggregated and treated as one contract in determining the tax on withdrawals (including deemed withdrawals). The effects of aggregation are not clear; however, it could affect the taxable amount of a withdrawal (or a deemed withdrawal) and could subject the withdrawal to the 10% penalty tax. OTHER CONSIDERATIONS. Changing the Policy owner, exchanging the Policy, changing from one Death Benefit option to another, and other Policy changes may have tax consequences depending on the circumstances of the change. Federal estate and state and local estate taxes or inheritance taxes and other tax consequences of ownership or receipt of Policy proceeds depend on the circumstances of each Policy owner or Beneficiary. 22 104 FEDERAL INCOME TAX WITHHOLDING We withhold and send to the federal government a part of the taxable portion of withdrawals unless the Policy owner notifies us in writing at the time of withdrawal that he or she elects no withholding. The Policy owner is always responsible for the payment of any taxes and early distribution penalties that may be due on the amounts received. The Policy owner may also be required to pay penalties under the estimated tax rules, if the owner's withholding and estimated tax payments are insufficient to satisfy the owner's total tax liability. 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 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 the Policy. SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS We hold the assets of the Separate Account. We keep these assets segregated and apart from our general funds. We maintain records of all purchases and redemptions of the shares of each portfolio of the Funds by each of the Subaccounts. VOTING INTERESTS We vote a Fund's shares held in the Separate Account we keep these 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. Owners of all Policies participating in each Subaccount are entitled to give us instructions with respect to that Subaccount. An owner's proportionate interest in that Subaccount is measured by units. We determine the number of shares for which a Policy owner may give voting instructions as of the record date for the meeting. Owners will receive proxy material, reports, and other materials relating to the appropriate portfolio of the Funds. We vote all Fund shares held in the Separate Account proportionately based on Policy owners' instructions. If changes in law permit, we may vote a Fund's shares in our own right. We 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, we may disregard voting instructions in favor of changes initiated by a Policy owner in the investment policy or the investment adviser of a portfolio of a Fund if we reasonably disapprove 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 we determine that the change would have an adverse effect on our General Account in that the proposed investment policy for a portfolio may result in overly speculative or unsound investments. In the event we disregard voting instructions, we will include a summary of that action and the reasons for it in the next annual report to Policy 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. We file an annual statement with the Director of Insurance on or before March 1st of each year covering our operations and reporting on our financial condition 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. The National Association of Insurance Commissioners conducts a full examination of our operations at least once every three years. In addition, we are subject to the insurance laws and regulations of the other states where we operate. Generally, the insurance departments of other states apply the laws of Illinois in determining our permissible investments. 23 105 KILICO'S DIRECTORS AND OFFICERS [TO BE UPDATED BY AMENDMENT] Our directors and principal officers 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 (54) 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 1992. President and Director of Zurich Life Insurance Company of 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 (Kemper) 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 (51) Executive Vice President of FKLA and FLA since 1995. Executive Vice President since 1995. Executive Vice President of ZLICA and ZD since March 1996. Director since May 1998. Director of FLA since December 1997. Director of FKLA and ZLICA since May 1998. Director of ZD from March 1996 to March 1997. 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 (46) 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 and Chief Financial Officer of ZD since March 1996. Director of FLA since May 1998. Director of ZD from March 1996 to March 1997. Treasurer and Chief Financial Officer of Kemper since January 1996. Chief Financial Officer of Alexander Hamilton Life Insurance Company from April 1989 to November 1995. James C. Harkensee (40) Senior Vice President of FKLA and FLA since January 1996. Senior Vice President since January Senior Vice President of ZLICA since 1995. Senior Vice 1996. President of ZD since 1995. Director of ZD from April 1993 to March 1997. 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 (42) 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. Director FLA since January 1996. Senior Vice President and Chief since May 1998. Actuary of ZLICA since March 1996. Senior Vice President and Chief Actuary of ZD since March 1996. Director of FLA since June 1997. Director of FKLA and ZLICA since May 1998. Director of ZD from March 1996 to March 1997. 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.
24 106
NAME AND AGE POSITION WITH KILICO YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE -------------------- ----------------------------------------------------- Edward K. Loughridge (43) Senior Vice President and Corporate Development Officer of Senior Vice President and Corporate FKLA and FLA since January 1996. Senior Vice President and Development Officer since January Corporate Development Officer for ZLICA and ZD since March 1996. 1996. Senior Vice President of Human Resources of Zurich-American Insurance Group from February 1992 to March 1996. Debra P. Rezabek (42) Senior Vice President of FKLA and FLA since March 1996. Senior Vice President since 1996. Corporate Secretary of FKLA and FLA since January 1996. General Counsel since 1992. Corporate Director of FLA since May 1998. Vice President of KILICO, Secretary since January 1996. FKLA and FLA since 1995. General Counsel and Director of Government Affairs of FKLA and FLA 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 and Corporate Secretary of ZD since March 1996. Director of ZD from March 1996 to March 1997. 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 Kemper since January 1996. Kenneth M. Sapp (53) Senior Vice President of FKLA, FLA and ZLICA since January Senior Vice President since January 1998. Director of IBS since May 1998. Director of IBSIA 1998. since September 1998. Vice President -- Aetna Life Brokerage of Aetna Life & Annuity Company from February 1992 to January 1998. George Vlaisavljevich (55) Senior Vice President of FKLA, FLA and ZLICA since October Senior Vice President since October 1996. Senior Vice President of ZD since March 1997. Director 1996. of IBS and IBSIA since October 1996. Executive Vice President of The Copeland Companies from April 1983 to September 1996. Loren J. Alter (59) Director of FKLA, FLA and Scudder Kemper Investments, Inc. Director since January 1996. (SKI) 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 Kemper since January 1996. William H. Bolinder (55) 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 and Director of Kemper since January 1996. Vice Chairman and Director of SKI 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. David A. Bowers (52) Director of FKLA and ZLICA since May 1997. Director of FLA Director since May 1997. since June 1997. Executive Vice President, Corporate Secretary and General Counsel of Zurich-American Insurance Group since August 1985. Vice President, General Council and Secretary of Kemper since January 1996.
25 107 LEGAL MATTERS All matters of Illinois law pertaining to the Policy, including the validity of the Policy and our right to issue the Policy under Illinois Insurance Law, have been passed upon by Frank J. Julian, our Associate General Counsel. Jorden Burt Boros Cicchetti Berenson & Johnson, Washington, D.C., has advised us 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. We are not a party in any litigation that is of material importance in relation to our total assets or that relates to the Separate Account. YEAR 2000 COMPLIANCE [TO BE UPDATED BY AMENDMENT] Many existing computer programs were originally designed without considering the impact of the year 2000 and currently use only two digits to identify the year in the date field. This issue affects nearly all companies and organizations and could cause computer applications and systems to fail or create erroneous results to occur for any transaction with a date of January 1, 2000, or later. Many companies must undertake major projects to address the year 2000 issue. Each company's costs and uncertainties will depend on a number of factors, including its software and hardware, and the nature of the industry. Companies must also coordinate with other entities with which they electronically interact, including suppliers, customers, creditors and other financial services institutions. If a company does not successfully address its year 2000 issues it could face material adverse consequences in the form of lawsuits against the company, lost business, erroneous results and substantial operating problems after January 1, 2000. We have taken substantial steps over the last several years to ensure that our systems will be compliant for the year 2000. These steps include the replacement of older systems with new compliant systems. In 1996, we replaced our investment accounting system. In 1997 we replaced our general ledger and accounts payable system. We have also ensured that new systems developed to support new product introductions in 1996 and 1997 are already year 2000 compliant. Data processing expenses related solely to bringing our systems in compliance with the year 2000 amounted to $88 thousand in 1997 and we anticipate that it will cost an additional $895 thousand to bring all remaining systems into compliance. We have also taken steps which require that all other entities with which we electronically interact, including suppliers and other financial services institutions, attest to us in writing that their systems are year 2000 compliant. EXPERTS [TO BE UPDATED BY AMENDMENT] The consolidated balance sheet of KILICO as of December 31, 1997 and the related consolidated statements of operations, stockholder's equity, and cash flows for the year ended December 31, 1997 have been included herein and in the registration statement in reliance upon the report of PricewaterhouseCoopers LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The consolidated balance sheet of KILICO as of December 31, 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 the year ended December 31, 1995 have been included herein and in the registration statement in reliance upon the report of KPMG 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 LLP covering KILICO's financial statements referred to above contains an explanatory paragraph that states as a result of the acquisition of its parent, Kemper Corporation, the consolidated financial information for the period after the acquisition is presented on a different cost basis than that for the period before the acquisition and, therefore, is not comparable. The statements of assets and liabilities and policy owners' equity of the Separate Account as of December 31, 1997 and the related statements of operations for the year then ended and the statements of changes in policy owners' equity for the year then ended has been included herein in reliance upon the report of PricewaterhouseCoopers LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. 26 108 The statement of changes in policy owners' equity of the Separate Account for the year ended December 31, 1996 has been included herein in reliance upon the report of KPMG LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. 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 upon payment of a fee. FINANCIAL STATEMENTS [TO BE UPDATED BY AMENDMENT] The financial statements of the Separate Account relate to other life insurance policies in addition to other than those offered by this Prospectus. As of the date of this Prospectus, no assets attributable to the Policies are reflected, as the Policies were not offered prior to such date. In addition, the financial statements for the Separate Account reflect Subaccounts that are not available under the Policies. Our included financial statements should be considered only as bearing upon our ability to meet our contractual obligations under the Policy. In addition to audited financial statements for the year ended December 31, 1997, we have provided unaudited financial statements for the period ended June 30, 1998. The investment experience of the Separate Account does not affect our financial statements. CHANGE OF ACCOUNTANTS [TO BE UPDATED BY AMENDMENT] On September 12, 1997, Kemper Investors Life Insurance Company ("KILICO") appointed the accounting firm of PricewaterhouseCoopers LLP as independent accountants for the year ended December 31, 1997 to replace KPMG LLP effective with such appointment. KILICO's Board of Directors approved the selection of PricewaterhouseCoopers LLP as the new independent accountants. Management had not consulted with PricewaterhouseCoopers LLP on any accounting, auditing or reporting matter, prior to that time. During the two most recent fiscal years ended December 31, 1996, there have been no disagreements with KPMG LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure or any reportable events. KPMG LLP's report on the financial statements for the past two years contained no adverse opinion or disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles. There were no disagreements with PricewaterhouseCoopers LLP on accounting or financial disclosures for the year ended December 31, 1997. 27 109 [TO BE UPDATED BY AMENDMENT] REPORT OF INDEPENDENT ACCOUNTANTS THE BOARD OF DIRECTORS OF KEMPER INVESTORS LIFE INSURANCE COMPANY AND POLICY OWNERS OF KILICO VARIABLE SEPARATE ACCOUNT: We have audited the accompanying statements of assets and liabilities and policy owners' equity of the Kemper Money Market Subaccount, Kemper Total Return Subaccount, Kemper High Yield Subaccount, Kemper Growth Subaccount, Kemper Government Securities Subaccount, Kemper International Subaccount and Kemper SmallCap Growth Subaccount (investment options within the Investors Fund Series), Founders Capital Appreciation Subaccount, Neuberger & Berman Mid-Cap Growth Subaccount, Jancap Growth Subaccount, Lord Abbett Growth & Income Subaccount, T. Rowe Price International Equity Subaccount, T. Rowe Price Asset Allocation Subaccount, PIMCO Limited Maturity Bond Subaccount, PIMCO Total Return Subaccount and INVESCO Equity Income Subaccount (investment options within the American Skandia Trust), of KILICO Variable Separate Account as of December 31, 1997 and the related statements of operations and the statements of changes in policy owners' equity for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The statement of changes in policy owners' equity for the year ended December 31, 1996 was audited by other auditors, whose report, dated March 26, 1997, expressed an unqualified opinion on that statement. We conducted our audit 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, 1997 by correspondence with transfer agents. 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 audit provides a reasonable basis for our opinion. In our opinion, the December 31, 1997 financial statements referred to above present fairly, in all material respects, the financial position of the subaccounts of KILICO Variable Separate Account at December 31, 1997 and the results of their operations and changes in their policy owners' equity for the year then ended, in conformity with generally accepted accounting principles. PricewaterhouseCoopers LLP Chicago, Illinois February 20, 1998 28 110 INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS KEMPER INVESTORS LIFE INSURANCE COMPANY: We have audited the accompanying statement of changes in policy owners' equity of the Kemper Money Market Subaccount, Kemper Total Return Subaccount, Kemper High Yield Subaccount, Kemper Growth Subaccount, Kemper Government Securities Subaccount, Kemper International Subaccount, Kemper SmallCap Growth Subaccount (investment options within the Investors Fund Series), Founders Capital Appreciation Subaccount, Neuberger & Berman Mid-Cap Growth Subaccount, Jancap Growth Subaccount, Lord Abbett Growth & Income Subaccount, T. Rowe Price International Equity Subaccount, T. Rowe Price Asset Allocation Subaccount, PIMCO Limited Maturity Bond Subaccount, PIMCO Total Return Subaccount, and INVESCO Equity Income Subaccount (investment options within the American Skandia Trust), of KILICO Variable Separate Account (the Account) for the year ended December 31, 1996. This financial statement is the responsibility of the Account's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit 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 statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our opinion. In our opinion, the financial statement referred to above presents fairly, in all material respects, the changes in policy owners' equity of the subaccounts of KILICO Variable Separate Account for the year ended December 31, 1996 in conformity with generally accepted accounting principles. KPMG LLP Chicago, Illinois March 26, 1997 29 111 KILICO VARIABLE SEPARATE ACCOUNT STATEMENTS OF ASSETS AND LIABILITIES AND POLICY OWNERS' EQUITY DECEMBER 31, 1997 (IN THOUSANDS)
INVESTORS FUND SERIES --------------------------------------------------------------------------------------------- KEMPER KEMPER KEMPER MONEY KEMPER KEMPER KEMPER GOVERNMENT KEMPER SMALLCAP MARKET TOTAL RETURN HIGH YIELD GROWTH SECURITIES INTERNATIONAL GROWTH SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ---------- ------------ ---------- ---------- ---------- ------------- ---------- ASSETS Investments in underlying portfolio funds, at current value......................... $885 2,890 1,934 2,758 4,709 48 224 Dividends and other receivables................... 101 148 1 -- -- -- 1 ---- ----- ----- ----- ----- --- --- Total assets.............. 986 3,038 1,935 2,758 4,709 48 225 LIABILITIES AND POLICY OWNERS' EQUITY Liabilities: Mortality and expense risk charges..................... 1 2 1 2 3 -- -- Other......................... 19 -- -- 15 9 -- 1 ---- ----- ----- ----- ----- --- --- Total liabilities......... 20 2 1 17 12 -- 1 ---- ----- ----- ----- ----- --- --- Policy owners' equity........... $966 3,036 1,934 2,741 4,697 48 224 ==== ===== ===== ===== ===== === === ANALYSIS OF POLICY OWNERS' EQUITY Excess of proceeds from units sold over payments for units redeemed...................... 414 726 939 993 2,445 49 204 Accumulated net investment income (loss)................. 552 1,209 832 975 1,635 -- 2 Accumulated net realized gain on sales of investments.......... -- 883 108 607 294 -- -- Unrealized appreciation (depreciation) of investments................... -- 218 55 166 323 (1) 18 ---- ----- ----- ----- ----- --- --- Policy owners' equity........... $966 3,036 1,934 2,741 4,697 48 224 ==== ===== ===== ===== ===== === ===
See accompanying notes to financial statements. 30 112
AMERICAN SKANDIA TRUST ------------------------------------------------------------------------------------------------------------ FOUNDERS NEUBERGER & BERMAN LORD ABBETT T. ROWE PRICE T. ROWE PRICE PIMCO LIMITED CAPITAL MID-CAP JANCAP GROWTH & INTERNATIONAL ASSET MATURITY APPRECIATION GROWTH GROWTH INCOME EQUITY ALLOCATION BOND SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------ ------------------ ---------- ----------- ------------- ------------- ------------- 135 201 527 112 96 58 8 -- -- -- -- -- -- -- --- --- --- --- --- -- -- 135 201 527 112 96 58 8 -- -- -- -- -- -- -- -- -- -- -- -- -- -- --- --- --- --- --- -- -- -- -- -- -- -- -- -- --- --- --- --- --- -- -- 135 201 527 112 96 58 8 === === === === === == == 131 197 507 109 100 56 8 -- (1) -- -- (1) -- -- -- -- -- -- -- -- -- 4 5 20 3 (3) 2 -- --- --- --- --- --- -- -- 135 201 527 112 96 58 8 === === === === === == == AMERICAN SKANDIA TRUST --------------------------- PIMCO TOTAL INVESCO RETURN EQUITY INCOME SUBACCOUNT SUBACCOUNT ----------- ------------- 17 72 -- -- -- -- 17 72 -- -- -- -- -- -- -- -- -- -- 17 72 == == 17 70 -- -- -- -- -- 2 -- -- 17 72 == ==
31 113 KILICO VARIABLE SEPARATE ACCOUNT STATEMENTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
INVESTORS FUND SERIES --------------------------------------------------------------------------------------------- KEMPER KEMPER KEMPER MONEY KEMPER KEMPER KEMPER GOVERNMENT KEMPER SMALLCAP MARKET TOTAL RETURN HIGH YIELD GROWTH SECURITIES INTERNATIONAL GROWTH SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ---------- ------------ ---------- ---------- ---------- ------------- ---------- Dividends and capital gains distributions................... $66 414 101 522 325 -- 2 Mortality and expense risk charges......................... 32 24 14 26 42 -- -- --- ---- --- ---- ---- -- -- Net investment income (loss).... 34 390 87 496 283 -- 2 --- ---- --- ---- ---- -- -- Net realized and unrealized gain (loss) on investments: Net realized gain (loss) on sales of investments.......... -- 426 96 (10) 19 -- -- Change in unrealized appreciation (depreciation) of investments................... -- (281) (27) (21) 17 (1) 18 --- ---- --- ---- ---- -- -- Net realized and unrealized gain (loss) on investments........... -- 145 69 (31) 36 (1) 18 --- ---- --- ---- ---- -- -- Net increase (decrease) in policy owners' equity resulting from operations...................... $34 535 156 465 319 (1) 20 === ==== === ==== ==== == ==
See accompanying notes to financial statements. 32 114
AMERICAN SKANDIA TRUST ------------------------------------------------------------------------------------------------------------ FOUNDERS NEUBERGER & BERMAN LORD ABBETT T. ROWE PRICE T. ROWE PRICE PIMCO LIMITED CAPITAL MID-CAP JANCAP GROWTH & INTERNATIONAL ASSET MATURITY APPRECIATION GROWTH GROWTH INCOME EQUITY ALLOCATION BOND SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------ ------------------ ---------- ----------- ------------- ------------- ------------- -- -- -- -- -- -- -- -- 1 -- -- 1 -- -- -- -- -- -- -- -- -- -- (1) -- -- (1) -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- 4 5 20 3 (3) 2 -- -- -- -- -- -- -- -- 4 5 20 3 (3) 2 -- -- -- -- -- -- -- -- 4 4 20 3 (4) 2 -- == == == == == == == AMERICAN SKANDIA TRUST ---------------------------- PIMCO TOTAL INVESCO EQUITY RETURN INCOME SUBACCOUNT SUBACCOUNT ----------- -------------- -- -- -- -- -- -- -- -- -- -- -- -- -- 2 -- -- -- 2 -- -- -- 2 == ==
33 115 KILICO VARIABLE SEPARATE ACCOUNT STATEMENTS OF CHANGES IN POLICY OWNERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (IN THOUSANDS)
INVESTORS FUND SERIES ----------------------------------------------------------------------------- KEMPER KEMPER KEMPER MONEY MARKET TOTAL RETURN HIGH YIELD SUBACCOUNT SUBACCOUNT SUBACCOUNT --------------------- ------------------- ------------------- 1997 1996 1997 1996 1997 1996 ---- ---- ---- ---- ---- ---- Operations: Net investment income................... $ 34 46 390 142 87 154 Net realized gain (loss) on sales of investments........................... -- -- 426 128 96 9 Change in unrealized appreciation (depreciation) of investments......... -- -- (281) 117 (27) 34 ------- ----- ----- ----- ----- ----- Net increase (decrease) in policy owners' equity resulting from operations.......................... 34 46 535 387 156 197 ------- ----- ----- ----- ----- ----- Account unit transactions: Proceeds from units sold................ 2,965 270 27 43 22 6 Net transfers (to) from affiliated divisions and subaccounts............. (1,059) 55 (400) 484 298 (567) Payments for units redeemed............. (2,011) (336) (217) (376) (50) (217) ------- ----- ----- ----- ----- ----- Net increase (decrease) in policy owners' equity from account unit transactions........................ (105) (11) (590) 151 270 (778) ------- ----- ----- ----- ----- ----- Total increase (decrease) in policy owners' equity.......................... (71) 35 (55) 538 426 (581) Policy owners' equity: Beginning of year....................... 1,037 1,002 3,091 2,553 1,508 2,089 ------- ----- ----- ----- ----- ----- End of year............................. $ 966 1,037 3,036 3,091 1,934 1,508 ======= ===== ===== ===== ===== =====
See accompanying notes to financial statements. 34 116
INVESTORS FUND SERIES - --------------------------------------------------------------- KEMPER KEMPER GOVERNMENT KEMPER KEMPER GROWTH SECURITIES INTERNATIONAL SMALLCAP GROWTH SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT - ------------- ------------- ------------- --------------- 1997 1996 1997 1996 1997 1996 1997 1996 - ---- ---- ---- ---- ---- ---- ---- ---- 496 261 283 251 -- -- 2 -- (10) 397 19 17 -- -- -- -- (21) (228) 17 (203) (1) -- 18 -- - ----- ----- ----- ----- -- -- --- -- 465 430 319 65 (1) -- 20 -- - ----- ----- ----- ----- -- -- --- -- 92 121 32 22 35 -- 137 2 (38) 65 492 (37) 19 -- 93 -- (138) (179) (131) (162) (5) -- (28) -- - ----- ----- ----- ----- -- -- --- -- (84) 7 393 (177) 49 -- 202 2 - ----- ----- ----- ----- -- -- --- -- 381 437 712 (112) 48 -- 222 2 2,360 1,923 3,985 4,097 -- -- 2 -- - ----- ----- ----- ----- -- -- --- -- 2,741 2,360 4,697 3,985 48 -- 224 2 ===== ===== ===== ===== == == === ==
\ 35 117 KILICO VARIABLE SEPARATE ACCOUNT STATEMENTS OF CHANGES IN POLICY OWNERS' EQUITY (CONTINUED) FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996 (IN THOUSANDS)
AMERICAN SKANDIA TRUST ------------------------------------------------------- NEUBERGER & FOUNDERS BERMAN LORD ABBETT CAPITAL MID-CAP JANCAP GROWTH & APPRECIATION GROWTH GROWTH INCOME SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------- ----------- ----------- ----------- 1997 1996 1997 1996 1997 1996 1997 1996 ---- ---- ---- ---- ---- ---- ---- ---- Operations: Net investment loss................................ $ -- -- (1) -- -- -- -- -- Net realized gain on sales of investments.......... -- -- -- -- -- -- -- -- Change in unrealized appreciation (depreciation) of investments...................................... 4 -- 5 -- 20 -- 3 -- ---- --- --- -- --- -- --- -- Net increase (decrease) in policy owners' equity resulting from operations...................... 4 -- 4 -- 20 -- 3 -- ---- --- --- -- --- -- --- -- Account unit transactions: Proceeds from units sold........................... 89 -- 124 2 330 4 58 2 Net transfers from affiliated divisions and subaccounts...................................... 63 -- 99 -- 242 -- 61 -- Payments for units redeemed........................ (21) -- (28) -- (69) -- (12) -- ---- --- --- -- --- -- --- -- Net increase in policy owners' equity from account unit transactions...................... 131 -- 195 2 503 4 107 2 ---- --- --- -- --- -- --- -- Total increase in policy owners' equity.............. 135 -- 199 2 523 4 110 2 Policy owners' equity: Beginning of year.................................. -- -- 2 -- 4 -- 2 -- ---- --- --- -- --- -- --- -- End of year........................................ $135 -- 201 2 527 4 112 2 ==== === === == === == === ==
See accompanying notes to financial statements. 36 118
AMERICAN SKANDIA TRUST ------------------------------------------------------------------------- T. ROWE PRICE T. ROWE PRICE PIMCO LIMITED INVESCO INTERNATIONAL ASSET MATURITY PIMCO TOTAL EQUITY EQUITY ALLOCATION BOND RETURN INCOME SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT ------------- ------------- ------------- ----------- ----------- 1997 1996 1997 1996 1997 1996 1997 1996 1997 1996 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- (1) -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- (3) -- 2 -- -- -- -- -- 2 -- --- -- -- -- -- -- -- -- -- -- (4) -- 2 -- -- -- -- -- 2 -- --- -- -- -- -- -- -- -- -- -- 63 -- 35 -- 4 -- 11 -- 49 -- 50 -- 27 -- 5 -- 8 -- 28 -- (13) -- (6) -- (1) -- (2) -- (7) -- --- -- -- -- -- -- -- -- -- -- 100 -- 56 -- 8 -- 17 -- 70 -- --- -- -- -- -- -- -- -- -- -- 96 -- 58 -- 8 -- 17 -- 72 -- -- -- -- -- -- -- -- -- -- -- --- -- -- -- -- -- -- -- -- -- 96 -- 58 -- 8 -- 17 -- 72 -- === == == == == == == == == ==
37 119 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 is a wholly-owned subsidiary of Kemper Corporation. Kemper Corporation was acquired by an investor group led by Zurich Insurance Company ("Zurich") on January 4, 1996. Effective February 27, 1998, KILICO and Kemper Corporation became wholly-owned subsidiaries of Zurich. The Separate Account is used to fund policies ("Policy") for the Select variable universal life policies and the Power V flexible premium variable universal life policies. The Separate Account is divided into sixteen subaccounts. The Select policies have five subaccounts which are available to Policy Owners and each subaccount invests exclusively in the shares of a corresponding portfolio of the Investors Fund Series (the "Fund"), an open-end diversified management investment company. The Power V policies have sixteen subaccounts which are available to Policy Owners and each subaccount invests exclusively in the shares of a corresponding portfolio of the Investors Fund Series and the American Skandia Trust, also an open-end diversified management investment company. 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, 1997. 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 a first in, first out ("FIFO") cost basis. ACCOUNT UNIT TRANSACTIONS Proceeds from a Policy are automatically allocated to the Kemper 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. 38 120 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) In early 1998, the Clinton Administration's Fiscal Year 1999 Budget was released and contained certain proposals to change the taxation of non-qualified fixed and variable annuities as well as variable universal life contracts. It is currently unknown whether such proposals will be adopted, amended or omitted in the final 1999 budget approved by Congress. (2) SUMMARY OF INVESTMENTS Investments, at cost, at December 31, 1997, are as follows (in thousands):
SHARES OWNED COST ------ ---- INVESTORS FUND SERIES Kemper Money Market Subaccount............................ 885 $ 885 Kemper Total Return Subaccount............................ 1,024 2,672 Kemper High Yield Subaccount.............................. 1,493 1,879 Kemper Growth Subaccount.................................. 919 2,592 Kemper Government Securities Subaccount................... 3,900 4,386 Kemper International Subaccount........................... 30 49 Kemper Small Cap Growth Subaccount........................ 114 206 AMERICAN SKANDIA TRUST Founders Capital Appreciation Subaccount.................. 8 131 Neuberger & Berman Mid-Cap Growth Subaccount.............. 12 196 Jancap Growth Subaccount.................................. 23 507 Lord Abbett Growth & Income Subaccount.................... 5 109 T. Rowe Price International Equity Subaccount............. 8 99 T. Rowe Price Asset Allocation Subaccount................. 4 56 PIMCO Limited Maturity Bond Subaccount.................... 1 8 PIMCO Total Return Subaccount............................. 1 17 INVESCO Equity Income Subaccount.......................... 4 70 ------- TOTAL INVESTMENTS.................................... $13,862 =======
The underlying investments are summarized below. INVESTORS FUND SERIES KEMPER MONEY MARKET SUBACCOUNT: This subaccount invests primarily in short-term obligations of major banks and corporations. KEMPER TOTAL RETURN SUBACCOUNT: This subaccount'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 subaccount may also make private placement investments (which are normally restricted securities). KEMPER HIGH YIELD SUBACCOUNT: This subaccount 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. KEMPER GROWTH SUBACCOUNT: This subaccount'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). KEMPER GOVERNMENT SECURITIES SUBACCOUNT: This subaccount invests primarily in U.S. Government Securities. The subaccount may also invest in fixed-income securities other than U.S. Government securities and may engage in options and financial futures transactions. KEMPER INTERNATIONAL SUBACCOUNT: This subaccount's investments will normally consist of equity securities of non-United States issuers, however, it may also invest in convertible and debt securities of non-United States issuers and foreign currencies. 39 121 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) KEMPER SMALL CAP GROWTH SUBACCOUNT: This subaccount's investments will consist primarily of common stocks and securities convertible into or exchangeable for common stocks and to a limited degree in preferred stocks and debt securities. At least 65% of the subaccount's total assets will be invested in equity securities of companies having a market capitalization of $1 billion or less at the time of initial investment. AMERICAN SKANDIA TRUST FOUNDERS CAPITAL APPRECIATION SUBACCOUNT: This subaccount seeks capital appreciation through investment primarily in common stocks of U.S. companies with market capitalizations of $1.5 billion or less. These stocks normally will be traded in the over-the-counter market. NEUBERGER & BERMAN MID-CAP GROWTH (FORMERLY BERGER CAPITAL GROWTH) SUBACCOUNT: This subaccount seeks long-term capital appreciation by investing primarily in the common stocks of established companies. JANCAP GROWTH SUBACCOUNT: This subaccount seeks growth of capital in a manner consistent with preservation of capital by emphasizing investments in common stocks. LORD ABBETT GROWTH & INCOME SUBACCOUNT: This subaccount seeks long-term growth of capital and income while attempting to avoid excessive fluctuations in market value by investing in common stocks of seasoned companies which are expected to show above-average growth. T. ROWE PRICE INTERNATIONAL EQUITY SUBACCOUNT: This subaccount seeks total return on its assets from long-term growth of capital and income principally through investment primarily in common stocks of established, non-U.S. companies. T. ROWE PRICE ASSET ALLOCATION SUBACCOUNT: This subaccount seeks a high level of total return by investing primarily in a diversified group of fixed income and equity securities. PIMCO LIMITED MATURITY BOND SUBACCOUNT: This subaccount seeks to maximize total return, consistent with preservation of capital and prudent investment management by investing primarily in fixed income securities of various types. PIMCO TOTAL RETURN SUBACCOUNT: This subaccount seeks to maximize total return, consistent with preservation of capital by investing primarily in fixed income securities of various types. INVESCO EQUITY INCOME SUBACCOUNT: This subaccount seeks high current income while following sound investment practices, with capital growth potential as an additional but secondary consideration. The subaccount invests primarily in dividend-paying, marketable common stocks of domestic and foreign industrial issuers. (3) TRANSACTIONS WITH AFFILIATES KILICO provides a death benefit payment upon the death of the Policy owner under the terms of the death benefit option selected by the Policy owner as further described in the Policy. KILICO assesses a monthly charge to the subaccounts for the cost of providing this insurance protection to the Policy owner. These cost of insurance charges vary with the issue age, sex and rate class of the Policy owner, and are allocated among the subaccounts in the proportion of each subaccount to the Separate Account value. Cost of insurance charges totaled approximately $121,300 and $396,200 for the Select and Power V variable universal life products, respectively, for the year ended December 31, 1997. 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. A state and local premium tax charge of 2.5% is deducted from each premium payment under the Power V policy prior to allocation of the net premium. This charge is to reimburse KILICO for the payment of state premium taxes. KILICO expects to pay an average state premium tax rate of approximately 2.5% but the actual premium tax attributable to a Policy may be more or less. In addition, a charge for federal taxes equal to 1% of each premium payment will be deducted to compensate KILICO for a higher corporate income tax liability resulting from changes made to the Internal Revenue Code by the Omnibus Budget Reconciliation Act of 1990. Policy loans are also provided for under the terms of the Policy. The minimum amount of the loan is $500 and is limited to 90% of the Policy's investment value, less applicable surrender charges. Interest is assessed against the policy loan under the terms of the Policy. Policy loans are carried in KILICO's general account. Proceeds payable on the surrender of a Policy are reduced by the amount of any applicable contingent deferred sales charge. 40 122 NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Scudder Kemper Investments, Inc. ("SKI"), formerly Zurich Kemper Investments, Inc., an affiliated company, is the investment manager of the portfolios of the Investors Fund Series portfolios. American Skandia Investment Services, Incorporated ("ASISI"), an unaffiliated company, is the investment manager for the American Skandia Trust. Investors Brokerage Services, Inc. ("IBS"), a wholly-owned subsidiary of KILICO, is the principal underwriter for the Separate Account. (4) NET TRANSFERS (TO) FROM AFFILIATED DIVISIONS AND SUBACCOUNTS Net transfers (to) from affiliated divisions or accounts include transfers of all or part of the Policy Owner's interest to or from another subaccount or to the general account of KILICO. (5) POLICY OWNERS' EQUITY Policy Owners' equity at December 31, 1997, is as follows (in thousands, except unit value; differences are due to rounding):
NUMBER POLICY OF UNIT OWNERS' UNITS VALUE EQUITY ------ ----- ------- POWER V POLICIES INVESTORS FUND SERIES: Kemper Money Market Subaccount.............................. 362 $ 1.054 $ 382 Kemper Total Return Subaccount.............................. 4 3.340 14 Kemper High Yield Subaccount................................ 26 1.413 36 Kemper Growth Subaccount.................................... 32 4.045 129 Kemper Government Securities Subaccount..................... 5 1.301 7 Kemper International Subaccount............................. 29 1.693 48 Kemper Small Cap Growth Subaccount.......................... 101 2.225 224
AMERICAN SKANDIA TRUST: Founders Capital Appreciation Subaccount.................... 8 17.611 135 Neuberger & Berman Mid-Cap Growth Subaccount................ 12 16.603 201 JanCap Growth Subaccount.................................... 22 23.905 527 Lord Abbett Growth & Income Subaccount...................... 5 21.040 112 T. Rowe Price International Equity Subaccount............... 8 12.098 96 T. Rowe Price Asset Allocation Subaccount................... 4 15.536 58 PIMCO Limited Maturity Bond Subaccount...................... -- 11.487 8 PIMCO Total Return Subaccount............................... 1 12.071 17 Invesco Equity Income Subaccount............................ 4 17.062 72 ------- TOTAL POWER V POLICY OWNERS' EQUITY.................... $ 2,066 =======
SELECT POLICIES INVESTORS FUND SERIES: Kemper Money Market Subaccount.............................. 357 $ 1.635 $ 584 Kemper Total Return Subaccount.............................. 1,215 2.488 3,022 Kemper High Yield Subaccount................................ 776 2.446 1,898 Kemper Growth Subaccount.................................... 779 3.354 2,612 Kemper Government Securities Subaccount..................... 2,330 2.013 4,690 ------- TOTAL SELECT POLICY OWNERS' EQUITY..................... $12,806 =======
41 123 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS THE BOARD OF DIRECTORS AND STOCKHOLDER'S KEMPER INVESTORS LIFE INSURANCE COMPANY: We have audited the accompanying consolidated balance sheet of Kemper Investors Life Insurance Company and subsidiaries as of December 31, 1997, and the related consolidated statements of operations, stockholder's equity, and cash flows for the year then ended. 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 audit. The financial statements of Kemper Investors Life Insurance Company and subsidiaries for the period from January 4, 1996 to December 31, 1996 (post-acquisition basis) and for the year ended December 31, 1995 (pre-acquisition basis), were audited by other auditors, whose unqualified report, dated March 21, 1997, included an explanatory paragraph that described the acquisition of Kemper Investors Life Insurance Company as discussed in Note 1 to the financial statements. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Kemper Investors Life Insurance Company and subsidiaries as of December 31, 1997, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ PricewaterhouseCoopers L.L.P. Coopers & Lybrand L.L.P. Chicago, Illinois March 18, 1998 42 124 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS THE BOARD OF DIRECTORS AND STOCKHOLDER KEMPER INVESTORS LIFE INSURANCE COMPANY: We have audited the accompanying consolidated balance sheet of Kemper Investors Life Insurance Company and subsidiaries as of December 31, 1996 and the related consolidated statements of operations, stockholder's equity, and cash flows for the period from January 4, 1996 to December 31, 1996 (post-acquisition), and for the year 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 the results of their operations and their cash flows for the post-acquisition period, in conformity with generally accepted accounting principles. Also, in our opinion, the aforementioned pre-acquisition consolidated financial statements present fairly, in all material respects, the results of their operations and their cash flows for the pre-acquisition period, 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 Corporation, the parent 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 period after the acquisition is presented on a different cost basis than that for the period before the acquisition and, therefore, is not comparable. KPMG LLP Chicago, Illinois March 21, 1997 43 125 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
DECEMBER 31 DECEMBER 31 1997 1996 ----------- ----------- ASSETS Fixed maturities, available for sale, at fair value (amortized cost: December 31, 1997, $3,644,075; December 31, 1996, $3,929,650)..................................... $ 3,668,643 $3,866,431 Short-term investments...................................... 236,057 71,696 Joint venture mortgage loans................................ 72,663 110,971 Third-party mortgage loans.................................. 102,974 106,585 Other real estate-related investments....................... 44,409 50,157 Policy loans................................................ 282,439 288,302 Equity securities........................................... 24,839 9,910 Other invested assets....................................... 20,820 13,597 ----------- ---------- Total investments................................. 4,452,844 4,517,649 Cash........................................................ 23,868 2,776 Accrued investment income................................... 117,789 115,199 Goodwill.................................................... 229,393 244,688 Value of business acquired.................................. 138,482 189,639 Deferred insurance acquisition costs........................ 59,459 26,811 Deferred income taxes....................................... 39,993 -- Reinsurance recoverable..................................... 382,609 427,165 Receivable on sales of securities........................... 20,076 32,569 Other assets and receivables................................ 3,187 34,117 Assets held in separate accounts............................ 5,121,950 2,127,247 ----------- ---------- Total assets...................................... $10,589,650 $7,717,860 =========== ========== LIABILITIES Future policy benefits...................................... $ 3,856,871 $4,256,521 Ceded future policy benefits................................ 382,609 427,165 Benefits and funds payable.................................. 150,524 36,142 Other accounts payable and liabilities...................... 212,133 59,462 Deferred income taxes....................................... -- 60,362 Liabilities related to separate accounts.................... 5,121,950 2,127,247 ----------- ---------- Total liabilities................................. 9,724,087 6,966,899 ----------- ---------- 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.................................. 806,538 761,538 Unrealized gain (loss) on investments....................... 12,637 (47,498) Retained earnings........................................... 43,888 34,421 ----------- ---------- Total stockholder's equity........................ 865,563 750,961 ----------- ---------- Total liabilities and stockholder's equity........ $10,589,650 $7,717,860 =========== ==========
See accompanying notes to consolidated financial statements. 44 126 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands)
YEAR ENDED DECEMBER 31 ------------------------------------ PREACQUISITION -------------- 1997 1996 1995 ---- ---- ---- REVENUE Net investment income....................................... $296,195 $299,688 $ 348,448 Realized investment gains (losses).......................... 10,546 13,602 (318,700) Premium income.............................................. 22,239 7,822 236 Separate account fees and charges........................... 85,413 25,309 21,909 Other income................................................ 11,087 9,786 16,192 -------- -------- --------- Total revenue..................................... 425,480 356,207 68,085 -------- -------- --------- BENEFITS AND EXPENSES Interest credited to policyholders.......................... 199,782 223,094 237,984 Claims incurred and other policyholder benefits............. 28,372 14,255 7,631 Taxes, licenses and fees.................................... 52,608 2,173 6,912 Commissions................................................. 32,602 25,962 24,881 Operating expenses.......................................... 36,837 24,678 20,837 Deferral of insurance acquisition costs..................... (38,177) (27,820) (36,870) Amortization of insurance acquisition costs................. 3,204 2,316 14,423 Amortization of value of business acquired.................. 24,948 21,530 -- Amortization of goodwill.................................... 15,295 10,195 -- -------- -------- --------- Total benefits and expenses....................... 355,471 296,383 275,798 -------- -------- --------- Income (loss) before income tax expense (benefit)........... 70,009 59,824 (207,713) Income tax expense (benefit)................................ 31,292 25,403 (74,664) -------- -------- --------- Net income (loss)................................. $ 38,717 $ 34,421 $(133,049) ======== ======== =========
See accompanying notes to consolidated financial statements. 45 127 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (in thousands)
PREACQUISITION -------------- DECEMBER 31 DECEMBER 31 JANUARY 4 DECEMBER 31 1997 1996 1996 1995 ----------- ----------- --------- ----------- CAPITAL STOCK, beginning and end of period........... $ 2,500 $ 2,500 $ 2,500 $ 2,500 -------- -------- -------- --------- ADDITIONAL PAID-IN CAPITAL, beginning of period...... 761,538 743,104 491,994 491,994 Capital contributions from parent.................... 45,000 18,434 -- -- Adjustment to reflect purchase accounting method..... -- -- 251,110 -- -------- -------- -------- --------- End of period.............................. 806,538 761,538 743,104 491,994 -------- -------- -------- --------- UNREALIZED GAIN (LOSS) ON INVESTMENTS, beginning of period............................................. (47,498) -- 68,502 (236,443) Unrealized gain (loss) on revaluation of investments, net................................................ 60,135 (47,498) -- 304,945 Adjustment to reflect purchase accounting method..... -- -- (68,502) -- -------- -------- -------- --------- End of period.............................. 12,637 (47,498) -- 68,502 -------- -------- -------- --------- RETAINED EARNINGS, beginning of period............... 34,421 -- 42,880 175,929 Net income (loss).................................... 38,717 34,421 -- (133,049) Dividends to parent.................................. (29,250) -- -- -- Adjustment to reflect purchase accounting method..... -- -- (42,880) -- -------- -------- -------- --------- End of period.............................. 43,888 34,421 -- 42,880 -------- -------- -------- --------- Total stockholder's equity................. $865,563 $750,961 $745,604 $ 605,876 ======== ======== ======== =========
See accompanying notes to consolidated financial statements. 46 128 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
YEAR ENDED DECEMBER 31 ---------------------------------------- PREACQUISITION -------------- 1997 1996 1995 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)...................................... $ 38,717 $ 34,421 $(133,049) Reconcilement of net income (loss) to net cash provided: Realized investment losses (gains).................. (10,546) (13,602) 318,700 Interest credited and other charges................. 198,206 230,298 237,984 Deferred insurance acquisition costs................ (34,973) (25,504) (22,447) Amortization of value of business acquired.......... 24,948 21,530 -- Amortization of goodwill............................ 15,295 10,195 -- Amortization of discount and premium on investments....................................... 17,866 25,743 4,586 Deferred income taxes............................... (99,370) (897) 38,423 Net change in current federal income taxes.......... 97,386 108,806 (86,990) Benefits and premium taxes due related to separate account bank-owned life insurance................. 180,546 -- -- Other, net.......................................... 17,168 (22,283) (29,905) --------- ----------- --------- Net cash provided from operating activities.... 445,243 368,707 327,302 --------- ----------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Cash from investments sold or matured: Fixed maturities held to maturity................... 229,208 264,383 320,143 Fixed maturities sold prior to maturity............. 633,872 891,995 297,637 Mortgage loans, policy loans and other invested assets............................................ 131,866 168,727 450,573 Cost of investments purchased or loans originated: Fixed maturities.................................... (606,028) (1,369,091) (549,867) Mortgage loans, policy loans and other invested assets............................................ (76,350) (119,044) (131,966) Short-term investments, net............................ (164,361) 300,819 (168,351) Net change in receivable and payable for securities transactions........................................ 29,746 (31,667) (1,397) Net reductions in other assets......................... 244 115 1,996 --------- ----------- --------- Net cash provided by investing activities...... 178,197 106,237 218,768 --------- ----------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Policyholder account balances: Deposits............................................ 145,687 141,159 247,778 Withdrawals......................................... (745,510) (700,084) (755,917) Capital contributions from parent...................... 45,000 18,434 -- Dividends to parent.................................... (29,250) -- -- Other.................................................. (18,275) 42,512 (35,309) --------- ----------- --------- Net cash used in financing activities.......... (602,348) (497,979) (543,448) --------- ----------- --------- Net increase (decrease) in cash........... 21,092 (23,035) 2,622 CASH, beginning of period................................ 2,776 25,811 23,189 --------- ----------- --------- CASH, end of period...................................... $ 23,868 $ 2,776 $ 25,811 ========= =========== =========
See accompanying notes to consolidated financial statements. 47 129 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 that change in control, Zurich and Insurance Partners owned 80 percent and 20 percent, respectively, of Kemper and therefore the Company. On February 27, 1998, Zurich acquired Insurance Partner's remaining 20 percent interest for cash. As a result of this transaction, Kemper and the Company became wholly-owned subsidiaries of Zurich. The financial statements include the accounts of the Company on a consolidated basis. All significant intercompany balances and transactions have been eliminated. Certain reclassifications have been made to the 1996 and 1995 consolidated financial statements in order for them to conform to the 1997 presentation. 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 years ended December 31, 1996 and 1997, 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 where appropriate 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 values as of the acquisition date. The difference between the cost of acquiring the Company and the net fair values of the Company's assets and liabilities as of the acquisition date has been recorded as goodwill. 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 began to amortize goodwill during 1996 on a straight-line basis over twenty-five years. In December of 1997, the Company changed its amortization period to twenty years in order to conform to Zurich's accounting practices and policies. As a result of the change in amortization periods, the Company recorded an increase in goodwill amortization expense of $5.1 million during 1997. 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, 1997, 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 48 130 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. 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, 2002 are as follows:
PROJECTED (IN THOUSANDS) BEGINNING ACCRETION OF ENDING YEAR ENDED DECEMBER 31 BALANCE AMORTIZATION INTEREST BALANCE - ---------------------------------------------------- --------- ------------ ------------ --------- 1996 (actual)....................................... $190,222 $(31,427) $ 9,897 $168,692 1997 (actual)....................................... 168,692 (34,906) 9,958 143,744 1998................................................ 143,744 (25,633) 8,933 127,044 1999................................................ 127,044 (23,701) 7,873 111,216 2000................................................ 111,216 (21,668) 6,876 96,424 2001................................................ 96,424 (19,122) 5,973 83,275 2002................................................ 83,275 (17,835) 5,134 70,574
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, 1997 and 1996, this adjustment increased (decreased) the value of business acquired by $(5.3) million and $20.9 million, respectively, and stockholder's equity by approximately $(3.4) 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, variable life insurance and interest-sensitive life insurance products consists of investment income, and policy charges such as mortality, expense and surrender charges and expense loads for premium taxes on certain contracts. 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. 49 131 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DEFERRED INSURANCE ACQUISITION COSTS The costs of acquiring new business, 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. 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 3.0 percent to 7.3 percent. Future minimum guaranteed interest rates vary from 3.0 percent to 4.0 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 and equity securities 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 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; 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. 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. 50 132 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 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 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 amounted to $108.8 million and $25.2 million, respectively. The Company paid federal income taxes of $29.0 million and $28.1 million directly to the United States Treasury Department during 1997 and 1996, respectively. 51 133 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, 1997 U.S. treasury securities and obligations of U.S. government agencies and authorities................. $ 6,258 $ 6,298 $ 4 $ (44) Obligations of states and political subdivisions, special revenue and nonguaranteed................... 29,330 29,308 160 (138) Debt securities issued by foreign governments......... 92,563 92,722 188 (347) Corporate securities.................................. 1,861,655 1,846,588 24,733 (9,666) Mortgage and asset-backed securities.................. 1,678,837 1,669,159 10,035 (357) ---------- ---------- ------- -------- Total fixed maturities......................... $3,668,643 $3,644,075 $35,120 $(10,552) ========== ========== ======= ======== 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) ========== ========== ======= ========
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 $220.0 million real estate portfolio at December 31, 1997 consists of joint venture and third-party mortgage loans and other real estate-related investments. At December 31, 1997 and 1996, total impaired real estate-related loans were as follows:
DECEMBER 31 DECEMBER 31 1997 1996 (in millions) ----------- ----------- Impaired loans without reserves--gross...................... $39.3 $39.8 Impaired loans with reserves--gross......................... 2.2 7.6 ----- ----- Total gross impaired loans........................... 41.5 47.4 Reserves related to impaired loans.......................... (2.1) (4.4) ----- ----- Net impaired loans................................... $39.4 $43.0 ===== =====
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, 1997 and 1996, the 52 134 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (3) INVESTED ASSETS AND RELATED INCOME (CONTINUED) Company's deficit in equity investments considered in determining reserves and write-downs amounted to $0 and $5.9 million, respectively. The Company had an average balance of $45.2 million and $30.8 million in impaired loans for 1997 and 1996, respectively. Cash payments received on impaired loans are generally applied to reduce the outstanding loan balance. At December 31, 1997 and December 31, 1996, loans on nonaccrual status, before reserves and write-downs, amounted to $47.4 million and $43.5 million, respectively. The Company's nonaccrual loans are generally included in impaired loans. At December 31, 1997, securities carried at approximately $6.3 million were on deposit with governmental agencies as required by law. Proceeds from sales of investments in fixed maturities prior to maturity were $633.9 million, $892.0 million and $297.6 million during 1997, 1996 and 1995, respectively. Gross gains of $3.1 million, $9.9 million and $21.2 million and gross losses of $13.7 million, $16.2 million and $11.9 million were realized on sales and write-downs of fixed maturities in 1997, 1996 and 1995, respectively. The carrying value and amortized cost of fixed maturity investments, by contractual maturity at December 31, 1997, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties and because mortgage-backed and asset-backed securities provide for periodic payments throughout their life.
CARRYING AMORTIZED VALUE COST VALUE (in thousands) -------- ---------- One year or less............................................ $ 47,724 $ 47,797 Over one year through five.................................. 649,279 648,291 Over five years through ten................................. 988,849 984,495 Over ten years.............................................. 303,954 294,333 Securities not due at a single maturity date, primarily mortgage and asset-backed securities(1)................... 1,678,837 1,669,159 ---------- ---------- Total fixed maturities............................... $3,668,643 $3,644,075 ========== ==========
- --------------- (1) Weighted average maturity of 3.8 years. The sources of net investment income were as follows:
PREACQUISITION -------------- 1997 1996 1995 (in thousands) -------- -------- -------------- Interest and dividends on fixed maturities................. $250,170 $250,683 $269,934 Dividends on equity securities............................. 2,123 646 681 Income from short-term investments......................... 4,128 9,130 13,159 Income from mortgage loans................................. 16,283 20,257 40,494 Income from policy loans................................... 20,549 20,700 19,658 Income from other real estate-related investments.......... 6,631 4,917 15,565 Income from other loans and investments.................... 2,045 2,480 1,555 -------- -------- -------- Total investment income............................. 301,929 308,813 361,046 Investment expense......................................... (5,734) (9,125) (12,598) -------- -------- -------- Net investment income............................... $296,195 $299,688 $348,448 ======== ======== ========
53 135 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, 1997, 1996 and 1995, were as follows:
REALIZED GAINS (LOSSES) ----------------------------------------------- PREACQUISITION -------------- 1997 1996 1995 (in thousands) -------- ------- -------------- Real estate-related...................................... $ 19,758 $17,462 $(325,611) Fixed maturities......................................... (10,656) (6,344) 9,336 Equity securities........................................ 914 -- (346) Other.................................................... 530 2,484 (2,079) -------- ------- --------- Realized investment gains (losses) before income tax expense (benefit)................................... 10,546 13,602 (318,700) Income tax expense (benefit) 3,691 4,761 (111,545) -------- ------- --------- Net realized investment gains (losses)................. $ 6,855 $ 8,841 $(207,155) ======== ======= =========
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, 1997, 1996 and 1995 were as follows:
CHANGE IN UNREALIZED GAINS (LOSSES) --------------------------------------------------------- PREACQUISITION -------------- DECEMBER 31 DECEMBER 31 JANUARY 4 DECEMBER 31 1997 1996 1996 1995 (in thousands) ------------ ------------ ---------- -------------- Fixed maturities..................................... $ 87,787 $(63,219) $ $351,964 Equity and other securities.......................... (103) 1,256 -- 180 Adjustment to deferred insurance acquisition costs... (2,325) 1,307 -- (14,277) Adjustment to value of business acquired............. (26,209) 20,947 -- -- -------- -------- -- -------- Unrealized gain (loss) before income tax expense... 59,150 (39,709) -- 337,867 Income tax expense (benefit)......................... (985) 7,789 -- 32,922 -------- -------- -- -------- Net unrealized gain (loss) on investments..... $ 60,135 $(47,498) $-- $304,945 ======== ======== == ========
(4) UNCONSOLIDATED INVESTEES At December 31, 1997 and 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, 1997 and December 31, 1996, the Company's net equity investment in unconsolidated investees amounted to $19.3 million and $11.7 million, respectively. The Company's share of net income related to such unconsolidated investees amounted to $835 thousand and $223 thousand in 1997 and 1996, respectively, and a net loss of $453 thousand in 1995. (5) CONCENTRATION OF CREDIT RISK The Company generally strives to maintain a diversified invested asset portfolio; however, certain concentrations of credit risk exist in mortgage and asset-backed securities and real estate. Approximately 35.1 percent of the Company's investment-grade fixed maturities at December 31, 1997 were mortgage-backed securities, down from 36.4 percent at December 31, 1996, due to sales and paydowns during 54 136 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (5) CONCENTRATION OF CREDIT RISK (CONTINUED) 1997. These investments consist 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 AAA credit quality. Approximately 10.8 percent and 8.8 percent of the Company's investment-grade fixed maturities at December 31, 1997 and 1996, respectively, consisted of corporate asset-backed securities. The majority of the Company's investments in asset-backed securities were backed by home equity loans (27.7%), auto loans (22.3%), manufactured housing loans (17.2%), equipment loans (13.7%), and commercial mortgage backed securities (10.7%). 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, 1997 California....................... 38.2% Hawaii........................... 14.2 Colorado......................... 9.8 Oregon........................... 9.2 Washington....................... 9.1 Florida.......................... 6.4 Texas............................ 5.1 Michigan......................... 3.7 Ohio............................. 3.3 Illinois......................... 1.0 ----- Total.................. 100.0% =====
DISTRIBUTION BY PROPERTY TYPE AS OF DECEMBER 31, 1997 Hotel............................ 41.3% Land............................. 28.2 Residential...................... 13.1 Retail........................... 3.3 Office........................... 3.1 Industrial....................... .9 Other............................ 10.1 ----- Total.................. 100.0% =====
Undeveloped land represented approximately 28.2 percent of the Company's real estate portfolio at December 31, 1997. 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 mortgage 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, 1997, loans to and investments in joint ventures in which Patrick M. Nesbitt or his affiliates ("Nesbitt"), a third-party real estate developer, have ownership interests constituted approximately $88.2 million, or 40.1 percent, of the Company's real estate portfolio. The Nesbitt ventures consist of nine hotel properties and two office buildings. At December 31, 1997, the Company did not have any Nesbitt-related off-balance-sheet legal funding commitments outstanding. At December 31, 1997, loans to a master limited partnership (the "MLP") between subsidiaries of Kemper and subsidiaries of Lumbermens Mutual Casualty Company ("Lumbermens"), a former affiliate, constituted approximately $60.5 million, or 27.5 percent, of the Company's real estate portfolio. Kemper's interest is 55 137 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 75 percent at December 31, 1997. At December 31, 1997, MLP-related commitments accounted for approximately $7.4 million of the Company's off-balance-sheet legal commitments, which the Company expects to fund. At December 31, 1997, the Company no longer had any outstanding loans or investments in projects with the Prime Group, Inc. or its affiliates, as all such investments have been sold or written-down to zero. However, the Company continues to have Prime Group-related commitments, which accounted for $25.7 million of the Company's off-balance-sheet legal commitments at December 31, 1997. The Company does not expect to fund any of these commitments. (6) INCOME TAXES Income tax expense (benefit) was as follows for the years ended December 31, 1997, 1996 and 1995:
PREACQUISITION -------------- 1997 1996 1995 (in thousands) -------- ------- -------------- Current.................................................. $130,662 $26,300 $(113,087) Deferred................................................. (99,370) (897) 38,423 -------- ------- --------- Total.......................................... $ 31,292 $25,403 $ (74,664) ======== ======= =========
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 each filed 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. The actual income tax expense (benefit) for 1997, 1996 and 1995 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 1997, 1996, and 1995 to income (loss) before income tax expense (benefit).
PREACQUISITION -------------- 1997 1996 1995 (in thousands) ------- ------- -------------- Computed expected tax expense (benefit)................... $24,503 $20,938 $(72,700) Difference between "expected" and actual tax expense (benefit): State taxes............................................. 1,801 913 (1,370) Amortization of goodwill................................ 5,353 3,568 -- Foreign tax credit...................................... (278) -- (183) Other, net.............................................. (87) (16) (411) ------- ------- -------- Total actual tax expense (benefit).............. $31,292 $25,403 $(74,664) ======= ======= ========
Deferred tax assets and liabilities are generally determined based on the difference between the financial statement and tax basis 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 valuation allowance is subject to future adjustments based upon, among other items, the Company's estimates of future operating earnings and capital gains. 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. 56 138 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 asset or liability were as follows:
DECEMBER 31 DECEMBER 31 JANUARY 4 1997 1996 1996 (in thousands) ----------- ------------ --------- Deferred federal tax assets: Deferred insurance acquisition costs.................. $ 75,522 $ 4,520 $ -- Unrealized losses on investments...................... -- 16,624 -- Life policy reserves.................................. 43,337 46,452 46,654 Unearned revenue...................................... 37,243 -- -- Real estate-related................................... 13,400 20,642 27,736 Other investment-related.............................. 3,298 5,409 1,773 Other................................................. 4,371 3,639 9,750 -------- -------- -------- Total deferred federal tax assets.................. 177,171 97,286 85,913 Valuation allowance................................... (15,201) (31,825) (15,201) -------- -------- -------- Total deferred federal tax assets after valuation allowance........................................ 161,970 65,461 70,712 -------- -------- -------- Deferred federal tax liabilities: Value of business acquired............................ 48,469 66,373 66,578 Deferred insurance acquisition costs.................. 20,811 9,384 -- Depreciation and amortization......................... 20,201 15,473 15,490 Other investment-related.............................. 18,774 28,855 37,919 Unrealized gains on investments....................... 9,002 -- -- Other................................................. 4,720 5,738 4,197 -------- -------- -------- Total deferred federal tax liabilities............. 121,977 125,823 124,184 -------- -------- -------- Net deferred federal tax assets (liabilities)........... $ 39,993 $(60,362) $(53,472) ======== ======== ========
The net deferred tax assets relate primarily to unearned revenue and the tax on deferred insurance acquisition costs ("DAC Tax") associated with $2.7 billion of new 1997 sales from a non-registered individual and group variable bank-owned life insurance contract ("BOLI"). As a result of proposed tax law changes, as more fully discussed below, the level of DAC Tax experienced in 1997 is not anticipated to occur in future periods and it is expected that the Company will return to its normalized earnings patterns in 1998. Management believes that it is more likely, than not, that the results of future operations will generate sufficient taxable income over the ten year amortization period of the unearned revenue and DAC Tax to realize such deferred tax assets. In early 1998, the Clinton Administration's Fiscal Year 1998 Budget ("Budget") was released and contained certain proposals to change the taxation of non-qualified fixed and variable annuities and variable life insurance contracts, including BOLI. It is currently unknown whether or not such proposals will be accepted, amended or omitted in the final 1999 Budget approved by Congress. If the current Budget proposals are accepted, certain of the Company's non-qualified fixed and variable annuities and certain of its variable life insurance products, including BOLI and the non-registered individual variable universal life insurance contracts introduced during 1997, may no longer be tax advantaged products and therefore no longer attractive to those customers who purchase them because of their favorable tax attributes. Additionally, sales of such products during 1998 may also be negatively impacted until the likelihood of the current proposals being enacted into law has been determined. 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 $45.0 million and $18.4 million during 1997 and 1996, respectively. The Company paid cash dividends of $29.3 million to Kemper during 1997. 57 139 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (7) RELATED-PARTY TRANSACTIONS (CONTINUED) 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, 1997 and December 31, 1996, joint venture mortgage loans totaled $72.7 million and $111.0 million, respectively, and during 1997, 1996 and 1995, the Company earned interest income on these joint venture loans of $7.5 million, $9.5 million and $19.6 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 Scudder Kemper Investments, Inc. ("SKI"), formerly Zurich Kemper Investments, Inc., an affiliated company, and the information systems of Kemper Service Company ("KSvC"), an SKI subsidiary, based on the Company's share of administrative, legal, marketing, investment management, information systems and operation and support services. During 1997, 1996 and 1995, expenses allocated to the Company from SKI and KSvC amounted to $114 thousand, $1.7 million and $4.4 million, respectively. The Company also paid to SKI investment management fees of $3.5 million, $3.6 million and $3.4 million during 1997, 1996 and 1995, respectively. In addition, expenses allocated to the Company from FKLA during 1997, 1996 and 1995 amounted to $30.0 million, $10.5 million and $14.3 million, respectively. During 1995, the Company sold certain mortgages and real estate-related investments, net of reserves, amounting to approximately $3.5 million 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 an affiliated non-life realty subsidiary for cash. The Company also paid to Kemper real estate subsidiaries $2.2 million, $1.8 million and $1.8 million in 1997, 1996 and 1995, respectively, 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 Fidelity Life Association, a Mutual Legal Reserve Company ("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, 1997 and 1996, the reinsurance recoverable related to the fixed-rate annuity liabilities ceded to FLA amounted to $382.6 million and $427.2 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. Premiums assumed during 1997 under the terms of the treaty amounted to $21.1 million and the face amount which remained outstanding at December 31, 1997 amounted to $12.6 billion. The Company's retention limit on term life insurance prior to 1997 was $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. Effective January 1, 1997, the Company ceded 90 percent of all new term life insurance premiums to outside reinsurers. Term life reserves ceded to outside reinsurers on the Company's direct business amounted to approximately $139 thousand and $102 thousand as of December 31, 1997 and 1996, respectively. 58 140 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During December 1997, the Company entered into a funds held reinsurance agreement with a Zurich affiliated company, EPICENTRE Reinsurance (Bermuda) Limited ("EPICENTRE"). Under the terms of this agreement, the Company ceded, on a yearly renewable term basis, ninety percent of the net amount at risk (death benefit payable to the insured less the insured's separate account cash surrender value) related to a new product developed in 1997, a non-registered variable bank-owned life insurance contract ("BOLI"), which is held in the Company's separate accounts. During 1997, the Company issued $59.3 billion (face amount) of new BOLI business and ceded $51.1 billion (face amount) to EPICENTRE under the terms of the treaty. During 1997, the Company also ceded $24.3 million of separate account fees (cost of insurance charges) to EPICENTRE. The Company has also withheld approximately $23.4 million of such funds due to EPICENTRE under the terms of the reinsurance agreement as a component of benefits and funds payable in the accompanying consolidated balance sheet as of December 31, 1997. (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 $1.9 million and $1.7 million at December 31, 1997 and 1996, respectively. The discount rate used in determining the allocated postretirement benefit obligation was 7.25 percent and 7.75 percent for 1997 and 1996, respectively. The assumed health care trend rate used was based on projected experience for 1997 and 1998, 8 percent in 1999, gradually declining to 5.0 percent by the year 2002 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, 1997 and 1996 by $242 thousand and $191 thousand, respectively. The Company also provides certain severance-related policies to provide benefits, generally limited in time, to former or inactive employees after employment but before retirement. (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 neither 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. 59 141 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (10) COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED) The Company is liable for guaranty fund assessments related to certain unaffiliated insurance companies that have become insolvent during the years 1997 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, 1997. (11) FINANCIAL INSTRUMENTS--OFF-BALANCE-SHEET RISK At December 31, 1997, the Company had future legal loan commitments and stand-by financing agreements totaling $75.3 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 $21.2 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. (12) 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 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, SKI. 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 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. 60 142 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (12) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) 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 maturities consistent with those remaining for the contracts being valued. The Company had projected its future average crediting rate in 1997 and 1996 to be 5.25 percent and 4.75 percent, respectively, while the assumed average market crediting rate was 6.0 percent and 5.8 percent in 1997 and 1996, respectively. The carrying values and estimated fair values of the Company's financial instruments at December 31, 1997 and 1996 were as follows:
DECEMBER 31, 1997 DECEMBER 31, 1996 ------------------------ ------------------------ CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE (in thousands) -------- ----- -------- ----- Financial instruments recorded as assets: Fixed maturities.............................. $3,668,643 $3,668,643 $3,866,431 $3,866,431 Cash and short-term investments............... 259,925 259,925 74,472 74,472 Mortgage loans and other real estate-related assets..................................... 220,046 220,046 267,713 267,713 Policy loans.................................. 282,439 282,439 288,302 288,302 Equity securities............................. 24,839 24,839 9,910 9,910 Other invested assets......................... 20,820 24,404 13,597 13,597 Financial instruments recorded as liabilities: Life policy benefits, excluding term life reserves................................... 3,846,023 4,050,852 4,249,264 4,101,588
(13) 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 1998 is $58.4 million. The Company paid cash dividends of $29.3 million to Kemper during 1997. The Company paid no cash dividends in 1996 or 1995. The Company's net income (loss) and capital and surplus as determined in accordance with statutory accounting principles were as follows:
1997 1996 1995 (in thousands) ---- ---- ---- Net income (loss)........................................... $ 58,372 $ 37,287 $(64,707) ======== ======== ======== Statutory capital and surplus............................... $476,924 $411,837 $383,374 ======== ======== ========
61 143 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (14) UNAUDITED INTERIM FINANCIAL INFORMATION The following table sets forth the Company's unaudited quarterly financial information: (in thousands)
QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 ------------- -------- ------- ------------ ----------- 1997 OPERATING SUMMARY Net investment income.............................. $74,249 $74,050 $72,950 $ 74,946 Realized investment gains (losses)................. 889 8,161 (3,032) 4,528 Premium income..................................... 5,008 4,121 3,938 9,172 Separate account fees and other income............. 8,909 12,961 12,215 62,415(1) ------- ------- ------- -------- Total revenue.............................. 89,055 99,293 86,071 151,061 ------- ------- ------- -------- Interest credited and benefits to policyholders.... 57,859 56,643 57,965 55,687 Commissions, taxes, licenses and fees.............. 8,023 9,475 8,389 59,323(1) Operating expenses................................. 7,175 8,780 10,014 10,868 Net deferral of insurance acquisition costs........ (7,216) (6,877) (7,471) (13,409) Amortization of value of business acquired......... 4,821 6,991 6,743 6,393 Amortization of goodwill........................... 2,547 2,552 2,549 7,647(2) ------- ------- ------- -------- Total benefits and expenses................ 73,209 77,564 78,189 126,509 ------- ------- ------- -------- Income before income tax expense................... 15,846 21,729 7,882 24,552 Income tax expense................................. 5,678 8,723 3,778 13,113 ------- ------- ------- -------- Net income................................. $10,168 $13,006 $ 4,104 $ 11,439 ======= ======= ======= ======== 1996 OPERATING SUMMARY Net investment income.............................. $72,302 $74,647 $76,070 $ 76,669 Realized investment gains (losses)................. (1,248) (2,439) 13,518 3,771 Premium income..................................... 130 109 150 7,433(3) Separate account fees and other income............. 8,028 9,419 8,478 9,170 ------- ------- ------- -------- Total revenue.............................. 79,212 81,736 98,216 97,043 ------- ------- ------- -------- Interest credited and benefits to policyholders.... 58,296 57,335 57,512 64,206 Commissions, taxes, licenses and fees.............. 6,868 6,486 6,819 7,962 Operating expenses................................. 5,440 4,920 6,974 7,344 Net deferral of insurance acquisition costs........ (5,032) (7,302) (5,434) (7,736) Amortization of value of business acquired......... 4,234 2,787 11,582 2,927 Amortization of goodwill........................... 2,547 2,552 2,549 2,547 ------- ------- ------- -------- Total benefits and expenses................ 72,353 66,778 80,002 77,250 ------- ------- ------- -------- Income before income tax expense................... 6,859 14,958 18,214 19,793 Income tax expense................................. 3,513 6,402 7,391 8,097 ------- ------- ------- -------- Net income................................. $ 3,346 $ 8,556 $10,823 $ 11,696 ======= ======= ======= ========
- --------------- Notes: (1) Reflects premium tax expense loads received and premium taxes incurred of $49.1 million related to new BOLI sales of $2.6 billion in the fourth quarter of 1997. (2) Reflects the effect of the change in amortization of goodwill from 25 to 20 years. (3) Reflects the assumption of term life insurance business from FKLA. 62 144 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data) (unaudited)
JUNE 30 DECEMBER 31 1998 1997 ----------- ----------- ASSETS Investments: Fixed maturities, available for sale, at market (cost: June 30, 1998, $3,550,377; December 31, 1997, $3,644,075)............................................ $ 3,591,991 $ 3,668,643 Short-term investments.................................... 41,806 236,057 Joint venture mortgage loans.............................. 67,868 72,663 Third-party mortgage loans................................ 104,206 102,974 Other real estate-related investments..................... 41,891 44,409 Policy loans.............................................. 277,034 282,439 Equity securities......................................... 75,341 24,839 Other invested assets..................................... 21,264 20,820 ----------- ----------- Total investments................................. 4,221,401 4,452,844 Cash........................................................ 20,785 23,868 Accrued investment income................................... 121,452 117,789 Goodwill.................................................... 223,023 229,393 Value of business acquired.................................. 124,780 138,482 Deferred insurance acquisition costs........................ 78,420 59,459 Deferred income taxes....................................... 48,819 39,993 Reinsurance recoverable..................................... 361,172 382,609 Other assets and receivables................................ 18,562 23,263 Assets held in separate accounts............................ 5,941,104 5,121,950 ----------- ----------- Total assets...................................... $11,159,518 $10,589,650 =========== =========== LIABILITIES AND STOCKHOLDER'S EQUITY Future policy benefits...................................... $ 3,662,012 $ 3,856,871 Ceded future policy benefits................................ 361,172 382,609 Benefits and funds payable.................................. 245,884 150,524 Other accounts payable and liabilities...................... 49,694 212,133 Liabilities related to separate accounts.................... 5,941,104 5,121,950 ----------- ----------- Total liabilities................................. 10,259,866 9,724,087 ----------- ----------- 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.................................. 806,538 806,538 Accumulated other comprehensive income...................... 21,609 12,637 Retained earnings........................................... 69,005 43,888 ----------- ----------- Total stockholder's equity........................ 899,652 865,563 ----------- ----------- Total liabilities and stockholder's equity........ $11,159,518 $10,589,650 =========== ===========
See accompanying notes to consolidated financial statements. 63 145 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands) (unaudited)
SIX MONTHS THREE MONTHS ENDED ENDED JUNE 30 JUNE 30 -------------------- ------------------- 1998 1997 1998 1997 ---- ---- ---- ---- REVENUE Net investment income.................................... $139,018 $148,299 $ 68,467 $74,050 Realized investment gains................................ 17,527 9,050 15,673 8,161 Premium income........................................... 11,144 9,129 5,941 4,121 Separate account fees and charges........................ 34,380 16,827 16,388 9,510 Other income............................................. 5,960 5,043 3,534 3,451 -------- -------- -------- ------- Total revenue.................................. 208,029 188,348 110,003 99,293 -------- -------- -------- ------- BENEFITS AND EXPENSES Interest credited to policyholders....................... 90,169 101,886 44,479 50,365 Claims and other policyholder benefits................... 25,700 12,616 13,460 6,278 Taxes, licenses and fees................................. 9,758 3,064 3,082 2,488 Commissions.............................................. 18,049 14,434 10,840 6,987 Operating expenses....................................... 22,253 15,955 12,157 8,780 Deferral of insurance acquisition costs.................. (21,600) (15,790) (12,710) (7,688) Amortization of insurance acquisition costs.............. 1,644 1,697 727 811 Amortization of value of business acquired............... 11,548 11,812 7,121 6,991 Amortization of goodwill................................. 6,370 5,099 3,186 2,552 -------- -------- -------- ------- Total benefits and expenses.................... 163,891 150,773 82,342 77,564 -------- -------- -------- ------- Income before income tax expense......................... 44,138 37,575 27,661 21,729 Income tax expense (benefit) Current........................................ 32,679 16,028 19,011 10,577 Deferred....................................... (13,658) (1,627) (7,237) (1,854) -------- -------- -------- ------- Total income tax expense....................... 19,021 14,401 11,774 8,723 -------- -------- -------- ------- Net income............................................... $ 25,117 $ 23,174 $ 15,887 $13,006 ======== ======== ======== =======
See accompanying notes to consolidated financial statements. 64 146 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in thousands) (unaudited)
SIX MONTHS ENDED THREE MONTHS ENDED JUNE 30 JUNE 30 ------------------- ------------------ 1998 1997 1998 1997 ---- ---- ---- ---- Net income................................................. $25,117 $ 23,174 $15,887 $13,006 Other comprehensive income (loss), before tax: Unrealized holding gains (losses) on investments arising during period: Unrealized holding gains (losses) on investments...... 10,522 (6,178) 10,246 64,826 Adjustment to value of business acquired.............. (5,487) (14,602) (5,181) 2,914 Adjustment to deferred insurance acquisition costs.... (1,855) (1,057) (1,367) 41 ------- -------- ------- ------- Total unrealized holding gains (losses) on investments arising during period.............. 3,180 (21,837) 3,698 67,781 ------- -------- ------- ------- Less reclassification adjustments for gains (losses) included in net income on the preceding page: Adjustment for gains included in realized investment gains............................................... (2,421) (978) (1,742) (1,003) Adjustment for amortization of premium on fixed maturities included in net investment income........ 8,851 8,997 4,175 4,232 Adjustment for gains included in amortization of value of business acquired................................ 3,333 2,454 2,978 2,223 Adjustment for gains included in amortization of insurance acquisition costs......................... 860 412 769 381 ------- -------- ------- ------- Total reclassification adjustments for gains included in net income......................... 10,623 10,885 6,180 5,833 ------- -------- ------- ------- Other comprehensive income (loss), before related income tax expense (benefit).................................... 13,803 (10,952) 9,878 73,614 Related income tax expense (benefit)....................... 4,831 (4,477) 3,457 1,945 ------- -------- ------- ------- Other comprehensive income (loss), net of tax.............. 8,972 (6,475) 6,421 71,669 ------- -------- ------- ------- Comprehensive income....................................... $34,089 $ 16,699 $22,308 $84,675 ======= ======== ======= =======
See accompanying notes to consolidated financial statements. 65 147 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (in thousands) (unaudited)
JUNE 30 DECEMBER 31 1998 1997 ------- ----------- CAPITAL STOCK, beginning and end of period.................. $ 2,500 $ 2,500 -------- -------- ADDITIONAL PAID-IN CAPITAL, beginning of period............. 806,538 761,538 Capital contributions from parent........................... -- 45,000 -------- -------- End of period..................................... 806,538 806,538 -------- -------- ACCUMULATED OTHER COMPREHENSIVE INCOME, beginning of period.................................................... 12,637 (47,498) Other comprehensive income, net of tax...................... 8,972 60,135 -------- -------- End of period..................................... 21,609 12,637 -------- -------- RETAINED EARNINGS, beginning of period...................... 43,888 34,421 Net income.................................................. 25,117 38,717 Dividend to parent.......................................... -- (29,250) -------- -------- End of period..................................... 69,005 43,888 -------- -------- Total stockholder's equity........................ $899,652 $865,563 ======== ========
See accompanying notes to consolidated financial statements. 66 148 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
SIX MONTHS ENDED JUNE 30 ------------------------ 1998 1997 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income................................................ $ 25,117 $ 23,174 Reconcilement of net income to net cash provided: Realized investment gains.............................. (17,527) (9,050) Interest credited and other charges.................... 88,303 101,886 Amortization of value of business acquired............. 11,548 11,812 Amortization of goodwill............................... 6,370 5,099 Deferred insurance acquisition costs................... (19,956) (14,093) Amortization of discount and premium on investments.... 8,851 8,997 Deferred income taxes.................................. (13,658) (1,627) Net change in current Federal income taxes............. (97,823) 3,840 Benefits and premium taxes due related to separate account bank-owned life insurance..................... 40,163 -- Other, net............................................. (21,795) 11,495 --------- --------- Net cash flow provided by operating activities.... 9,593 141,533 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Cash from investments sold or matured: Fixed maturities held to maturity...................... 258,237 104,154 Fixed maturities sold prior to maturity................ 505,188 209,569 Equity securities...................................... 460 -- Mortgage loans, policy loans and other invested assets................................................ 54,780 117,093 Cost of investments purchased or loans originated: Fixed maturities....................................... (675,192) (229,921) Equity securities...................................... (48,585) -- Mortgage loans, policy loans and other invested assets................................................ (26,951) (76,014) Short-term investments, net............................... 194,251 62,729 Net change in receivable and payable for securities transactions........................................... (677) 13,677 Net change in other assets................................ -- 114 --------- --------- Net cash provided by investing activities......... 261,511 201,401 --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Policyholder account balances: Deposits............................................... 72,626 67,412 Withdrawals............................................ (356,177) (343,675) Dividends to parent....................................... -- (29,250) Other..................................................... 9,364 (37,834) --------- --------- Net cash used in financing activities............. (274,187) (343,347) --------- --------- Net decrease in cash........................................ (3,083) (413) CASH at the beginning of period............................. 23,868 2,776 --------- --------- CASH at the end of the period............................... $ 20,785 $ 2,363 ========= =========
See accompanying notes to consolidated financial statements. 67 149 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Kemper Investors Life Insurance Company ("KILICO") is incorporated under the insurance laws of the State of Illinois. KILICO is licensed in the District of Columbia and all states, except New York. KILICO is a wholly-owned subsidiary of Kemper Corporation ("Kemper"), a nonoperating holding company. On January 4, 1996, an investor group comprised of Zurich Insurance Company ("Zurich"), and Insurance Partners, L.P. ("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 owned 80 percent and 20 percent, respectively, of Kemper and therefore KILICO. On February 27, 1998, Zurich acquired Insurance Partners' remaining 20 percent interest for cash. As a result of this transaction, Kemper and KILICO became wholly-owned subsidiaries of Zurich. The acquisition of Kemper on January 4, 1996 was accounted for using the purchase method of accounting. Under the purchase method of accounting, KILICO's assets and liabilities have been marked to their relative fair values as of the acquisition date. The difference between the cost of acquiring KILICO and the net fair values of KILICO's assets and liabilities as of the acquisition date has been recorded as goodwill. KILICO began to amortize goodwill during 1996 on a straight-line basis over twenty-five years. In December of 1997, KILICO changed its amortization period to twenty years in order to conform to Zurich's accounting practices and policies. 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 KILICO's life insurance business in force and represents the portion of the cost to acquire KILICO 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. 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, 2003 are as follows:
PROJECTED (IN THOUSANDS) BEGINNING ACCRETION OF ENDING YEAR ENDED DECEMBER 31 BALANCE AMORTIZATION INTEREST BALANCE - ---------------------------------------------------- --------- ------------ ------------ --------- 1998................................................ $143,744 $(31,301) $8,877 $121,320 1999................................................ 121,320 (23,621) 7,889 105,588 2000................................................ 105,588 (21,587) 6,899 90,900 2001................................................ 90,900 (19,100) 5,995 77,795 2002................................................ 77,795 (17,820) 5,157 65,132 2003................................................ 65,132 (15,897) 4,364 53,599
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 KILICO's net income but rather are recorded as a credit or charge to accumulated other comprehensive income, net of income tax. As of June 30, 1998, the accumulated affects of this adjustment increased the value of business acquired and accumulated other comprehensive income by approximately $7.4 million and $4.8 million, respectively. 2. In the opinion of management, all necessary adjustments consisting of normal recurring accruals have been made for a fair statement of the results of KILICO for the periods included in these financial statements. These financial statements should be read in conjunction with the financial statements and related notes in the 1997 Annual Report on Form 10-K/A No. 1. 3. In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 130, REPORTING COMPREHENSIVE INCOME. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses). This statement requires that all items required to be reported be displayed with the same prominence as other financial statements. KILICO adopted SFAS No. 130 on January 1, 1998 and accordingly restated 1997 results for comparative purposes. The impact of implementation did not affect KILICO's reported net income before 68 150 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) reporting other comprehensive income. Other comprehensive income, however, by design, could be materially different from reported net income, as changes in unrealized appreciation and depreciation of investments for example are now included as a component of reported comprehensive income. 4. During December 1997, KILICO entered into a funds held reinsurance agreement with a Zurich affiliated company, EPICENTRE Reinsurance (Bermuda) Limited ("EPICENTRE"). Under the terms of this agreement, KILICO ceded, on a yearly renewable term basis, ninety percent of the net amount at risk (death benefit payable to the insured less the insured's separate account cash surrender value) related to a non-registered variable bank-owned life insurance contract ("BOLI"), which is held in KILICO's separate accounts. During the first quarter of 1998, KILICO ceded to EPICENTRE approximately $77.3 million of separate account fees (cost of insurance charges) paid to KILICO by these policyholders for the life insurance coverage provided under the terms of each separate account contract. KILICO has also withheld approximately $95.3 million of such funds due to EPICENTRE under the terms of the reinsurance agreement as a component of benefits and funds payable in the accompanying consolidated balance sheet as of June 30, 1998. KILICO remains primarily liable to its policyholders for these amounts. 69 151 APPENDIX A [TO BE UPDATED BY AMENDMENT] ILLUSTRATIONS OF CASH VALUES, CASH SURRENDER VALUES AND 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%. This charge is guaranteed not to exceed an effective annual rate of 0.90%. In addition, the net investment returns also reflect the deduction of the Fund investment advisory fees and other Fund expenses, (.85%, the average of the fees and expenses). The tables also reflect applicable charges and deductions including a 3.5% deduction against premiums, a monthly administrative charge of $5 and 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 -1.75%, 4.25% and 10.25%, on a current basis. On a guaranteed basis, these rates of return would be -1.75%, 4.25% and 10.25%, respectively. Cost of insurance rates vary by issue age, sex, rating class and Policy Year and, therefore, are not reflected in the approximate net annual investment rate of return above. Values are shown for Policies which are issued to a male standard nonsmoker and a male preferred nonsmoker. Values for Policies issued on a basis involving a higher mortality risk would result in lower Cash Values, Surrender Values and Death Benefits than those illustrated. Females generally have a more favorable rate structure than males. 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, we will furnish an illustration based on the proposed Insured's age, sex and premium payment requested. 70 152 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE STANDARD NON-SMOKER $1,000.00 ANNUAL PREMIUM ISSUE AGE 35 $100,000 INITIAL DEATH BENEFIT: VALUES--CURRENT COST OF INSURANCE
0.00% HYPOTHETICAL 6.00% HYPOTHETICAL 12.00% HYPOTHETICAL PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN PAID PLUS ---------------------------- ---------------------------- ----------------------------- POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT - ------ --------- ------ --------- ------- ------ --------- ------- ------- --------- ------- 1 1,050 724 17 100,000 775 68 100,000 825 119 100,000 2 2,153 1,431 649 100,000 1,578 796 100,000 1,731 949 100,000 3 3,310 2,115 1,258 100,000 2,404 1,548 100,000 2,719 1,862 100,000 4 4,526 2,777 1,845 100,000 3,256 2,324 100,000 3,797 2,866 100,000 5 5,802 3,417 2,410 100,000 4,134 3,127 100,000 4,977 3,970 100,000 6 7,142 4,030 3,056 100,000 5,033 4,060 100,000 6,263 5,289 100,000 7 8,549 4,617 3,691 100,000 5,956 5,030 100,000 7,666 6,740 100,000 8 10,027 5,178 4,316 100,000 6,903 6,041 100,000 9,199 8,337 100,000 9 11,578 5,714 4,930 100,000 7,876 7,092 100,000 10,877 10,093 100,000 10 13,207 6,241 5,550 100,000 8,892 8,201 100,000 12,731 12,040 100,000 11 14,917 6,760 6,178 100,000 9,954 9,371 100,000 14,781 14,198 100,000 12 16,713 7,272 6,812 100,000 11,065 10,605 100,000 17,047 16,588 100,000 13 18,599 7,776 7,455 100,000 12,226 11,904 100,000 19,553 19,232 100,000 14 20,579 8,273 8,105 100,000 13,439 13,271 100,000 22,324 22,156 100,000 15 22,657 8,762 8,762 100,000 14,708 14,708 100,000 25,387 25,387 100,000 16 24,840 9,244 9,244 100,000 16,035 16,035 100,000 28,774 28,774 100,000 17 27,132 9,719 9,719 100,000 17,422 17,422 100,000 32,518 32,518 100,000 18 29,539 10,188 10,188 100,000 18,872 18,872 100,000 36,658 36,658 100,000 19 32,066 10,649 10,649 100,000 20,388 20,388 100,000 41,235 41,235 100,000 20 34,719 11,103 11,103 100,000 21,973 21,973 100,000 46,296 46,296 100,000 25 50,113 11,042 11,042 100,000 28,907 28,907 100,000 79,580 79,580 106,637 30 69,761 8,753 8,753 100,000 35,880 35,880 100,000 133,557 133,557 162,939 35 94,836 2,454 2,454 100,000 42,036 42,036 100,000 219,467 219,467 254,582 40 126,840 0 0 0 45,849 45,849 100,000 356,899 356,899 381,662 45 167,685 0 0 0 43,601 43,601 100,000 579,146 579,146 608,104
ASSUMPTIONS: (1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES 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. (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. 71 153 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE STANDARD NON-SMOKER $1,000.00 ANNUAL PREMIUM ISSUE AGE 35 $100,000 INITIAL DEATH BENEFIT: VALUES--GUARANTEED COST OF INSURANCE
0.00% HYPOTHETICAL 6.00% HYPOTHETICAL 12.00% HYPOTHETICAL PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN PAID PLUS ----------------------------- ---------------------------- ----------------------------- POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT - ------ --------- ------- --------- ------- ------ --------- ------- ------- --------- ------- 1 1,050 723 17 100,000 774 67 100,000 824 118 100,000 2 2,153 1,427 645 100,000 1,574 792 100,000 1,727 945 100,000 3 3,310 2,109 1,253 100,000 2,398 1,541 100,000 2,712 1,855 100,000 4 4,526 2,769 1,838 100,000 3,247 2,316 100,000 3,788 2,856 100,000 5 5,802 3,406 2,399 100,000 4,121 3,114 100,000 4,963 3,956 100,000 6 7,142 4,018 3,044 100,000 5,019 4,045 100,000 6,246 5,272 100,000 7 8,549 4,604 3,679 100,000 5,940 5,014 100,000 7,646 6,720 100,000 8 10,027 5,164 4,302 100,000 6,885 6,023 100,000 9,176 8,314 100,000 9 11,578 5,697 4,913 100,000 7,854 7,070 100,000 10,848 10,064 100,000 10 13,207 6,202 5,511 100,000 8,846 8,156 100,000 12,677 11,986 100,000 11 14,917 6,677 6,094 100,000 9,862 9,279 100,000 14,677 14,094 100,000 12 16,713 7,121 6,661 100,000 10,899 10,440 100,000 16,866 16,406 100,000 13 18,599 7,531 7,210 100,000 11,958 11,637 100,000 19,262 18,941 100,000 14 20,579 7,908 7,740 100,000 13,039 12,871 100,000 21,889 21,721 100,000 15 22,657 8,249 8,249 100,000 14,140 14,140 100,000 24,769 24,769 100,000 16 24,840 8,551 8,551 100,000 15,261 15,261 100,000 27,930 27,930 100,000 17 27,132 8,810 8,810 100,000 16,397 16,397 100,000 31,400 31,400 100,000 18 29,539 9,021 9,021 100,000 17,546 17,546 100,000 35,211 35,211 100,000 19 32,066 9,177 9,177 100,000 18,702 18,702 100,000 39,399 39,399 100,000 20 34,719 9,273 9,273 100,000 19,861 19,861 100,000 44,006 44,006 100,000 25 50,113 8,643 8,643 100,000 25,560 25,560 100,000 75,316 75,316 100,924 30 69,761 5,296 5,296 100,000 30,489 30,489 100,000 126,341 126,341 154,136 35 94,836 0 0 0 33,021 33,021 100,000 207,201 207,201 240,353 40 126,840 0 0 0 29,753 29,753 100,000 336,114 336,114 359,641 45 167,685 0 0 0 11,154 11,154 100,000 544,304 544,304 571,519
ASSUMPTIONS: (1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES 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. (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. 72 154 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE STANDARD NON-SMOKER $3,000.00 ANNUAL PREMIUM ISSUE AGE 55 $100,000 INITIAL DEATH BENEFIT: VALUES--CURRENT COST OF INSURANCE
0.00% HYPOTHETICAL 6.00% HYPOTHETICAL 12.00% HYPOTHETICAL PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN PAID PLUS ---------------------------- ----------------------------- --------------------------------- POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT - ------ --------- ------ --------- ------- ------- --------- ------- --------- --------- --------- 1 3,150 2,034 789 100,000 2,181 937 100,000 2,330 1,085 100,000 2 6,458 3,973 2,503 100,000 4,397 2,927 100,000 4,840 3,370 100,000 3 9,930 5,812 4,117 100,000 6,641 4,946 100,000 7,544 5,849 100,000 4 13,577 7,554 5,634 100,000 8,919 7,000 100,000 10,468 8,548 100,000 5 17,406 9,186 7,041 100,000 11,221 9,076 100,000 13,626 11,481 100,000 6 21,426 10,750 8,617 100,000 13,590 11,457 100,000 17,090 14,958 100,000 7 25,647 12,306 10,230 100,000 16,090 14,014 100,000 20,957 18,881 100,000 8 30,080 13,853 11,879 100,000 18,727 16,754 100,000 25,271 23,297 100,000 9 34,734 15,391 13,565 100,000 21,511 19,684 100,000 30,085 28,258 100,000 10 39,620 16,921 15,287 100,000 24,448 22,813 100,000 35,458 33,823 100,000 11 44,751 18,443 17,045 100,000 27,547 26,149 100,000 41,453 40,055 100,000 12 50,139 19,956 18,840 100,000 30,817 29,701 100,000 48,144 47,028 100,000 13 55,796 21,461 20,672 100,000 34,268 33,479 100,000 55,610 54,821 100,000 14 61,736 22,957 22,540 100,000 37,909 37,492 100,000 63,942 63,525 100,000 15 67,972 24,446 24,446 100,000 41,751 41,751 100,000 73,240 73,240 100,000 16 74,521 25,926 25,926 100,000 45,806 45,806 100,000 83,616 83,616 100,000 17 81,397 27,397 27,397 100,000 50,084 50,084 100,000 95,163 95,163 107,534 18 88,617 28,861 28,861 100,000 54,598 54,598 100,000 107,905 107,905 119,775 19 96,198 30,317 30,317 100,000 59,362 59,362 100,000 121,965 121,965 132,942 20 104,158 31,764 31,764 100,000 64,389 64,389 100,000 137,482 137,482 147,106 25 150,340 21,999 21,999 100,000 87,858 87,858 100,000 239,762 239,762 251,750 30 209,282 0 0 0 121,313 121,313 127,378 400,686 400,686 420,720 35 284,509 0 0 0 159,922 159,922 167,918 648,764 648,684 681,202 40 380,519 0 0 0 207,267 207,367 209,441 1,046,572 1,046,572 1,057,038 45 503,055 0 0 0 271,436 271,436 271,436 1,723,950 1,723,950 1,723,950
ASSUMPTIONS: (1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES 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. (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. 73 155 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE STANDARD NON-SMOKER $3,000.00 ANNUAL PREMIUM ISSUE AGE 55 $100,000 INITIAL DEATH BENEFIT: VALUES--GUARANTEED COST OF INSURANCE
0.00% HYPOTHETICAL 6.00% HYPOTHETICAL 12.00% HYPOTHETICAL PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN PAID PLUS ---------------------------- ---------------------------- --------------------------------- POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT - ------ --------- ------ --------- ------- ------ --------- ------- --------- --------- --------- 1 3,150 2,032 787 100,000 2,179 935 100,000 2,328 1,083 100,000 2 6,458 3,967 2,497 100,000 4,390 2,920 100,000 4,833 3,363 100,000 3 9,930 5,804 4,110 100,000 6,633 4,938 100,000 7,534 5,840 100,000 4 13,577 7,542 5,623 100,000 8,907 6,987 100,000 10,454 8,534 100,000 5 17,406 9,174 7,029 100,000 11,207 9,062 100,000 13,610 11,465 100,000 6 21,426 10,693 8,560 100,000 13,529 11,396 100,000 17,026 14,894 100,000 7 25,647 12,091 10,015 100,000 15,869 13,793 100,000 20,732 18,656 100,000 8 30,080 13,358 11,385 100,000 18,219 16,245 100,000 24,755 22,781 100,000 9 34,734 14,481 12,654 100,000 20,569 18,742 100,000 29,131 27,305 100,000 10 39,620 15,443 13,808 100,000 22,911 21,276 100,000 33,904 32,269 100,000 11 44,751 16,234 14,836 100,000 25,238 23,840 100,000 39,127 37,729 100,000 12 50,139 16,842 15,726 100,000 27,546 26,430 100,000 44,872 43,756 100,000 13 55,796 17,253 16,464 100,000 29,833 29,044 100,000 51,224 50,435 100,000 14 61,736 17,454 17,037 100,000 32,095 31,678 100,000 58,286 57,869 100,000 15 67,972 17,424 17,424 100,000 34,328 34,328 100,000 66,185 66,185 100,000 16 74,521 17,129 17,129 100,000 36,517 36,517 100,000 75,073 75,073 100,000 17 81,397 16,478 16,478 100,000 38,610 38,610 100,000 85,132 85,132 100,000 18 88,617 15,512 15,512 100,000 40,655 40,655 100,000 96,526 96,526 107,144 19 96,198 14,111 14,111 100,000 42,592 42,592 100,000 109,096 109,096 118,914 20 104,158 12,196 12,196 100,000 44,395 44,395 100,000 122,967 122,967 131,575 25 150,340 0 0 0 50,863 50,863 100,000 215,888 215,888 226,683 30 209,282 0 0 0 49,169 49,169 100,000 361,151 361,151 379,208 35 284,509 0 0 0 17,378 17,378 100,000 582,756 582,756 611,894 40 380,519 0 0 0 0 0 0 937,119 937,119 946,490 45 503,055 0 0 0 0 0 0 1,545,663 1,545,663 1,545,663
ASSUMPTIONS: (1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES 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. (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. 74 156 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE STANDARD NON-SMOKER $1,500.00 ANNUAL PREMIUM ISSUE AGE 35 $150,000 INITIAL DEATH BENEFIT: VALUES--CURRENT COST OF INSURANCE
0.00% HYPOTHETICAL 6.00% HYPOTHETICAL 12.00% HYPOTHETICAL PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN PAID PLUS ---------------------------- ---------------------------- ----------------------------- POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT - ------ --------- ------ --------- ------- ------ --------- ------- ------- --------- ------- 1 1,575 1,116 63 150,000 1,193 140 150,000 1,270 217 150,000 2 3,229 2,205 1,040 150,000 2,429 1,264 150,000 2,663 1,497 150,000 3 4,965 3,260 1,982 150,000 3,703 2,425 150,000 4,183 2,905 150,000 4 6,788 4,281 2,891 150,000 5,015 3,624 150,000 5,844 4,453 150,000 5 8,703 5,269 3,766 150,000 6,368 4,865 150,000 7,661 6,157 150,000 6 10,713 6,217 4,763 150,000 7,756 6,302 150,000 9,641 8,187 150,000 7 12,824 7,124 5,741 150,000 9,180 7,797 150,000 11,803 10,421 150,000 8 15,040 7,993 6,704 150,000 10,642 9,354 150,000 14,167 12,879 150,000 9 17,367 8,823 7,651 150,000 12,145 10,973 150,000 16,755 15,583 150,000 10 19,810 9,640 8,607 150,000 13,715 12,682 150,000 19,614 18,581 150,000 11 22,376 10,444 9,573 150,000 15,357 14,485 150,000 22,775 21,904 150,000 12 25,069 11,237 10,550 150,000 17,072 16,385 150,000 26,270 25,583 150,000 13 27,898 12,018 11,537 150,000 18,866 18,386 150,000 30,135 29,654 150,000 14 30,868 12,788 12,536 150,000 20,742 20,490 150,000 34,407 34,156 150,000 15 33,986 13,546 13,546 150,000 22,702 22,702 150,000 39,131 39,131 150,000 16 37,261 14,293 14,293 150,000 24,752 24,752 150,000 44,354 44,354 150,000 17 40,699 15,029 15,029 150,000 26,895 26,895 150,000 50,128 50,128 150,000 18 44,309 15,754 15,754 150,000 29,135 29,135 150,000 56,513 56,513 150,000 19 48,099 16,469 16,469 150,000 31,478 31,478 150,000 63,571 63,571 150,000 20 52,079 17,173 17,173 150,000 33,926 33,926 150,000 71,376 71,376 150,000 25 75,170 17,204 17,204 150,000 44,772 44,772 150,000 122,808 122,808 164,563 30 104,641 13,904 13,904 150,000 55,849 55,849 150,000 206,035 206,035 251,363 35 142,254 4,625 4,625 150,000 66,020 66,020 150,000 338,501 338,501 392,661 40 190,260 0 0 0 73,340 73,340 150,000 550,408 550,408 588,937 45 251,528 0 0 0 73,203 73,203 150,000 893,092 893,092 937,747
ASSUMPTIONS: (1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES 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. (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. 75 157 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE STANDARD NON-SMOKER $1,500.00 ANNUAL PREMIUM ISSUE AGE 35 $150,000 INITIAL DEATH BENEFIT: VALUES--GUARANTEED COST OF INSURANCE
0.00% HYPOTHETICAL 6.00% HYPOTHETICAL 12.00% HYPOTHETICAL PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN PAID PLUS ---------------------------- ---------------------------- ----------------------------- POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT - ------ --------- ------ --------- ------- ------ --------- ------- ------- --------- ------- 1 1,575 1,114 61 150,000 1,191 138 150,000 1,268 215 150,000 2 3,229 2,200 1,034 150,000 2,423 1,258 150,000 2,657 1,491 150,000 3 4,965 3,252 1,973 150,000 3,693 2,415 150,000 4,173 2,895 150,000 4 6,788 4,270 2,879 150,000 5,002 3,612 150,000 5,830 4,439 150,000 5 8,703 5,252 3,749 150,000 6,349 4,846 150,000 7,639 6,136 150,000 6 10,713 6,199 4,744 150,000 7,734 6,280 150,000 9,616 8,162 150,000 7 12,824 7,105 5,722 150,000 9,156 7,773 150,000 11,774 10,391 150,000 8 15,040 7,972 6,684 150,000 10,616 9,327 150,000 14,133 12,844 150,000 9 17,367 8,797 7,626 150,000 12,112 10,940 150,000 16,711 15,539 150,000 10 19,810 9,581 8,549 150,000 13,647 12,615 150,000 19,533 18,500 150,000 11 22,376 10,320 9,448 150,000 15,218 14,347 150,000 22,620 21,749 150,000 12 25,069 11,010 10,323 150,000 16,825 16,138 150,000 25,999 25,312 150,000 13 27,898 11,652 11,171 150,000 18,466 17,986 150,000 29,700 29,220 150,000 14 30,868 12,242 11,991 150,000 20,143 19,892 150,000 33,759 33,507 150,000 15 33,986 12,778 12,778 150,000 21,853 21,853 150,000 38,210 38,210 150,000 16 37,261 13,256 13,256 150,000 23,596 23,596 150,000 43,097 43,097 150,000 17 40,699 13,669 13,669 150,000 25,365 25,365 150,000 48,464 48,464 150,000 18 44,309 14,009 14,009 150,000 27,156 27,156 150,000 54,360 54,360 150,000 19 48,099 14,269 14,269 150,000 28,962 28,962 150,000 60,844 60,844 150,000 20 52,079 14,437 14,437 150,000 30,778 30,778 150,000 67,978 67,978 150,000 25 75,170 13,618 13,618 150,000 39,784 39,784 150,000 116,527 116,527 156,146 30 104,641 8,741 8,741 150,000 47,831 47,831 150,000 195,380 195,380 238,364 35 142,254 0 0 0 52,653 52,653 150,000 320,337 320,337 371,590 40 190,260 0 0 0 49,589 49,589 150,000 519,551 519,551 555,920 45 251,528 0 0 0 25,674 25,674 150,000 841,278 841,278 883,342
ASSUMPTIONS: (1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES 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. (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. 76 158 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE STANDARD NON-SMOKER $4,500.00 ANNUAL PREMIUM ISSUE AGE 55 $150,000 INITIAL DEATH BENEFIT: VALUES--CURRENT COST OF INSURANCE
0.00% HYPOTHETICAL 6.00% HYPOTHETICAL 12.00% HYPOTHETICAL PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN PAID PLUS ------------------------------ ----------------------------- --------------------------------- POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT - ------ --------- -------- --------- ------- ------- --------- ------- --------- --------- --------- 1 4,725 3,080 1,220 150,000 3,303 1,442 150,000 3,526 1,666 150,000 2 9,686 6,019 3,821 150,000 6,659 4,461 150,000 7,327 5,129 150,000 3 14,896 8,807 6,271 150,000 10,059 7,524 150,000 11,422 8,886 150,000 4 20,365 11,448 8,575 150,000 13,512 10,639 150,000 15,852 12,979 150,000 5 26,109 13,926 10,716 150,000 17,003 13,793 150,000 20,639 17,428 150,000 6 32,139 16,302 13,108 150,000 20,597 17,404 150,000 25,890 22,697 150,000 7 38,471 18,664 15,556 150,000 24,389 21,281 150,000 31,751 28,642 150,000 8 45,120 21,013 18,057 150,000 28,390 25,434 150,000 38,290 35,334 150,000 9 52,101 23,350 20,613 150,000 32,613 29,877 150,000 45,588 42,852 150,000 10 59,431 25,673 23,224 150,000 37,068 34,619 150,000 53,732 51,284 150,000 11 67,127 27,984 25,890 150,000 41,770 39,676 150,000 62,821 60,727 150,000 12 75,208 30,282 28,610 150,000 46,731 45,059 150,000 72,963 71,291 150,000 13 83,694 32,567 31,385 150,000 51,966 50,784 150,000 84,281 83,099 150,000 14 92,604 34,839 34,214 150,000 57,489 56,865 150,000 96,911 96,286 150,000 15 101,959 37,099 37,099 150,000 63,318 63,318 150,000 111,005 111,005 150,000 16 111,782 39,347 39,347 150,000 69,469 69,469 150,000 126,733 126,733 150,000 17 122,096 41,582 41,582 150,000 75,959 75,959 150,000 144,222 144,222 162,971 18 132,926 43,804 43,804 150,000 82,808 82,808 150,000 163,516 163,516 181,503 19 144,297 46,015 46,015 150,000 90,034 90,034 150,000 184,805 184,805 201,438 20 156,237 48,213 48,213 150,000 97,660 97,660 150,000 208,302 208,302 222,883 25 225,511 33,869 33,869 150,000 133,777 133,777 150,000 363,174 363,174 381,333 30 313,924 0 0 0 184,737 184,737 193,974 606,842 606,842 637,184 35 426,763 0 0 0 243,337 243,337 255,504 982,477 982,477 1,031,601 40 570,779 0 0 0 315,352 315,352 318,506 1,584,830 1,584,830 1,600,678 45 754,583 0 0 0 412,616 412,616 412,616 2,610,507 2,610,507 2,610,507
ASSUMPTIONS: (1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES 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. (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. 77 159 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE STANDARD NON-SMOKER $4,500.00 ANNUAL PREMIUM ISSUE AGE 55 $150,000 INITIAL DEATH BENEFIT: VALUES--GUARANTEED COST OF INSURANCE
0.00% HYPOTHETICAL 6.00% HYPOTHETICAL 12.00% HYPOTHETICAL PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN PAID PLUS ---------------------------- ---------------------------- --------------------------------- POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER DEATH YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT - ------ --------- ------ --------- ------- ------ --------- ------- --------- --------- --------- 1 4,725 3,077 1,217 150,000 3,300 1,439 150,000 3,523 1,663 150,000 2 9,686 6,009 3,811 150,000 6,648 4,450 150,000 7,316 5,118 150,000 3 14,896 8,795 6,260 150,000 10,047 7,511 150,000 11,408 8,873 150,000 4 20,365 11,432 8,559 150,000 13,494 10,621 150,000 15,831 12,958 150,000 5 26,109 13,908 10,696 150,000 16,982 13,772 150,000 20,614 17,404 150,000 6 32,139 16,215 13,022 150,000 20,506 17,313 150,000 25,794 22,601 150,000 7 38,471 18,342 15,234 150,000 24,059 20,950 150,000 31,414 28,305 150,000 8 45,120 20,272 17,316 150,000 27,829 24,673 150,000 37,519 34,563 150,000 9 52,101 21,986 19,249 150,000 31,204 28,468 150,000 44,162 41,426 150,000 10 59,431 23,460 21,011 150,000 34,769 32,320 150,000 51,410 48,961 150,000 11 67,127 24,677 22,583 150,000 38,316 36,222 150,000 59,347 57,253 150,000 12 75,208 25,620 23,949 150,000 41,841 40,169 150,000 68,081 66,409 150,000 13 83,694 26,271 25,088 150,000 45,339 44,157 150,000 77,742 76,560 150,000 14 92,604 26,606 25,981 150,000 48,806 48,181 150,000 88,489 87,864 150,000 15 101,959 26,597 26,597 150,000 52,236 52,236 150,000 100,516 100,516 150,000 16 111,782 26,193 26,193 150,000 55,610 55,610 150,000 114,055 114,055 150,000 17 122,096 25,258 25,258 150,000 58,851 58,851 150,000 129,386 129,386 150,000 18 132,926 23,852 23,852 150,000 62,032 62,032 150,000 148,693 146,693 162,830 19 144,297 21,798 21,798 150,000 65,065 65,065 150,000 165,766 165,766 180,684 20 156,237 18,979 18,979 150,000 67,918 68,918 150,000 186,813 186,813 199,890 25 225,511 0 0 0 78,835 78,835 150,000 327,808 327,808 344,198 30 313,924 0 0 0 79,494 79,494 150,000 548,221 548,221 575,632 35 426,763 0 0 0 43,360 43,360 150,000 884,469 884,469 928,692 40 570,779 0 0 0 0 0 0 1,422,153 1,422,153 1,436,375 45 754,583 0 0 0 0 0 0 2,345,524 2,345,524 2,345,524
ASSUMPTIONS: (1) BASED ON DEATH BENEFIT OPTION A AND ASSUMES 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. (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. 78 160 APPENDIX B TABLE OF DEATH BENEFIT FACTORS
ATTAINED ATTAINED ATTAINED ATTAINED AGE* PERCENT AGE* PERCENT AGE* PERCENT AGE* PERCENT - -------- ------- -------- ------- -------- ------- -------- ------- 0-40 250 50 185 60 130 70 115 41 243 51 178 61 128 71 113 42 236 52 171 62 126 72 111 43 229 53 164 63 124 73 109 44 222 54 157 64 122 74 107 45 215 55 150 65 120 75-90 105 46 209 56 146 66 119 91 104 47 203 57 142 67 118 92 103 48 197 58 138 68 117 93 102 49 191 59 134 69 116 94 101 95-99 100
* attained age as of the beginning of the Policy Year 79 161 (This page intentionally left blank) 80 162 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 will agree 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 will agree 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-1 163 CONTENTS OF REGISTRATION STATEMENT This Registration Statement comprises the following Papers and Documents: The Facing sheet. (1) Reconciliation and tie between items in N-8B-2 and Prospectus. Power V prospectus consisting of 75 pages and Farmers VUL I prospectus consisting of 80 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: (2) A. Frank J. Julian, Esq. (Included in Opinion filed as Exhibit 3(a)). B. PricewaterhouseCoopers LLP, independent accountants (Filed as Exhibit 6(a)). C. KPMG LLP, Independent Auditors (Filed as Exhibit 6(b)). (6) D. Christopher J. Nickele, FSA (Included in Opinion filed as Exhibit 3(b)(i)). (7) E. Steven D. Powell, FSA (Included in Opinion filed as Exhibit 3(b)(ii)). The following exhibits: (1) 1-A(1) KILICO Resolution establishing the Separate Account (1) 1-A(3)(a) Distribution Agreement between KILICO and Investors Brokerage Services, Inc. (IBS) (3) 1-A(3)(b) Specimen Selling Group Agreement of IBS (2) 1-A(3)(c) Schedules of commissions (3) 1-A(3)(d) General Agent Agreement (2) 1-A(5) Form of Policy (1) 1-A(6)(a) KILICO Articles of Incorporation (3) 1-A(6)(b) By-Laws of KILICO (4) 1-A(8)(a) Participation Agreement among KILICO, American Skandia Trust and American Skandia Investment Services, Incorporated (4) 1-A(8)(b) Service Agreement between KILICO and American Skandia Investment Services, Incorporated (6) 1-A(8)(c) Form of Participation Agreement between Kemper Investors Life Insurance Company and Scudder Variable Life Investment Fund (6) 1-A(8)(d) Form of Participating Contract and Policy Agreement between Kemper Investors Life Insurance Company and Scudder Kemper Investments, Inc. (6) 1-A(8)(e) Form of Indemnification Agreement between Kemper Investors Life Insurance Company and Scudder Kemper Investment, Inc. (5) 1-A(8)(f) Fund Participation Agreement among Kemper Investors Life Insurance Company, Fidelity Variable Insurance Products Fund and Fidelity Distributors Corporation (5) 1-A(8)(g) Fund Participation Agreement among Kemper Investors Life Insurance Company, Fidelity Variable Insurance Products Fund II and Fidelity Distributors Corporation (6) 1-A(8)(h) Form of Fund Participation Agreement among Kemper Investors Life Insurance Company, Fidelity Variable Insurance Products Fund III and Fidelity Distributors Corporation (6) 1-A(8)(i) Form of Amendment to Fund Participation Agreement among Kemper Investors Life Insurance Company, Fidelity Variable Insurance Products Fund and Fidelity Distributors Corporation
II-2 164 (6) 1-A(8)(j) Form of Amendment to Fund Participation Agreement among Kemper Investors Life Insurance Company, Fidelity Variable Insurance Products Fund II and Fidelity Distributors Corporation (7) 1-A(8)(k) Form of Participation Agreement among Kemper Investors Life Insurance Company, PIMCO Variable Insurance Trust, and PIMCO Funds Distributors LLC (7) 1-A(8)(l) Form of Participation Agreement Among Templeton Variable Products Series Fund, Franklin Templeton Distributors, Inc. and Kemper Investors Life Insurance Company. (2) 1-A(10) Application for Policy (2) 2 Specimen Notice of Withdrawal Right (2) 3(a) Opinion and consent of legal officer of KILICO as to legality of policies being registered (6) 3(b)(i) Opinion and consent of actuarial officer of KILICO regarding prospectus illustrations and actuarial matters (7) 3(b)(ii) Opinion and consent of actuarial officer of KILICO regarding prospectus illustrations and actuarial matters 6(a) Consents of PricewaterhouseCoopers LLP, independent accountants 6(b) Consent of KPMG LLP, independent auditors (2) 8 Procedures Memorandum, pursuant to Rule 6e-3(T)(b)(12)(iii) (1) 11 Representation, description and undertakings regarding mortality and expense risk charge pursuant to Rule 6e-3(T)(b)(13)(iii)(F)
- ------------------------- (1) Incorporated by reference to the Registration Statement of the Registrant on Form S-6 filed on or about December 26, 1995 (File No. 33-65399). (2) Incorporated by reference to Pre-Effective Amendment No. 1 to the Registration Statement of the Registrant on Form S-6 filed on or about June 5, 1996 (File No. 33-65399). (3) Incorporated by reference to Amendment No. 2 to the Registration Statement on Form S-1 (File No. 333-02491) filed on or about April 23, 1997. (4) Incorporated by reference to Post-Effective Amendment No. 1 to the Registration Statement of the Registrant on Form S-6 filed on or about April 28, 1997 (File No. 33-65399). (5) Incorporated by reference to Post-Effective Amendment No. 24 to the Registration Statement on Form N-4 filed on or about April 26, 1996 (File No. 2-72671). (6) Incorporated by reference to Post-Effective Amendment No. 2 to the Registration Statement of the Registrant on Form S-6 filed on or about April 27, 1998 (File No. 33-65399). (7) Incorporated by reference to Post-Effective Amendment No. 3 to the Registration Statement of the Registrant on Form S-6 filed on or about October 28, 1998 (File No. 33-65399). II-3 165 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant, KILICO Variable Separate Account 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 22nd day of January, 1999. 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 22nd day of January, 1999.
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/ DAVID A. BOWERS Director - ----------------------------------------------- David A. Bowers /s/ ELIANE C. FRYE Director - ----------------------------------------------- Eliane C. Frye /s/ GUNTHER GOSE Director - ----------------------------------------------- Gunther Gose /s/ JAMES E. HOHMANN Director - ----------------------------------------------- James E. Hohmann
II-4 166 EXHIBIT INDEX 6(a) Consents of PricewaterhouseCoopers LLP, independent accountants 6(b) Consent of KPMG LLP, independent auditors
EX-99.6(A) 2 CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 6(a) CONSENT OF INDEPENDENT ACCOUNTANTS The Board of Directors of Kemper Investors Life Insurance Company and Contract Owners of KILICO Flexible Premium Variable Life Insurance Policies We consent to the inclusion in this registration statement on Form S-6 (File No. 33-65399) of our report dated February 20, 1998, on our audit of the financial statements of KILICO Variable Separate Account and to the reference to our firm under the caption "Experts." PricewaterhouseCoopers LLP Chicago, Illinois January 22, 1999 2 CONSENT OF INDEPENDENT ACCOUNTANTS The Board of Directors of Kemper Investors Life Insurance Company and Contract Owners of KILICO Flexible Premium Variable Life Insurance Policies We consent to the inclusion in this registration statement on Form S-6 (File No. 33-65399) of our report dated March 18, 1998, on our audit of the consolidated financial statements of Kemper Investors Life Insurance Company and to the reference to our firm under the caption "Experts." PricewaterhouseCoopers LLP Chicago, Illinois January 22, 1999 EX-99.6(B) 3 CONSENT OF KPMG LLP 1 EXHIBIT 6(b) CONSENT OF INDEPENDENT AUDITORS The Board of Directors Kemper Investors Life Insurance Company We consent to the use of our reports included herein on the consolidated financial statements of Kemper Investors Life Insurance Company (KILICO) and on the financial statement of the subaccounts of KILICO Variable Separate Account and to the references to our firm under the heading "Experts" in the prospectuses. 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 period after the acquisition is presented on a different cost basis than that for the period before the acquisition and, therefore, is not comparable. KPMG LLP Chicago, Illinois January 22, 1999 -----END PRIVACY-ENHANCED MESSAGE-----