-----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, TmZN7P8RY3llENUmXQun3io55iKUSlL/3QH1QlyxojWhtmuES21t53TDpKCeY7hu 96MZyTs0Ae3jXiEyRQCqlw== 0000950124-99-001266.txt : 19990218 0000950124-99-001266.hdr.sgml : 19990218 ACCESSION NUMBER: 0000950124-99-001266 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19990217 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: 497 SEC ACT: SEC FILE NUMBER: 033-65399 FILM NUMBER: 99544675 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 497 1 497 1 PROSPECTUS--JANUARY 4, 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 (the "Policy") offered by Kemper Investors Life Insurance Company ("KILICO"). The Policy provides for life insurance and for the accumulation of Cash Value on a variable basis. Premiums under the Policy are flexible, subject to certain restrictions. The Death Benefit and Cash Value of the Policy may vary to reflect the investment experience of the KILICO Variable Separate Account (the "Separate Account"). The Policy meets the definition of "life insurance" under Section 7702 of the Internal Revenue Code. The Policy may be issued as or become a modified endowment contract. For a Policy treated as a modified endowment contract, certain distributions will be includable in gross income for Federal income tax purposes. See "Federal Tax Matters", page 22 for a discussion of laws that affect the tax treatment of the Policy. An Owner may allocate premiums under a Policy to one or more of the Subaccounts of the Separate Account and the Fixed Account. Each Subaccount invests in shares of one portfolio of an underlying mutual fund. The underlying mutual funds (and the portfolios of the underlying mutual funds) currently available under the Policy are: (a) Investors Fund Series (formerly Kemper Investors Fund) (portfolios--Kemper High Yield, Kemper Government Securities, Kemper-Dreman High Return Equity and Kemper Small Cap Growth); (b) Janus Aspen Series (portfolio--Capital Appreciation Portfolio) ("Janus Aspen Capital Appreciation Portfolio"); (c) PIMCO Variable Insurance Trust (portfolios--PIMCO Low Duration Bond and PIMCO Foreign Bond); (d) Templeton Variable Products Series Fund (portfolio--Templeton Developing Markets Fund (Class 2 Shares)); and (e) Scudder Variable Life Investment Fund ("VLIF") (portfolios--Scudder VLIF International (A-Shares), Scudder VLIF Growth and Income (A-Shares) Scudder VLIF Bond (A-Shares), and Scudder VLIF Money Market). The other portfolios of the Funds are not currently available for investment under the Policy. The accompanying Prospectuses for the Funds describe the investment objectives and the attendant risks of the portfolios of the Funds. The Cash Value in the Fixed Account will accrue interest at a rate that is guaranteed by KILICO. The Policy permits the Owner to choose from two death benefit options. KILICO guarantees that the Death Benefit payable for a Policy will never be less than the Death Benefit stated in the Policy Specifications, less Debt, as long as the Policy is in force. There is no guaranteed Cash Value. If the Surrender Value is insufficient to cover the charges under the Policy, the Policy will lapse. A guarantee premium and guarantee period are stated in the Policy Specifications. Payment of the guarantee premium is not required but if paid as specified under the Policy will guarantee that the Policy will not lapse during the guarantee period. The Owner may examine the Policy and return it to KILICO for a refund during the Free-Look Period. It may not be advantageous to purchase a Policy as a replacement for another type of life insurance policy, or to obtain additional insurance protection if a flexible premium variable life insurance policy is already owned. This Prospectus generally describes only that portion of the Cash Value allocated to the Separate Account. For a brief summary of the Fixed Account option see "The Fixed Account Option" on page 7. THIS PROSPECTUS IS VALID ONLY IF ACCOMPANIED OR PRECEDED BY A CURRENT PROSPECTUS FOR THE APPLICABLE UNDERLYING FUND. ALL PROSPECTUSES SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE. THIS PROSPECTUS AND OTHER INFORMATION ABOUT THE SEPARATE ACCOUNT REQUIRED TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION (SEC) CAN BE FOUND IN THE SEC'S WEB SITE AT HTTP://WWW.SEC.GOV. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. 2 TABLE OF CONTENTS - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Page ---- DEFINITIONS................................................. 1 SUMMARY..................................................... 2 KILICO AND THE SEPARATE ACCOUNT............................. 5 THE FUNDS................................................... 5 FIXED ACCOUNT OPTION........................................ 7 THE POLICY.................................................. 8 POLICY BENEFITS AND RIGHTS.................................. 10 CHARGES AND DEDUCTIONS...................................... 15 GENERAL PROVISIONS.......................................... 18 DOLLAR COST AVERAGING....................................... 20 SYSTEMATIC WITHDRAWAL PLAN.................................. 21 DISTRIBUTION OF POLICIES.................................... 21 FEDERAL TAX MATTERS......................................... 22 LEGAL CONSIDERATIONS........................................ 25 SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS................ 25 VOTING INTERESTS............................................ 25 STATE REGULATION OF KILICO.................................. 26 DIRECTORS AND OFFICERS OF KILICO............................ 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................................. 72 APPENDIX B TABLE OF DEATH BENEFIT FACTORS................... 81
3 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--Date of receipt means the valuation date during which a request, form or payment is received at KILICO's Home Office. KILICO is deemed to have received any request, form or payment on the date it is actually received at the Home Office, provided that it is received before the close of the New York Stock Exchange (which is normally 3:00 p.m. Long Grove time) on any date when the New York Stock Exchange is open. Otherwise, it will be deemed to be received on the next such day. DEBT--Debt means (1) the principal of any outstanding loan, plus (2) any loan interest due or accrued to KILICO. FIXED ACCOUNT--The amount of assets held in the General Account attributable to the fixed portion of the Policy. FREE-LOOK PERIOD--The period of time in which an Owner may cancel the Policy and receive a refund. The applicable period of time will depend on the state in which the Policy is issued; however, it will be at least 10 days from the date the Policy is received by the Owner. 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 Policy Loans. 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 Owner in the application. POLICY DATE--The date shown in the Policy Specifications. The Policy Date is the date used to determine Policy Years and Monthly Processing Dates. The Policy Date is the date that insurance coverage takes effect subject to any principles of conditional receipt under applicable law. 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 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--The surrender value of a Policy is (1) the Cash Value minus (2) any applicable Surrender Charge; minus (3) any Debt. TRADE DATE--The date 30 days following the date all requirements for coverage have been completed by the Owner and coverage under the Policy is recorded by KILICO 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 4 SUMMARY The following summary should be read in conjunction with the detailed information in this Prospectus. You should refer to the heading "Definitions" for the meaning of certain terms. Variations from the information appearing in this Prospectus due to individual state requirements are described in supplements which are attached to this Prospectus, or in endorsements to the Policy, as appropriate. Unless otherwise indicated, the description of the Policy contained in this Prospectus assumes that the Policy is in force, that there is no indebtedness, and that current Federal tax laws apply. The Owner of a Policy pays a premium for life insurance coverage on the person insured. The Policy is a flexible premium policy, so subject to certain limitations, a Policy 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. There is no guaranteed Cash Value. If the Surrender Value is insufficient to pay charges under the Policy, the Policy will lapse unless an additional premium payment or loan repayment is made. A guarantee premium and a guarantee period are stated in the Policy Specifications. The Policy is guaranteed to remain in force during the guarantee period provided the sum of the premiums paid less withdrawals and debt is equal to or greater than the sum of the guarantee premiums. (See "The Policy--Premiums and Allocation of Premiums and Separate Account Value," pages 8 and 9, respectively, "Charges and Deductions," page 15, and "Policy Benefits and Rights," page 10.) Under certain circumstances, 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. Excess premiums paid may also cause the Policy to become a modified endowment contract. For a Policy treated as a modified endowment contract, certain distributions will be included in the Owner's gross income for purposes of Federal income tax (See "Federal Tax Matters," page 22.) The purpose of the Policy is to provide insurance protection for the beneficiary named therein. No claim is made that the Policy is in any way similar or comparable to a systematic investment plan of a mutual fund. POLICY BENEFITS CASH VALUE. The Policy provides for a Cash Value. The Cash Value will reflect the amount and frequency of premium payments, the investment experience of the selected Subaccounts, any values in the Fixed Account and Loan Account, and charges imposed in connection with the Policy. The Owner bears the entire investment risk on that portion of the net premiums and Cash Value allocated to the Separate Account. KILICO does not guarantee a minimum Separate Account Value. (See "Policy Benefits and Rights--Cash Value," page 12.) The Owner may surrender a Policy at any time and receive the Surrender Value, which equals the Cash Value less any applicable surrender charge and outstanding Debt. Partial withdrawals are also available subject to restrictions. (See "Policy Benefits and Rights--Surrender Privilege," page 14.) POLICY LOANS. The Owner may borrow up to 90% of the Policy's Cash Value minus applicable surrender charges. The minimum amount of a loan is $500. Interest at an effective annual rate of 4.50% in the first nine Policy Years and 3.00% thereafter will be charged on outstanding loan amounts. (See "Federal Tax Matters," page 22.) When a loan is made, a portion of the Policy's Cash Value equal to the amount of the loan will be transferred from the Separate Account and the Fixed Account (proportionately, unless the Owner requests otherwise) to the Loan Account. Cash Values within the Loan Account will earn 3.00% annual interest. Such earnings will be allocated to the Loan Account. (See "Policy Benefits and Rights--Policy Loans," page 13.) If the Policy is treated as a modified endowment contract, a loan will be treated as a distribution for Federal income tax purposes and may be subject to tax, withholding and penalties. (See "Federal Tax Matters," page 22.) DEATH BENEFITS. As long as the Policy remains in force, the Policy provides a death benefit payment upon the death of the Insured. The Policy contains 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. In either case, the death benefit will not be less than a specified multiple of the Cash Value. The death benefit payable will be reduced by any Debt. (See "Policy Benefits and Rights--Death Benefits," page 10.) 2 5 PREMIUMS The Owner has flexibility concerning the amount and frequency of premium payments. At the time of application, the Owner will determine a Planned Premium. However, the Owner will not be required to adhere to the schedule 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 may affect whether the Policy will be classified as a modified endowment contract. The minimum monthly premium payment is $50. Other minimums apply for other payment modes. Payment of the scheduled premium will not guarantee that a Policy will remain in force. Instead, the duration of the Policy depends on the Policy's Surrender Value. A guarantee premium and a guarantee period are stated in the Policy Specifications. A Policy will remain in force during the guarantee period provided the sum of the premiums paid less withdrawals and Debt is equal to or greater than 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. An Owner indicates in the application for the Policy 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. On the day following the date of receipt, the initial premium less applicable charges will be allocated to the Scudder VLIF Money Market Subaccount. On the Trade Date, the Separate Account Value in the Scudder VLIF Money Market Subaccount will be allocated among the Subaccounts and the Fixed Account in accordance with the Owner's instructions in the application. (See "The Policy -- Policy Issue," page 8.) TRANSFERS. Separate Account Value may be transferred among the Subaccounts. One transfer of all or part of the Separate Account Value may be made within a fifteen day period. Transfers are also permitted between the Fixed Account and the Subaccounts, subject to restrictions. (See "Allocation of Premiums and Separate Account Value," page 9.) THE FUNDS The following portfolios of the Investors Fund Series (formerly Kemper Investors Fund) are currently available for investment by the Separate Account: KEMPER HIGH YIELD PORTFOLIO, KEMPER GOVERNMENT SECURITIES PORTFOLIO, KEMPER-DREMAN HIGH RETURN EQUITY PORTFOLIO AND KEMPER SMALL CAP GROWTH PORTFOLIO. The following portfolio of Janus Aspen Series is currently available for investment by the Separate Account: CAPITAL APPRECIATION PORTFOLIO. The following portfolios of PIMCO Variable Insurance Trust are currently available for investment by the Separate Account: PIMCO LOW DURATION BOND AND 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) AND 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 6 CHARGES A state and local premium tax charge of 2.5% is deducted from each premium payment under the Policy prior to allocation of the net premium. In addition, a charge of 1% of each premium payment will be deducted to compensate KILICO for higher corporate income tax liability resulting from changes in the tax law made by the Omnibus Budget Reconciliation Act of 1990. (See Charges and Deductions--Deductions from Premiums, page 15.) No other charges are currently made from premium or the Separate Account for Federal, state or other taxes. Should KILICO determine that such taxes may be imposed, it may make deductions from the Separate Account to pay those taxes. (See "Federal Tax Matters," page 22.) Deductions will be made from the Policy's Cash Value in each Subaccount and the Fixed Account on the Policy Date and on each Monthly Processing Date for the cost of providing life insurance coverage for the Insured. In addition, KILICO deducts an asset charge from each Subaccount on a daily basis for the assumption by KILICO of certain mortality and expense risks incurred in connection with the Policy, at an annual rate of .90%. (See "Charges and Deductions--Cost of Insurance Charge and Mortality and Expense Risk Charge," page 15.) A $5 per month administrative expense charge is deducted from the Policy's Cash Value on each Monthly Processing Date. (See "Charges and Deductions--Monthly Administrative Charge," page 15.) If, prior to the 15th Policy year or the 15th Policy Year following an increase in Specified Amount, the Policy is surrendered or the Cash Value is applied under a Settlement Option, a surrender charge will be deducted. (See "Policy Benefits and Rights--Surrender Privilege," page 14.) In addition, the Subaccounts of the Separate Account purchase shares of the Funds. Each Portfolio of the Funds incurs annual fund operating expenses which consist of 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 The Cash Value, while it remains in the Policy, and the Death Benefit should be subject to the same Federal income tax treatment as the cash value under a conventional fixed benefit life insurance policy. Under existing tax law, the Owner is generally not deemed to be in receipt of the Cash Value under a Policy until a distribution occurs through a withdrawal or surrender. Generally, distributions are not included in income until the amount of the distributions exceed the premiums paid for the Policy. If the Policy is treated as a modified endowment contract (MEC), a loan will also be treated as a distribution. Generally, distributions from a MEC (including loans) are included in income to the extent the Cash Value exceeds premiums paid for the Policy. A change of Owners, an assignment, a loan or a surrender of the Policy may have tax consequences. Death Benefits payable under the Policy should be completely excludable from the gross income of the Beneficiary. As a result, the Beneficiary generally will not be subject to income tax on the Death Benefit. (See "Federal Tax Matters," page 22.) FREE-LOOK PERIOD The Owner is granted a period of time to examine a Policy and return it for a refund. The applicable period of time will depend on the state in which the Policy is issued; however, it will be at least 10 days from the date the Policy is received by the Owner. (See "Policy Benefits and Rights--Free-Look Period and Exchange Rights," page 14.) ILLUSTRATIONS OF CASH VALUES, SURRENDER VALUES, DEATH BENEFITS Tables in Appendix A illustrate the Cash Values, Surrender Values and Death Benefits based upon certain hypothetical assumed rates of return for the Separate Account and the charges deducted under the Policy. 4 7 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"). 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 by KILICO as a separate investment account on January 22, 1987. The Separate Account will receive and invest 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 the general business of KILICO, but the income, capital gains or capital losses of the Separate Account are credited to or charged against the assets held in the Separate Account, without regard to any other income, capital gains or capital losses of any other separate account or arising out of any other business which KILICO may conduct. The benefits provided under the Policy are obligations of KILICO. The Separate Account has been registered with the Securities and Exchange Commission ("Commission") as a unit investment trust under the Investment Company Act of 1940 (the "1940 Act"). Such registration does not involve supervision by the Commission of the management, investment practices or policies of the Separate Account or KILICO. The Policy currently offers twelve Subaccounts. Each Subaccount invests exclusively in shares of one of the corresponding portfolios of the Funds. Income and both realized and unrealized gains or losses from the assets of each Subaccount generally are credited to or charged against that Subaccount without regard to income, gains or losses from any other Subaccount of the Separate Account or arising out of any business KILICO may conduct. 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 (formerly Kemper Investors Fund), Janus Aspen Series, PIMCO Variable Insurance Trust, Templeton Variable Products Series Fund and Scudder Variable Life Investment Fund, series type mutual funds registered with the Commission as open-end management investment companies. Registration of the Funds does not involve supervision of their management, investment practices or policies by the Commission. The Funds are designed to 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 neither KILICO nor the Funds foresees any such disadvantages to variable life insurance owners, variable annuity owners or qualified retirement plans. Management of the Funds has an obligation to monitor events to identify material conflicts between such owners and determine what action, if any, should be taken. In addition, if KILICO believes that a Fund's response to any of those events or conflicts insufficiently protects the Owners, it will take appropriate action on its own. The Separate Account invests in the underlying 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. 5 8 INVESTORS FUND SERIES (FORMERLY KEMPER INVESTORS FUND) 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. 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. 6 9 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. There is no assurance that any of the Portfolios of the Funds will achieve its stated objective. More detailed information, including a description of risks involved in investing in each of the Portfolios may be found in the prospectus for each Fund and each Fund's Statement of Additional Information. CHANGE OF INVESTMENTS KILICO reserves the right, subject to applicable law, to make additions to, deletions from, or substitutions for the shares held by the Separate Account or that the Separate Account may purchase. KILICO reserves the right to eliminate the shares of any of the portfolios of the Funds and to substitute shares of another portfolio of the Funds or of another investment company, if the shares of a portfolio are no longer available for investment, or if in its judgment further investment in any portfolio becomes inappropriate in view of the purposes of the Policy or the Separate Account. KILICO may also eliminate or combine one or more subaccounts, transfer assets, or it may substitute one subaccount for another subaccount, if, in its sole discretion, marketing, tax or investment conditions warrant. KILICO will not substitute any shares attributable to an Owner's interest in a Subaccount of the Separate Account without notice to the Owner and prior approval of the Commission, to the extent required by the 1940 Act or other applicable law. Nothing contained in this Prospectus shall prevent the Separate Account from purchasing other securities for other series or classes of policies, or from permitting a conversion between series or classes of policies on the basis of requests made by Owners. KILICO also reserves the right to establish additional subaccounts of the Separate Account, each of which would invest in a new portfolio of the Funds, or in shares of another investment company, with a specified investment objective. New subaccounts may be established when, in the sole discretion of KILICO, marketing needs or investment conditions warrant, and any new subaccounts may be made available to existing Owners as determined by KILICO. If deemed by KILICO 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 other KILICO separate accounts. To the extent permitted by law and subject to any regulatory approvals, KILICO may also transfer the assets of the Separate Account to another separate account, or to the General Account. FIXED ACCOUNT OPTION NET PREMIUMS ALLOCATED BY POLICY OWNERS TO THE FIXED ACCOUNT OF THE POLICY AND TRANSFERS TO THE FIXED ACCOUNT BECOME PART OF THE GENERAL ACCOUNT OF KILICO, WHICH SUPPORTS INSURANCE AND ANNUITY OBLIGATIONS. BECAUSE OF EXEMPTIVE AND EXCLUSIONARY PROVISIONS, INTERESTS IN THE FIXED ACCOUNT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 ("1933 ACT") NOR IS THE FIXED ACCOUNT REGISTERED AS AN INVESTMENT COMPANY UNDER THE INVESTMENT COMPANY ACT OF 1940 ("1940 ACT"). ACCORDINGLY, NEITHER THE FIXED ACCOUNT NOR ANY INTERESTS THEREIN GENERALLY ARE SUBJECT TO THE PROVISIONS OF THE 1933 OR 1940 ACTS AND KILICO HAS BEEN ADVISED THAT THE STAFF OF THE SECURITIES AND EXCHANGE COMMISSION HAS NOT REVIEWED THE DISCLOSURES IN THIS PROSPECTUS WHICH RELATE TO THE FIXED PORTION. DISCLOSURES REGARDING THE FIXED ACCOUNT, HOWEVER, MAY BE SUBJECT TO CERTAIN GENERALLY APPLICABLE PROVISIONS OF THE FEDERAL SECURITIES LAWS RELATING TO THE ACCURACY AND COMPLETENESS OF STATEMENTS MADE IN PROSPECTUSES. Under the Fixed Account Option offered under the Policies, KILICO allocates payments to its General Account and pays a fixed interest rate for stated periods. This Prospectus describes only the element of the Contract pertaining to the Separate Account except where it makes specific reference to fixed accumulation and settlement elements. 7 10 The Policies guarantee that payments allocated to the Fixed Account will earn a minimum fixed interest rate of 3%. KILICO, at its discretion, may credit interest in excess of 3%. KILICO reserves the right to change the rate of excess interest credited as provided under the terms of the Policy. KILICO also reserves the right to declare separate rates of excess interest for net premiums or amounts transferred at designated times, with the result that amounts at any given designated time may be credited with a higher or lower rate of excess interest than the rate or rates of excess interest previously credited to such amounts and net premiums or amounts transferred at any other designated time. THE POLICY POLICY ISSUE Before KILICO will issue a Policy, it must receive a completed application and a full initial premium at its Home Office. A Policy ordinarily will be issued only for Insureds Age 1 through 75 who supply satisfactory evidence of insurability to KILICO. Acceptance of an application is subject to underwriting by KILICO. After underwriting is complete and the Policy is delivered to the Owner, insurance coverage under the Policy will be deemed to have begun as of the Policy Date. (See "Premiums," below.) PREMIUMS Premiums are to be paid to KILICO at its Home Office. (See "Distribution of Policies.") Checks ordinarily must be made payable to KILICO. PLANNED PREMIUMS. When applying for a Policy, a Policy Owner will specify a Planned Premium payment that provides for the payment of level premiums over a specified period of time. However, the Policy Owner is not required to pay Planned Premiums. The minimum monthly premium that will be accepted by KILICO is $50. For modes other than monthly the 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, which is a type of life insurance contract subject to different tax treatment than conventional life insurance contracts for certain pre-death distributions. (See "Federal Tax Matters.") Accordingly, variations from the Planned Premiums on a Policy that is not otherwise a modified endowment contract may result in the Policy becoming a modified endowment contract for tax purposes. Payment of the Planned Premium will not guarantee that a Policy will remain 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 is the period that ends on the third Policy anniversary. During the guarantee period, the policy will remain in force and no grace period will begin provided that the total premiums received, less any withdrawals and any outstanding loans, equals or exceeds the monthly guarantee premium times the number of months since the Policy Date, including the current month. KILICO may reject or limit any premium payment that is below the current minimum premium amount requirements, or that would increase the death benefit by more than the amount of the premium. All or a portion of a premium payment will be rejected and returned to the Owner if it would disqualify the Policy as life insurance under the Internal Revenue Code. Certain charges will be deducted from each premium payment. (See "Charges and Deductions.") The remainder of the premium, known as the net premium, will be allocated as described below under "Allocation of Premiums and Separate Account Value." POLICY DATE. The Policy Date is the date used to determine Policy Years and Monthly Processing Dates. The Policy Date will be the date that coverage on the Insured takes effect. If such date is the 29th, 30th, or 31st of a month, the Policy Date will be the first of the following month. In the event an application is declined by KILICO, the Cash Value in the Scudder VLIF Money Market Subaccount plus the total amount of monthly deductions and deductions against premiums will be refunded. 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.") 8 11 ALLOCATION OF PREMIUMS AND SEPARATE ACCOUNT VALUE ALLOCATION OF PREMIUMS. The initial net premium will be allocated to the Scudder VLIF Money Market Subaccount. The Separate Account Value will remain 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 will be allocated to the Subaccounts and the Fixed Account as elected by the Owner in the application for the Policy. Additional premiums received will continue to be allocated in accordance with the Owner's instructions in the application unless contrary instructions are received. Once a change in allocation is made, all future premiums will be allocated in accordance with the new allocation, unless contrary written instructions are received. The 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. The Separate Account Value will vary with the investment experience of the chosen Subaccounts. The 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. One transfer of all or a part of the Separate Account Value may be made within a fifteen day period. All transfers made during a business day will be treated as one request. Fixed Account Value may be transferred to one or more Subaccounts. One transfer of part of the 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 KILICO, or by telephone authorization under forms authorized by KILICO. (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 Owner's remaining interest in a Subaccount or the Fixed Account, from which amounts are to be transferred, would be less than $500 after such transfer. These minimums may be waived for reallocations under established third party asset allocation programs. Transfers will be based on the Accumulation Unit values next determined following receipt of valid, complete transfer instructions by KILICO. The transfer provision may be suspended, modified or terminated at any time by KILICO. KILICO reserves the right to charge up to $25 for each transfer. KILICO disclaims all liability for acting in good faith in following instructions which are given in accordance with procedures established by KILICO, including requests for personal identifying information, that are designed to limit unauthorized use of the privilege. Therefore, a Policy Owner would bear this 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 asset allocation program determined by such third party. 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 that will be available for transfer under third party authorizations. AUTOMATIC ASSET REALLOCATION. A Policy Owner may elect to have transfers made automatically among the Subaccounts of the Separate Account 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 will not be subject to the $500 minimum transfer amounts. An election to participate in the automatic asset reallocation program must be in writing in the form prescribed by KILICO and returned to KILICO at its home office. POLICY LAPSE AND REINSTATEMENT LAPSE. Lapse will occur when the Surrender Value of a Policy is insufficient to cover the monthly deductions, and a grace period expires without a sufficient payment being made. (See "Charges and Deductions.") A grace period of 61 days will be given to the Owner. It begins when notice is sent that the Surrender Value of the Policy is insufficient to cover the monthly deductions. Failure to make a premium payment or loan repayment during the grace period sufficient to keep the Policy in force for three months will cause the Policy to lapse and terminate without value. If payment is received within the grace period, the premium or loan repayment will be allocated to the Subaccounts and the Fixed Account in accordance with the most current allocation instructions, unless otherwise requested. Amounts over and above the amounts necessary to prevent lapse may be paid as additional premiums, however, to the extent otherwise permitted. (See "The Policy--Premiums.") 9 12 KILICO will not accept any payment that would cause the total premium payment to exceed the maximum payment permitted by the Code for life insurance under the guideline premium limits. However, the Owner may voluntarily repay a portion of Debt to avoid lapse. (See "Federal Tax Matters.") If premium payments have not exceeded the maximum payment permitted by the Code, the Owner may choose to make a larger payment than the minimum required payment to avoid the recurrence of the potential lapse of coverage. The Owner may also combine premium payments with Debt repayments. The death benefit payable during the grace period will be the Death Benefit in effect immediately prior to the grace period, less any Debt 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 KILICO; (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 against the Policy which existed at the date of termination of coverage. The effective date of reinstatement of a Policy will be the Monthly Processing Date that coincides with or next follows the date the application for reinstatement is approved by KILICO. Suicide and incontestability provisions will apply from the effective date of reinstatement. 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 will be equal to the death benefit minus any Debt and minus any monthly deductions due during the grace period. A Policy Owner may select one of two death benefit options: Option A or Option B. An applicant designates the death benefit option in the application. 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 Specified Amount is chosen by the Owner on the application and is stated in the Policy Specifications. The minimum Specified Amount permitted under the Policy is $50,000. OPTION A. Under Option A, the death benefit will be equal to 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 age of the Insured and will be at least equal to the cash value corridor in Section 7702 of the Internal Revenue Code. The death benefit percentage is 250% for an Insured at Age 40 or under, and it declines for older Insureds. 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 will be equal to 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 and as stated in the Appendix. The death benefit under Option B will always vary 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 10 13 Amount, but Cash Values that vary as shown, and which assume an 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 is equal to $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 is equal to the higher value. Under Option B, the death benefit for Policy I is equal to $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 is equal to the higher value. All calculations of death benefit will be 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 a payment plan offered under the Policy. The Policy should be consulted for details. Death Benefits under the Policy will ordinarily be paid within seven days after KILICO receives all documentation required for such a payment. Payments may be postponed in certain circumstances. (See "General Provisions -- Postponement of Payments") CHANGES IN DEATH BENEFIT OPTION After the first Policy Year, a Policy Owner may request that the death benefit under the Policy be changed from Option A to Option B, or from Option B to Option A. Changes in the death benefit option may be made only once per Policy Year and should be made in writing to KILICO's Home Office. The effective date of any such change is the next Monthly Processing Date after the change is accepted. A change in the death benefit from Option A to Option B will result in a reduction in the Specified Amount of the Policy by the amount of the Policy's Cash Value, with the result that the death benefit payable under Option B at the time of the change will equal that which would have been payable under Option A immediately prior to the change. The change in option will affect the determination of the death benefit since Cash Value will then be added to the new Specified Amount, and the death benefit will then vary with Cash Value. A change in the death benefit from Option B to Option A will result in an increase in the Specified Amount of the Policy by the amount of the Policy's Cash Value, with the result that the death benefit payable under Option A at the time of the change will equal that which would have been payable under Option B immediately prior to the change. However, the change in option will affect the determination of the death benefit since the Cash Value will no longer be added to the Specified Amount in determining the death benefit. From that point on, the death benefit will equal 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 since this charge varies with the net amount at risk, which generally is the amount by which the death benefit exceeds Cash Value. (See "Charges and Deductions--Cost of Insurance Charge.") Assuming that the Policy's death benefit would not be equal to Cash Value times a death benefit percentage under either Option A or B, changing from Option B to Option A will generally decrease the future net amount at risk, and therefore decrease the future cost of insurance charges. Changing from Option A to Option B will generally result in a net amount at risk that remains level. Such a change, however, will result in an increase in the cost of insurance charges over time, since the cost of insurance rates increase with the Insured's Age. 11 14 CHANGES IN SPECIFIED AMOUNT After the first Policy Year, a Policy Owner may request an increase or decrease in the Specified Amount under a Policy subject to approval from KILICO. A change in Specified Amount may only be made once per Policy Year and must be in an amount at least equal to $25,000. Increases are not allowed after the Insured attains age 75. Increasing the Specified Amount could increase the death benefit under a Policy, and decreasing the Specified Amount could decrease the death benefit. Decreases in the death benefit may have tax consequences. (See "Federal Tax Matters.") The amount of change in the death benefit will depend, among other things, upon the death benefit option chosen by the Owner and the degree to which the death benefit under a Policy exceeds the Specified Amount prior to the change. Changing the Specified Amount could affect the subsequent level of the death benefit while the Policy is in force and the subsequent level of Policy values. An increase in Specified Amount may increase the net amount at risk under a Policy, which will increase an Owner's cost of insurance charge and the guarantee premium amount. However, the guarantee period will not be extended as a result of an increase in Specified Amount. Conversely, a decrease in Specified Amount may decrease the net amount at risk, which will decrease an Owner's cost of insurance charge. A decrease in Specified Amount will not decrease the guarantee premium. INCREASES. Additional evidence of insurability satisfactory to KILICO will be required for an increase in Specified Amount. DECREASES. Any decrease in Specified Amount will first be applied to the most recent increases successively, then to the original Specified Amount. A decrease will not be permitted if the Specified Amount would fall below the lesser of the initial Specified Amount or $50,000. If a decrease in the Specified Amount would result in total premiums paid exceeding the premium limitations prescribed under tax law to qualify the Policy as a life insurance contract, KILICO will refund the Policy Owner the amount of such excess above the premium limitations. Some or all of the amount refunded may be subject to tax. (See "Federal Tax Matters.") KILICO reserves the right to disallow a requested decrease, and will not permit a requested decrease, among other reasons, (1) if compliance with the guideline premium limitations under tax law resulting from the requested decrease would result in immediate termination of the Policy, or (2) if, to effect the requested decrease, payments to the Owner would have to be made from Cash Value for compliance with the guideline premium limitations, and the amount of such payments would exceed the Surrender Value under the Policy. Any request for an increase or decrease in Specified Amount must be made by written application to KILICO's Home Office. It will become effective on the Monthly Processing Date on or next following KILICO's acceptance of the request. If the Owner is not the Insured, KILICO will also require the consent of the Insured before accepting a request. BENEFITS AT MATURITY If the Insured is living on the Policy Date anniversary nearest the Insured's 100th birthday, KILICO will pay the Owner the Surrender Value of the Policy. On the Maturity Date, the Policy will terminate and KILICO will have no further obligations under the Policy. CASH VALUE The Policy's Cash Value will reflect the investment experience of the selected Subaccounts, the frequency and amount of premiums paid, transfers between Subaccounts, withdrawals, any Fixed Account or Loan Account values, and any charges assessed in connection with the Policy. An Owner may make partial withdrawals of Cash Value or surrender the Policy and receive the Policy's Surrender Value, which equals the Cash Value less surrender charges and Debt. (See "Surrender Privilege.") There is no minimum guaranteed Cash Value. CALCULATION OF CASH VALUE. The Cash Value of the Policy is the total of the Policy's Separate Account Value, Fixed Account Value and Loan Account value. The Cash Value is determined on each Valuation Date. It will first be calculated on the Policy Date. On that date, the Cash Value equals the initial premium, less the monthly deductions for the first Policy Month. (See "Charges and Deductions.") On any Valuation Date during the Policy Year, the Policy's Separate Account Value in any Subaccount will equal: (1) The Policy's Separate Account Value in the Subaccount at the end of the preceding Valuation Period, multiplied by the Investment Experience Factor (defined below) for the current Valuation Period; plus 12 15 (2) Any net premiums received during the current Valuation Period which are allocated to the Subaccount; plus (3) All amounts transferred to the Subaccount, either from another Subaccount or the Fixed Account or from the Loan Account in connection with the repayment of a Policy loan (see "Policy Benefits and Rights--Policy Loans,") during the current Valuation Period; 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 in connection with 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 the annual rate declared by KILICO. The annual rate will never be less than 3%. ACCUMULATION UNIT VALUE. Each Subaccount has a distinct Accumulation Unit Value. When net premiums or other amounts are allocated to a Subaccount, a number of units are purchased based on the Accumulation Unit Value of the Subaccount at the end of the Valuation Period during which the allocation is made. When amounts are transferred out of, or deducted from, a Subaccount, units are redeemed in a similar manner. For each Subaccount, the Accumulation Unit Value was initially set at 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 multiplied by the Accumulation Unit Value for the immediately preceding period. Each Valuation Period has a single Accumulation Unit Value which applies for each day in the period. The number of Accumulation Units will not change as a result of investment experience. The Investment Experience Factor may be greater or less than one; therefore, the Accumulation Unit Value may increase or decrease. INVESTMENT EXPERIENCE FACTOR. The investment experience of the Separate Account is calculated by applying the Investment Experience Factor to the Separate Account Value in each Subaccount during a Valuation Period. Each Subaccount has its own distinct Investment Experience Factor. The Investment Experience Factor of a Subaccount for any Valuation Period is determined by dividing (1) by (2) and subtracting (3) from the result, where: (1) is the net result of: a. The net asset value per share of the investment held in the Subaccount determined at the end of the current Valuation Period; plus b. the per share amount of any dividend or capital gain distributions made by the investment held in the Subaccount division, if the "ex-dividend" date occurs during the current Valuation Period; plus or minus c. a charge or credit for any taxes reserved for the current valuation period which we determine to have resulted from the investment operations of the Subaccount; (2) is the net asset value per share of the investment held in the Subaccount, determined at the end of the last prior Valuation Period; (3) is the factor representing the Mortality and Expense Risk Charge. (See "Charges and Deductions--Mortality and Expense Risk Charge.") POLICY LOANS After the first Policy Year, the Owner may by written request to KILICO borrow all or part of the maximum loan amount of the Policy. The maximum loan amount is 90% of the Policy's Cash Value minus applicable surrender charges. The amount of any new loan may not exceed the maximum loan amount less Debt on the date a loan is granted. The minimum amount of a loan is $500. Any amount due an Owner under a Policy Loan 13 16 ordinarily will be paid within 7 days after KILICO receives a loan request at its Home Office, although payments may be postponed under certain circumstances. (See "Postponement of Payments," and "Federal Tax Matters.") On the date a Policy loan is made, an amount equal to the loan amount will be transferred from the Separate Account and Fixed Account to the Loan Account. Unless the Owner directs otherwise, the loaned amount will be deducted from the Subaccounts and the Fixed Account in proportion to the values that each bears to the Separate Account Value of the Policy in all of the Subaccounts plus the Fixed Account Value at the end of the Valuation Period during which the request is received. The loan interest will be assessed at an effective annual rate of 4.5% in the first nine Policy Years and 3.00% thereafter. Interest not paid when due will be added to the loan amount due upon the earlier of the next Policy Date anniversary or when coverage ceases upon lapse, surrender, death or maturity and bear interest at the same rate. When interest is added to the loan amount, a transfer in this amount will be made from the Separate Account and the Fixed Account to the Loan Account. Cash Value in the Loan Account will earn 3.00% annual interest. Such earnings will be allocated to the Loan Account. LOAN REPAYMENT. While the Policy is in force, policy loans may be repaid at any time, in whole or in part. At the time of repayment, Cash Value in the Loan Account equal to the amount of the repayment which exceeds the difference between interest due and interest earned will be allocated to the Subaccounts and the Fixed Account according to the Owner's current allocation instructions, unless otherwise requested by the Owner. Transfers from the Loan Account to the Separate Account or the Fixed Account as a result of the repayment of Debt will be allocated at the end of the Valuation Period during which the repayment is received. Such transfers will not be counted in determining the transfers made within a 15 day period. EFFECTS OF POLICY LOAN. Policy loans decrease Surrender Value and, therefore, the amount available to pay the charges necessary to keep the Policy in force. If Surrender Value on the day immediately preceding a Monthly Processing Date is less than the monthly deductions for the next month, KILICO will notify the Owner. (See "General Provisions--Written Notices and Requests.") The Policy will lapse and terminate without value, unless a sufficient payment is made to KILICO within 61 days of the date such notice is sent to the Owner. (See "The Policy--Policy Lapse and Reinstatement.") EFFECT ON INVESTMENT EXPERIENCE. A Policy Loan will have an effect on the Cash Value of a Policy. The collateral for the loan (the amount held in the Loan Account) does not participate in the experience of the Subaccounts or the current interest rate of the Fixed Accounts while the loan is outstanding. If the interest credited to the Loan Account is more than the amount that would 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 treated as a modified endowment contract, a loan will be treated as a distribution and will be includible in income to the extent the Cash Value exceeds the premiums paid for the Policy. Therefore, a loan may be subject to Federal income tax and a 10% tax penalty may also apply. (See "Federal Tax Matters.") SURRENDER PRIVILEGE While the Insured is living and the Policy is in force, the Owner may surrender the Policy for its Surrender Value. To surrender the Policy, the Owner must make written request to KILICO at its Home Office and return the Policy to KILICO. The Surrender Value is equal to the Cash Value less any applicable Surrender Charge and any Debt. (See "Surrender Charge," below.) PARTIAL WITHDRAWALS. After the first Policy Year, a Policy Owner may make withdrawals of amounts less than the Surrender Value. The minimum amount of each withdrawal is $500 and the maximum amount at any time that a surrender charge is assessable is 10% of the Surrender Value. A $25 withdrawal charge will be imposed for processing each withdrawal. (See "Charges and Deductions.") A withdrawal will decrease the Cash Value by the amount of the withdrawal and, if Death Benefit Option A is in effect, will reduce the Specified Amount by the amount of the withdrawal. FREE-LOOK PERIOD AND EXCHANGE RIGHTS The Owner may, until the end of the period of time specified in the Policy, examine the Policy and return it for a refund. The applicable period of time will depend on the state in which the Policy is issued; however, it will 14 17 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 will be the sum of the Cash Value in the Kemper Money Market Subaccount plus the total amount of monthly deductions and deductions made against Premiums. An Owner seeking a refund should return the Policy to KILICO at its Home Office or to the agent who sold the Policy. At any time during the first two years after the Issue Date, the Owner may exchange the Policy for a non-variable permanent fixed benefit life insurance policy then currently being offered by KILICO or an affiliate on the life of the Insured. No evidence of insurability will be 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 under the Policy must be repaid and the surrender of the Policy is required before the exchange is made. The Policy Date and issue age will be the same as existed under the Policy. CHARGES AND DEDUCTIONS DEDUCTIONS FROM PREMIUMS A state and local premium tax charge of 2.5% is deducted from each premium payment under the 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. COST OF INSURANCE CHARGE A monthly deduction is made from the Subaccounts and the Fixed Account for the cost of insurance to cover KILICO's anticipated mortality costs. The cost of insurance charge is deducted monthly in advance and is allocated among the Subaccounts and the Fixed Account in proportion each bears to the Cash Value of the Policy less Debt. The cost of insurance will be deducted on the Policy Date and on each Monthly Processing Date thereafter by the cancellation of units. If the Monthly Processing Date falls on a day other than a Valuation Date, the charge will be determined on the next Valuation Date. The cost of insurance charge is determined by multiplying the applicable cost of insurance rate (see below) by the "net amount at risk" for each policy month. The net amount at risk is equal to the Death Benefit minus the Cash Value on the Monthly Processing Date. COST OF INSURANCE RATE. The monthly cost of insurance rates are based on the issue age, sex, rate class of the Insured and Policy Year. The monthly cost of insurance rates will be determined by KILICO based on its expectations as to future mortality experience. Any change in the schedule of rates will apply to all individuals of the same class as the Insured. The cost of insurance rate may never exceed those shown in the table of guaranteed maximum cost of insurance rates in the Policy. The guaranteed maximum cost of insurance rates are based on the 1980 Commissioner's Standard Ordinary Smoker and Non-Smoker Mortality Tables, 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. KILICO currently places 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 A daily charge is deducted from the Subaccounts of the Separate Account for mortality and expense risks assumed by KILICO. This charge will be at an annual rate of 0.90%. The mortality and expense risk assumed is that KILICO's estimates of longevity and of the expenses incurred over the lengthy period the Policy may be in effect--which estimates are the basis for the level of other charges KILICO makes under the Policy--will not be correct. MONTHLY ADMINISTRATIVE CHARGE KILICO deducts a monthly administrative expense charge to reimburse it for certain expenses related to maintenance of the Policies, accounting and record keeping and periodic reporting to owners. This charge is 15 18 designed only to reimburse KILICO for certain actual administrative expenses. Currently, this charge is $5 per month. OTHER CHARGES SURRENDER CHARGE. During the first fourteen (14) Policy Years and the first fourteen (14) Policy Years following an increase in Specified Amount, if the Policy is surrendered or if the Cash Value is applied under a Settlement Option, a Surrender Charge will be deducted from the Policy's Cash Value. The Surrender Charge consists of the sum of: (a) an administrative component (issue charge); and (b) a sales component (deferred sales charge). The sum of (a) and (b) are multiplied by (c), the applicable surrender charge percentage. During the first fourteen (14) Policy Years following an increase in Specified Amount, an additional surrender charge will apply. The additional charge will be 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 applicable Surrender Charge will be determined based upon the date of receipt of 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 is designed to cover the administrative expenses associated with underwriting and issuing a Policy, including 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 and (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 is to reimburse KILICO for some of the expenses of distributing the Policies. 16 19 (c) Surrender Charge Percentage. As stated above, a surrender charge percentage is applied to the sum of the deferred issue charge and deferred sales charge due during the first fourteen (14) Policy Years and the first fourteen (14) Policy Years following an increase in Specified Amount. For issue ages up to age 66, the surrender charge percentage is 100% for Policy Years 1-5 and will decline 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 will decline by 10% 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 when 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 would be calculated as follows: (i) Issue Charge -- [100 x $5.00]........................... $500.00 ($5.00/$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) Applicable Surrender Charge Percentage................ 100% (iv) Calculation of Surrender Charge [(a)$500.00 + (b)$189.00 + $75.00)] x (c) 100%......... $764.00
WITHDRAWAL CHARGE. A charge of $25 will be imposed for each partial withdrawal. This charge is designed to reimburse KILICO for the administrative expenses related to the withdrawal. TRANSFER CHARGE. KILICO reserves the right to charge up to $25 for each transfer. The transfer charge is designed to reimburse KILICO for the administrative expenses related to the transfer. TAXES. Currently, no charges are made against the Separate Account for Federal, state or other taxes that may be attributable to the Separate Account. KILICO may, however, in the future impose charges for Federal income taxes attributable to the Separate Account. Charges for other taxes, if any, attributable to the Policy may also be made. (See "Federal Tax Matters.") CHARGES AGAINST THE FUND. Under the investment advisory agreements between each Fund, on behalf of the portfolios, and the investment manager and/or adviser, such entities provide investment advisory and/or management services for the portfolios. The Funds are responsible for the advisory fees and various other expenses. The investment advisory fees differ with respect to each of the portfolios of the Funds. (See "The Funds.") 17 20 In addition, the Subaccounts of the Separate Account purchase shares of the Funds. Each Portfolio of the Funds incurs annual fund operating expenses which consist of management fees, 12b-1 fees and other expenses. (See "Charges and Deductions--Charges Against the Funds," page 18.) 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 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. KILICO may receive compensation from the investment advisers of the Funds for services related to the Funds. Such compensation will be consistent with the services rendered or the cost savings resulting from the arrangement. For more information concerning the investment advisory fees and other charges against the portfolios of the Funds, see the prospectuses for the Funds and the Statements of Additional Information available upon request. SYSTEMATIC WITHDRAWAL PLAN. A charge of $50 is imposed to enter into a Systematic Withdrawal Plan (SWP.) In addition, a $25 charge will be imposed each time a change is made to the SWP. These charges are to reimburse KILICO for expenses related to the administration of the SWP. (See "Systematic Withdrawal Plan.") REDUCTION OF CHARGES. KILICO may reduce certain charges and the minimum initial premium in special circumstances that result in lower sales, administrative, or mortality expenses. For example, special circumstances may exist in connection with group or sponsored arrangements, sales to KILICO policyowners, or sales to employees or clients of members of the Kemper group of companies. The amounts of any reductions will reflect the reduced sales effort and administrative costs resulting from, or the different mortality experience expected as a result of, the special circumstances. Reductions will not be unfairly discriminatory against any person, including the affected Owners and owners of all other policies funded by the Separate Account. GENERAL PROVISIONS SETTLEMENT OPTIONS The Owner, or Beneficiary at the death of the Insured if no election by the Owner is in effect, may elect to have all of the Death Benefit or Surrender Value of this Policy paid in a lump sum or have the amount applied to one of the Settlement Options. Payments under these options will not be affected by the investment experience of the Separate Account after proceeds are applied under a Settlement Option. Payment will be made as elected by the payee on a monthly, quarterly, semi-annual or annual basis. The option selected must result in a payment that is at least equal to KILICO's required minimum, according to rules in effect at the time the option is chosen. If at any time the payments are less than the minimum payment, KILICO may increase the period between payments to quarterly, semi-annual or annual so that the payment is at least equal to our minimum payment or to make the payment in one lump sum. 18 21 The Cash Value on the day immediately preceding the date on which the first benefit payment is due will first be reduced by any applicable Surrender Charge and Debt. The Surrender Value will be used to determine the benefit payment. The payment will be based on the Settlement Option elected in accordance with the appropriate settlement option table. OPTION 1--INCOME FOR SPECIFIED PERIOD. KILICO will pay income for the period and payment mode elected but not less than 5 years nor more than 30 years. OPTION 2--LIFE INCOME. KILICO will pay a monthly income to the payee during the payee's lifetime. If this Option is elected, annuity payments terminate automatically and immediately on the death of the 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. OPTION 3--LIFE INCOME WITH INSTALLMENTS GUARANTEED. KILICO will pay a monthly income for the guaranteed period elected and thereafter for the remaining lifetime of the payee. The period elected may only be 5, 10, 15 or 20 years. OPTION 4--JOINT AND SURVIVOR ANNUITY. KILICO will pay the full monthly income while both payees are living. Upon the death of either payee, the income will continue during the lifetime of the surviving payee. The surviving payee's income shall be the percentage of such full amount chosen at the time of election of this option. The percentages available are 50%, 66 2/3%, 75% and 100%. Payments terminate automatically and immediately upon the death of the surviving payee without regard to the number or total amount of payments received. KILICO's 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 of the Funds is not reasonably practicable or it is not reasonably practicable to determine the value of the net assets of the Separate Account. Transfers may also be postponed under these circumstances. PAYMENT NOT HONORED BY BANK. The portion of any payment due under the Policy which is derived from any amount paid to KILICO by check or draft may be postponed until such time as KILICO determines that such instrument has been honored by the bank upon which it was drawn. THE CONTRACT The Policy, any endorsements, and the application constitute the entire contract between KILICO and the Owner. All statements made by the Insured or contained in the application will, in the absence of fraud or misrepresentation, be deemed representations and not warranties. Only the President, the Secretary, or an Assistant Secretary of KILICO is authorized to change or waive the terms of a Policy. Any change or waiver must be in writing and signed by one of those persons. MISSTATEMENT OF AGE OR SEX If the age or sex of the Insured is misstated, the Death Benefit will be changed to what the cost of insurance on the previous Monthly Processing Date would have purchased based on the correct sex and age. INCONTESTABILITY KILICO 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. 19 22 SUICIDE Suicide by the Insured, while sane or insane, within two years from the Issue Date of the Policy is a risk not assumed under the Policy. KILICO's 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. ASSIGNMENT No assignment of a Policy is binding on KILICO until it is received by KILICO at its Home Office. KILICO assumes no responsibility for the validity of the assignment. Any claim under an assignment is subject to proof of the extent of the interest of the assignee. If this Policy is assigned, the rights of the Owner and Beneficiary are subject to the rights of the assignee of record. NONPARTICIPATING This Policy will not pay dividends. It will not participate in any of KILICO's surplus or earnings. OWNER AND BENEFICIARY The Owner may, at any time during the life of the Insured and while the Policy is in force, designate a new Owner. Primary and secondary Beneficiaries may be designated by the Owner in the application. If changed, the primary or secondary Beneficiary is as shown in the latest change filed with KILICO. If no Beneficiary survives the Insured, the Insured's estate will be the Beneficiary. The interest of any Beneficiary may be subject to that of an assignee. Any change of Owner or Beneficiary must be made in writing in a form acceptable to KILICO. The change will take effect as of the date the request is signed. KILICO will not be liable for any payment made or other action taken before the notice has been received at KILICO's Home Office. RECORDS AND REPORTS KILICO will maintain all records relating to the Separate Account. KILICO will send Owners, at their last known address of record, an annual report stating the Death Benefit, the Accumulation Unit Value, the Cash Value and Surrender Value under the Policy, and indicating any additional premium payments, partial withdrawals, transfers, Policy loans and repayments and charges made during the Policy Year. In addition, Owners will be sent confirmations and acknowledgments of various transactions. Owners will also be sent annual and semi-annual reports for the Fund to the extent required by the 1940 Act. WRITTEN NOTICES AND REQUESTS Any written notice or request to be sent to KILICO should be sent to its Home Office, 1 Kemper Drive, Long Grove, Illinois 60049. The notice or request should include the Policy number and the Insured's full name. Any notice sent by KILICO to an Owner will be sent to the address shown in the application unless an address change has been filed with KILICO. OPTIONAL INSURANCE BENEFITS Subject to certain requirements, a Policy Owner may elect to add one or more of the following optional insurance benefits to the Policy by a Rider at the time of application for a Policy. These optional benefits are: waiver of all monthly deductions against the Policy in the event of total disability of the Insured; term insurance on the Insured's dependent children; acceleration of the payment of a portion of the death benefit when the Insured is terminally ill; and term insurance on an additional insured specified by the Owner. The cost of any additional insurance benefits will be deducted as part of the monthly deductions. Certain restrictions may apply. Restrictions and provisions related to these benefits are more fully described in the applicable rider. Samples of the provisions are available from KILICO upon written request. DOLLAR COST AVERAGING A Policy Owner may predesignate a portion of the Cash Value under a Policy attributable to the Fixed Account, the Scudder VLIF Money Market Subaccount or the Kemper Government Securities Subaccount (the designated account is referred to as the "DCA Account") to be automatically transferred on a monthly basis to one or more of the other Subaccounts and the Fixed Account. A Policy Owner may enroll in this program at the time the Policy is issued or anytime thereafter by properly completing the Dollar Cost Averaging enrollment form 20 23 and returning it to KILICO at its home office at least five (5) business days prior to the 10th day of a month which is the date that all Dollar Cost Averaging transfers will be made ("Transfer Date"). Transfers will commence on the first Transfer Date following the Trade Date. Transfers will be made in the amounts designated by the Policy Owner and must be at least $500 per Subaccount or General Account. The total Cash Value in the DCA Account at the time Dollar Cost Averaging is elected must be at least equal to the greater of $10,000 or the amount designated to be transferred on each Transfer Date multiplied by the duration selected. Dollar Cost Averaging will cease automatically if the Cash Value does not equal or exceed the amount designated to be transferred on each Transfer Date and the remaining amount will be transferred. Dollar Cost Averaging will terminate when (i) the number of designated monthly transfers has been completed, (ii) the Cash Value attributable to the DCA Account is insufficient to complete the next transfer, (iii) the Policy Owner requests termination in writing and such writing is received by KILICO at its home office at least five business days prior to the next Transfer Date in order to cancel the transfer scheduled to take effect on such date, or (iv) the Policy is surrendered. KILICO reserves the right to amend Dollar Cost Averaging on thirty days notice or terminate it at any time. A Policy Owner may initiate, reinstate or change Dollar Cost Averaging or change existing Dollar Cost Averaging terms by properly completing the new enrollment form and returning it to KILICO at its home office at least five (5) business days, (ten (10) business days for Fixed Account transfers), prior to the next Transfer Date such transfer is to be made. When utilizing Dollar Cost Averaging, a Policy Owner must be invested in the DCA Account and may be invested in the Fixed Account and a maximum of eight other Subaccounts at any given time. SYSTEMATIC WITHDRAWAL PLAN KILICO administers a Systematic Withdrawal Plan ("SWP") which allows certain Policy Owners to preauthorize periodic withdrawals after the first Policy Year. Policy Owners entering into a SWP agreement instruct KILICO to withdraw selected amounts from the Fixed Account, or from a maximum of two Subaccounts on a monthly, quarterly, semi-annual or annual basis. Currently the SWP is available to Policy Owners who request a minimum $500 periodic payment. The amounts distributed under the SWP are partial withdrawals and will be subject to surrender charges, if applicable. (See "Policy Benefits and Rights--Surrender Privileges," page 14.) The $25 withdrawal charge does not apply. However, a charge of $50 will be imposed at the time a SWP is established. In addition, a $25 charge will be imposed each time a change is made to the SWP. These charges are designed to reimburse KILICO for expenses related to the administration of the SWP. Withdrawals taken under the SWP may be subject to income taxes, withholding and tax penalties. (See "Federal Tax Matters.") Policy Owners interested in the SWP may obtain an application and full information concerning this program and its restrictions from their representative or KILICO's home office. The right is reserved to amend the SWP on thirty days' notice. The SWP may be terminated at any time by the Contract Owner or KILICO. DISTRIBUTION OF POLICIES The Policy is sold by licensed insurance representatives who represent KILICO and who are registered representatives of broker-dealers which are registered under the Securities Exchange Act of 1934 and are members of the National Association of Securities Dealers, Inc. The Policy is distributed through the principal underwriter, Investors Brokerage Services, Inc. ("IBS"), an affiliate of KILICO. IBS is engaged in the sale and distribution of other variable life policies and annuities. The maximum sales commission payable to registered representatives will be 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, KILICO may, from time to time, pay or allow additional promotional incentives, in the form of cash or other compensation, to licensed broker-dealers that sell the Policies. In some instances, such other incentives may be offered only to certain licensed broker-dealers that sell or are expected to sell during specified time periods certain minimum amounts of the Policy or other contracts issued by KILICO. 21 24 FEDERAL TAX MATTERS INTRODUCTION The following 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 (the "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 the purchase of the Policy. In addition, KILICO MAKES NO GUARANTEE REGARDING ANY TAX TREATMENT -- FEDERAL, STATE OR LOCAL -- OF ANY POLICY OR OF ANY TRANSACTION INVOLVING A POLICY. KILICO'S TAX STATUS Under current interpretations of federal income tax law, KILICO is taxed as a life insurance company and the operations of the Separate Account are treated as part of the total operations of KILICO. The operations of the Separate Account do not materially affect KILICO's Federal income tax liability because KILICO is allowed a deduction to the extent that net investment income of the Separate Account is applied to increase Policy Cash Values. KILICO may incur state and local taxes attributable to the Separate Account. At present, these taxes are not significant. Accordingly, KILICO does not charge or credit the Separate Account for Federal, state or local taxes. However, KILICO's federal income taxes are increased in respect of the Policies because of the federal tax law's treatment of deferred acquisition costs. Accordingly, a charge equal to 1% of each premium payment in all Policy Years is made to compensate KILICO for its higher corporate income tax liability. If there is a material change in applicable federal, state or local law, charges or credits may be made to the Separate Account for federal, state or local taxes, or reserves for such taxes, if any, attributable to the Separate Account. Such charges or credits will be determined independent of the taxes actually paid by KILICO. TAXATION OF LIFE INSURANCE POLICIES TAX STATUS OF THE POLICY. Section 7702 of the Code establishes a statutory definition of life insurance for federal tax purposes. KILICO believes that the Policy will meet the current statutory definition of life insurance, which places limitations on the amount of premiums that may be paid and the Cash Values that can accumulate relative to the Death Benefit. As a result, the Death Benefit payable under the Policy will generally be excludable from the Beneficiary's gross income, and interest and other income credited under the Policy will not be 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" in accordance with Treasury Department regulations, and (2) KILICO, rather than the Policy Owner, is considered the owner of the assets of the Separate Account for federal income tax purposes. DIVERSIFICATION REQUIREMENTS. The Code and Treasury Department regulations prescribe the manner in which the investments of a segregated asset account, such as the Separate Account, are to 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 for federal income tax purposes and the Owner would generally be taxable currently on the income on the contract (as defined in the tax law). KILICO expects that the Separate Account, through the Funds, will comply with the diversification requirements prescribed by the Code and Treasury Department regulations. OWNERSHIP TREATMENT. In certain circumstances, variable life insurance contract owners may be considered the owners, for federal income tax purposes, of the assets of a segregated asset account, such as the Separate Account, used to support their contracts. In those circumstances, income and gains from the segregated asset account would be includible in the contract owners' gross income. The Internal Revenue Service (the "IRS") has stated in published rulings that a variable contract owner will be considered the owner of the assets of a segregated asset account if the owner possesses incidents of ownership in those assets, such as the ability to exercise investment control over the assets. In addition, the Treasury Department announced, in connection with the issuance of regulations concerning investment diversification, that those regulations "do not provide guidance concerning the circumstances in which investor control of the investments of a segregated asset account may cause the investor, rather than the insurance company, to be treated as the owner of the assets in the account." This announcement also stated that guidance would be issued by way of regulations or rulings on the "extent to 22 25 which policyholders may direct their investments to particular sub-accounts [of a segregated asset account] without being treated as owners of the underlying assets." As of the date of this Prospectus, no such guidance has been issued. The ownership rights under the Policy are similar to, but different in certain respects from, those described by the IRS in rulings in which it was determined that contract owners were not owners of the assets of a segregated asset account. For example, the Owner of this Policy has the choice of more investment options to which to allocate premium payments and Separate Account values, and may be able to transfer among investment options more frequently, than in such rulings. These differences could result in the Policy Owner being treated as the owner of a portion of the assets of the Separate Account and thus subject to current taxation on the income and gains from those assets. In addition, KILICO does not know what standards will be set forth in the regulations or rulings which the Treasury Department has stated it expects to issue. KILICO therefore reserves 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 remainder of this discussion assumes that the Policy will be treated as a life insurance contract for federal tax purposes. TAX TREATMENT OF LIFE INSURANCE DEATH BENEFIT PROCEEDS. In general, the amount of the Death Benefit payable under a Policy by reason of the death of the Insured is excludable from gross income under Section 101 of the Code. Certain transfers of the Policy for valuable consideration, however, may result in a portion of the Death Benefit being taxable. If the Death Benefit is not received in a lump sum and is, instead, applied under a Settlement Option, generally payments will be prorated between amounts attributable to the Death Benefit, which will be excludable from the Beneficiary's income, and amounts attributable to interest (accruing after the Insured's death), which will be includible in the Beneficiary's income. TAX DEFERRAL DURING ACCUMULATION PERIOD. Under existing provisions of the Code, except as described below, any increase in an Owner's Cash Value is generally not taxable to the Owner unless amounts are received (or are deemed to be received) from the Policy prior to the Insured's death. If there is a surrender of the Policy, an amount equal to the excess of the Cash Value over the "investment in the contract" will be includible in the Owner's income. The "investment in the contract" generally is the aggregate premium payments less the aggregate amount received under the Policy previously to the extent such amounts received were excludable from gross income. Whether withdrawals (or other amounts deemed to be distributed) from the Policy constitute income to the Owner depends, in part, upon whether the Policy is considered a "modified endowment contract" ("MEC") for federal income tax purposes. POLICIES WHICH ARE NOT MECS TAX TREATMENT OF WITHDRAWALS GENERALLY. If the Policy is not a MEC (described below), the amount of any withdrawal from the Policy generally will be treated first as non-taxable recovery of premiums paid and then as income from the Policy. Thus, a withdrawal from a Policy that is not a MEC generally will not be includible in income except to the extent the withdrawal exceeds the investment in the contract immediately before the withdrawal. CERTAIN DISTRIBUTIONS REQUIRED BY THE TAX LAW IN THE FIRST 15 POLICY YEARS. As indicated above, section 7702 places limitations on the amount of premiums that may be paid and the Cash Values that can accumulate relative to the Death Benefit. Where cash distributions are required under section 7702 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, within the meaning of the tax law, during this period), some or all of such amounts may be includible in income notwithstanding the general rule described in the preceding paragraph. A reduction in benefits may result upon a decrease in the 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 classified as a MEC, a loan under the Policy generally will be treated as indebtedness of the Owner. As a result, no part of any loan under a Policy will constitute income to the Owner so long as the Policy remains in force. However, in those situations where the interest rate credited to the Loan Account equals the interest rate charged for the loan, it is possible that 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 the proceeds of a surrender for purposes of determining whether any amounts are includible in the Owner's income. Generally, interest paid on any loans under this Policy will not be tax deductible. The nondeductibility of interest includes interest paid or accrued on indebtedness with respect to one or more life insurance policies 23 26 owned by a taxpayer covering any individual who is or has been an officer or employee of, or financially interested in, any trade or business carried on by the taxpayer. A limited exception to this rule exists for certain interest paid in connection with certain "key person" insurance. In the case of interest paid in connection with a loan with respect to a Policy covering the life of any key person, interest is deductible only to the extent that the aggregate amount of loans under one or more life insurance policies does not exceed $50,000. Further, even as to such loans up to $50,000, interest would not be deductible if the Policy were deemed for federal tax purposes to be a single premium life insurance policy or, in certain circumstances, if the loans were treated as "systematic borrowing" within the meaning of the tax law. A "key person" is an individual who is either an officer or a twenty percent owner of the taxpayer. The maximum number of individuals who can be treated as key persons may not exceed the greater of (1) 5 individuals or (2) the lesser of 5 percent of the total number of officers and employees of the taxpayer or 20 individuals. Owners should consult a tax advisor regarding the deductibility of interest incurred in connection with loans under this Policy. In addition, in the case of Policies issued to a non-natural taxpayer, or held for the benefit of such an entity, a portion of the taxpayer's otherwise deductible interest expenses may not be deductible as a result of ownership of a policy even if no loans are taken under the policy. An exception to the latter rule is provided for certain life Policies which cover the life of an individual who is a 20-percent owner, or an officer, director, or employee of, a trade or business. However, this exception is not applicable to Survivorship Policies, other than where the Insureds are a 20-percent owner and his or her spouse. Entities that are considering purchasing the Policy, or entities that will be beneficiaries under a policy, should consult a tax advisor. POLICIES WHICH ARE MECS CHARACTERIZATION OF A POLICY AS A MEC. In general, a Policy will be considered a MEC for federal income tax purposes if (1) the Policy is received in exchange for a life insurance contract that was a MEC, or (2) the Policy is entered into after June 21, 1988 and premiums are paid into the Policy more rapidly than the rate defined by a "7-Pay Test." This test generally provides that a Policy will fail this test (and thus be considered a MEC) if the accumulated amount paid under the Policy at any time 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. A material change of the Policy (as defined in the tax law) will generally result 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. KILICO will monitor the Policies and will attempt to notify Owners on a timely basis if a Policy is in jeopardy of becoming a MEC. The Policy Owner may then request that KILICO take whatever steps are available to avoid treating the Policy as a MEC, if that is desired. TAX TREATMENT OF WITHDRAWALS, LOANS, ASSIGNMENTS AND PLEDGES UNDER MECS. If the Policy is a MEC, withdrawals from the Policy will be treated first as withdrawals of income and then as a recovery of premiums paid. Thus, withdrawals will be includible in income to the extent the Cash Value exceeds the investment in the contract. The amount of any Policy loan will be treated as a withdrawal for tax purposes. In addition, the discussion of interest on loans and of lapses while loans are outstanding under the caption "Policies Which Are Not MECs" also applies to Policies which are MECs. If the Owner assigns or pledges any portion of the Cash Value (or agrees to assign or pledge any portion), such portion will be treated as a withdrawal for tax purposes. The Owner's 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 Policy treated as a MEC, an Owner should consult a qualified tax advisor. 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 equal to 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 tax law), 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, as defined in the tax law). AGGREGATION OF POLICIES. All life insurance contracts which are treated as MECs and which are purchased by the same person from KILICO or any of is affiliates within the same calendar year will be aggregated and treated as one contract for purpose of determining the tax on withdrawals (including deemed withdrawals). The effects of such aggregation are not clear; however, it could affect the amount of a withdrawal (or a deemed withdrawal) that is taxable and the amount which might be subject to the 10% penalty tax described above. 24 27 ACTIONS TO ENSURE COMPLIANCE WITH THE TAX LAW. KILICO reserves the right to refund premiums which exceed those permitted by the federal tax definition of life insurance. KILICO also reserves the right to increase the Death Benefit (which may result in larger charges under a Policy) or to take any other action deemed necessary to ensure the compliance of the Policy with the federal tax definition of life insurance. OTHER CONSIDERATIONS. Changing the Owner, exchanging the Policy, changing from one Death Benefit option to another, and other changes under the Policy may have tax consequences (other than those discussed herein) depending on the circumstances of such change or withdrawal. Federal estate and state and local estate, inheritance and other tax consequences of ownership or receipt of Policy proceeds depend on the circumstances of each Policy Owner or Beneficiary. FEDERAL INCOME TAX WITHHOLDING KILICO will withhold and remit to the Federal government a part of the taxable portion of withdrawals made under a Policy unless the Owner notifies KILICO in writing at or before the time of the withdrawal that he or she elects not to have any amounts withheld. Regardless of whether the Owner requests that no taxes be withheld or whether KILICO withholds a sufficient amount of taxes, the Owner will be responsible for the payment of any taxes and early distribution penalties that may be due on the amounts received. The 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 described in this Prospectus contains cost of insurance rates that distinguish between men and women. Accordingly, employers and employee organizations should consider, in consultation with legal counsel, the impact of Federal, state and local laws, including Title VII of the Civil Rights Act, the Equal Pay Act, and NORRIS and subsequent cases on any employment-related insurance or fringe benefit program before purchasing this Policy. SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS KILICO holds the assets of the Separate Account. The assets are kept segregated and held separate and apart from the general funds of KILICO. KILICO maintains records of all purchases and redemptions of the shares of each portfolio of the Funds by each of the Subaccounts. VOTING INTERESTS To the extent required by law, KILICO will 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. If, however, the 1940 Act or any regulation thereunder should be amended or if the present interpretation thereof should change, and as a result KILICO determines that it is permitted to vote a Fund's shares in its own right, it may elect to do so. Owners of all Policies participating in each Subaccount shall have voting interests with respect to that Subaccount, based upon each Owner's proportionate interest in that Subaccount as measured by units. Each person having a voting interest in a Subaccount will receive proxy material, reports, and other materials relating to the appropriate portfolio of the Funds. KILICO will vote shares of the Funds for which it has not received timely instructions in proportion to the voting instructions that KILICO has received with respect to all variable policies participating in a portfolio. KILICO will also vote any Fund shares attributed to amounts it has accumulated in the Subaccounts in the same proportions that Owners vote. KILICO may, when required by state insurance regulatory authorities, disregard voting instructions if the instructions require that the shares be voted so as to cause a change in the subclassification or investment objective of the Fund or of one or more of its portfolios or to approve or disapprove an investment advisory contract for a portfolio of the Fund. In addition, KILICO itself may disregard voting instructions in favor of changes initiated by an Owner in the investment policy or the investment adviser of a portfolio of a Fund if KILICO reasonably disapproves of such changes. A proposed change would be disapproved only if the change is 25 28 contrary to state law or prohibited by state regulatory authorities, or if KILICO determines that the change would have an adverse effect on its General Account in that the proposed investment policy for a portfolio may result in overly speculative or unsound investments. In the event KILICO does disregard voting instructions, a summary of that action and the reasons for such action will be included in the next annual report to Owners. STATE REGULATION OF KILICO KILICO, a stock life insurance company organized under the laws of Illinois, is subject to regulation by the Illinois Department of Insurance. An annual statement is filed with the Director of Insurance on or before March 1st of each year covering the operations and reporting on the financial condition of KILICO as of December 31st of the preceding year. Periodically, the Director of Insurance examines the liabilities and reserves of KILICO and the Separate Account and certifies to their adequacy, and a full examination of KILICO's operations is conducted by the National Association of Insurance Commissioners at least once every three years. In addition, KILICO is subject to the insurance laws and regulations of other states within which it is licensed to operate. Generally, the insurance department of any other state applies the laws of the state of domicile in determining permissible investments. DIRECTORS AND OFFICERS OF KILICO The directors and principal officers of KILICO are listed below together with their current positions and their other business experience during the past five years. The address of each officer and director is 1 Kemper Drive, Long Grove, Illinois 60049.
NAME AND AGE POSITION WITH KILICO YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE -------------------- ----------------------------------------------------- John B. Scott (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.
26 29
NAME AND AGE POSITION WITH KILICO YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE -------------------- ----------------------------------------------------- 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. 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.
27 30
NAME AND AGE POSITION WITH KILICO YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE -------------------- ----------------------------------------------------- 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.
LEGAL MATTERS All matters of Illinois law pertaining to the Policy, including the validity of the Policy and KILICO's right to issue the Policy under Illinois Insurance Law, have been passed upon by Frank J. Julian, Associate General Counsel of KILICO. Jorden Burt Boros Cicchetti Berenson & Johnson, Washington, D.C., has advised KILICO on certain legal matters concerning Federal securities laws applicable to the issue and sale of Policies. LEGAL PROCEEDINGS There are no legal proceedings to which the Separate Account is a party or to which the assets of the Separate Account are subject. KILICO is not a party in any litigation that is of material importance in relation to its total assets or that relates to the Separate Account. YEAR 2000 COMPLIANCE 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 and 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. KILICO has taken substantial steps over the last several years to ensure that its systems will be compliant for the year 2000. Such steps have included the replacement of older systems with new systems which are already compliant. In 1996, KILICO replaced its investment accounting system and in 1997 KILICO replaced its general ledger and accounts payable system. KILICO has 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 KILICO's systems in compliance with the year 2000 amounted to $88 thousand in 1997 and KILICO anticipates that it will cost an additional $895 thousand to bring all remaining systems into compliance. KILICO has also undertaken steps which require that all other entities with which KILICO electronically interacts, including suppliers and other financial services institutions, attest in writing to KILICO that their systems are year 2000 compliant. EXPERTS 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, L.L.P., 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 period 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 Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The report of KPMG Peat Marwick LLP covering KILICO's financial statements referred to above 28 31 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, L.L.P., 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 Peat Marwick 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 The financial statements of the Separate Account relate to life insurance policies 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. The financial statements of KILICO that are included should be considered only as bearing upon KILICO's ability to meet its contractual obligations under the Policy. In addition to audited financial statements for the year ended December 31, 1997, KILICO has provided unaudited financial statements for the period ended June 30, 1998. KILICO's financial statements do not bear on the investment experience of the assets held in the Separate Account. CHANGE OF ACCOUNTANTS On September 12, 1997, Kemper Investors Life Insurance Company ("KILICO") appointed the accounting firm of PricewaterhouseCoopers, L.L.P. (on July 1, 1998, Coopers & Lybrand L.L.P. merged with Price Waterhouse LLP to form PricewaterhouseCoopers, L.L.P.) as independent accountants for the year ended December 31, 1997 to replace KPMG Peat Marwick LLP effective with such appointment. KILICO's Board of Directors approved the selection of PricewaterhouseCoopers, L.L.P. as the new independent accountants. Management had not consulted with PricewaterhouseCoopers, L.L.P. 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 Peat Marwick LLP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure or any reportable events. KPMG Peat Marwick 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, L.L.P. on accounting or financial disclosures for the year ended December 31, 1997. 29 32 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. /s/ PricewaterhouseCoopers, L.L.P. PricewaterhouseCoopers, L.L.P. Chicago, Illinois February 20, 1998 30 33 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 PEAT MARWICK LLP Chicago, Illinois March 26, 1997 31 34 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 35
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 36 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 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 ------------ ------------------ ---------- ----------- ------------- ------------- ------------- -- -- -- -- -- -- -- -- 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 38 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 39
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 40 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 41
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 42 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 43 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 44 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 45 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 46 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. - ---------------------------------- PricewaterhouseCoopers, L.L.P. - ------------------------------ Chicago, Illinois March 18, 1998 44 47 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 PEAT MARWICK LLP Chicago, Illinois March 21, 1997 45 48 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 49 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 50 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 51 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 52 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 53 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 54 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 55 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 56 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 57 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 58 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 59 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 60 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 61 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 62 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 63 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 64 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 65 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 66 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 67 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. 65 68 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. 66 69 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. 67 70 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. 68 71 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. 69 72 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 70 73 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. 71 74 APPENDIX A 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, KILICO will furnish an illustration based on the proposed Insured's age, sex and premium payment requested. 72 75 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. 73 76 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. 74 77 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. 75 78 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. 76 79 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. 77 80 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. 78 81 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. 79 82 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. 80 83 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 81 -----END PRIVACY-ENHANCED MESSAGE-----