-----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, JyAzVQOhfGLdvD1F8nenUPrHqYAb4fwzot4Xlvrr/GtIW8/CsNyD0BerG4AxDVlY 4w/CcMvoK5OlwLSk6y47Dw== 0000950137-97-000017.txt : 19970106 0000950137-97-000017.hdr.sgml : 19970106 ACCESSION NUMBER: 0000950137-97-000017 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19970103 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: KILICO VARIABLE SEPARATE ACCOUNT/IL CENTRAL INDEX KEY: 0000810369 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 36305975 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 497 SEC ACT: 1933 Act SEC FILE NUMBER: 033-65399 FILM NUMBER: 97500886 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 WMA/VUL PROSPECTUS 1 [WORLD MARKETING ALLIANCE, INC. LOGO] POWER V VARIABLE UNIVERSAL LIFE PROSPECTUS DECEMBER 30, 1996 Includes Prospectuses for: Kemper Investors Fund American Skandia Trust This prospectus does not constitute an offer to sell or a solicitation of an offer to buy securities in any state, to any person, to whom it is not lawful to make such an offer in such state. [ZURICH KEMPER LIFE LOGO] 2 PROSPECTUS--DECEMBER 30, 1996 - -------------------------------------------------------------------------------- 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 (847) 550-5500 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 21 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) Kemper Investors Fund (portfolios--Money Market, Total Return, High Yield, Growth, Government Securities, International and Small Cap Growth); and (b) American Skandia Trust (portfolios--Lord Abbett Growth and Income, JanCap Growth, T. Rowe Price International Equity, T. Rowe Price Asset Allocation, Founders Capital Appreciation, INVESCO Equity Income, PIMCO Total Return Bond, PIMCO Limited Maturity Bond and Berger Capital Growth). 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. ------------------------------ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. 3 TABLE OF CONTENTS - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
Page ----- DEFINITIONS................................................................................. 1 SUMMARY..................................................................................... 2 KILICO AND THE SEPARATE ACCOUNT............................................................. 5 THE FUNDS................................................................................... 5 FIXED ACCOUNT OPTION........................................................................ 7 THE POLICY.................................................................................. 8 POLICY BENEFITS AND RIGHTS.................................................................. 10 CHARGES AND DEDUCTIONS...................................................................... 15 GENERAL PROVISIONS.......................................................................... 17 DOLLAR COST AVERAGING....................................................................... 20 SYSTEMATIC WITHDRAWAL PLAN.................................................................. 20 DISTRIBUTION OF POLICIES.................................................................... 20 FEDERAL TAX MATTERS......................................................................... 21 LEGAL CONSIDERATIONS........................................................................ 22 SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS................................................ 22 VOTING INTERESTS............................................................................ 22 STATE REGULATION OF KILICO.................................................................. 23 DIRECTORS AND OFFICERS OF KILICO............................................................ 23 LEGAL MATTERS............................................................................... 26 LEGAL PROCEEDINGS........................................................................... 26 EXPERTS..................................................................................... 26 REGISTRATION STATEMENT...................................................................... 26 FINANCIAL STATEMENTS........................................................................ 26 APPENDICES.................................................................................. 54
4 DEFINITIONS ACCUMULATION UNIT--An accounting unit of measure used to calculate the value of each Subaccount. AGE--The Insured's age on his or her 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 5 SUMMARY The following summary should be read in conjunction with the detailed information in this prospectus. You should refer to the heading "Definitions" for the meaning of certain terms. 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," page 8, "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 21.) 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, subject to the requirements of the Internal Revenue Code. 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 21.) 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 14.) 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 21.) 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 2 6 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.) 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 Separate Account currently consists of sixteen Subaccounts, each of which invests in shares of a designated portfolio of the Kemper Investors Fund or American Skandia Trust. On the day following the date of receipt, the initial premium less applicable charges will be allocated to the Money Market Subaccount. On the Trade Date, which is thirty days from the Issue Date, the Separate Account Value in the 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 Kemper Investors Fund are currently available for investment by the Separate Account: MONEY MARKET PORTFOLIO, TOTAL RETURN PORTFOLIO, HIGH YIELD PORTFOLIO, GROWTH PORTFOLIO, GOVERNMENT SECURITIES PORTFOLIO, INTERNATIONAL PORTFOLIO AND SMALL CAP GROWTH PORTFOLIO. The following portfolios of American Skandia Trust are currently available for investment by the Separate Account: LORD ABBETT GROWTH AND INCOME, JANCAP GROWTH, T. ROWE PRICE INTERNATIONAL EQUITY, T. ROWE PRICE ASSET ALLOCATION, FOUNDERS CAPITAL APPRECIATION, INVESCO EQUITY INCOME, PIMCO TOTAL RETURN BOND, PIMCO LIMITED MATURITY BOND AND BERGER CAPITAL GROWTH. For a more detailed description of the Funds, see "The Funds," page 5, the Funds' prospectuses, and Statements of Additional Information available upon request. CHARGES 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.) 3 7 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 21.) 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 16.) 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 16.) 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 and other expenses. The management fees for each Portfolio for the year ending December 31, 1995 as a percentage of average net assets were as follows: Money Market 0.50%; Total Return 0.55%; High Yield 0.60%; Growth 0.60%; Government Securities 0.55%; International 0.75%; Small Cap Growth 0.65%; Lord Abbett Growth and Income 0.75%; JanCap Growth 0.90%; T-Rowe Price Asset Allocation 0.85%; T-Rowe Price International Equity 1.00%; Founders Capital Appreciation .90%; INVESCO Equity Income 0.75%; PIMCO Total Return Bond 0.65%; PIMCO Limited Maturity Bond 0.65% and Berger Capital Growth 0.75%. The other expenses for each Portfolio for the year ending December 31, 1995 as a percentage of average net assets were as follows: Money Market 0.05%; Total Return 0.05%; High Yield 0.05%; Growth 0.04%; Government Securities 0.10%; International 0.17%; Small Cap Growth 0.22%; Lord Abbett Growth and Income 0.24%; JanCap Growth 0.22%; T. Rowe Price Asset Allocation 0.40%; T. Rowe Price International Equity 0.33%; Founders Capital Appreciation 0.32%; INVESCO Equity Income 0.23%; PIMCO Total Return Bond 0.24%; PIMCO Limited Maturity Bond 0.24%; and Berger Capital Growth 0.42%. The investment manager for the American Skandia Trust has agreed to reimburse each Portfolio to the extent expenses exceed specified percentage limits. Without this reimbursement, the other expenses for the T. Rowe Price Asset Allocation Portfolio would have been 0.44%. For additional information about the fees and expenses of the Funds, see "The Funds", page 5, and the prospectuses for the Funds. 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, if the Policy is not treated as a modified endowment contract, 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. If the Policy is treated as a modified endowment contract, a loan will also be treated as a distribution. 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 21.) 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 15.) ILLUSTRATIONS OF CASH VALUES, SURRENDER VALUES, DEATH BENEFITS Tables in the Appendix 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 8 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. Zurich Insurance Company and Insurance Partners L.P. and Insurance Partners Offshore (Bermuda), L.P. indirectly and directly own 80 percent and 20 percent, respectively, of Kemper Corporation. 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 Separate Account is currently divided into sixteen 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. THE FUNDS The Separate Account invests in shares of the Kemper Investors Fund and American Skandia Trust, 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, with respect to American Skandia Trust, 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 9 KEMPER INVESTORS FUND The Kemper Investors Fund portfolios in which the Separate Account invests are summarized below: MONEY MARKET PORTFOLIO: This Portfolio seeks maximum current income to the extent consistent with stability of principal from a portfolio of high quality money market instruments that mature in twelve months or less. TOTAL RETURN PORTFOLIO: This Portfolio seeks a high total return, a combination of income and capital appreciation, by investing in a combination of debt securities and common stocks. HIGH YIELD PORTFOLIO: This Portfolio seeks a high level of current income by investing in fixed-income securities. GROWTH PORTFOLIO: This Portfolio seeks maximum appreciation of capital through diversification of investment securities having potential for capital appreciation. GOVERNMENT SECURITIES PORTFOLIO: This Portfolio seeks high current return consistent with preservation of capital from a portfolio composed primarily of U.S. Government securities. INTERNATIONAL PORTFOLIO: This Portfolio seeks a total return, a combination of capital growth and income, principally through an internationally diversified portfolio of equity securities. SMALL CAP GROWTH PORTFOLIO: This Portfolio seeks maximum appreciation of investors' capital. Zurich Kemper Investments, Inc. ("ZKI") (formerly Kemper Financial Services, Inc.), an affiliate of KILICO, is the investment adviser to each portfolio of the Kemper Investors Fund specified above and manages its daily investments and business affairs, subject to the policies established by the trustees of the Kemper Investors Fund. For its advisory services to the Portfolios, ZKI receives compensation monthly at annual rates equal to .50 of 1%, .55 of 1%, .60 of 1%, .60 of 1%, .55 of 1%, .75 of 1% and .65% of 1% of the average daily net asset values of the Money Market Portfolio, the Total Return Portfolio, the High Yield Portfolio, the Growth Portfolio, the Government Securities Portfolio, the International Portfolio and the Small Cap Growth Portfolio, respectively. AMERICAN SKANDIA TRUST The American Skandia Trust portfolios in which the Separate Account invests are summarized below: LORD ABBETT GROWTH AND INCOME PORTFOLIO: This Portfolio seeks long-term growth of capital and income while attempting to avoid excessive fluctuations in market value. JANCAP GROWTH PORTFOLIO: This Portfolio seeks growth of capital in a manner consistent with preservation of capital. T. ROWE PRICE INTERNATIONAL EQUITY PORTFOLIO: This Portfolio seeks total return on its assets from long-term growth of capital and income through investment primarily in established, non-U.S. companies. T. ROWE PRICE ASSET ALLOCATION PORTFOLIO: This Portfolio seeks a high level of total return by investing primarily in a diversified group of fixed income and equity securities. FOUNDERS CAPITAL APPRECIATION PORTFOLIO: This Portfolio seeks capital appreciation through investment primarily in common stocks of small U.S. companies with market capitalizations of $1.5 billion or less. The Portfolio's securities will ordinarily be traded in the over-the-counter market. INVESCO EQUITY INCOME PORTFOLIO: This Portfolio seeks high current income while following sound investment practices, with capital growth potential as an additional but secondary consideration, by investing its assets primarily in dividend-paying, marketable common stocks of domestic and foreign industrial issuers. PIMCO TOTAL RETURN BOND PORTFOLIO: This Portfolio seeks to realize maximum total return consistent with preservation of capital. PIMCO LIMITED MATURITY BOND PORTFOLIO: This Portfolio seeks to realize maximum total return consistent with preservation of capital and prudent investment management. BERGER CAPITAL GROWTH PORTFOLIO: This Portfolio seeks to achieve long-term capital appreciation primarily by investing in the common stocks of established companies. 6 10 American Skandia Investment Services, Incorporated ("ASISI") is the investment manager for the American Skandia Trust. ASISI engages a sub-adviser for each Portfolio as described in the Prospectus to the American Skandia Trust. ASISI receives compensation at annual rates equal to the following percentages of average daily net asset values: Lord Abbett Growth and Income 0.75%; JanCap Growth 0.90%; T. Rowe Price Asset Allocation 0.85%; T. Rowe Price International Equity 1.00%; Founders Capital Appreciation .90%; INVESCO Equity Income 0.75%; PIMCO Total Return Bond 0.65%; PIMCO Limited Maturity Bond 0.65%; and Berger Capital Growth 0.75%. ASISI is solely responsible for compensating the sub-advisers. There is no assurance that any of the Portfolios of the Kemper Investors Fund or the American Skandia Trust 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, KILICO may also transfer the assets of the Separate Account associated with the Policy 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 11 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. 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 Money Market Subaccount plus the total amount of monthly deductions and deductions against premiums will be refunded. 8 12 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.") ALLOCATION OF PREMIUMS AND SEPARATE ACCOUNT VALUE ALLOCATION OF PREMIUMS. The initial net premium will be allocated to the Money Market Subaccount. The Separate Account Value will remain in the Money Market Subaccount until the Trade Date, which is 30 days after the Issue Date. On the Trade Date, the Separate Account Value in the 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 written instructions are received. Once a change in allocation is made, all future premiums will be allocated in accordance with the new allocation, unless contrary written instructions are received. The 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. 9 13 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.") 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 14 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 POLICY POLICY I II 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 15 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. (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. 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.") 12 16 On any Valuation Date during the Policy Year, the Policy's Separate Account Value in any Subaccount will equal: (1) The Policy's Separate Account Value in the Subaccount at the end of the preceding Valuation Period, multiplied by the Investment Experience Factor (defined below) for the current Valuation Period; plus (2) Any 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; 13 17 (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, subject to the requirements of the Internal Revenue Code. The amount of any new loan may not exceed the maximum loan amount less Debt on the date a loan is granted. The minimum amount of a loan is $500. Any amount due an Owner under a Policy Loan ordinarily will be paid within 7 days after KILICO receives a loan request at its Home Office, although payments may be postponed under certain circumstances. (See "Postponement of Payments," and "Federal Tax Matters.") 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 taxed in the same way as a loan from an annuity. Therefore, a loan may be subject to Federal income tax and a 10% tax penalty may 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.) 14 18 SURRENDER CHARGE. During the first fourteen Policy Years and the first fourteen 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 is assessed against the Cash Value. The Surrender Charge consists of two components, an administrative component (issue charge) and a sales component (deferred sales 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. For issue ages up to age 66, the full issue charge will apply in 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 full issue charge will apply in 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. 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. KILICO does not expect to profit from the issue charge. The deferred sales charge is equal to 30% of premiums paid up to one Target Premium shown in the Policy and a percentage of premiums paid above one Target Premium equal to 7.5% for issue ages up to age 66 and 5% for issue ages 66-75. For issue ages up to age 66, the full deferred sales charge will apply in 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 full deferred sales charge will apply in 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. The deferred sales charge is to reimburse KILICO for some of the expenses of distributing the Policies. During the first fourteen Policy Years following an increase in Specified Amount, an additional surrender charge will apply. The additional charge will be calculated as described above 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. 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 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 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 15 19 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%. KILICO may profit from this charge. 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 designed only to reimburse KILICO for certain actual administrative expenses. KILICO does not expect to recover from this charge any amount in excess of aggregate maintenance expenses. Currently, this charge is $5 per month. OTHER CHARGES SURRENDER CHARGE. During the first fourteen Policy Years and the first fourteen 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 is assessed against the Cash Value. The Surrender Charge consists of two components, an administrative component (issue charge) and a sales component (deferred sales 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. For issue ages up to age 66, the full issue charge will apply in 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 full issue charge will apply in 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. 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, 16 20 determining insurability and the Insured's underwriting class, and establishing policy records. KILICO does not expect to profit from the issue charge. The deferred sales charge is equal to 30% of premiums paid up to one Target Premium shown in the Policy and a percentage of premiums paid above one Target Premium equal to 7.5% for issue ages up to age 66 and 5% for issue ages 66-75. For issue ages up to age 66, the full deferred sales charge will apply in 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 full deferred sales charge will apply in 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. The deferred sales charge is to reimburse KILICO for some of the expenses of distributing the Policies. During the first fourteen Policy Years following an increase in Specified Amount, an additional surrender charge will apply. The additional charge will be calculated as described above 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. 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. KILICO does not expect to recover any amount in excess of aggregate expenses. 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.") 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 17 21 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. 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 SEC; (2) The SEC by order permits postponement for the protection of Owners; or (3) An emergency exists, as determined by the SEC, as a result of which disposal of securities of the Fund is not reasonably practicable or it is not reasonably practicable to determine the value of the net assets of the Separate Account. Transfers may also be postponed under these circumstances. 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. 18 22 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. 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 19 23 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 Money Market Subaccount or the 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 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," page 21. 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. 20 24 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. FEDERAL TAX MATTERS The ultimate effect of Federal income taxes on the Policy, on settlement options and on the economic benefit to the Owner, Beneficiary or payee depends on KILICO's tax status, and upon the tax status of the individual concerned. KILICO'S TAX STATUS Under current interpretations of Federal income tax law, KILICO is taxed as a life insurance company and the operations of the Separate Account are treated as part of the total operations of KILICO. The operations of the Separate Account do not materially affect KILICO's Federal income tax liability because KILICO is allowed a deduction to the extent that net investment income of the Separate Account is applied to increase Owners' equity. KILICO may incur state and local taxes attributable to the Separate Account. At present, these taxes are not significant. Accordingly, KILICO does not charge or credit the Separate Account for Federal, state or local taxes. Thus, the Separate Account may realize net investment income, such as interest, dividends or capital gains, and reinvest such income all without tax consequences to the Separate Account. If there is a material change in applicable Federal, state or local law, however, charges or credits may be made to the Separate Account for Federal, state or local taxes, or reserves for such taxes, if any, attributable to the Separate Account. Such charges or credits will be determined independent of the taxes actually paid by KILICO. TAX STATUS OF THE POLICY Section 7702 of the Internal Revenue Code ("Code") provides that if certain tests are met, a Policy will be treated as a life insurance policy for federal tax purposes. KILICO will monitor compliance with these tests. The Policy should thus receive the same federal income tax treatment as fixed benefit life insurance. As a result, the death benefit payable under a Policy is excludable from gross income of the beneficiary under Section 101 of the Code. Section 7702A of the Code defines modified endowment contracts as those policies issued or materially changed on or after June 21, 1988 on which the total premiums paid during the first seven years exceed the amount that would have been paid if the policy provided for paid up benefits after seven level annual premiums. The Code provides for taxation of surrenders, partial surrenders, loans, collateral assignments and other pre-death distributions from modified endowment contracts in the same way annuities are taxed. Modified endowment contract distributions are defined by the Code as amounts not received as an annuity and are taxable to the extent the cash value of the policy exceeds, at the time of distribution, the premiums paid into the policy. A 10% tax penalty also applies to the taxable portion of such distributions unless the Policy Owner is over age 59 1/2 or disabled, or if other exceptions apply. It may not be advantageous to replace existing insurance with Policies described in this prospectus. It may also be disadvantageous to purchase a policy to obtain additional insurance protection if the purchaser already owns another variable life insurance policy. The Policies offered by this prospectus may or may not be issued as modified endowment contracts. KILICO will monitor premiums paid and will notify the Policy Owner when the Policy's non-modified endowment status is in jeopardy. If a policy is not a modified endowment contract, a cash distribution during the first 15 years after a policy is issued which causes a reduction in death benefits may still become fully or partially taxable to the Owner pursuant to Section 7702(f)(7) of the Code. The Policy Owner 21 25 should carefully consider this potential effect and seek further information before initiating any changes in the terms of the Policy. Under certain conditions, a Policy may become a modified endowment as a result of a material change or a reduction in benefits as defined by Section 7702A(c) of the Code. In addition to meeting the tests required under Section 7702 and Section 7702A, Section 817(h) of the Code requires that the investments of separate accounts such as the Separate Account be adequately diversified. Regulations issued by the Secretary of the Treasury, set the standards for measuring the adequacy of this diversification. A variable life policy that is not adequately diversified under these regulations would not be treated as life insurance under Section 7702 of the Code. To be adequately diversified, each Subaccount of the Separate Account must meet certain tests. KILICO believes that the investments of the Separate Account meet the applicable diversification standards. Should the Secretary of the Treasury issue additional rules or regulations limiting the number of funds, transfers between funds, exchanges of funds or changes in investment objectives of funds such that the Policy would no longer qualify as life insurance under Section 7702 of the Code, KILICO will take whatever steps are available to remain in compliance. KILICO will monitor compliance with these regulations and, to the extent necessary, will change the objectives or assets of the sub-account investments to remain in compliance. A total surrender or cancellation of the Policy by lapse may have adverse tax consequences depending on the circumstances. 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. OTHER CONSIDERATIONS Because of the complexity of the law in its application to a specific individual, tax advice may be needed by a person contemplating purchase of a Policy or the exercise of elections under a Policy. The above comments concerning the Federal income tax consequences are not exhaustive and are not intended as tax advice. Counsel and other competent advisers should be consulted for more complete information. This discussion is based on KILICO's understanding of Federal income tax laws as they are currently interpreted by the Internal Revenue Service. No representation is made as to the likelihood of continuation of these current laws and interpretations. KILICO also believes the Policy meets other requirements concerning Owner control over investments. However, the Secretary of Treasury has not issued regulations on this subject. Such regulations, if adopted, could include requirements not included in the Policy. Because the guidance has not been published, there can be no assurance as to content or even whether application will be prospective only. KILICO will make modifications to the Policy to comply with such regulations. LEGAL CONSIDERATIONS On July 6, 1983, the Supreme Court held in ARIZONA GOVERNING COMMITTEE V. NORRIS that certain annuity benefits provided by employers' retirement and fringe benefit programs may not vary between men and women on the basis of sex. The Policy described in this Prospectus contains cost of insurance rates that distinguish between men and women. Accordingly, employers and employee organizations should consider, in consultation with legal counsel, the impact of federal, state and local laws, including Title VII of the Civil Rights Act, the Equal Pay Act, and Norris and subsequent cases on any employment-related insurance or fringe benefit program before purchasing this Policy. SAFEKEEPING OF THE SEPARATE ACCOUNT'S ASSETS KILICO holds the assets of the Separate Account. The assets are kept segregated and held separate and apart from the general funds of KILICO. KILICO maintains records of all purchases and redemptions of the shares of each portfolio of the 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 22 26 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 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 (51) Chief Executive Officer and President of Federal Kemper Life Chief Executive Officer since Assurance Company and Fidelity Life Association since 1988. Chief February 1992. President since Executive Officer and President of Zurich Life Insurance Company November 1993. Director since of America since January 1996. Chairman of the Board of Federal 1992. Kemper Life Assurance Company 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 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.
23 27
NAME AND AGE POSITION WITH KILICO YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE - ------------------------------ ------------------------------------------------------------------ Jerome J. Cwiok (48) Executive Vice President of Federal Kemper Life Assurance Company Executive Vice President since and Fidelity Life Association since 1995. Executive Vice President 1995. of Zurich Life Insurance Company of America since March 1996. Senior Vice President of KILICO, Federal Kemper Life Assurance Company and Fidelity Life Association from 1993 to 1995. Vice President of Federal Kemper Life Assurance Company and Fidelity Life Association since 1993. Executive Vice President of Academy Insurance Group from 1986 to 1993. Elaine C. Frye (47) Executive Vice President of Federal Kemper Life Assurance Company Executive Vice President since and Fidelity Life Association since 1995. Executive Vice President 1995. of Zurich Life Insurance Company of America since March 1996. Senior Vice President of KILICO from 1992 to 1995. Senior Vice President of Federal Kemper Life Assurance Company and Fidelity Life Association from 1993 to 1995. Vice President of Federal Kemper Life Assurance Company and Fidelity Life Association from 1988 to 1993. Frederick L. Blackmon (43) Senior Vice President and Chief Financial Officer of Federal Senior Vice President and Kemper Life Assurance Company and Fidelity Life Association since Chief Financial Officer since November 1995. Treasurer and Chief Financial Officer of Kemper November 1995. Corporation since January 1996. Senior Vice President and Chief Financial Officer of Zurich Life Insurance Company of America since March 1996. Chief Financial Officer of Alexander Hamilton Life Insurance Company from April 1989 to November 1995. James E. Hohmann (40) Senior Vice President and Chief Actuary of Federal Kemper Life Senior Vice President and Assurance Company and Fidelity Life Association since December Chief Actuary since December 1995. Senior Vice President and Chief Actuary of Zurich Life 1995. Insurance Company of America since March 1996. Managing Principal (Partner) of Tillinghast--Towers Perrin from January 1991 to December 1995. Consultant/Principal (Partner) of Tillinghast--Towers Perrin from November 1986 to January 1991. Debra P. Rezabek (40) Senior Vice President of Federal Kemper Life Assurance Company and Senior Vice President since Fidelity Life Association since 1996. General Counsel of Federal 1996. General Counsel since Kemper Life Assurance Company and Fidelity Life Association since 1992. Corporate Secretary 1992. Corporate Secretary of Federal Kemper Life Assurance Company since January 1996. and Fidelity Life Association since January 1996. Senior Vice President and General Counsel of Zurich Life Insurance Company of America since March 1996. Assistant General Counsel of Federal Kemper Life Assurance Company and Fidelity Life Association from 1988 to 1992. Assistant Secretary of KILICO, Federal Kemper Life Assurance Company and Fidelity Life Association from 1992 to 1996. Assistant Secretary of Kemper Corporation since January 1996. Loren J. Alter (57) Director of Federal Kemper Life Assurance Company, Fidelity Life Director since January 1996. Association and Zurich Kemper Investments, Inc. since January 1996. Director of Zurich Life Insurance Company of America since May 1979. Executive Vice President of Zurich Insurance Company since 1979. President, Chief Executive Officer and Director of Kemper Corporation since January 1996.
24 28
NAME AND AGE POSITION WITH KILICO YEAR OF ELECTION OTHER BUSINESS EXPERIENCE DURING PAST 5 YEARS OR MORE - ------------------------------ ------------------------------------------------------------------ William H. Bolinder (52) Chairman of the Board and Director of Federal Kemper Life Chairman of the Board and Assurance Company and Fidelity Life Association since January Director since January 1996. 1996. Chairman of the Board and Director of Zurich Life Insurance Company of America since March 1995. Chairman of the Board of Kemper Corporation since January 1996. Vice Chairman and Director of Zurich Kemper Investments, Inc. since January 1996. 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 1986. Chief Executive Officer of American Guarantee and Liability 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. U.S. Manager of Zurich Insurance Company, U.S. Branch since 1986. Underwriter for Zurich American Lloyds since 1986. Daniel L. Doctoroff (37) Director of Kemper Corporation, Federal Kemper Life Assurance Director since January 1996. Company and Fidelity Life Association since January 1996. Managing Partner of Insurance Partners Advisors, L.P. since February 1994. Vice President of Keystone, Inc. since October 1992. Managing Director of Rosecliff Inc./Oak Hill Partners, Inc. since August 1987. Director of Bell & Howell Company since 1989; National Re Corporation since 1990; Specialty Foods Corporation since 1993; and Transport Holdings Inc. since 1995. Steven M. Gluckstern (45) Director of Kemper Corporation, Federal Kemper Life Assurance Director since January 1996. Company and Fidelity Life Association since January 1996. Chairman of the Board and Director of Zurich Kemper Investments, Inc. since January 1996. Chairman of the Board and Chief Executive Officer of Zurich Reinsurance Centre, Inc. since May 1993. President of Centre Re, Bermuda from December 1986 to May 1993. Michael P. Stramaglia (36) Director of Federal Kemper Life Assurance Company and Fidelity Director since January 1996. Life Association since January 1996. Chief Executive Officer and President of Zurich Life Insurance Company of Canada since June 1994. Executive Vice-President and Chief Operating Officer of Zurich Life Insurance Company of Canada from June 1993 to June 1994. Senior Vice-President of the Corporate Division of Zurich Life Insurance Company of Canada from November 1990 to January 1993. Director of Zurich Life Insurance Company of Canada, Zurich Life of Canada Holdings Limited, Zurich Indemnity Company of Canada, Zurich Canadian Holdings Limited, and Zurmex Canada Holdings Limited. Paul H. Warren (40) Director of Kemper Corporation, Federal Kemper Life Assurance Director since January 1996. Company and Fidelity Life Association since January 1996. Partner of Insurance Partners Advisors, L.P. since March 1994. Managing Director of International Insurance Advisors since March 1992. Vice President of J.P. Morgan from June 1986 to March 1992. Director of Unionamerica Holdings plc since 1993; Unionamerica Insurance Company since 1993; Tarquin plc since 1994; and Chairman Underwriting Agencies Ltd. since 1994.
25 29 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. Katten Muchin & Zavis, Washington, D.C., has advised KILICO on certain legal matters concerning federal securities laws applicable to the issue and sale of Policies. LEGAL PROCEEDINGS There are no legal proceedings to which the Separate Account is a party or to which the assets of the Separate Account are subject. KILICO is not a party in any litigation that is of material importance in relation to its total assets or that relates to the Separate Account. EXPERTS The financial statements of KILICO and the Separate Account have been included in the Prospectus in reliance upon the reports 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. As discussed in the notes to KILICO's consolidated financial statements, effective January 1, 1994, KILICO changed its method of accounting for investment securities to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards ("SFAS") 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. Also, as discussed in the notes effective January 1, 1993, KILICO changed its method of accounting for impairment of loans receivable to adopt the provisions of SFAS 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN, and changed its method of accounting for income taxes to adopt the provisions of SFAS 109, ACCOUNTING FOR INCOME TAXES. 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. The financial statements of KILICO that are included should be considered only as bearing upon KILICO's ability to meet its contractual obligations under the Policy. KILICO's financial statements do not bear on the investment experience of the assets held in the Separate Account. 26 30 INDEPENDENT AUDITORS' REPORT THE BOARD OF DIRECTORS KEMPER INVESTORS LIFE INSURANCE COMPANY: We have audited the accompanying combined statement of assets and liabilities and policy owners' equity of the KILICO Variable Separate Account as of December 31, 1995, and the related combined statement of operations for the year then ended, and the combined statements of changes in policy owners' equity for the years ended December 31, 1995 and 1994. 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 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 combined financial statements referred to above present fairly, in all material respects, the combined financial position of the KILICO Variable Separate Account as of December 31, 1995, and the combined results of its operations for the year then ended, and the combined changes in its policy owners' equity for the years ended December 31, 1995 and 1994, in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP Chicago, Illinois February 16, 1996 27 31 KILICO VARIABLE SEPARATE ACCOUNT COMBINED STATEMENT OF ASSETS AND LIABILITIES AND POLICY OWNERS' EQUITY DECEMBER 31, 1995 (IN THOUSANDS)
MONEY GOVERNMENT MARKET TOTAL RETURN HIGH YIELD EQUITY SECURITIES COMBINED SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT -------- ---------- ------------ ---------- ---------- ---------- ASSETS Investments, at current value.......... $11,671 1,001 2,557 2,087 1,925 4,101 Dividends and other receivables........ 7 3 -- 4 -- -- ------- ----- ----- ----- ----- ----- Total assets..................... 11,678 1,004 2,557 2,091 1,925 4,101 LIABILITIES AND POLICY OWNERS' EQUITY Liabilities: Mortality and expense risk charges... 14 2 4 2 2 4 ------- ----- ----- ----- ----- ----- Policy owners' equity.................. $11,664 1,002 2,553 2,089 1,923 4,097 ======= ===== ===== ===== ===== ===== ANALYSIS OF POLICY OWNERS' EQUITY Excess of proceeds from units sold over payments for units redeemed.......... $ 6,441 530 1,165 1,447 1,070 2,229 Accumulated net investment income...... 3,059 472 677 591 218 1,101 Accumulated net realized gain on sales of investments.......................... 810 -- 329 3 220 258 Unrealized appreciation of investments.......................... 1,354 -- 382 48 415 509 ------- ----- ----- ----- ----- ----- Policy owners' equity.................. $11,664 1,002 2,553 2,089 1,923 4,097 ======= ===== ===== ===== ===== =====
See accompanying notes to combined financial statements. 28 32 KILICO VARIABLE SEPARATE ACCOUNT COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1995 (IN THOUSANDS)
MONEY GOVERNMENT MARKET TOTAL RETURN HIGH YIELD EQUITY SECURITIES COMBINED SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT -------- ---------- ------------ ---------- ---------- ---------- Dividends and capital gains distributions..................... $ 613 88 67 90 116 252 Mortality and expense risk charges........................... 107 20 20 15 14 38 ------ ---- --- --- --- --- Net investment income............... 506 68 47 75 102 214 ------ ---- --- --- --- --- Net realized and unrealized gain on investments: Net realized gain on sales of investments..................... 144 -- 14 54 31 45 Change in unrealized appreciation of investments.................. 1,253 -- 442 106 301 404 ------ ---- --- --- --- --- Net realized and unrealized gain on investments....................... 1,397 -- 456 160 332 449 ------ ---- --- --- --- --- Net increase in policy owners' equity resulting from operations........................ $1,903 68 503 235 434 663 ====== ==== === === === ===
See accompanying notes to combined financial statements. 29 33 KILICO VARIABLE SEPARATE ACCOUNT COMBINED STATEMENTS OF CHANGES IN POLICY OWNERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 (IN THOUSANDS)
MONEY MARKET COMBINED SUBACCOUNT ----------------------- -------------------- 1995 1994 1995 1994 ------- ------ ----- ----- Operations: Net investment income............................................. $ 506 615 68 43 Net realized gain (loss) on sales of investments.................. 144 55 -- -- Change in unrealized appreciation (depreciation) of investments.................................................. 1,253 (1,154) -- -- ------- ------ ----- ----- Net increase (decrease) in policy owners' equity resulting from operations..................................... 1,903 (484) 68 43 ------- ------ ----- ----- Account unit transactions: Proceeds from units sold.......................................... 108 514 76 507 Net transfers (to) from subaccounts............................... -- -- (348) 14 Payments for units redeemed....................................... (791) (563) (104) (96) ------- ------ ----- ----- Net increase (decrease) in policy owners' equity from account unit transactions................................ (683) (49) (376) 425 ------- ------ ----- ----- Total increase (decrease) in policy owners' equity.................. 1,220 (533) (308) 468 Policy owners' equity: Beginning of year................................................. 10,444 10,977 1,310 842 ------- ------ ----- ----- End of year....................................................... $11,664 10,444 1,002 1,310 ======= ====== ===== =====
See accompanying notes to combined financial statements. 30 34
GOVERNMENT TOTAL RETURN HIGH YIELD EQUITY SECURITIES SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT - --------------- --------------- --------------- --------------- 1995 1994 1995 1994 1995 1994 1995 1994 - ----- ----- ----- ----- ----- ----- ----- ----- 47 188 75 88 102 57 214 239 14 20 54 28 31 (1) 45 8 442 (458) 106 (171) 301 (143) 404 (382) - ----- ----- ----- ----- ----- ----- ----- ----- 503 (250) 235 (55) 434 (87) 663 (135) - ----- ----- ----- ----- ----- ----- ----- ----- -- -- 17 6 3 1 12 -- 72 (455) 270 13 508 (71) (502) 499 (146) (133) (147) (177) (143) (75) (251) (82) - ----- ----- ----- ----- ----- ----- ----- ----- (74) (588) 140 (158) 368 (145) (741) 417 - ----- ----- ----- ----- ----- ----- ----- ----- 429 (838) 375 (213) 802 (232) (78) 282 2,124 2,962 1,714 1,927 1,121 1,353 4,175 3,893 - ----- ----- ----- ----- ----- ----- ----- ----- 2,553 2,124 2,089 1,714 1,923 1,121 4,097 4,175 ===== ===== ===== ===== ===== ===== ===== =====
31 35 KILICO VARIABLE SEPARATE ACCOUNT NOTES TO COMBINED 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 owned by Kemper Corporation which was acquired by an investor group led by Zurich Insurance Company ("Zurich") on January 4, 1996. The Separate Account receives and invests premiums under a variable life insurance policy ("Policy"). The Separate Account is divided into five Subaccounts and each Subaccount invests exclusively in a corresponding Portfolio of the Kemper Investors Fund (The "Fund"), an open-end diversified management investment company. The Fund has added two additional Subaccounts, the International Portfolio and the Small Capitalization Equity Portfolio, which are not available investment vehicles to policy owners of the Separate Account. SECURITY VALUATION The investments are stated at current value which is based on the closing bid price, net asset value, at December 31, 1995. SECURITY TRANSACTIONS AND INVESTMENT INCOME Security transactions are accounted for on the trade date (date when KILICO accepts risks of providing insurance coverage to the insured). Dividends and capital gains distributions are recorded as income on the ex-dividend date. Realized gains and losses from security transactions are reported on an identified cost basis. ACCOUNT UNIT TRANSACTIONS Proceeds from a Policy are automatically allocated to the Money Market Subaccount on the trade date for a 15 day period. At the end of this period, the Separate Account value (cash value) may be allocated to other Subaccounts as designated by the owner of the Policy. ACCUMULATION UNIT VALUATION On each day the New York Stock Exchange (the "Exchange") is open for trading, the accumulation unit value is determined as of the earlier of 3:00 p.m. (Chicago time) or the close of the Exchange by dividing the total value of each Subaccount's investments and other assets, less liabilities, by the number of accumulation units outstanding in the respective Subaccount. FEDERAL INCOME TAXES The operations of the Separate Account are included in the Federal income tax return of KILICO. Under existing Federal income tax law, investment income and realized capital gains and losses of the Separate Account increase liabilities under the policy and are, therefore, not taxed. Thus the Separate Account may realize net investment income and capital gains and losses without Federal income tax consequences. 32 36 NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) (2) SUMMARY OF INVESTMENTS Investments, at cost, at December 31, 1995, are as follows (in thousands):
SHARES OWNED COST ----- ------- INVESTMENT PORTFOLIO Kemper Investors Fund Money Market Portfolio.............................. 1,001 $ 1,001 Kemper Investors Fund Total Return Portfolio.............................. 991 2,175 Kemper Investors Fund High Yield Portfolio................................ 1,658 2,039 Kemper Investors Fund Equity Portfolio.................................... 590 1,510 Kemper Investors Fund Government Securities Portfolio..................... 3,231 3,592 ------- TOTAL INVESTMENTS.................................................... $10,317 =======
The underlying investments and significant industry concentrations are summarized below. MONEY MARKET PORTFOLIO: This Portfolio invests primarily in short-term obligations of major banks and corporations. At December 31, 1995, no industry exceeded 20% of the Portfolio's assets. TOTAL RETURN PORTFOLIO: This Portfolio's investments will normally consist of fixed-income and equity securities. Fixed-income securities will include bonds and other debt securities and preferred stocks. Equity investments normally will consist of common stocks and securities convertible into or exchangeable for common stocks, however, the Portfolio may also make private placement investments (which are normally restricted securities). At December 31, 1995, 21.9% of the Portfolio's assets were invested in U.S. Government obligations. No other industry exceeded 20% of the Portfolio's assets. HIGH YIELD PORTFOLIO: This Portfolio invests in fixed-income securities, a substantial portion of which are high yielding fixed-income securities. These securities ordinarily will be in the lower rating categories of recognized rating agencies or will be non-rated, and generally will involve more risk than securities in the higher rating categories. At December 31, 1995, 21.4% of the Portfolio's assets were invested in the broadcasting, cable systems and publishing industry. No other industry exceeded 20% of the Portfolio's assets. EQUITY PORTFOLIO: This Portfolio's investments normally will consist of common stocks and securities convertible into or exchangeable for common stocks, however, it may also make private placement investments (which are normally restricted securities). At December 31, 1995, no industry exceeded 20% of the Portfolio's assets. GOVERNMENT SECURITIES PORTFOLIO: This Portfolio invests primarily in U.S. Government Securities. The Portfolio will also invest in fixed-income securities other than U.S. Government securities and will engage in options and financial futures transactions. At December 31, 1995, the Portfolio had 84.2% of its assets invested in U.S. Government obligations. No other industry exceeded 20% of the Portfolio's assets. (3) TRANSACTIONS WITH AFFILIATES KILICO assesses a monthly charge to the Subaccounts for the cost of insurance. The cost of insurance charge is allocated among the Subaccounts in the proportion of each Subaccount to the Separate Account value. Cost of insurance charges totaled approximately $140,300 for the year ended December 31, 1995. Additionally, KILICO assesses a daily charge to the Subaccounts for mortality and expense risk assumed by KILICO at an annual rate of .90% of assets. Proceeds payable on the surrender of a Policy are reduced by the amount of any applicable contingent deferred sales charge. During the year ended December 31, 1995, KILICO received contingent deferred sales charges of approximately $5,200. Kemper Financial Services, Inc. ("KFS"), an affiliated company, is the investment manager of the Portfolios of the Fund which serve as the underlying investments of the Separate Account. In connection with the acquisition of Kemper Corporation on January 4, 1996, Zurich also acquired 100% of KFS. 33 37 NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) (4) POLICY OWNERS' EQUITY Policy owners' equity at December 31, 1995 is as follows (in thousands, except unit value; differences are due to rounding):
NUMBER POLICY OF UNIT OWNERS' UNITS VALUE EQUITY ------ ------ ------- Money Market Subaccount................................................ 666 $1.505 $ 1,002 Total Return Subaccount................................................ 1,412 1.808 2,553 High Yield Subaccount.................................................. 1,068 1.956 2,089 Equity Subaccount...................................................... 831 2.314 1,923 Government Securities Subaccount....................................... 2,235 1.834 4,097 ------- TOTAL POLICY OWNERS' EQUITY.................................. $11,664 =======
34 38 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors Kemper Investors Life Insurance Company: We have audited the consolidated balance sheet of Kemper Investors Life Insurance Company and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, stockholder's equity and cash flows for each of the years in the three-year period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Kemper Investors Life Insurance Company and subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in the notes to the consolidated financial statements, effective January 1, 1994, the Company changed its method of accounting for investment securities to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards ("SFAS") 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. Also, as discussed in the notes, effective January 1, 1993, the Company changed its method of accounting for impairment of loans receivable to adopt the provisions of SFAS 114, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN, and changed its method of accounting for income taxes to adopt the provisions of SFAS 109, ACCOUNTING FOR INCOME TAXES. KPMG PEAT MARWICK LLP Chicago, Illinois March 15, 1996 35 39 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (in thousands, except share data)
DECEMBER 31 --------------------------- 1995 1994 ---------- ---------- ASSETS Fixed maturities, available for sale, at fair value (cost: 1995, $3,643,985; 1994, $3,707,356).................................... $3,752,325 $3,463,732 Short-term investments............................................. 372,515 204,164 Joint venture mortgage loans....................................... 120,359 351,359 Third-party mortgage loans......................................... 144,450 318,682 Other real estate-related investments.............................. 34,780 237,242 Policy loans....................................................... 289,390 277,743 Other invested assets.............................................. 29,809 40,527 ---------- ---------- Total investments........................................ 4,743,628 4,893,449 Cash............................................................... 25,811 23,189 Accrued investment income.......................................... 104,402 125,543 Deferred insurance acquisition costs............................... 318,636 310,465 Federal income tax receivable...................................... 112,646 25,656 Reinsurance recoverable............................................ 502,836 642,801 Other assets and receivables....................................... 12,617 7,993 Assets held in separate accounts................................... 1,761,110 1,507,984 ---------- ---------- Total assets............................................. $7,581,686 $7,537,080 ========== ========== LIABILITIES Future policy benefits............................................. $4,573,212 $4,843,690 Ceded future policy benefits....................................... 502,836 642,801 Other accounts payable and liabilities............................. 25,943 67,261 Deferred income taxes.............................................. 112,709 41,364 Liabilities related to separate accounts........................... 1,761,110 1,507,984 ---------- ---------- Total liabilities........................................ 6,975,810 7,103,100 ---------- ---------- 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......................................... 491,994 491,994 Unrealized gain (loss) on investments.............................. 68,502 (236,443) Retained earnings.................................................. 42,880 175,929 ---------- ---------- Total stockholder's equity............................... 605,876 433,980 ---------- ---------- Total liabilities and stockholder's equity............... $7,581,686 $7,537,080 ========== ==========
See accompanying notes to consolidated financial statements. 36 40 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS (in thousands)
YEAR ENDED DECEMBER 31 ------------------------------------- 1995 1994 1993 --------- -------- -------- REVENUE Net investment income.................................... $ 348,448 $353,084 $339,274 Realized investment losses............................... (318,700) (54,557) (27,584) Fees and other income.................................... 38,337 31,950 25,687 --------- -------- -------- Total revenue.................................. 68,085 330,477 337,377 --------- -------- -------- BENEFITS AND EXPENSES Benefits and interest credited to policyholders.......... 245,615 248,494 275,689 Commissions, taxes, licenses and fees.................... 31,793 26,910 33,875 Operating expenses....................................... 20,837 25,324 24,383 Deferral of insurance acquisition costs.................. (36,870) (31,852) (31,781) Amortization of insurance acquisition costs.............. 14,423 20,809 12,376 --------- -------- -------- Total benefits and expenses.................... 275,798 289,685 314,542 --------- -------- -------- Income (loss) before income tax expense (benefit) and cumulative effect of change in accounting principle.... (207,713) 40,792 22,835 Income tax expense (benefit)............................. (74,664) 14,431 11,142 --------- -------- -------- Income (loss) before cumulative effect of change in accounting principle............... (133,049) 26,361 11,693 Cumulative effect of change in accounting principle...... -- -- 2,350 --------- -------- -------- Net income (loss).............................. $(133,049) $ 26,361 $ 14,043 ========= ======== ========
See accompanying notes to consolidated financial statements. 37 41 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY (in thousands)
1995 1994 1993 --------- --------- -------- CAPITAL STOCK, beginning and end of year..................... $ 2,500 $ 2,500 $ 2,500 --------- --------- -------- ADDITIONAL PAID-IN CAPITAL, beginning of year................ 491,994 409,423 310,237 Capital contributions from parent............................ -- 82,500 90,000 Transfer of limited partnership interest to parent........... -- 71 9,186 --------- --------- -------- End of year........................................ 491,994 491,994 409,423 --------- --------- -------- UNREALIZED GAIN (LOSS) ON INVESTMENTS, beginning of year..... (236,443) 93,096 39,872 Unrealized gain (loss) on revaluation of investments, net.... 304,945 (329,539) 53,224 --------- --------- -------- End of year........................................ 68,502 (236,443) 93,096 --------- --------- -------- RETAINED EARNINGS, beginning of year......................... 175,929 149,568 136,055 Net income (loss)............................................ (133,049) 26,361 14,043 Dividend of limited partnership interest to parent........... -- -- (530) --------- --------- -------- End of year........................................ 42,880 175,929 149,568 --------- --------- -------- Total stockholder's equity......................... $ 605,876 $ 433,980 $654,587 ========= ========= ========
See accompanying notes to consolidated financial statements. 38 42 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands)
YEAR ENDED DECEMBER 31 --------------------------------------- 1995 1994 1993 --------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss)..................................... $(133,049) $ 26,361 $ 14,043 Reconcilement of net income (loss) to net cash provided: Realized investment losses......................... 318,700 54,557 27,584 Interest credited and other charges................ 237,984 242,591 269,766 Deferred insurance acquisition costs............... (22,447) (11,043) (19,405) Amortization of discount and premium on investments...................................... 4,586 (1,383) (203) Deferred income taxes.............................. 38,423 20,809 14,596 Federal income tax receivable...................... (86,990) 809 (10,110) Other, net......................................... (29,905) (14,161) 40,258 --------- ----------- ----------- Net cash provided from operating activities... 327,302 318,540 336,529 --------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Cash from investments sold or matured: Fixed maturities held to maturity.................. 320,143 144,717 187,949 Fixed maturities sold prior to maturity............ 297,637 910,913 1,652,119 Mortgage loans, policy loans and other invested assets........................................... 450,573 536,668 881,505 Cost of investments purchased or loans originated: Fixed maturities................................... (549,867) (1,447,393) (2,322,085) Mortgage loans, policy loans and other invested assets........................................... (131,966) (281,059) (443,445) Short-term investments, net........................... (168,351) 198,299 (214,999) Net change in receivable and payable for securities transactions....................................... (1,397) (16,553) 39,078 Net reductions in other assets........................ 1,996 2,678 8,062 --------- ----------- ----------- Net cash provided by (used in) investing activities.................................. 218,768 48,270 (211,816) --------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Policyholder account balances: Deposits........................................... 247,778 215,034 246,219 Withdrawals........................................ (755,917) (652,513) (516,340) Capital contributions from parent..................... -- 82,500 90,000 Other................................................. (35,309) 3,871 16,776 --------- ----------- ----------- Net cash used in financing activities......... (543,448) (351,108) (163,345) --------- ----------- ----------- Net increase (decrease) in cash.......... 2,622 15,702 (38,632) CASH, beginning of period............................... 23,189 7,487 46,119 --------- ----------- ----------- CASH, end of period..................................... $ 25,811 $ 23,189 $ 7,487 ========= =========== ===========
See accompanying notes to consolidated financial statements. 39 43 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 and interest-sensitive life insurance products marketed primarily through a network of financial institutions, nonaffiliated and affiliated 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 investors group comprised of Zurich Insurance Company ("Zurich"), Insurance Partners, L.P. ("IP") and Insurance Partners Offshore (Bermuda), L.P. (together with IP, "Insurance Partners") acquired all of the issued and outstanding common stock of Kemper. As a result of the change in control, Zurich and Insurance Partners indirectly and directly own 80 percent and 20 percent, respectively, of Kemper and therefore the Company. The consolidated financial statements of the Company as of December 31, 1995 have been prepared on a historical cost basis and have not been adjusted to reflect the fair values of the Company's assets and liabilities as of the date of the acquisition by Zurich and Insurance Partners. The consolidated financial statements have been prepared in accordance with generally accepted accounting principles. The statements include the accounts of the Company on a consolidated basis. All significant intercompany balances and transactions have been eliminated. 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, provisions for real estate-related losses and reserves, other than temporary declines in values for fixed maturities, the valuation allowance for deferred income taxes and the calculation of fair value disclosures for certain financial instruments. LIFE INSURANCE REVENUE AND EXPENSES Revenue for annuities and interest-sensitive life insurance products consists of investment income, and policy charges such as mortality, expense and surrender charges. Expenses consist of benefits and interest credited to contracts, policy maintenance costs and amortization of deferred insurance acquisition costs. Also reflected in fees and other income is a ceding commission experience adjustment received in 1995 as a result of certain reinsurance transactions entered into by the Company during 1992. (See the note captioned "Reinsurance".) 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. Beginning in 1994, deferred insurance acquisition costs 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. FUTURE POLICY BENEFITS Liabilities for future policy benefits related to annuities and interest-sensitive life contracts reflect net premiums received plus interest credited during the contract accumulation period and the present value of future payments for contracts that have annuitized. Current interest rates credited during the contract accumulation period range from 4 percent to 8.35 percent. Future minimum guaranteed interest rates vary from 4 percent to 8.35 percent for periods ranging from a portion of 1996 up to a portion of 1998 and are 40 44 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) generally 3 percent to 4.5 percent thereafter. For contracts that have annuitized, interest rates used in determining the present value of future payments range principally from 3 percent to 11.25 percent. INVESTED ASSETS AND RELATED INCOME Investments in fixed maturities are carried at fair value. Short-term investments are carried at cost, which approximates fair value. (See the note captioned "Fair Value of Financial Instruments".) 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 certain bonds issued by real estate finance or development companies; notes receivable from real estate ventures; investments in real estate ventures carried at cost, adjusted for the equity in the operating income or loss of such ventures; and real estate owned carried primarily 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. Prior to year-end 1995, the Company evaluated its real estate-related assets (including accrued interest) by estimating the probabilities of loss utilizing various projections that included several factors relating to the borrower, property, term of the loan, tenant composition, rental rates, other supply and demand factors and overall economic conditions. Generally, at that time, the reserve was based upon the excess of the loan amount over the estimated future cash flows from the loan discounted at the loan's contractual rate of interest taking into consideration the effects of recourse to, and subordination of loans held by, affiliated non-life realty companies. At year-end 1995, reflecting the Company's change in strategy with respect to its real estate portfolio, and the disposition thereof, real estate-related investments were valued using an estimate of the investments observable market price, net of estimated costs to sell. SFAS 114 defines "impaired loans" as loans in which it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. In the fourth quarter of 1994, the Company adopted SFAS 118, ACCOUNTING BY CREDITORS FOR IMPAIRMENT OF A LOAN--INCOME RECOGNITION AND DISCLOSURES. SFAS 118 amends SFAS 114, providing clarification of income recognition issues and requiring additional disclosures relating to impaired loans. The adoption of SFAS 118 had no effect on the Company's financial position or results of operations at or for the year ended December 31, 1994. 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. 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. 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 securities, over the estimated life of the security. Such amortization is included in net interest income. Amortization of the discount or premium from mortgage-backed securities is recognized using a level effective yield method which considers the estimated timing and amount of prepayments of the underlying mortgage 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 mortgage-backed securities change as a result of changes in prepayment rates, the adjustment is also included in net investment income. The Company does not accrue interest income on fixed maturities deemed to be impaired on an other-than-temporary basis, or on mortgage loans, real estate-related bonds and other real estate loans where the likelihood of collection of interest is doubtful. Policy loans are carried at their unpaid balance. Other invested assets consist primarily of venture capital investments and a leveraged lease and are carried at cost. Other invested assets also included equity securities which are carried at fair value. 41 45 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 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 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 Federal consolidated tax return. Under SFAS 109, ACCOUNTING FOR INCOME TAXES, 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 paid to (refunded by) Kemper under the tax allocation arrangement for the years ended December 31, 1995, 1994 and 1993 amounted to $(25.2 million), $(10.7 million) and $4.2 million, respectively. Not reflected in the statement of cash flows are rollovers of mortgage loans, other loans and investments totaling approximately $57.0 million and $146.0 million in 1994 and 1993, respectively. The Company also transferred its equity ownership interests in two limited partnerships during 1994 and 1993. (See the note captioned "Related-Party Transactions".) (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, depending upon certain economic and business conditions. 42 46 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (3) INVESTED ASSETS AND RELATED INCOME (CONTINUED) The carrying value (estimated fair value) of fixed maturities compared with amortized cost, adjusted for other-than-temporary declines in value, at December 31, 1995 and 1994, were as follows:
ESTIMATED UNREALIZED CARRYING AMORTIZED --------------------- (in thousands) VALUE COST GAINS LOSSES ---------- ---------- -------- --------- 1995 U.S. treasury securities and obligations of U.S. government agencies and authorities............ $ 215,637 $ 212,494 $ 3,163 $ (20) Obligations of states and political subdivisions, special revenue and nonguaranteed.............. 24,241 22,469 1,772 -- Debt securities issued by foreign governments.... 139,361 134,715 5,120 (474) Corporate securities............................. 1,698,270 1,638,178 65,075 (4,983) Mortgage-backed securities....................... 1,674,816 1,636,129 40,278 (1,591) ---------- ---------- -------- --------- Total fixed maturities.................... $3,752,325 $3,643,985 $115,408 $ (7,068) ========== ========== ======== ========= 1994 U.S. treasury securities and obligations of U.S. government agencies and authorities............ $ 10,682 $ 10,998 $ 24 $ (340) Obligations of states and political subdivisions, special revenue and nonguaranteed.............. 25,021 25,691 -- (670) Debt securities issued by foreign governments.... 109,624 120,950 50 (11,376) Corporate securities............................. 1,679,428 1,805,933 7,027 (133,532) Mortgage-backed securities....................... 1,638,977 1,743,784 -- (104,807) ---------- ---------- -------- --------- Total fixed maturities.................... $3,463,732 $3,707,356 $ 7,101 $(250,725) ========== ========== ======== =========
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 $300 million real estate portfolio consists of joint venture and third-party mortgage loans and other real estate-related investments. At December 31, 1995 and 1994, total impaired loans amounted to $21.9 million and $75.9 million, respectively. Impaired loans with reserves were $21.9 million and $67.6 million with corresponding reserves of $6.5 million and $18.8 million at December 31, 1995 and 1994, respectively. The Company had an average balance of $124.2 million and $93.9 million in impaired loans for 1995 and 1994, respectively. Cash payments received on impaired loans are generally applied to reduce the outstanding loan balance. At December 31, 1995 and 1994, loans on nonaccrual status amounted to $3.5 million and $274.6 million, respectively. Impaired loans are generally included in the Company's nonaccrual loans. 43 47 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (3) INVESTED ASSETS AND RELATED INCOME (CONTINUED) At December 31, 1995, securities carried at approximately $5.9 million were on deposit with governmental agencies as required by law. Proceeds from sales of investments in fixed maturities prior to maturity were $297.6 million, $910.9 million and $1.7 billion during 1995, 1994 and 1993, respectively. Gross gains of $21.2 million, $6.0 million and $80.4 million and gross losses of $4.7 million, $55.9 million and $37.8 million were realized on sales of fixed maturities in 1995, 1994 and 1993, respectively. The following table sets forth the maturity aging schedule of fixed maturity investments at December 31, 1995:
CARRYING AMORTIZED (in thousands) VALUE COST VALUE ---------- ---------- One year or less........................................................ $ 25,617 $ 25,202 Over one year through five.............................................. 576,138 562,374 Over five years through ten............................................. 1,248,675 1,200,157 Over ten years.......................................................... 227,079 220,123 Securities not due at a single maturity date(1)......................... 1,674,816 1,636,129 ---------- ---------- Total fixed maturities........................................... $3,752,325 $3,643,985 ========== ==========
- --------------- (1) Weighted average maturity of 5.4 years. The sources of net investment income were as follows:
(in thousands) 1995 1994 1993 -------- -------- -------- Interest and dividends on fixed maturities................. $269,934 $274,231 $221,144 Dividends on equity securities............................. 681 1,751 3,084 Income from short-term investments......................... 13,159 10,668 12,155 Income from mortgage loans................................. 40,494 41,713 82,028 Income from policy loans................................... 19,658 18,517 16,826 Income from other real estate-related investments.......... 15,565 21,239 11,755 Income from other loans and investments.................... 1,555 3,533 8,008 -------- -------- -------- Total investment income............................. 361,046 371,652 355,000 Investment expense......................................... (12,598) (18,568) (15,726) -------- -------- -------- Net investment income............................... $348,448 $353,084 $339,274 ======== ======== ========
Realized gains (losses) for the years ended December 31, 1995, 1994 and 1993, were as follows:
REALIZED GAINS (LOSSES) ------------------------------------------- (in thousands) 1995 1994 1993 --------- -------- -------- Real estate-related................................. $(325,611) $(41,720) $(79,652) Fixed maturities.................................... 9,336 (49,857) 36,234 Equity securities................................... (346) 28,243 17,086 Other............................................... (2,079) 8,777 (1,252) --------- -------- -------- Realized investment losses before income tax benefit........................................ (318,700) (54,557) (27,584) Income tax benefit.................................. (111,545) (19,095) (7,917) --------- -------- -------- Net realized investment losses.................... $(207,155) $(35,462) $(19,667) ========= ======== ========
44 48 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (3) INVESTED ASSETS AND RELATED INCOME (CONTINUED) 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, 1995, 1994 and 1993 were as follows:
CHANGE IN UNREALIZED GAINS (LOSSES) ------------------------------------------ (in thousands) 1995 1994 1993 -------- --------- ------- Fixed maturities.................................... $351,964 $(351,646) $60,258 Equity securities................................... 180 (32,710) 19,882 Adjustment to deferred insurance acquisition costs............................................. (14,277) 11,325 -- -------- --------- ------- Unrealized gain (loss) before income tax expense (benefit)...................................... 337,867 (373,031) 80,140 Income tax expense (benefit)........................ 32,922 (43,492) 26,916 -------- --------- ------- Net unrealized gain (loss) on investments.... $304,945 $(329,539) $53,224 ======== ========= =======
(4) UNCONSOLIDATED INVESTEES At December 31, 1995, the Company, along with other Kemper subsidiaries, directly held partnership interests or options to acquire equity interests (or has made loans with additional interest features) 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, 1995 and 1994, the Company's net equity investment in unconsolidated investees amounted to $17.1 million and $45.4 million, respectively. The Company's share of net losses related to such unconsolidated investees amounted to $453 thousand and $6.3 million for the years ended December 31, 1995 and 1994, respectively. Also at December 31, 1995, the Company had joint venture-related loans totaling $21.8 million before reserves to partnerships in which Lumbermens Mutual Casualty Company, an affiliate until August 1993 ("Lumbermens"), and Fidelity Life Association ("FLA"), an affiliated mutual insurance company, had equity interests. These joint venture-related loans totaled $37.5 million before reserves at December 31, 1994. (See the note captioned "Financial Instruments--Off-Balance-Sheet Risk".) (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-backed securities and real estate. Approximately 45.7 percent of the Company's investment-grade fixed maturities at December 31, 1995 were mortgage-backed securities, down from 49.2 percent at December 31, 1994. 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 of AAA credit quality, and the markets for these investments have been and are expected to remain liquid. The Company plans to continue to reduce its holding of such investments over time. Future investment income from mortgage-backed securities may be affected by the timing of principal payments and the yields on reinvestment alternatives available at the time of such payments. Due to the 45 49 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (5) CONCENTRATION OF CREDIT RISK (CONTINUED) fact that the Company's investments in mortgage-backed securities were predominately made since 1992, the current interest rate environment is not expected to cause any material extension of the average maturities of these investments. With the exception of many of the Company's September 1994 purchases of such investments, most of these investments were purchased by the Company at discounts. Prepayment activity on securities purchased at a discount is not expected to result in any material losses to the Company because prepayments would generally accelerate the reporting of the discounts as investment income. Prepayment activity resulting from a decline in interest rates on such securities purchased at a premium would accelerate the amortization of the premiums which would result in reductions of investment income related to such securities. At December 31, 1995, the Company had unamortized discounts and premiums of $17.0 million and $11.0 million, respectively, related to mortgage-backed securities. Given the credit quality, liquidity and anticipated payment characteristics of the Company's investments in mortgage-backed securities, the Company believes that the associated risk can be managed without material adverse consequences on its consolidated financial statements. 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, 1995 California........................ 28.7% Illinois.......................... 24.4 Texas............................. 10.2 Oregon............................ 7.4 Colorado.......................... 6.5 Hawaii............................ 6.2 Washington........................ 5.7 Florida........................... 4.8 Ohio.............................. 2.9 Other(1).......................... 3.2 ----- Total................... 100.0% ===== DISTRIBUTION BY PROPERTY TYPE AS OF DECEMBER 31, 1995 Hotel............................. 34.3% Office............................ 30.2 Land.............................. 17.2 Residential....................... 4.8 Retail............................ 4.5 Industrial........................ 3.0 Other............................. 6.0 ----- Total................... 100.0% =====
- --------------- (1) No other single location exceeded 2.0 percent. Real estate markets have been depressed in recent periods in areas where most of the Company's real estate portfolio is located. California real estate market conditions have continued to be worse than in many other areas of the country. Real estate markets in northern California and Illinois show some stabilization and improvement. Undeveloped land represented approximately 17.2 percent of the Company's real estate portfolio at December 31, 1995. 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 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. The majority of the Company's real estate loans are on properties or projects where the Company, Kemper, or their affiliates have taken ownership positions in joint ventures with a small number of partners. (See the note captioned "Unconsolidated Investees".) 46 50 (5) CONCENTRATION OF CREDIT RISK (CONTINUED) At December 31, 1995, loans to and investments in joint ventures in which Patrick M. Nesbitt or his affiliates ("Nesbitt") have interests constituted approximately $99.7 million, or 33.3 percent, of the Company's real estate portfolio. The Nesbitt ventures primarily consist of eleven hotel properties. At December 31, 1995, the Company did not have any Nesbitt-related off-balance-sheet legal funding commitments outstanding. At December 31, 1995, loans to and investments in a master limited partnership (the "MLP") between subsidiaries of Kemper and subsidiaries of Lumbermens, constituted approximately $66.0 million, or 22.0 percent, of the Company's real estate portfolio. The Company's interest in the MLP is a less than one percent limited partnership interest, and Kemper's interest is 75 percent at December 31, 1995. Prior to 1995, Kemper's interest was 50 percent. At December 31, 1995, MLP-related commitments accounted for approximately $29.8 million of the Company's off-balance-sheet legal commitments, of which the Company expects to fund $17.0 million. At December 31, 1995, the Company's loans to and investments in projects with the Prime Group, Inc. or its affiliates totaled approximately $24.8 million, or 8.3 percent, of the Company's real estate portfolio. Prime Group-related commitments accounted for $165.6 million of the off-balance-sheet legal commitments at December 31, 1995, of which the Company expects to fund $15.0 million. (6) INCOME TAXES Income tax expense (benefit) was as follows for the years ended December 31, 1995, 1994 and 1993:
(in thousands) 1995 1994 1993 --------- ------- ------- Current.................................................. $(113,087) $(6,898) $(5,773) Deferred................................................. 38,423 21,329 16,915 --------- ------- ------- Total.......................................... $ (74,664) $14,431 $11,142 ========= ======= =======
Included in the current tax benefit is the recognition of a net operating loss carryover at December 31, 1995 which will be 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 will file a stand alone Federal income tax return. Previously, the Company had filed a consolidated Federal income tax return with Kemper. In the first quarter of 1996, the Company and Kemper settled the outstanding balances for the short period under the tax allocation agreement with Kemper making a payment to the Company of approximately $30 million. The Company's receivable from Kemper for all remaining balances under the tax allocation agreement, after adjusting for the $30 million payment, totaled approximately $82.6 million at December 31, 1995. Such remaining amounts are expected to be settled in the fourth quarter of 1996. The actual income tax expense (benefit) for 1995, 1994 and 1993 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 1995, 1994, and 1993 to income (loss) before income tax expense (benefit) and cumulative effect of change in accounting principle.
(in thousands) 1995 1994 1993 -------- ------- ------- Computed expected tax expense (benefit)....................... $(72,700) $14,277 $ 7,992 Difference between "expected" and actual tax expense (benefit): State taxes................................................. (1,370) 645 332 Foreign tax credit.......................................... (183) (155) 358 Change in tax rate.......................................... -- -- 1,441 Change in valuation allowance............................... -- -- 701 Other, net.................................................. (411) (336) 318 -------- ------- ------- Total actual tax expense (benefit).................. $(74,664) $14,431 $11,142 ======== ======= =======
47 51 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (6) INCOME TAXES (CONTINUED) Under SFAS 109 ACCOUNTING FOR INCOME TAXES, deferred tax assets and liabilities are generally determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Under SFAS 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. SFAS 109 allows recognition of deferred tax assets if future realization of the tax benefit is more likely than not, with a valuation allowance for the portion that is not likely to be realized. The implementation of SFAS 109 in 1993 resulted in a one-time increase to earnings of $2.4 million. Under SFAS 109, a valuation allowance is established 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 Kemper's Federal income tax return or a change in circumstances which causes the recognition of the benefits to become more likely than not. During 1995 and 1994, the change in the valuation allowance related solely to the change in the net deferred Federal tax asset or liability from unrealized gains or losses on investments. The tax effects of temporary differences that give rise to significant portions of the Company's net deferred Federal tax liability were as follows:
DECEMBER 31, ---------------------------------------- (in thousands) 1995 1994 1993 --------- --------- -------- Deferred Federal tax assets: Unrealized losses on investments..................... $ -- $ 85,331 $ -- Life policy reserves................................. 42,512 51,519 60,446 Real estate-related.................................. 21,920 39,360 45,851 Other investment-related............................. 1,725 7,435 12,498 Other................................................ 6,864 6,415 5,804 --------- --------- -------- Total deferred Federal tax assets................. 73,021 190,060 124,599 Valuation allowance.................................. (15,201) (100,532) (15,201) --------- --------- -------- Total deferred Federal tax assets after valuation allowance....................................... 57,820 89,528 109,398 --------- --------- -------- Deferred Federal tax liabilities: Deferred insurance acquisition costs................. 111,523 108,663 100,834 Unrealized gains on investments...................... 37,919 -- 49,193 Depreciation and amortization........................ 18,767 18,878 21,367 Other................................................ 2,320 3,351 2,049 --------- --------- -------- Total deferred Federal tax liabilities............ 170,529 130,892 173,443 --------- --------- -------- Net deferred Federal tax liabilities................... $(112,709) $ (41,364) $(64,045) ========= ========= ========
The valuation allowance is subject to future adjustments based on, among other items, Kemper's estimates of future operating earnings and capital gains. The tax returns through the year 1986 have been examined by the Internal Revenue Service ("IRS"). Changes proposed are not material to the Company's financial position. The tax returns for the years 1987 through 1990 are currently under examination by the IRS. (7) RELATED-PARTY TRANSACTIONS The Company received cash capital contributions of $82.5 million and $90.0 million during 1994 and 1993, respectively. 48 52 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (7) RELATED-PARTY TRANSACTIONS (CONTINUED) In 1994 and 1993, the Company transferred the majority of its deficit equity ownership interest in two limited partnerships to another Kemper subsidiary resulting in an increase of the Company's additional paid-in capital of $71 thousand and $9.2 million, respectively. The Company also paid a non-cash dividend of $530 thousand in December 1993, which represented the positive equity ownership interests of the majority of one of its limited partnerships. Net losses associated with the Company's ownership interests in these limited partnerships amounted to $0.4 million, $1.4 million and $5.4 million in 1995, 1994 and 1993, respectively, and are included in the Company's consolidated statement of operations. 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, 1995 and 1994, joint venture mortgage loans totaled $120 million and $351 million, respectively, and during 1995, 1994 and 1993, the Company earned interest income on these joint venture loans of $19.6 million, $22.0 million and $63.1 million, respectively. All of the Company's personnel are employees of Federal Kemper Life Assurance Company ("FKLA"), an affiliated company. The Company is allocated expenses for the utilization of FKLA employees and facilities, the investment management services of Zurich Kemper Investments, Inc. ("ZKI"), an affiliated company, and the information systems of Kemper Service Company ("KSvC"), a ZKI subsidiary, based on the Company's share of administrative, legal, marketing, investment management, information systems and operation and support services. During 1995, 1994 and 1993, expenses allocated to the Company from ZKI and KSvC amounted to $4.4 million, $6.5 million and $3.1 million, respectively. The Company also paid to ZKI investment management fees of $3.4 million, $6.0 million and $6.7 million during 1995, 1994 and 1993, respectively. In addition, expenses allocated to the Company from FKLA during 1995, 1994 and 1993 amounted to $14.3 million, $11.1 million and $13.1 million, respectively. During 1995, 1994 and 1993, the Company sold certain mortgages and real estate-related investments, net of reserves, amounting to approximately $3.5 million, $154.0 million and $343.7 million respectively, to KFC Portfolio Corp., an affiliated non-life realty company, in exchange for cash. No gain or loss was recognized on these sales. The Company also paid KFC Portfolio Corp. $1.8 million in 1995 related to the management of the Company's real estate portfolio. (8) REINSURANCE In the ordinary course of business, the Company enters into reinsurance agreements to diversify risk and limit its overall financial exposure to certain blocks of fixed-rate annuities. The Company generally cedes 100 percent of the related annuity liabilities under the terms of the reinsurance agreements. Although these reinsurance agreements contractually obligate the reinsurers to reimburse the Company, they do not discharge the Company from its primary liabilities and obligations to policyholders. As such, these amounts paid or deemed to have been paid are recorded on the Company's consolidated balance sheet as reinsurance recoverables and ceded future policy benefits. In 1992 and 1991, the Company entered into 100 percent indemnity reinsurance agreements ceding $515.7 million and $416.3 million, respectively, of its fixed-rate annuity liabilities to FLA. FLA is a mutual insurance company that shares common management with the Company and FKLA and common board members with the Company, FKLA and Kemper. As of December 31, 1995, the reinsurance recoverable related to the fixed-rate annuity liabilities ceded to FLA amounted to approximately $503 million. During 1995 the Company recorded income of $4.4 million related to a ceding commission experience adjustment from the 1992 reinsurance agreement. (9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company and FKLA sponsor a welfare plan that provides medical and life insurance benefits to their 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 49 53 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (9) POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED) 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 discount rate used in determining the allocated postretirement benefit obligation was 7.25 percent and 8 percent for 1995 and 1994, respectively. The assumed health care trend rate used was based on projected experience for 1995 and 1996, 10 percent in 1997, gradually declining to 6 percent by the year 2000 and remaining at that level thereafter. The status of the plan as of December 31, 1995 and 1994, was as follows: Accumulated postretirement benefit obligation:
(in thousands) 1995 1994 ---- ---- Retirees.......................................................................... $234 $206 Fully eligible active plan participants........................................... 111 58 Other active plan participants.................................................... 427 101 Unrecognized gain (loss) from actuarial experience................................ (85) 314 ---- ---- Accrued liability....................................................... $687 $679 ==== ====
Components of the net periodic postretirement benefit cost:
(in thousands) 1995 1994 ---- ---- Service cost-benefits attributed to service during the period..................... $ 58 $ 31 Interest cost on accumulated postretirement benefit obligations................... 41 43 Amortization of unrecognized actuarial gain....................................... (19) (35) ---- ---- Total................................................................... $ 80 $ 39 ===== =====
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, 1995 and 1994 by $146 thousand and $48 thousand, respectively, and the net postretirement health care interest and service costs for the years ended December 31, 1995 and 1994 by $24 thousand and $14 thousand, respectively. During 1994, the Company adopted certain severance-related policies to provide benefits, generally limited in time, to former or inactive employees after employment but before retirement. The effect of adopting these policies was immaterial. (10) COMMITMENTS AND CONTINGENT LIABILITIES The Company is involved in various legal actions for which it establishes liabilities where appropriate. In the opinion of the Company's management, based upon the advice of legal counsel, the resolution of such litigation is not expected to have a material adverse effect on the consolidated financial statements. Although none of the Company or its joint venture projects have been identified as a "potentially responsible party" under Federal environmental guidelines, inherent in the ownership of or lending to real estate projects is the possibility that environmental pollution conditions may exist on or near or relate to properties owned or previously owned on properties securing loans. Where the Company has presently identified remediation costs, they have been taken into account in determining the cash flows and resulting valuations of the related real estate assets. Based on the Company's receipt and review of environmental reports on most of the projects in which it is involved, the Company believes its environmental exposure would be immaterial to its consolidated results of operations. However, the Company may be required in the future to take actions to remedy environmental exposures, and there can be no assurance that material environmental exposures will not develop or be identified in the future. The amount of future environmental costs is impossible to estimate due to, among other factors, the unknown magnitude of possible exposures, the unknown timing and extent of corrective actions that may be required, the determination of the Company's liability in proportion to others and the extent such costs may be covered by insurance or various environmental indemnification agreements. 50 54 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (10) COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED) See the note captioned "Financial Instruments--Off-Balance-Sheet Risk" below for the discussion regarding the Company's loan commitments and standby financing agreements. The Company is liable for guaranty fund assessments related to certain unaffiliated insurance companies that have become insolvent during the years 1995 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. Assessments levied against the Company and charged to expense in 1995, 1994 and 1993 amounted to $5.8 million, $0.0 million and $5.8 million, respectively. Such amounts relate to accrued guaranty fund assessments of $5.0 million and $4.0 million at December 31, 1995 and 1994, respectively. 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, 1995. (11) FINANCIAL INSTRUMENTS--OFF-BALANCE-SHEET RISK At December 31, 1995, the Company had loan commitments and stand-by financing agreements totaling $248.2 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 $56.4 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) DERIVATIVE FINANCIAL INSTRUMENTS The Company is party to derivative financial instruments in the normal course of business for other than trading purposes to hedge exposures in foreign currency fluctuations related to certain foreign fixed maturity securities held by the Company. The following table summarizes various information regarding these derivative financial instruments as of December 31, 1995 and 1994:
WEIGHTED WEIGHTED AVERAGE AVERAGE REPRICING (in thousands) NOTIONAL CARRYING ESTIMATED YEARS TO FREQUENCY 1995 AMOUNT VALUE FAIR VALUE EXPIRATION (DAYS) - ---- -------- -------- ---------- ---------- --------- Non-trading foreign exchange forward options..................... $ 43,754 $112 $112 .32 30 1994 - ---- Non-trading foreign exchange forward options..................... 34,541 18 18 .25 30
The Company's hedges relating to foreign currency exposure are implemented using forward contracts on foreign currencies. These are generally short duration contracts with U.S. money-center banks. The Company records realized and unrealized gains and losses on such investments in net income on a current basis. The amounts of gain (loss) included in net income during 1995, 1994 and 1993 totaled $(1.0 million), $6.4 million and $(2.8 million), respectively. (13) FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value estimates are made at specific points in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. A significant portion of the Company's financial instruments are carried at fair value. (See the 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 51 55 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (13) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) based on judgments regarding current and future economic conditions and the risk characteristics of the investments. Although fair value estimates are calculated using assumptions that management believes are appropriate, changes in assumptions could significantly affect the estimates and such estimates should be used with care. Fair value estimates are determined for existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and certain liabilities that are not considered financial instruments. Accordingly, the aggregate fair value estimates presented do not represent the underlying value of the Company. For example, the Company's subsidiaries are not considered financial instruments, and their value has not been incorporated into the fair value estimates. In addition, tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates. The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments: Fixed maturities and equity securities: Fair values for fixed maturity securities and for equity securities were determined by using market quotations, or independent pricing services that use prices provided by market makers or estimates of fair values obtained from yield data relating to instruments or securities with similar characteristics, or fair value as determined in good faith by the Company's portfolio manager, ZKI. Cash and short-term investments: The carrying amounts reported in the consolidated balance sheet for these instruments approximate fair values. Mortgage loans and other real estate-related investments: Fair values for mortgage loans and other real estate-related investments for year-end 1994 were estimated on a project-by-project basis. Generally, the projected cash flows of the collateral were discounted using a discount rate of 10 to 12 percent. The resulting collateral estimates were then used to determine the value of the Company's real estate-related investments. Fair values for mortgage loans and other real estate-related investments for year-end 1995 were estimated based upon the investments observable market price, net of estimated costs to sell. The estimates of fair value should be used with care given the inherent difficulty of estimating the fair value of real estate due to the lack of a liquid quotable market. Other loans and investments: The carrying amounts reported in the consolidated balance sheet for these instruments approximate fair values. The fair values of policy loans were estimated by discounting the expected future cash flows using an interest rate charged on policy loans for similar policies currently being issued. Life policy benefits: Fair values of the life policy benefits regarding investment contracts (primarily deferred annuities) and universal life contracts were estimated by discounting gross benefit payments, net of contractual premiums, using the average crediting rate currently being offered in the marketplace for similar contracts with maturities consistent with those remaining for the contracts being valued. The Company had projected its future average crediting rate in 1995 and 1994 to be 4.5 percent and 5.5 percent, respectively, while the assumed average market crediting rate was 5.5 percent in 1995 and 6.5 percent in 1994. 52 56 KEMPER INVESTORS LIFE INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (13) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The carrying values and estimated fair values of the Company's financial instruments at December 31, 1995 and 1994 were as follows:
DECEMBER 31 ----------------------------------------------------- 1995 1994 ------------------------ ------------------------ CARRYING FAIR CARRYING FAIR (in thousands) VALUE VALUE VALUE VALUE ---------- ---------- ---------- ---------- Financial instruments recorded as assets: Fixed maturities(1)........................ $3,752,325 $3,752,325 $3,463,732 $3,463,732 Cash and short-term investments............ 398,326 398,326 227,353 227,353 Mortgage loans and other real estate-related assets................... 299,589 299,589 907,283 804,867 Policy loans............................... 289,390 289,390 277,743 277,743 Other invested assets...................... 29,809 21,043 40,527 40,527 Financial instruments recorded as liabilities: Life policy benefits....................... 4,573,212 4,488,297 4,843,690 4,709,561
- --------------- (1) Includes $112 and $18 carrying value and fair value for 1995 and 1994, respectively, of derivative securities used to hedge the foreign currency exposure on certain specific foreign fixed maturity investments. (14) STOCKHOLDER'S EQUITY--RETAINED EARNINGS The maximum amount of dividends which can be paid by insurance companies domiciled in the State of Illinois to shareholders without prior approval of regulatory authorities is restricted. The maximum amount of dividends which can be paid by the Company without prior approval in 1996, assuming that there is sufficient statutory earned surplus, is $38.3 million. The Company paid no cash dividends in 1995, 1994 or 1993. The Company's net income (loss) and stockholder's equity as determined in accordance with statutory accounting principles were as follows:
(in thousands) 1995 1994 1993 -------- -------- -------- Net income (loss)............................................. $(64,707) $ 44,491 $(36,178) ======== ======== ======== Statutory surplus............................................. $383,374 $416,243 $329,430 ======== ======== ========
53 57 APPENDIX A ILLUSTRATIONS OF CASH VALUES, CASH SURRENDER VALUES, DEATH BENEFITS The tables in this Prospectus have been prepared to help show how values under a Policy change with investment experience. The tables illustrate how Cash Values, Surrender Values (reflecting the deduction of Surrender Charges, if any) and Death Benefits under a Policy issued on an insured of a given age would vary over time if the hypothetical gross investment rates of return were a uniform, after tax, annual rate of 0%, 6%, and 12%. If the hypothetical gross investment rate of return averages 0%, 6%, or 12%, but fluctuates over or under those averages throughout the years, the Cash Values, Surrender Values and Death Benefits may be different. The amounts shown for the Cash Value, Surrender Value and Death Benefit as of each Policy Anniversary reflect the fact that the net investment return on the assets held in the Subaccounts is lower than the gross return. This is because of a daily charge to the Subaccounts for assuming mortality and expense risks, which is equivalent to an effective annual charge of 0.90%. 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, (.92%, 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 -1.82%, 4.18% and 10.18%, on a current basis. On a guaranteed basis, these rates of return would be -1.82%, 4.18% and 10.18%, 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. 54 58 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE STANDARD NON-SMOKER $1,000. ANNUAL PREMIUM ISSUE AGE 35 $100,000 INITIAL DEATH BENEFIT: VALUES--CURRENT COST OF INSURANCE
12% HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL GROSS INVESTMENT PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN RETURN PAID PLUS --------------------------------- -------------------------------- --------------------- POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE - ------ --------- ------- --------- ------- ------ --------- ------- ------- --------- 1 1,050 724 17 100,000 774 68 100,000 825 118 2 2,153 1,429 648 100,000 1,576 794 100,000 1,729 947 3 3,310 2,112 1,255 100,000 2,401 1,544 100,000 2,715 1,858 4 4,526 2,771 1,840 100,000 3,250 2,318 100,000 3,791 2,859 5 5,802 3,409 2,403 100,000 4,125 3,118 100,000 4,966 3,960 6 7,142 4,019 3,046 100,000 5,020 4,047 100,000 6,247 5,273 7 8,549 4,603 3,678 100,000 5,938 5,013 100,000 7,643 6,718 8 10,027 5,161 4,298 100,000 6,880 6,017 100,000 9,168 8,306 9 11,578 5,693 4,909 100,000 7,846 7,062 100,000 10,836 10,052 10 13,207 6,216 5,525 100,000 8,855 8,164 100,000 12,677 11,987 11 14,917 6,730 6,148 100,000 9,909 9,326 100,000 14,712 14,130 12 16,713 7,237 6,778 100,000 11,010 10,550 100,000 16,961 16,501 13 18,599 7,736 7,415 100,000 12,160 11,838 100,000 19,445 19,124 14 20,579 8,227 8,059 100,000 13,362 13,193 100,000 22,190 22,022 15 22,657 8,711 8,711 100,000 14,617 14,617 100,000 25,223 25,223 16 24,840 9,187 9,187 100,000 15,929 15,929 100,000 28,574 28,574 17 27,132 9,656 9,656 100,000 17,299 17,299 100,000 32,277 32,277 18 29,539 10,118 10,118 100,000 18,731 18,731 100,000 36,368 36,368 19 32,066 10,573 10,573 100,000 20,227 20,227 100,000 40,889 40,889 20 34,719 11,020 11,020 100,000 21,789 21,789 100,000 45,883 45,883 25 50,113 10,923 10,923 100,000 28,575 28,575 100,000 78,636 78,636 30 69,761 8,599 8,599 100,000 35,318 35,318 100,000 131,633 131,633 35 94,836 2,275 2,275 100,000 41,110 41,110 100,000 215,714 215,714 40 126,840 (11,752) 0 100,000 44,302 44,302 100,000 349,794 349,794 45 167,685 (42,893) 0 100,000 40,832 40,832 100,000 565,945 565,945 POLICY DEATH YEAR BENEFIT - ------ ------- 1 100,000 2 100,000 3 100,000 4 100,000 5 100,000 6 100,000 7 100,000 8 100,000 9 100,000 10 100,000 11 100,000 12 100,000 13 100,000 14 100,000 15 100,000 16 100,000 17 100,000 18 100,000 19 100,000 20 100,000 25 105,372 30 160,592 35 250,228 40 374,279 45 594,242
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. 55 59 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE STANDARD NON-SMOKER $1,000. ANNUAL PREMIUM ISSUE AGE 35 $100,000 INITIAL DEATH BENEFIT: VALUES--GUARANTEED COST OF INSURANCE
12% HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL GROSS INVESTMENT PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN RETURN PAID PLUS --------------------------------- -------------------------------- --------------------- POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE - ------ --------- ------- --------- ------- ------ --------- ------- ------- --------- 1 1,050 723 16 100,000 773 67 100,000 824 117 2 2,153 1,425 644 100,000 1,572 790 100,000 1,725 943 3 3,310 2,106 1,249 100,000 2,395 1,538 100,000 2,708 1,851 4 4,526 2,764 1,832 100,000 3,241 2,310 100,000 3,781 2,850 5 5,802 3,398 2,391 100,000 4,112 3,105 100,000 4,952 3,945 6 7,142 4,007 3,034 100,000 5,006 4,032 100,000 6,230 5,256 7 8,549 4,590 3,665 100,000 5,922 4,997 100,000 7,623 6,698 8 10,027 5,147 4,285 100,000 6,862 6,000 100,000 9,145 8,283 9 11,578 5,676 4,892 100,000 7,824 7,040 100,000 10,807 10,023 10 13,207 6,177 5,486 100,000 8,810 8,119 100,000 12,624 11,933 11 14,917 6,647 6,065 100,000 9,816 9,234 100,000 14,609 14,026 12 16,713 7,086 6,626 100,000 10,844 10,385 100,000 16,779 16,320 13 18,599 7,492 7,170 100,000 11,893 11,571 100,000 19,154 18,833 14 20,579 7,863 7,695 100,000 12,962 12,794 100,000 21,756 21,587 15 22,657 8,198 8,198 100,000 14,049 14,049 100,000 24,606 24,606 16 24,840 8,495 8,495 100,000 15,155 15,155 100,000 27,731 27,731 17 27,132 8,749 8,749 100,000 16,276 16,276 100,000 31,160 31,160 18 29,539 8,953 8,953 100,000 17,406 17,406 100,000 34,921 34,921 19 32,066 9,104 9,104 100,000 18,543 18,543 100,000 39,053 39,053 20 34,719 9,194 9,194 100,000 19,681 19,681 100,000 43,594 43,594 25 50,113 8,534 8,534 100,000 25,240 25,240 100,000 74,373 74,373 30 69,761 5,161 5,161 100,000 29,953 29,953 100,000 124,441 124,441 35 94,836 (3,252) 0 100,000 32,143 32,143 100,000 203,535 203,535 40 126,840 (21,775) 0 100,000 28,278 28,278 100,000 329,234 329,234 45 167,685 (64,123) 0 100,000 8,456 8,456 100,000 531,604 531,604 POLICY DEATH YEAR BENEFIT - ------ ------- 1 100,000 2 100,000 3 100,000 4 100,000 5 100,000 6 100,000 7 100,000 8 100,000 9 100,000 10 100,000 11 100,000 12 100,000 13 100,000 14 100,000 15 100,000 16 100,000 17 100,000 18 100,000 19 100,000 20 100,000 25 100,000 30 151,818 35 236,101 40 352,281 45 558,184
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. 56 60 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE STANDARD NON-SMOKER $3,000. ANNUAL PREMIUM ISSUE AGE 55 $100,000 INITIAL DEATH BENEFIT: VALUES--CURRENT COST OF INSURANCE
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN PAID PLUS ------------------------------------ --------------------------------- ----------------------- POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE - ------ --------- ---------- --------- ------- ------- --------- ------- --------- --------- 1 3,150 2,032 787 100,000 2,180 935 100,000 2,328 1,083 2 6,457 3,968 2,499 100,000 4,392 2,922 100,000 4,835 3,365 3 9,930 5,803 4,108 100,000 6,631 4,936 100,000 7,533 5,838 4 13,577 7,539 5,619 100,000 8,902 6,983 100,000 10,448 8,529 5 17,406 9,164 7,019 100,000 11,195 9,050 100,000 13,596 11,451 6 21,426 10,721 8,588 100,000 13,553 11,420 100,000 17,045 14,913 7 25,647 12,267 10,191 100,000 16,040 13,964 100,000 20,893 18,817 8 30,080 13,804 11,830 100,000 18,662 16,688 100,000 25,183 23,209 9 34,734 15,332 13,505 100,000 21,427 19,600 100,000 29,968 28,141 10 39,620 16,850 15,215 100,000 24,342 22,707 100,000 35,304 33,669 11 44,751 18,358 16,960 100,000 27,417 26,019 100,000 41,255 39,857 12 50,139 19,857 18,741 100,000 30,659 29,543 100,000 47,892 46,776 13 55,796 21,347 20,558 100,000 34,078 33,289 100,000 55,293 54,504 14 61,736 22,827 22,410 100,000 37,683 37,266 100,000 63,548 63,131 15 67,972 24,298 24,298 100,000 41,484 41,484 100,000 72,753 72,753 16 74,521 25,760 25,760 100,000 45,493 45,493 100,000 83,020 83,020 17 81,397 27,213 27,213 100,000 49,720 49,720 100,000 94,444 94,444 18 88,617 28,657 28,657 100,000 54,177 54,177 100,000 107,045 107,045 19 96,198 30,092 30,092 100,000 58,878 58,878 100,000 120,941 120,941 20 104,158 31,518 31,518 100,000 63,834 63,834 100,000 136,268 136,268 25 150,340 21,578 21,578 100,000 86,603 86,603 100,000 237,080 237,080 30 209,282 (8,154) 0 100,000 119,288 119,288 125,253 395,181 395,181 35 284,509 (97,968) 0 100,000 157,008 157,008 164,858 638,100 638,100 40 380,519 (411,771) 0 100,000 203,214 203,214 205,246 1,026,438 1,026,438 45 503,055 (2,584,062) 0 100,000 266,594 266,594 266,594 1,693,207 1,693,207 POLICY DEATH YEAR BENEFIT - ------ --------- 1 100,000 2 100,000 3 100,000 4 100,000 5 100,000 6 100,000 7 100,000 8 100,000 9 100,000 10 100,000 11 100,000 12 100,000 13 100,000 14 100,000 15 100,000 16 100,000 17 106,722 18 118,820 19 131,826 20 145,807 25 248,934 30 414,940 35 670,005 40 1,036,702 45 1,693,207
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. 57 61 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE STANDARD NON-SMOKER $3,000. ANNUAL PREMIUM ISSUE AGE 55 $100,000 INITIAL DEATH BENEFIT: VALUES--GUARANTEED COST OF INSURANCE
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN PAID PLUS ------------------------------------- ------------------------------------ ----------------------- POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE - ------ --------- ----------- --------- ------- ---------- --------- ------- --------- --------- 1 3,150 2,030 785 100,000 2,178 933 100,000 2,326 1,081 2 6,457 3,962 2,492 100,000 4,385 2,915 100,000 4,827 3,358 3 9,930 5,795 4,100 100,000 6,623 4,928 100,000 7,523 5,829 4 13,577 7,527 5,608 100,000 8,890 6,970 100,000 10,434 8,515 5 17,406 9,152 7,007 100,000 11,181 9,036 100,000 13,579 11,435 6 21,426 10,663 8,530 100,000 13,493 11,360 100,000 16,981 14,848 7 25,647 12,053 9,977 100,000 15,819 13,743 100,000 20,668 18,592 8 30,080 13,310 11,336 100,000 18,153 16,180 100,000 24,667 22,693 9 34,734 14,421 12,594 100,000 20,486 18,659 100,000 29,014 27,187 10 39,620 15,372 13,737 100,000 22,806 21,171 100,000 33,750 32,115 11 44,751 16,150 14,752 100,000 25,108 23,710 100,000 38,929 37,531 12 50,139 16,745 15,629 100,000 27,389 26,273 100,000 44,619 43,503 13 55,796 17,142 16,353 100,000 29,644 28,855 100,000 50,904 50,115 14 61,736 17,329 16,912 100,000 31,870 31,454 100,000 57,886 57,469 15 67,972 17,283 17,283 100,000 34,062 34,062 100,000 65,687 65,687 16 74,521 16,973 16,973 100,000 36,205 36,205 100,000 74,457 74,457 17 81,397 16,306 16,306 100,000 38,244 38,244 100,000 84,370 84,370 18 88,617 15,323 15,323 100,000 40,229 40,229 100,000 95,616 95,616 19 96,198 13,905 13,905 100,000 42,096 42,096 100,000 108,027 108,027 20 104,158 11,972 11,972 100,000 43,819 43,819 100,000 121,716 121,716 25 150,340 (8,555) 0 100,000 49,628 49,628 100,000 213,228 213,228 30 209,282 (66,744) 0 100,000 46,231 46,231 100,000 355,822 355,822 35 284,509 (256,141) 0 100,000 8,445 8,445 100,000 572,633 572,633 40 380,519 (1,034,342) 0 100,000 (210,217) 0 100,000 918,269 918,269 45 503,055 (16,453,856) 0 100,000 (5,701,798) 0 100,000 1,520,778 1,520,778 POLICY DEATH YEAR BENEFIT - ------ --------- 1 100,000 2 100,000 3 100,000 4 100,000 5 100,000 6 100,000 7 100,000 8 100,000 9 100,000 10 100,000 11 100,000 12 100,000 13 100,000 14 100,000 15 100,000 16 100,000 17 100,000 18 106,133 19 117,750 20 130,236 25 223,890 30 373,613 35 601,265 40 927,452 45 1,520,778
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. 58 62 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE PREFERRED NON-SMOKER $1,500. ANNUAL PREMIUM ISSUE AGE 35 $150,000 INITIAL DEATH BENEFIT: VALUES--CURRENT COST OF INSURANCE
12% HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL GROSS INVESTMENT PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN RETURN PAID PLUS --------------------------------- --------------------------------- --------------------- POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE - ------ --------- ------- --------- ------- ------- --------- ------- ------- --------- 1 1,575 1,115 62 150,000 1,192 139 150,000 1,269 216 2 3,229 2,203 1,037 150,000 2,427 1,261 150,000 2,660 1,495 3 4,965 3,255 1,977 150,000 3,697 2,419 150,000 4,177 2,899 4 6,788 4,287 2,896 150,000 5,020 3,629 150,000 5,848 4,458 5 8,703 5,302 3,799 150,000 6,401 4,898 150,000 7,693 6,190 6 10,713 6,300 4,846 150,000 7,842 8,388 150,000 9,729 8,275 7 12,824 7,282 5,900 150,000 9,346 7,963 150,000 11,977 10,594 8 15,040 8,248 6,960 150,000 10,916 9,628 150,000 14,458 13,169 9 17,367 9,198 8,027 150,000 12,555 11,383 150,000 17,197 16,025 10 19,810 10,133 9,100 150,000 14,265 13,232 150,000 20,220 19,187 11 22,376 11,052 10,181 150,000 16,050 15,179 150,000 23,558 22,687 12 25,069 11,957 11,270 150,000 17,914 17,226 150,000 27,242 26,555 13 27,898 12,846 12,366 150,000 19,859 19,378 150,000 31,309 30,828 14 30,868 13,721 13,470 150,000 21,889 21,637 150,000 35,798 35,547 15 33,986 14,582 14,582 150,000 24,008 24,008 150,000 40,754 40,754 16 37,261 15,429 15,429 150,000 26,219 26,219 150,000 46,224 46,224 17 40,699 16,261 16,261 150,000 28,528 28,528 150,000 52,263 52,263 18 44,309 17,081 17,081 150,000 30,937 30,937 150,000 58,929 58,929 19 48,099 17,886 17,886 150,000 33,452 33,452 150,000 66,288 66,288 20 52,079 18,679 18,679 150,000 36,077 36,077 150,000 74,411 74,411 25 75,170 20,280 20,280 150,000 48,989 48,989 150,000 128,390 128,390 30 104,641 19,653 19,653 150,000 63,509 63,509 150,000 215,487 215,487 35 142,254 15,296 15,296 150,000 79,573 79,573 150,000 354,743 354,743 40 190,260 4,372 4,372 150,000 97,457 97,457 150,000 578,149 578,149 45 251,528 (19,587) 0 150,000 118,321 118,321 150,000 939,143 939,143 POLICY DEATH YEAR BENEFIT - ------ ------- 1 150,000 2 150,000 3 150,000 4 150,000 5 150,000 6 150,000 7 150,000 8 150,000 9 150,000 10 150,000 11 150,000 12 150,000 13 150,000 14 150,000 15 150,000 16 150,000 17 150,000 18 150,000 19 150,000 20 150,000 25 172,043 30 262,894 35 411,501 40 618,620 45 986,101
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. 59 63 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE PREFERRED NON-SMOKER $1,500. ANNUAL PREMIUM ISSUE AGE 35 $150,000 INITIAL DEATH BENEFIT: VALUES--GUARANTEED COST OF INSURANCE
12% HYPOTHETICAL 0% HYPOTHETICAL 6% HYPOTHETICAL GROSS INVESTMENT PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN RETURN PAID PLUS --------------------------------- -------------------------------- --------------------- POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE - ------ --------- ------- --------- ------- ------ --------- ------- ------- --------- 1 1,575 1,114 60 150,000 1,190 137 150,000 1,267 214 2 3,229 2,197 1,031 150,000 2,421 1,255 150,000 2,654 1,488 3 4,965 3,247 1,968 150,000 3,688 2,410 150,000 4,167 2,889 4 6,788 4,262 2,871 150,000 4,993 3,603 150,000 5,819 4,429 5 8,703 5,241 3,738 150,000 6,335 4,832 150,000 7,623 6,119 6 10,713 6,182 4,728 150,000 7,714 6,260 150,000 9,591 8,137 7 12,824 7,084 5,701 150,000 9,129 7,746 150,000 11,739 10,357 8 15,040 7,946 6,657 150,000 10,580 9,292 150,000 14,086 12,797 9 17,367 8,765 7,593 150,000 12,067 10,895 150,000 16,649 15,477 10 19,810 9,542 8,510 150,000 13,591 12,558 150,000 19,451 18,418 11 22,376 10,274 9,402 150,000 15,149 14,277 150,000 22,515 21,644 12 25,069 10,957 10,270 150,000 16,740 16,053 150,000 25,866 25,179 13 27,898 11,591 11,110 150,000 18,366 17,885 150,000 29,534 29,054 14 30,868 12,173 11,922 150,000 20,024 19,773 150,000 33,553 33,302 15 33,986 12,700 12,700 150,000 21,713 21,713 150,000 37,958 37,958 16 37,261 13,170 13,170 150,000 23,433 23,433 150,000 42,791 42,791 17 40,699 13,574 13,574 150,000 25,178 25,178 150,000 48,094 48,094 18 44,309 13,905 13,905 150,000 26,941 26,941 150,000 53,915 53,915 19 48,099 14,155 14,155 150,000 28,717 28,717 150,000 60,311 60,311 20 52,079 14,314 14,314 150,000 30,500 30,500 150,000 67,344 67,344 25 75,170 13,448 13,448 150,000 39,289 39,289 150,000 115,080 115,080 30 104,641 8,530 8,530 150,000 47,001 47,001 150,000 192,468 192,468 35 142,254 (3,905) 0 150,000 51,289 51,289 150,000 314,710 314,710 40 190,260 (31,401) 0 150,000 47,287 47,289 150,000 508,980 508,980 45 251,528 (94,364) 0 150,000 21,445 21,445 150,000 821,747 821,747 POLICY DEATH YEAR BENEFIT - ------ ------- 1 150,000 2 150,000 3 150,000 4 150,000 5 150,000 6 150,000 7 150,000 8 150,000 9 150,000 10 150,000 11 150,000 12 150,000 13 150,000 14 150,000 15 150,000 16 150,000 17 150,000 18 150,000 19 150,000 20 150,000 25 154,208 30 234,811 35 365,064 40 544,609 45 862,835
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. 60 64 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE PREFERRED NON-SMOKER $4,500. ANNUAL PREMIUM ISSUE AGE 55 $150,000 INITIAL DEATH BENEFIT: VALUES--CURRENT COST OF INSURANCE
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN PAID PLUS ---------------------------------- --------------------------------- ----------------------- POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE - ------ --------- -------- --------- ------- ------- --------- ------- --------- --------- 1 4,725 3,078 1,217 150,000 3,300 1,440 150,000 3,524 1,663 2 9,686 6,083 3,886 150,000 6,725 4,527 150,000 7,395 5,197 3 14,896 9,059 6,523 150,000 10,322 7,786 150,000 11,694 9,159 4 20,365 12,003 9,131 150,000 14,099 11,226 150,000 16,470 13,597 5 26,109 14,918 11,708 150,000 18,066 14,856 150,000 21,775 18,565 6 32,139 17,803 14,610 150,000 22,233 19,040 150,000 27,667 24,474 7 38,471 20,658 17,550 150,000 26,609 23,501 150,000 34,212 31,104 8 45,120 23,484 20,528 150,000 31,205 28,249 150,000 41,481 38,525 9 52,101 26,281 23,545 150,000 36,032 33,295 150,000 49,555 46,819 10 59,431 29,049 26,600 150,000 41,101 38,652 150,000 58,524 56,075 11 67,127 31,789 29,695 150,000 46,425 44,331 150,000 68,485 66,391 12 75,208 34,501 32,829 150,000 52,016 50,344 150,000 79,550 77,878 13 83,694 37,185 36,003 150,000 57,889 56,707 150,000 91,839 90,657 14 92,604 39,842 39,217 150,000 64,056 63,431 150,000 105,490 104,865 15 101,959 42,471 42,471 150,000 70,533 70,533 150,000 120,652 120,652 16 111,782 45,074 45,074 150,000 77,336 77,336 150,000 137,477 137,477 17 122,096 47,650 47,650 150,000 84,481 84,481 150,000 156,033 156,033 18 132,926 50,199 50,199 150,000 91,984 91,984 150,000 176,486 176,486 19 144,297 52,722 52,722 150,000 99,865 99,865 150,000 199,033 199,033 20 156,237 55,220 55,220 150,000 108,142 108,142 150,000 223,894 223,894 25 225,511 52,731 52,731 150,000 152,731 152,731 160,367 388,823 388,823 30 313,924 37,427 37,427 150,000 208,639 208,639 219,071 650,497 650,497 35 426,763 (7,436) 0 150,000 273,977 273,977 287,676 1,060,127 1,060,127 40 570,779 (129,413) 0 150,000 354,062 354,062 357,603 1,718,253 1,718,253 45 754,583 (657,234) 0 150,000 460,091 460,091 460,091 2,827,146 2,827,146 POLICY DEATH YEAR BENEFIT - ------ --------- 1 150,000 2 150,000 3 150,000 4 150,000 5 150,000 6 150,000 7 150,000 8 150,000 9 150,000 10 150,000 11 150,000 12 150,000 13 150,000 14 150,000 15 150,000 16 158,099 17 176,317 18 195,899 19 216,946 20 239,566 25 408,264 30 683,022 35 1,113,133 40 1,735,436 45 2,827,146
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. 61 65 FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY MALE PREFERRED NON-SMOKER $4,500. ANNUAL PREMIUM ISSUE AGE 55 $150,000 INITIAL DEATH BENEFIT: VALUES--GUARANTEED COST OF INSURANCE
0% HYPOTHETICAL 6% HYPOTHETICAL 12% HYPOTHETICAL PREMIUM GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN GROSS INVESTMENT RETURN PAID PLUS ------------------------------------- ------------------------------------ ----------------------- POLICY INTEREST CASH SURRENDER DEATH CASH SURRENDER DEATH CASH SURRENDER YEAR AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE - ------ --------- ----------- --------- ------- ---------- --------- ------- --------- --------- 1 4,725 3,075 1,214 150,000 3,297 1,437 150,000 3,520 1,660 2 9,686 6,002 3,804 150,000 6,641 4,443 150,000 7,308 5,110 3 14,896 8,781 6,246 150,000 10,031 7,496 150,000 11,392 8,856 4 20,365 11,409 8,536 150,000 13,468 10,595 150,000 15,802 12,929 5 26,109 13,875 10,665 150,000 16,943 13,733 150,000 20,568 17,358 6 32,139 16,170 12,977 150,000 20,450 17,257 150,000 25,726 22,533 7 38,471 18,284 15,175 150,000 23,983 20,875 150,000 31,317 28,209 8 45,120 20,199 17,243 150,000 27,530 24,574 150,000 37,386 34,430 9 52,101 21,896 19,159 150,000 31,077 28,341 150,000 43,984 41,248 10 59,431 23,352 20,904 150,000 34,610 32,161 150,000 51,177 48,728 11 67,127 24,550 22,456 150,000 38,120 36,026 150,000 59,046 56,952 12 75,208 25,474 23,802 150,000 41,603 39,931 150,000 67,698 66,026 13 83,694 26,103 24,921 150,000 45,053 43,870 150,000 77,258 76,076 14 92,604 26,416 25,792 150,000 48,465 47,840 150,000 87,883 87,258 15 101,959 26,384 26,384 150,000 51,833 51,833 150,000 99,761 99,761 16 111,782 25,956 25,956 150,000 55,137 55,137 150,000 113,120 113,120 17 122,096 24,997 24,997 150,000 58,296 58,296 150,000 128,232 128,232 18 132,926 23,565 23,565 150,000 61,385 61,385 150,000 145,322 145,322 19 144,297 21,485 21,485 150,000 64,313 64,313 150,000 164,155 164,155 20 156,237 18,639 18,639 150,000 67,044 67,044 150,000 184,927 184,927 25 225,511 (11,771) 0 150,000 76,957 76,957 150,000 323,789 323,789 30 313,924 (98,215) 0 150,000 75,011 75,011 150,000 540,164 540,164 35 426,763 (379,805) 0 150,000 29,675 29,675 150,000 869,152 869,152 40 570,779 (1,537,012) 0 150,000 (241,207) 0 150,000 1,393,618 1,393,618 45 754,583 (24,467,453) 0 150,000 (7,091,252) 0 150,000 2,307,875 2,307,875 POLICY DEATH YEAR BENEFIT - ------ --------- 1 150,000 2 150,000 3 150,000 4 150,000 5 150,000 6 150,000 7 150,000 8 150,000 9 150,000 10 150,000 11 150,000 12 150,000 13 150,000 14 150,000 15 150,000 16 150,000 17 150,000 18 161,307 19 178,929 20 197,872 25 339,979 30 567,172 35 912,609 40 1,407,554 45 2,307,875
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. 62 66 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 63 67 (This page intentionally left blank) 64 68 [WORLD MARKETING ALLIANCE, INC.] POWER V is marketed exclusively by World Marketing Alliance, Inc.; distributed by Investors Brokerage Services, Inc.; and policy is underwritten by Kemper Investors Life Insurance Company, Long Grove, IL 60049 [ZURICH KEMPER LIFE LOGO] WMA-1002 (12/96) -----END PRIVACY-ENHANCED MESSAGE-----